Palm whistles by the elephants in the room

Palm is trying to dance around a bunch of elephants in the room--increased competition, inconsistency and the need to expand--but it's getting difficult.

To wit: Palm made a big deal about the sellthrough of 617,000 for its smartphones on its fiscal second quarter earnings conference call. Arguably it had no choice since its third quarter outlook was weaker than expected. What else can you do when the financials aren't pretty?

Palm's fiscal second quarter GAAP earnings of 12 cents a share on sales of $392.9 million were in line with its profit warning a few weeks ago, but its third quarter outlook calling for GAAP earnings of 8 to 10 cents a share disappointed. The big question: Where does Palm go from here?

Merrill Lynch analyst Vivek Arya summed Palm's prospects up nicely in a research note:

"Palm standalone does not have the scale to be successful when rivals RIM, Samsung, Motorola and HTC are launching attractive products at lower price points."

Palm's mission to thwart its rivals: Sell you on the benefits of the Treo so maybe you'll pay a little more to maintain its profit margins. To that end Palm is launching a $25 million marketing campaign to pitch the Treo, said CEO Edward Colligan on Palm's conference call.

"We have done an excellent job of tapping into the mobile professional market, a group of people that truly values information on the go. As we broaden our target demographic, we believe there is an opportunity to reach a whole new set of users who may not be as driven by e-mail on the go, but more interested in getting information access, getting access to the core information they care about, much of which resides on the Internet. We believe Treo provides the best Internet access of any device on the market and we intend to make that better known."

Umm ok. One catch: Some folks (including me) just use their smartphone as a modem to get connectivity to their laptops. I don't care what the Treo does it's not going to beat a full laptop screen experience.

Nevertheless, Palm will offer some handholding to get you to keep the Treo. Colligan argued that handholding matters.   

"Since the new customers we attract may be less technical, we will help them feel comfortable trying a Treo through a unique program we call Butler, an effort to handhold our customers through the setup process."

All that effort is nice and maybe Treo evangelists drive sales, but there are a few elephants in the room that Palm has to address.

Elephant 1: Palm results are inconsistent and cutting the next quarter's outlook isn't going to help matters. Palm can blame carriers for Treo delays, but ultimately it looks like an excuse. And excuses are tools of incompetence.

Colligan:

"The first and foremost objective is our commitment to profitable growth. We need to deliver more predictable financial results to our investors and we are driving toward that goal. We are making excellent progress, increasing the number of world-class carrier partners, so that issues that come up with any particular product or particular carrier have less impact on our quarters."

Elephant 2: International expansion. Palm needs to become global and the company is making progress. About 35 percent of Palm's sales come from abroad. What it really needs is to generate a hit in Asia with its mobile-happy population. Most of Palm's conference call focused on Europe.

Elephant 3: Palm is tethered to business sales. Colligan said that business users are tracking toward 40 percent of sales. While that's not necessarily a bad thing, these users aren't the ones to buy the latest greatest Treo at the drop of a hat. The Treo is a tool not a fashion statement. As smartphones move downstream, Palm will need to generate some Apple-like love for its products.
Elephant 4: There is a lot more competition for Palm, which used to have the smartphone market largely to itself. That's no longer the case with Samsung's Blackjack, RIM tinkering in the market and the Motorola Q. Sure you can argue that these offerings are deficient--as Colligan did--but everything has a price. Meanwhile, Colligan noted that the recent flurry of smartphones hitting the market isn't likely to last.

In other words, Palm is banking on reduced competition at some point.

Colligan:

"I cannot imagine the competitive number of offerings that has come out in the last quarter is sustainable on a consistent basis."