Palm Troubles Continue with 44% Profit Drop

Profits continue to drop despite strong sales of Palm's Treo smartphone

Palm Inc.'s troubles continued on Thursday as the company posted a profit of US$15.4 million for the fourth quarter, a 44 percent drop from its $27.2 million mark one year earlier, despite strong sales of its Treo smartphone.

The company reported revenue of $401.3 million for the quarter ending June 1, down slightly from the $403.1 million it earned in the same quarter in 2006 and also below Wall Street's forecast of $406.6 million, according to analysts polled by Thomson Financial.

The results come just weeks after the company faced rumors it would be acquired by rivals Motorola Inc. or Nokia Corp. Instead, Palm raised $325 million of extra money by selling a 25 percent stake of the company to private equity investors.

Palm is shifting its product portfolio from personal digital assistants (PDAs) to smartphones, which are far more popular and offer a potential for greater profit margin because of their higher price tags. In the past quarter, Palm drew 86 percent of its revenue from smartphone sales, a huge swing for a company that in 1996 drew its entire revenue from the Palm Pilot PDA. Palm's smartphone revenue of $344.2 million for the quarter was up 14 percent from the same quarter in 2006.

"Our record Treo sell-through reflects strong fundamentals in the core focus areas of our business," said Palm CEO Ed Colligan. "I'm confident that in fiscal year 2008, more and more standard handset customers will demand the capabilities and ease of use of Palm smartphones, which aligns us well for future growth and profitability."

Despite Colligan's optimism, Palm's smartphone sales did not help its results. Palm earned a profit of $0.15 per share in the fourth quarter, matching analysts' expectation of $0.15 but coming in far below the $0.25 it made a year earlier.

Looking into the future, the company predicted revenue between $355 million and $365 million for the coming quarter, the first period of Palm's fiscal 2008. If the company meets the higher end of goal, it would beat its mark of $355.8 million in revenue for the first quarter of 2007.

However, Palm may be distracted by change in its boardroom. As a condition of buying a large share of the company, the investment group Elevation Partners insisted on installing a new chairman, former Apple Inc. vice president Jon Rubinstein. Palm also raised questions among investors in May when it launched the Foleo, a miniature laptop intended to sell as a "smartphone companion." That product quickly faced criticism that its $599 price was too high and that its 10-inch screen was too large.

Also on Thursday, Palm reported revenue of $1.56 billion for the full fiscal year 2007, down 1 percent from the $1.58 billion it earned in 2006. Palm earned profit of $56.4 million for the year, far below its $336.2 million profit in 2006, although the 2006 figure included a one-time tax rebate of $219.5 million.