Palm Recovers From 2001 Woes, Sees Profit Ahead

Palm, of Santa Clara, California, on Thursday posted a third quarter loss, before special items, of 2 cents a share -- 2 cents better than Wall Street expected, on revenue that was some $40 million greater than forecasts.

The financial news confirmed for some that Palm has awakened from the nightmare that was 2001, when it struggled to deliver new products on time, fought a price war that pinched its margins and endured constant talk it might be bought by Sony or International Business Machines , or perhaps merge with rival Handspring

"It's really a classic turnaround," said J.P. Morgan analyst Paul Coster. "Fiscal discipline has been restored. I don't want to belittle the strategic challenge ahead of them, because it's still quite considerable, but they are heading in the right direction."

Investors agreed; on Friday Palm shares jumped 22 percent to close at around $3.86, its highest level in about 2 months. It was the Nasdaq's third most active issue.

Led by a new leadership team, Palm aims in 2002 to make good on its plans to feed the desires of both consumer and corporate users, beef up its software for new wireless and multimedia devices and fend off the challenge of Microsoft , which also make Personal Digital Assistant (PDA) software.

BATTLES WITH EXECUTION, COMPETITION

Palm's to-do list looked quite similar last year, but analysts found such an aggressive plan hard to swallow, considering Palm's missteps with its roll-out of its m500 series of high-end devices, and an aborted merger with Extended Systems

While it fought those and other battles, its competitors gathered steam.

Handspring whet consumer appetites with Treo, its combination personal digital assistant and mobile phone, and Microsoft upgraded its software that power handheld computers made by companies such as Compaq Computer

Much of this occurred even after Palm set in motion a plan aimed at splitting its hardware group, which makes the PDAs, and PalmSource, its software group which designs the software that drives them and others, in order to squeeze the greatest return from both.

But Palm's problems persisted. In September, it postponed the debut of a highly-anticipated wireless device, the i705. Investors, perhaps weary of Palm's woes, and shaken by the September 11 attacks, balked. Palm's stock, which began 2001 at about $29 a share, dwindled to about $1.50.

What's more, In November, Chief Executive Carl Yankowski quit.

And yet, Palm ended 2001 with a 59 percent share of the global market for handheld operating software, and Palm-branded devices had about 40 percent of the market, according to market research firm International Data Should they right themselves, analysts say, Palm could develop new ways of expanding revenue.

"Palm's PalmSource division has managed to maintain a 60 percent global market share despite the relentless efforts of industry titans Microsoft, Nokia, Motorola, and Ericsson," said U.S. Bancorp Piper Jaffray analyst William Crawford.

He added that separation of PalmSource from the hardware group will draw in new licensees, and grow the licensing revenue potential.

CEO BENHAMOU SOLIDIFIES STRUCTURE

Much of Palm's optimism for 2002, is built upon a rigid schedule put in place by Eric Benhamou, who took the reins as interim chief executive at Palm after Yankowski's exit.

Benhamou was chairman and CEO of 3Com when the networking equipment maker in 1999 first planned to spin off Palm into a publicly traded company.

"Eric has really put in place a map for how Palm can achieve this turnaround," Palm Chief Financial Officer Judy Bruner told Reuters. "We just have much tighter operation in place. It really comes down to having a good strategy and then blocking and tackling."

With expectations growing thanks to the successful debut of its new products, including the wireless i705 and the m130, a color model aimed at consumers, Palm now sees a profit within reach. In the fourth quarter, which ends in May, Bruner said Palm expects to be break even or earn a slight profit.

Benhamou is still the top man at 3Com and will not keep the job at Palm. On Thursday, he said the search for a new CEO is ongoing, and that the position would likely be filled soon.

"Maybe they should wait a bit longer," J.P. Morgan's Coster said when asked about Benhamou's plan to hand over control.

REUTERS

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