Palm recovers from 2001 woes, sees profit ahead

Franklin Paul

NEW YORK: Shaking off a troubled year that saw it go from dominating the

handheld computer market to a possible takeover target, Palm Inc. is once again

flexing its muscles, and optimistically looking towards turning a profit in the

near-term.

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 Corp. or International Business Machines Corp., or perhaps

merge with rival Handspring Inc.

"It's really a classic turnaround," said JP 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

Corp., 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 Inc.

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 Corp.

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 Corp. 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 US 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," JP

Morgan's Coster said when asked about Benhamou's plan to hand over control.