Palm (PALM) isn’t having trouble selling its Treo and Centro smartphones: It sold 1 million of them last quarter, up 49% from a year ago. But it is having trouble making money off them: The company lost $42 million last quarter on $367 million of revenue.
Palm’s big hope: That long-awaited, top-secret new phones running a long-awaited, top-secret operating system will show up next year and command higher prices and higher margins.
That’s a big bet: The smartphone market is getting increasingly competitive, as Apple (AAPL) expands its iPhone sales in more countries, as Google (GOOG) Android-powered phones hit the market, and as Research In Motion (RIMM) adds more BlackBerry gadgets to its arsenal.
But the good news for Palm is that the market for smartphones is growing like a weed. Citigroup expects the smartphone market to grow 50% to 60% annually for the next several years. Citi thinks smartphones will comprise 22% of the overall mobile phone market next year, up from less than 9% in 2006.
Obviously, Palm’s executives want to take share from rivals. But because the market’s exploding, if Palm simply keeps its current market share — about 3% — it will be in good shape. For instance, if Palm can keep its unit sales growth — and, more importantly, its revenue growth — in line with the market, next year’s August quarter sales could be closer to $550 million — and the following year, more than $800 million.
The key: Figuring out a way to either charge more for its phones — or spend less to make them — so Palm’s margins get into the black. Or else none of this means anything to Palm’s investors, including private equity firm Elevation Partners, which put $325 million into the gadget maker last summer.
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