Palm can't execute; The downside of Centro

The squeeze is on for Palm and patience with the company has to be wearing thin.

After market close Thursday, Palm issued a profit warning for its fiscal second quarter (statement). Palm said it will report revenue between $345 million and $350 million, down from the company's projection for sales between $370 million to $380 million on Oct. 1. Palm also said it will lose 22 cents to 24 cents a share including charges and 8 cents a share to 10 cents a share excluding them. Wall Street was expecting a profit of 4 cents a share, according to Thomson Financial.

To make matters worse, Palm had already lowered its outlook for the second quarter. Wall Street crushes companies that lower the earnings bar and then proceed to trip over it. And true to form analysts are bailing on Palm and its already shaky prospects. For instance, Bank of America analyst Tim Long cut his price target to $5 from $15. "After disappointing guidance last quarter, Palm fails to deliver," said Long in a research note. That's a common refrain these days.

In Wall Street research notes, Palm's preannouncement has been called "awkward" and a "stone in the holiday stocking." Privately, Palm is probably being called worse. The company just can't execute. Thomas Weisel analyst Hasan Imam added that Palm has a terrible track record of moving products from the R&D stage to store shelves.

This go round Palm blamed its shortfall on a device that was delayed and a profit margin squeeze courtesy of its Centro $99 phone (right) and higher warranty costs. The revenue shortfall is due to "a delay in shipping a product that the company had previously expected to have certified within the quarter." Meanwhile, Palm's focus on the low end of the market has hurt gross margins. Palm projected gross margins of 29.3 percent to 29.8 percent, down from its previous outlook of 33.3 percent to 33.8 percent. And "higher warranty costs" is a euphemism for "we have quality issues."

Long estimates that the product that doomed Palm was the Windows 6.0 mobile upgrade to the Treo 750. Sound familiar? A year ago, certification problems with the Treo 750 caused Palm to miss its November quarter a year ago.

In many respects, Palm is just replaying previous quarters. The company habitually fails to get its products certified on schedule and often falls short of expectations. Perhaps, Palm's partnership with Elevation Partners can turn things around, but I'll believe it when I see it--and when current management changes. Palm has canceled its ill-conceived Foleo to double down on an operating system being lapped by the minute and a $99 low-margin phone.

Given Palm's product designs are stale, its new operating system is months away at best and it misses estimates with abandon you really have to wonder how long CEO Ed Colligan can stay at the helm of this ship.