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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.

Palm's Centro was the one bright spot during a pretty bad second quarter.

(Credit: CNET Networks)

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.

Palm posted disappointing financial results Monday, swinging to a loss for the first time since 2003.

During the company's first fiscal quarter of 2008, which ended August 31, Palm recorded a net loss of $800,000, compared with net income of $16.5 million last year. Smart phone revenue was up 21 percent, but overall revenue was up just 1 percent from $356 million last year to $361 million this year.

Much has been made about the effect of the iPhone on Palm, but were that it's only problem. Everyone's passing Palm by these days as the company has been slower than rivals like Research in Motion, Nokia, and others to introduce updated designs. It recently launched the Palm Centro to try to recapture some momentum, but the impact of that launch won't be felt until next quarter.

Perhaps that's why Palm spent so much into research and development during the past quarter, spending $53 million compared with $41 million last year. But things aren't going to get much better during the next quarter, as Palm forecast that both revenue and profit would fall well below Wall Street's expectations.