Palm rides Treo sales to strong quarter

Thanks to strong sales of its Treo smart phone, Palm beat analyst expectations for quarterly profits. The Sunnyvale, California, company on Thursday reported revenue of US$388.5 million for the third quarter of fiscal year 2006, up 36 percent from the year-ago period. That compares to analyst estimates of $374.65 million for the quarter, which ended March 3.

Palm predicted revenue between $400 million and $405 million for the fourth quarter of fiscal year 2006, which will end June 2. That would beat current analyst estimates of $394.91 million for that period. Shares of Palm (Nasdaq ticker: PALM) were trading up $0.18 at $20.32.

Palm designers differentiated the Treo products from its competitors by picking an operating system based on Microsoft Windows instead of Symbian or other choices. Combined with the recent launch of the Origami handheld computer, that could signal a strong future for Microsoft in portable devices.

"Smart phone sell-through reported by our carrier partners more than doubled over the year-ago period, validating our strategic decision to support multiple open platforms and offer a choice of smart phones based on either Windows Mobile or Palm OS," said Ed Colligan, president and chief executive officer of Palm during a conference call.

Third-quarter sales of the Treo 650 and 700w smart phones reached 564,000, up 102 percent from the year-ago period. That growth helped push Palm's share of the U.S. converged smart phone/PDA (personal digital assistant) market to 30 percent, up from 22 percent a year ago.

Those numbers included sales of the Treo 700w smart phone, the company's first product to use the Microsoft Windows Mobile operating system. Palm expects to launch three more smart phones this calendar year.

But those numbers did not overwhelm analysts, who said Palm was overly reliant on U.S. sales.

"The downside is that 80 percent of their sales are in the U.S., which is actually kind of dangerous. The U.S. buys 40 percent of all PCs in the world, but only 5 or 6 percent of all smart phones," said Todd Kort, an analyst with Gartner Inc.

Operating in such a small pool, Palm could see its total market share slip. Worldwide growth in sales of smart phones is slated to increase from 46 million last year to 96 million this year, while Palm grows only from 1.95 million to about 3 million. That would reduce Palm's market share from 4 percent or 5 percent to 3 percent, Kort said.

The saving grace for Palm is that the company reached an average selling price (ASP) of $511 per smart phone, compared to just $197 per handheld. That gap powered Treo sales to represent a record 74 percent of Palm's revenue for last quarter.

"Clearly their future is with smart phones, and as that mix moves toward the higher ASP, it will give them better gross margins and improve their financial picture," Kort said.