Analysts say there are no easy answers. The company may have to scale back its far-flung effort to be the device manufacturer, operating-system developer, Internet service provider and portal for handheld devices for both businesses and consumers.
After telling analysts that sales for the quarter would be roughly half of already lowered expectations, Palm CEO Carl Yankowski said Thursday that the company is looking at various options that would involve "more or less dramatically changing our business model."
It is a dramatic turn of events for Palm, a company that launched a very successful initial public offering just 14 months ago. In its first day of trading, the company had a market value of US$53 billion.
As recently as six months ago Palm was generating $1 billion a year in sales and was still enjoying 100 percent year-over-year growth.
Now the company faces dwindling cash and a glut of its products, some of which may be thrown out to avoid destroying the pricing structure in the handheld business. In late trading Friday its shares had tumbled nearly 30 percent to $5 as analysts issued a series of bearish reports on the company. Its market capitalisation is now about $3 billion.
"I've never seen anything go from so great six months ago to so bad in such a short period of time," said financial analyst Thomas Sepenzis, who covers Palm for CIBC World Markets.
During a conference call after the dire announcement, Yankowski refused to outline the alternatives Palm is considering.
A handful of options
The company could take several paths.
It could scale back its Palm.net business in which it tries to be both portal and Internet service provider to customers with wireless Palms. It could also look to split off the part of the company that develops and licenses the operating system from the business that makes and sells Palm-branded devices.
Exiting the hardware business--where Palm's greatest losses have come--may seem attractive. Cellular phone company Qualcomm, for example, made such a move in late 1999 and watched its stock price soar.
But in Palm's case, more than 95 cents out of every dollar of revenue comes from sales of its devices. Further, Palm gets far less for each handheld that uses its operating system than, say, Microsoft gets for each PC that uses Windows.
While the licensing arrangements vary, Palm has said that in most cases it gets a mid-single-digit percentage of the revenue collected by licensees for each device they sell.
For example, if Company X uses the Palm OS in a handheld that generates $150 in revenue, Palm might get about 5 percent, or $7.50. Even though the Palm OS has a large share of the handheld market, a business built solely on the revenue from licensing the OS would generate substantially lower sales than Palm now collects.
While Palm's OS is increasingly being used in cell phones, which represents a growth opportunity, the company has said the percentage it collects from phone makers is less than from handhelds.
By the same token, the device business alone could be less attractive.
"If you are just selling devices, you will be commoditised," said J.P. Morgan H&Q analyst Paul Coster. He also believes that Palm will get little value if it tries to sell parts of its business.
"I don't think there is any miracle cure," he said. "If you spin out some of these businesses, they are so minuscule (that they) won't command the premiums they deserve."
Apple Computer has struggled for nearly 20 years with similar questions. The company briefly licensed other companies to build Mac clones but reversed course after the move started to eat into Apple's own sales and margins.
