First, the Good News
By Eric Lin, Tue Sep 21 23:45:00 GMT 2004

PalmOne started yesterday off announcing it was in the black last quarter and sales had improved. However a second phone call with investors revealed a darker outlook for this quarter.

PalmOne continued its turn around, announcing that it was profitable for the first quarter of financial year 2005. Not only did it improve year over year results (PalmOne was in the red Q1 2004), it also continued to surge up from the previous quarter, its first profitable quarter in some time. PalmOne shipped fewer units than last quarter: 981,000 in the first quarter compared to 1.1 million in the fourth. However profits jumped from $13.3 million to $19.6 million on slightly higher revenue of $273.1 million.

The news caused a jump PalmOne's stock price until analysts and investors hung up from a second, less positive phone call. Although PalmOne still expects a profitable second quarter, it told analysts it was lowering expectations based on weak PDA sales that will offset increased smartphone demand. PalmOne also cited a rise in research and marketing expenditures that will bite into profits. However in the earlier phone call, PalmOne CEO Todd Bradley said "Excitement is mounting in our category, and we're confident that our innovative products ... will help us maintain and extend our market leadership."

PDA sales still account for at least 80% of PalmOne's unit sales (though they only make up around 50% of revenues). PDAs, especially low cost PDAs, are clearly PalmOne's "category." Yet despite a consistent decline in PDA sales, Bradley insists there's excitement for this category in the marketplace. Maybe he meant PalmOne's other category, the smartphones that it said would become the company's focus almost a year ago. Despite launching a number of new low-end PDAs, PalmOne has not launched any smartphones since the announcement. In fact, it has yet to develop a smartphone -- the Treo 600 was a Handspring product. Nor has PalmOne given any indication that it would launch a "family of Treo products" as it said.

Less than a year may not be enough time to fully develop an entire new line of smartphones, especially when the company hasn't really developed any before. However PalmOne hasn't even refreshed the Treo 600 in that time period. It's as though the company announced a new focus on smartphones but hasn't been able to shift its organization to the new focus. PalmOne's success with PDAs may have created a company culture that is holding it back from succeeding with smartphones.