Pilot Error: Palm Tumbles
---Ahh, remember this one? Just another great short called by Anthony. If I remember correctly that was on ipo day or thereabouts. Maybe sooner;-) Thank you , real nice job. I missed that short but collected on RIMM in sympathy. Regards, AD ---
From High-Tech Stardom
By PUI-WING TAM
Staff Reporter of THE WALL STREET JOURNAL
SANTA CLARA, Calif. -- When the first hint of slowing sales hit highflying Palm Inc. in March, its top brass gathered to address this unexpected setback. The cure, they decided, lay in quickly launching the newest model of their hand-held computers.
"Can we get the m500 line out in two weeks?" Chief Executive Carl Yankowski asked his lieutenants, referring to Palm's new model. Their reply was unanimous: Yes, they could.
Palm unveiled the m500 line on March 19, offering devices with a coveted expansion slot for more memory or accessories. Sales of Palm's existing devices, predictably, slowed further, as customers decided to wait for the new ones. The only problem: The wait wasn't two weeks. The new ones weren't ready. Palm wasn't able to ship them in volume until May, more than six weeks after announcing them.
Suddenly Palm, its sales off and its older products piling up, was looking at a huge inventory write-off and net loss. As the stock gave ground, an acquisition that was key to its strategy collapsed. And now, with breathtaking speed, the onetime tech darling has become an unprofitable company with a battered stock, down 95% since last November.
Hand-Cuffed
The pioneer of one of the great high-tech hits of the 1990s, Palm once seemed immune to the malaise infecting Silicon Valley. It behaved like a tech company of old: Caught up in the fast growth of a new line of gadgetry, it charged ahead, not paying much heed to what could go wrong. Today, Palm stands as a stark lesson in how dangerous the technology business is for even an industry leader to navigate.
It's a uniquely bad time for Palm to stumble, given who is lurking in the hedgerows: Microsoft Corp. Though its Pocket PC operating system for hand-helds has had limited success so far, the software giant has a record of eventually dominating the fields where it makes a big push. It's pushing in hand-helds now, announcing this week a new generation of operating software code-named Merlin.
Microsoft may already be making inroads. Handango, a Web site (www.handango.com) that sells software for hand-helds to corporations, estimates that inquiries have shifted to 40% Pocket PC devices, up from 30% last year. Inquiries about devices using Palm's operating system make up about 20% of calls, down from 30%. And Microsoft's forces may get a further boost from the linkup of two major users of its hand-held-computer software, Hewlett-Packard Co. and Compaq Computer Corp.
Palm executives, who at first blamed their company's troubles on the soft economy, now acknowledge they share the fault. "When a company is in growth mode," says Satjiv Chahil, chief marketing officer, "it tends to focus on meeting the growth instead of paying attention to keeping a tightly tuned organization."
Mr. Yankowski, the CEO, says, "We were blindsided."
Hand-helds with Palm's software -- sold by Sony Corp. and Handspring Inc. in addition to Palm -- remain dominant, and Palm is taking steps to get its business back on track. It has hired new executives and is reorganizing, splitting its hardware and software divisions into subsidiaries. More than a fifth of the work force is gone. Palm expects to report another net loss for its fiscal first quarter ended last week, but it has hopes of becoming profitable again by the end of the fiscal quarter just beginning.
Mr. Yankowski says Palm is learning from its mistakes. "This was our first major product transition and some of these problems were avoidable in hindsight," he says. Now, after the management additions and other actions, he says, "I'm cautiously optimistic."
Such a struggle hardly seemed possible late last year. In the holiday season, consumers were eagerly snapping up Palm computers for gifts. They drove the company to 165% year-over-year sales growth.
The torrid demand, however, left the company with a problem: a dearth of flash-memory chips and other parts. At times, Palm's supply-chain team was so desperate for components that it dipped into the "gray market," buying chips from brokers who deal outside company-sanctioned channels. Reacting to the shortages, Palm stepped up its ordering and built up a large inventory of chips and other parts.
Microsoft Hopes Merlin Charms Pocket PC Users, Challenges Palm (Sept. 6)
Palm's Market Share, Sales Decline as Tech Firms Escalate Competition (Aug. 7)
Palm Posts Big Loss on Charges, Aims for Profit in 2nd Quarter (June 27)
Hand-Held Computer Maker Palm Warns of Weak Revenue in Quarter (May 18)
All around it, the high-tech landscape was souring. By late 2000, profit warnings by prominent players such as H-P and Apple Computer Inc. were dominating headlines. Layoffs from failing dot-coms became a daily event. But Palm executives felt immune to the tech slump, by their own admission, and made only glancing attempts to rethink the company's soaring growth.
Palm pushed ahead with construction of a new headquarters in San Jose. Executives say that only infrequent meetings were held on operational issues, such as managing the supply chain and forecasting sales by trying to get a grass-roots feel for demand. Mr. Yankowski began a search for an operations executive and created a council to oversee operations, but the overriding priority was to meet demand. In conversations with retailers earlier this year, Mr. Yankowski was told sales of hand-helds were still growing. "Keep shipping," he says they told him.
In March, Palm said it would acquire Extended Systems Inc., a Boise, Idaho, provider of wireless software to corporations. The deal, for $264 million in Palm's stock, would anchor efforts to sell more to corporations, where it hadn't had as much success as in the consumer market.
Awash by then in older products -- and in parts to make more of them -- Palm began preparing for a March 19 announcement of the new hand-held-computer line. Thin and light, the m500 line featured a color screen on one model, the m505.
That was when executives began receiving troubling data from their sales and forecasting staff. Sales of their pocket computers, it appeared, had abruptly cooled. "It was startling to us," says Judy Bruner, chief financial officer.
Mr. Yankowski convened an emergency meeting with top aides. "The key is our availability of new product" in the m500 line, he said. "Are we still on target for launch? Can we get the m500 line out in [stores] in two weeks?" He says managers were unanimous that they could. Ms. Bruner confirms that executives expected the m500 line to be on store shelves in early April.
Doubts quickly surfaced. Mr. Chahil found out from staffers that initial production was running into problems, particularly at a factory of Flextronics Inc., which Palm had hired to build the products. A spokesman for Flextronics, citing development snafus, confirms that production in a plant in Zalaegerszeg, Hungary, "didn't go as fast as possible."
Palm takes the blame for the technical snags, noting that it didn't leave enough time for testing of the m500 and m505 before sending the designs to be manufactured. As a result, only when parts got to the factory did some problems become apparent. One battery, for example, came in larger than expected and didn't fit. "There was a series of normal kinds of start-up issues," says Ms. Bruner, who adds that Palm expected to meet the April shipping date.
The uncertainty was such, however, that Mr. Chahil decided to cancel much of the planned advertising around the m500's launch. He toyed with postponing the unveiling itself until April. But Palm had already scheduled press activities around the planned launch, to take place at a trade show in Germany known as CeBIT.
"It made sense to announce at CeBIT," a high-profile show, says Mr. Yankowski, the CEO. Mr. Chahil adds, "We didn't want to be missing in action." So on March 19, Palm went ahead with its announcement of the m500 and m505.
The move backfired. Consumers largely stopped buying existing devices such as the Palm Vx and the Palm VIIx, which were now in ample supply in stores. At The Wiz, an electronics retailer based in Edison, N.J., "Our sales momentum [on hand-helds] was through the roof right up till Palm announced their new product line-up," says Dan Bode, a Wiz executive. "At that point, sales went into a decline."
Palm was saddled with a mountain of old inventory and a shaky outlook. On March 27, the company, whose earnings had been steadily rising along with its sales, jolted investors by reporting a small net loss for its fiscal third quarter ended March 1 and projecting a larger loss for its fourth quarter ending June 1. Palm slashed its fourth-quarter revenue estimate to around $300 million from $500 million.
The company cut 250 workers. It halted construction of the new headquarters. It even eliminated free sodas for employees.
Palm's share of global hand-held-device shipments to distributors and retailers in the second calendar quarter fell to 32% from 50% in the quarter before, according to Gartner Dataquest. Shipments of Compaq hand-helds, which use Microsoft's software, doubled to 16.1%.
Palm tried to stir consumer interest in older models with price cutting, a strategy relatively new to the hand-held-computer market. It bought radio ads to trumpet the discounts and devised commercial tie-ins to promote the cheaper hand-helds.
Manufacturing of the m500 line kept hitting snags. Besides the battery issue, glitches involving a vibrating alarm and electromagnetic interference delayed production. "We didn't adequately anticipate the number of issues," Ms. Bruner says.
Mr. Yankowski realized by mid-April that Palm couldn't meet retailers' schedules to load the new devices into stores. "We couldn't build the product fast enough to get the load that we anticipated [because of] manufacturing hiccups," the CEO says. "It wasn't the volume that we wanted."
On May 16, Palm summoned the CEO of Extended Systems, the company it planned to acquire, and told him Palm's sales had slowed drastically. With the value of the acquisition down 60% because of Palm's plunging stock, both sides agreed to scotch it. "We realized we couldn't do justice to the deal," says Extended's CEO, Steve Simpson.
Meanwhile, Palm's rivals were increasing their efforts to capitalize on the company's mistakes. Research in Motion Ltd., the Ontario-based maker of the popular Blackberry pagers, was pushing to get a patent to cover its wireless e-mail technology. And Microsoft stepped up efforts to win users to its Pocket PC system, which is used by Toshiba Corp. and Casio Computer Corp. in addition to Compaq and H-P. Microsoft launched a "Mobile Experience" campaign, featuring two 52-foot trucks, and held workshops and parties for Pocket PC fans across the country. "There was a line equivalent of one city-block long to get into the trucks at one party," marvels Eric Levine, editor of a gadget Web site called Smaller.com (www.smaller.com).
Things could hardly have been less festive at Palm. On May 17, it warned its loss for its fiscal fourth quarter ending June 1 would be twice as wide as forecast just two months earlier. Revenue was also looking far worse, as much as 70% below forecasts made early in the year. Palm also said retailers were sitting on 12 weeks of inventory, four weeks above industry norms. The company might have to take a charge of $300 million, primarily to write off excess inventory.
Mr. Yankowski gathered employees for a pep rally at a hall on the corporate campus. He laid out five priorities: Get rid of old inventory, return to profitability, launch the m500 line, prepare a wireless Internet device and create a next-generation operating system. "We'll be punching in on all of these," he declared.
Not all of Palm's people are on hand to carry out the agenda. Since March, restructuring has meant an exodus of managers who looked after tasks ranging from product marketing to the global supply chain. Palm has brought in several new ones, among them a former Gateway Inc. operations chief, Todd Bradley, and a former AT&T Corp. chief technology officer, David Nagel. Palm also has formed a separate subsidiary for its software division, paving the way for its possible spinoff.
Results for the fiscal quarter ended June 1 weren't quite as bad as Palm's most recent projections. The net loss came in at $392.1 million -- compared with a net profit of $12.4 million a year earlier -- but revenue wasn't as bad as the May estimate, nor was the charge against earnings: $269 million. The inventory situation was looking better.
Palm's sales have stabilized now, though below previous levels. Mr. Yankowski, pointing to improvement since the m500 line at last became available in late May, says Palm "will get up again." |
