Is the Centro helping or hurting Palm?

It's even shaped like a little lifeboat, and it's supposed to bring the Palm brand out of the doldrums and back into people's pockets. The Centro may be doing so, but the problem is, it's doing so at a cost.

Quarterly earnings releases typically focus mainly or entirely on the good news, and let the analysts out there do the math. But when the math is something as simple as determining gross margin -- a little detail quite obviously omitted from yesterday's printed earnings report from Palm -- the result is that it becomes the center of attention.

That is bad enough news considering Palm posted a pretty big loss for its fiscal third quarter, which ended last February: nearly $29.2 million after taxes.

The good news was supposed to be all about the Centro, the low-cost smartphone Palm is selling worldwide through carriers such as AT&T, Sprint, and Vodafone in Europe. In the last quarter, the company shipped 826,000 smart phones (up 13% over the prior quarter) versus just under 200,000 handhelds; and amid that mix of Smartphones, there's supposed to be both Treos and Centros. The Treo has been the big revenue provider, up until the Centro was brought in last September.

But here's where the math comes in: gross margins came in at 29.8% for the third quarter. That's versus 36.8% for the third quarter of 2007, when the Treo was the principal product in the smartphone line.

Palm President and CEO Ed Colligan couldn't hold up the fort for very long. When directly asked whether his initial comments about a revenue downtrend coupled with Windows Mobile "aging" should be interpreted as an indicator of a downtrend for the remainder of the fiscal year, he broke down into full honesty mode:

"I think what it's pointing towards is we're seeing a lot of success with Centro but it has -- it is bringing that success at a lower margin and a lower ASP [average selling price] line," Colligan responded during his company's quarterly conference call on Thursday (Read the complete earnings transcript on Seeking Alpha).

"So the good news is that sell-through is growing. We are reaching new customers. We are extending the Palm brand to those customers. But until we fix our mix, essentially, until we get new Windows Mobile, new Treo products out at a higher price point and higher margins, it's difficult to make up all the revenue between those two...and those products aren't coming out this quarter, so we are going to do everything we can to drive the top line on Centros as high as we can get it. But we're trying to just -- I guess, without giving direct guidance -- make sure that everyone is being prudent about this quarter: It's going to continue to be a tough quarter relative to top line pressure."

Later, Colligan elaborated: "I don't know how to say it other than saying we believe that Centro growth will help us to some extent offset the declines in some of our older aging product lines, including Windows Mobile and older Treos, for that matter, you know, older Palm OS Treos."

It will be Q1 of fiscal 2009 -- between June and August -- when the company is due to bring out its next line of Windows Mobile-based Treos. That introduction, Colligan told analysts, will help stabilize margins mostly because it will be businesses that invest in the product, not general consumers.

"Well, it's targeted at the enterprise, so you know, I don't think it's going to be something that's radically off what we think is a core design center that makes sense there," Colligan told one analyst, after cautioning that he couldn't get into too much further detail. "For instance, it has a keyboard. We think it's critical to have a keyboard in enterprise...Does it have similarities to other Treos? Yes. Will it be great? Yeah, we think so."

The last time Palm had this bad a quarter overall, it laid off ten percent of its workforce to compensate. The Centro -- the company's designated savior -- was what it chose to produce instead of the Foleo, conceivably a UMPC-like device that would have had some of Colligan's key enterprise features, including a keyboard, an enterprise focus, and a higher margin.

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