PalmSource Stumbles as Sony Exits PDA Business

Updated from June 1

Shares of PalmSource(PSRC - Cramer's Take - Stockpickr) took a dive Tuesday and were down again Wednesday after its second-largest customer said it was dropping out of the market for personal digital assistants (PDAs) in Europe and the U.S.

The news of Sony's (SNE - Cramer's Take - Stockpickr) defection pulled PalmSource down $2.41, or 12%, to $17.84 Tuesday; the stock was recently down another 55 cents, or 3.1%, to $17.29.

PalmSource develops and distributes the Palm operating system (OS) for handhelds and smart phones; its sister company, palmOne (PLMO - Cramer's Take - Stockpickr) is the major manufacturer of handheld devices using the operating system.

Sony contributed about 12% of the company's revenue on a trailing nine month basis, said David Limp, PalmSource's senior vice president for business development. PalmSource will report fourth-quarter earnings later this month; it seems likely that the loss of Sony will show up in the first or second quarter of the fiscal 2005.

Limp said Sony, which remains a large shareholder, will continue to produce and sell its popular Clie handhelds in Japan.

The move puts additional pressure on PalmSource to increase revenue from its smart phone business. Although smart phones contribute only about 25% of the company's revenue, they are its fastest growing market, and are becoming all the more important as the market for the traditional PDA slows.

"The long-term prospect for the Palm OS is not great right now," said analyst Todd Kort, who follows the PDA market for market researcher Gartner.

At the end of the first quarter of 2004, preliminary data by market researcher Gartner showed the Palm OS with a market share of 40.7%, down from 49% a year earlier, while Microsoft's (MSFT - Cramer's Take - Stockpickr) Windows CE's share has risen to 40.5% from 36.7%. Equally disturbing, the market for the devices that run on those operating systems is shrinking, says Gartner. Worldwide shipments of PDAs, slipped 4.6% in the quarter vs. year-ago levels.