After a Rough Year, Palm's CEO Abruptly Quits

The embattled handheld maker is starting a search to replace Carl Yankowski.
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Updated from 5:14 p.m. EST

Charismatic

Palm

(PALM)

CEO Carl Yankowski abruptly resigned after the market closed Thursday. The handheld maker announced that he would be replaced by Palm Chairman Eric Benhamou while a search is started for a full-time CEO.

The embattled company has faced numerous troubles in 2001, including a massive excess of inventory and the delayed launch of the new high-end m500 family of handhelds in the spring. In the months that followed, Palm entered a vicious price war with its competitors that wreaked havoc on margins and forced the company to write down components. To add insult to injury, consumer demand began flagging for PDAs in the summer, further damping Palm's prospects for a quick rebound and putting the company in a cash quandary.

"People have been calling for someone's head, specifically his, and now they get it. They should reward the board," says CIBC World Markets' Tom Sepenzis. He would be most enthusiastic about a replacement from the wireless market, such as a

Nokia

(NOK) - Get Report

or

Motorola

(MOT)

executive. Palm has recently added several

Apple

(AAPL) - Get Report

alumni to its management, including the recently appointed CEO of its Platform Solutions Group, David Nagel. Todd Bradley, a 2001 addition as COO of the hardware side of the business, hails from

Gateway

(GTW)

. Neither Yankowsi nor Benhamou were available for comment.

Benhamou's interim appointment was not accompanied by a lowered economic outlook. The 3Com chairman reiterated the company's financial guidance from Sept. 20, asserting that Palm expects revenues to be flat to slightly up from the first quarter of fiscal 2002's $214.3 million. Benhamou reported in a press release that demand has improved from its rock-bottom summer level.Palm has seen its balance sheet ravaged since sales took a one-time 65% sequential drop in the spring quarter, the fourth quarter of Palm's fiscal 2001, to $165 million. The company opted to write down $436.5 million in charges for inventory and staff reductions at that time. By the end of its most recent quarter, Palm had worked revenues back up to $214 million, but its cash and equivalents were depleted down to $328 million, with a $150 million credit line at the ready.

During the Sept. 20 earnings report, Yankowski explained that the company would delay the rollout of a highly anticipated wireless e-mail device and would not come out with a wirelessly connected offering until sometime in 2002. Jittery investors pushed Palm's stock down 30% from its depressed state in weeks following Sept. 20. The lack of a wireless device in the hopper highlights one of the biggest issues facing a new Palm CEO.

"Regardless of who they find, many of the issues facing Palm won't be solved by management," says US Bancorp Piper Jaffray's Bill Crawford. "The industry is facing significant commoditization, as well as a difficult transition to wireless that the industry has to make. Palm will be competing against very large cell phone companies in the not-too-distant future."

Additionally, Palm has been criticized for its weakness when it comes to a concerted sales effort to corporations. Palm was in the process of acquiring enterprise application developer

Extended Systems

(XTND)

when it tripped on supply chain and product roll-ut issues. The two parties canceled the merge, leaving Palm with a less formalized approach to corporate customers, while the perceived threat of

Microsoft's

(MSFT) - Get Report

Pocket PC operating system and Microsoft partners

Compaq

(CPQ)

and

Hewlett-Packard

(HWP)

grew.