PalmSource Losses Narrow, But It's Not Out of the Red Yet
By Eric Lin, Fri Jun 25 21:30:00 GMT 2004

The OS company's fiscal fourth-quarter revenues rose slightly over last year, cutting its losses. PalmSource says it could break even next quarter, but can they do it?

PalmSource managed to slightly increase fiscal fourth-quarter revenue and cut losses over the same quarter last year. The OS arm of the Palm family saw revenues of $17.7 million last quarter, for a loss $2.9 million. In last year's fourth quarter, while they were still a division of Palm, they had revenues of $17.4 million and losses of $3.3 million. Whole-year revenues fell just $300,000 from last year to $73.1 million, although PalmSource managed to cut losses significantly from $21.8 million last year to $15.2 million this year.

PalmSource expects next quarter's report to look much better, but I am skeptical unless PalmSource has some major cost-cutting measures up their sleeve. PalmSource will lose a significant chunk of licensing revenue next quarter (probably 200,000 devices' worth or more) from Sony, since it announced it will only sell PDAs in Japan as of this summer. PalmSource will probably seek to make up the bulk of that revenue in smartphone sales, since PDA sales are continually declining. Palm OS licensees shipped 1.4 million devices in the fourth quarter, 78% of which were PDAs and 18% smartphones. That equates to about 252,000 smartphones, of which 151,000 were Treos.

PalmOne interim CFO Phillippe Morali expects Treo shipments to grow to about 250,000 this quarter, but he does not guess whether those will cannibalize PDA sales. He does, however, predict that smartphones will account for 50% of PalmOne's revenues by the end of the current fiscal year. Because of the significant price difference between Palm OS PDAs and smartphones, it's difficult to project how that translates into unit sales. Based on current figures, I calculate that smartphones would need to make up just under 24% of Palm's units to achieve that goal, which matches Morali's expectations of shipping 250,000 units next quarter.

Other Palm OS smartphone makers made up a surprising 101,000 units, or 40%, of smartphones shipped last quarter. Samsung and other manufacturers have announced new smartphone models, but each licensee's sales are so small, it will be difficult to offset the loss from Sony -- especially if the new handsets only replace previous models. PalmSource's revenues may rise, but only if PalmOne and other licensees can grow their smartphone business without cannibalizing their PDA sales, or if PalmSource can get the Palm OS onto more devices. PalmSource needs to forge new smartphone licensing agreements for smartphones, optimally adding a well-known phone brand, but a relatively unknown company (like benQ) that could come out with a desirable, affordable device would serve it well.