Apple

Apple experienced a bit of a setback in the U.S. smartphone market during the first quarter after coming out of nowhere last year to rank among the top companies.

According to data compiled by IDC, Apple's still the second-leading smartphone maker in the U.S. behind Research in Motion and the BlackBerry franchise. But it lost market share going from the fourth quarter to the first at the expense of RIM and Palm, according to the figures provided by IDC analyst Ramon Llamas.

RIM's market share went from 35.1 percent in the fourth quarter to 44.5 percent in the first, while Apple's dropped from 26.7 percent in the fourth quarter to 19.2 percent in the first. Palm's Centro lifted that company's market share to 13.4 percent in the first quarter, up from 7.9 percent in the fourth. Samsung and HTC ranked fourth and fifth in the U.S. market with 8.6 percent and 4.1 percent of the market, respectively.

During its most recent earnings call, Apple revealed that it sold 1.7 million iPhones, which was down from the 2.3 million units it sold during the fourth-quarter holiday shopping season. Both RIM and Palm grew their shipments on a quarter-by-quarter basis over roughly the same time period, although the dates don't match up precisely with Apple because RIM and Palm are on slightly different fiscal calendars.

It's not exactly clear what might have led to the decline. Both RIM and Palm have intensified their pursuit of consumer smartphone users, RIM from the high end with devices like the Curve and Pearl and Palm from the low end with the $99 Centro.

Given the iPhone shortages that have been going on for several weeks ahead of iPhone 2.0's expected debut next Monday, Apple might have also lost share this quarter. But the company has consistently reiterated its intention to ship 10 million units in 2008, the first full calendar year the iPhone has been on sale. RIM sold 14 million BlackBerrys during its 2008 fiscal year, which ended on March 1.

Palm CEO Ed Colligan says the company's long-awaited operating system of the future will center around the Internet, and be distinct from the familiar Palm OS that's currently available.

Palm has been somewhat tight-lipped about the future of its operating system development, but Colligan gave an interview to APC in which he described the "Nova" OS as a "next-generation operating system with much more capabilities, driven around the Internet and Web-based applications." Nova will be based on a Linux core and is scheduled to arrive next year.

The idea is to return to what made Palm successful in years past, and what is making Apple's iPhone successful at this juncture: the development of a complete system, including hardware, software, and links to the outside world via the Internet or the desktop PC. Palm lost control of its operating system when it split from PalmSource in 2003, and it is still using a four-year old operating system on its Treo and Centro smartphones.

Colligan isn't going to make that mistake again. But it's not clear what Palm will bring to the table in terms of user interface, which was the big breakthrough that Apple made with the iPhone.

Designing a new smartphone around the Internet in the late 2000s isn't necessarily innovative; it's a basic requirement. The real innovation in handheld computing is around how people interact with their computers, and we'll have to see what Palm cooks up in that regard when Nova is ready next year.

Palm will continue to release devices based on the classic Palm OS, Colligan told APC. The Centro, a bright spot for Palm amid the troubles of the past year, will continue to use the classic Palm OS to help keep that phone at around $99. And Palm will also continue to pitch Windows Mobile Treos for business customers even after the release of the new operating system, he said. Nova will be used on something in between a Centro and a Treo, but the company has yet to decide on the naming convention for that new category.

While it's been a rough couple of years for Colligan and Palm, he remains optimistic, drawing on the experiences of many of his current colleagues when they worked at Apple.

"So just looking at Palm's situation today there's no logical reason, in a market with this kind of growth opportunity and the dynamics that are happening and how quickly things change--and again you could look at Apple and the iPhone as something that's come out of nowhere, essentially, and changed the dynamics of the smartphone space--there's every opportunity to do that in our case as well," Colligan said.

Palm's Centro continues to sell well, but it's going to be a long time before the company's business gets back in the black.

Palm reported its financial results for its fiscal third quarter Thursday. Let's get the good news out of the way first: the Centro lifted Palm to its best smartphone quarter in its history, with 833,000 units on a "sell-through" basis, meaning phones that were actually purchased by people, not retailers.

The problem is that at $99, the Centro doesn't generate a lot of revenue or profit on those unit sales. Palm's overall revenue fell 24 percent from last year to $312 million, and it lost $31.5 million. Excluding restructuring charges and other items, the company lost 16 cents a share, 2 cents worse than what Wall Street analysts were expecting. In its second fiscal quarter, Palm lost $9.6 million on revenue of $349.6 million.

Palm is planning to revamp its Treo smartphone lineup in the upcoming months, said Ed Colligan, president and CEO of the company. New models are needed to replace an "aging" set of Windows Mobile Treos, which will also help the company "rebuild our product line at the high end," he said.

But the real goal for the company is to get an updated version of Palm OS out the door. The ancient operating system hasn't received a significant update in four years, allowing rivals to pass it by in an instant. Colligan reiterated the company's goal of getting that Linux-based operating system out by the end of the year, and praised Executive Chairman Jon Rubenstein for helping attract Apple's Mike Bell over to the team.

Until then, however, Palm will have to rely on sales of the low-margin Centro to keep the lights on. And to make matters worse, it will have to take an impairment charge in the next quarter because of its exposure to the tanking market for auction-rate securities.

Palm reported sharp declines in revenue and earnings on Tuesday, as expected, but demand for its Centro smartphone is outpacing the company's ability to supply its carrier partners, according to executives.

We already knew that Palm's second-fiscal quarter, which ended November 30, was going to be a bad one. In fact, Palm has been laying off employees this month as a result of the earnings shortfall. The company confirmed the ugly numbers: It lost $9.6 million, or 9 cents a share, and revenue fell 11 percent to $349.6 million.

CEO Ed Colligan revealed that the mystery product that Palm had failed to qualify during the quarter was the Treo 755p, which made its debut with Verizon just this week. Andy Brown, Palm's CFO, said that revenue for the quarter was on course to be flat compared with last year until it became clear the 755p wasn't going to make it out the door by the end of November.

But there was a significant bright spot during the quarter. The Centro set a company record for "sell-through" shipments--phones that actually made their way into the hands of customers as opposed to retailers--during the quarter, according to Colligan. The $99 Centro is available from Sprint, and Palm is finding it hard to keep up with demand.

That means, unfortunately, that things still have to get worse before they get better. Colligan expects Centro shipments to increase, but the company is also worried about component shortages affecting its ability to ship products to Sprint. Therefore, the midpoint of Palm's revenue guidance for the current quarter, at $315 million, was $43 million below what financial analysts were expecting, according to Thomson One.

Colligan credited Jon Rubinstein, chairman of the board, as having had a "profound impact" on Palm in his short time aboard since Elevation Partners became Palm's largest shareholder. The company is refocusing its efforts around building "world-class quality" smartphones and wants to "retake the mantle of design and innovation leadership," Colligan said.

The proof, as always, will be in the products. Colligan said we can expect new Treos later this year, and the company continues to work on its next-generation operating system, so desperately needed to replace the ancient Palm OS. That's not expected until the end of next year, but if Palm can get some mileage out of the Centro and the Treo 500, maybe that can hold the company over until the new software is ready to let Palm really start competing with the software capabilities available on some of today's smartphones.

It's not going to be a happy holiday season for Palm employees.

The company issued a statement after the close of the market Thursday warning that revenue for its second fiscal quarter would be about $30 million less than it had predicted. In addition, its gross margin is expected to be about four points lower. It's just the latest item of bad news from a company that can't wait for 2007 to end.

The reasons? Palm failed to qualify "a product that the company had previously expected to have certified within the quarter," it said in its statement. It had higher-than-expected warranty expenses, which is never a good thing. And even the only piece of good news was still sort of bad: higher-than-expected shipments of Palm's new Centro smartphone meant that the average selling prices of its products fell.

Is it officially time to start the Ed Colligan Watch? With Elevation Partners packing the board of directors with its people, it's hard to imagine that the company could allow this to continue much longer. Palm's CEO has done several things right, such as the decision to embrace Windows Mobile as Palm OS development stagnated, but the company has also let the part it controls--the hardware--grow stale compared with the likes of Apple, Nokia, LG, Samsung, and even Motorola. And don't forget the Foleo.

Palm's stock was trading beneath its 52-week low Friday on the news. And with the next version of the Palm OS not expected until 2009, it's probably going to be a rocky year for the company.

Palm's got a new smart phone in the works that could be its answer to the iPhone, the BlackBerry Curve and the Helio Ocean.

On Thursday, the company showed off a design called "Centro" at an event for media and analysts hosted by Sprint in Reston, Va., according to a Palm representative. At this point details are sketchy, and official photos are nonexistent, but Centro will be the smallest smart phone that Palm has released running Palm OS, the company said.

It will be targeted at the young'uns, which is probably appropriate, according to Gearlog. Gearlog's Sascha Segan, who was in attendance, said the Centro's QWERTY keyboard is "infinitesimal: it's actually impossible to type on this thing with two thumbs." Palm said the design also incorporates a touch screen, but it's not clear how large or what you can do with that screen.

Gearlog called the Centro "Treo 800" and "Gandolf," both names that have come up before among the Palm enthusiasts. It's also not clear if Centro will run Garnet, the decaying version of Palm OS, or a newer Linux-based version from Access or Palm. No further details were forthcoming from Palm, but the devices shown at the Sprint event were slated for this fall.