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Will Investors' Patience for Palm Device Match Their Enthusiasm?

The company's shares get a pop Monday, but analysts say the i705 will take time to catch on.



shares shot up Monday on expectations that its new wireless handheld, the i705, can help pave the company's way back to profitability. But the product, which goes on sale this week and is aimed at the high-margin corporate market, could take some time to catch on.

The i705 is designed to replace the Palm VII, an early wireless data device that was seen as flawed, and competes most closely with

Research in Motion's


BlackBerry and


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handheld PC.

"It's definitely a move in the right direction," said Stephen Sweeney, analyst at Dresdner Kleinwort Wasserstein. "But the company is still suffering from low margins, and demand is shifting to the low end. This i705 will take more time to ramp up."

After posting a loss for 2001, Palm forecast in December it would break even on revenue of $290 million to $300 million in its fiscal fourth quarter, which ends in May. Analysts, on average, haven't bought it: They estimate the company will post a loss of 4 cents a share for that quarter and won't turn a profit until the second quarter of fiscal 2003, according to

Sweeney doesn't see the company breaking even until the August or November quarters of next year, after the company launches an operating system that will allow corporate clients to operate the i705 and other handhelds from a centralized server.

Under the current system, the handheld can transfer email and email attachments from a desktop computer through the system. Some said that system is too clumsy for corporate use. Palm will do a test launch of its new operating system in February, but it isn't set for commercial release until the summer or fall.

After rising more than 200% from early October lows, shares of Palm began to slip in early January. Palm closed up 25 cents, or 6%, at $4.15 Monday. Rivals Research in Motion and


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ended down 25 cents to $22.27 and 15 cents to $5.84, respectively.

Pony Up

Whether sold to companies or consumers, wireless handhelds are more lucrative than nonwireless because of monthly connection revenues, which manufacturers like Palm share with network operators. But corporate deals offer the fattest margins because of the long-term service and software contracts that accompany sales to these customers.

In addition, once you snare a corporate customer, you keep him, says Bill Crawford, analyst at U.S. Bancorp Piper Jaffray. Corporate customers tend to spend a long time investigating a product, and work with their providers to fix problems and make the investment work.

Still, the most likely target market for the i705 is the approximately 180,000 users of the Palm VII, for whom if offers a "compelling upgrade," said Andrew Scott, analyst at Needham. "It will also be attractive to some enterprise customers that need a wireless data solution today and are unwilling to wait six months to a year to wait for next-generation products," he said. But in a weak IT spending environment, there may be a lot of companies that are willing to wait.

The i705's biggest competition will be Research in Motion's BlackBerry, in that both are tailored to the corporate market, with real-time email and data transfer. Handspring's Treo, which has voice calling, is aimed at the consumer market and is facing delays.

In the meantime, the wireless and PC sectors are set to give the handheld makers a run for their money with their own handheld computers and combination wireless-phone organizers later this year. Microsoft has already launched several versions of its pocket PC, and



offers the iPaq.


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mobile phone and data organizer has surpassed Palm in Europe and is scheduled to launch in the U.S. in early summer.


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is also planning to launch a touch-screen combination phone based on Microsoft PC software sometime this year.

Stiff Little Fingers

Most of the analysts agreed that the biggest drawback of the i705 is the attachable snap-on keyboard. Both the Handspring Treo and RIM's BlackBerry have integrated keyboards, which are much easier to use. "

The i705 would have created more buzz if it had integrated keyboard, or a voice calling device like the Treo," said Sweeney.

It has a few advantages, however. The i705 can operate


Instant Messenger and allows users to receive emailed photos, or attached documents, including Excel, Microsoft Word and PowerPoint.

The fiscal third-quarter launch at least shows that the new management team is meeting its goals, said Needham's Scott. Chief Executive Carl Yankowski resigned in November after a tough year, and a new management team was installed shortly afterward. The i705 was originally scheduled to come to market in the late summer or fall of last year, but a new launch date was set in December after Yankowski's resignation.

"They definitely thought through this product launch a lot better than other recent ones," says J.P. Morgan Chase analyst Paul Coster.