Smart Phone Makers Get Ready for iPhone Competition

SAN FRANCISCO – Palm Inc. (PALM) and Research In Motion Ltd. reported starkly different earnings, but the two major smart phone makers both face intense scrutiny from Wall Street about whether they'll withstand competition from Apple Inc.'s iPhone.

Research In Motion said Thursday that its fiscal first-quarter earnings grew 73 percent thanks to increased sales and subscriber additions. The BlackBerry maker also announced a 3-for-1 stock split, and the shares surged more than 17 percent after hours.

RIM shares climbed $28.40 to $193.99 in high-volume trading. The shares had ended the regular session up $2.14 at $165.59 before the results were released.

By contrast, rival Palm reported a 43 percent plunge in fiscal fourth-quarter profit amid sharply rising costs. Its shares fell 44 cents, or 2.7 percent, in extended trading after gaining 31 cents to $16.56 in the regular session.

Both companies reported earnings a day before the launch of Apple Inc.'s heavily hyped iPhone, and analysts peppered Palm and RIM executives with questions about whether they'll withstand the competition.

Featuring a 3.5-inch touch-screen display, the combination cell phone, iPod media player and wireless Web browser starts at $499. But its lack of a physical keyboard and questions about compatibility with corporate e-mail systems lead many to believe RIM's BlackBerrys and Palm's Treos will remain the workhorses of the smart phone market.

RIM Co-Chief Executive Jim Balsillie said the iPhone has raised awareness for many types of smart phones that offer Internet access, e-mail and other services.

"I think they did a great favor because they drove attention to the converged appliance space," Balsillie said. "IPhone is launching in one carrier in one country. We're in about 100 countries and have 300 carriers. To the extent that there's interest there, there is another 109 countries that are interested in these kinds of things."

The Waterloo, Ontario-based company's sales for the quarter ended June 2 totaled $1.08 billion, up 77 percent from $613.1 million last year. RIM said 76 percent of first-quarter revenue came from stronger-than-expected device sales.

Ed Colligan, Palm president and chief executive officer, said thousands of news articles and breathless hype in blogs and the mainstream media could be a double-edged sword for Apple. Reviewers are likely to seize on the iPhone's any perceived flaw.

"I've never seen the kind of feeding frenzy we've seen in the media," Colligan said. "We expect it to be a very successful product — but I don't know how it can possibly live up to the hype."

Sunnyvale-based Palm sold a record 750,000 Treos, which generated $344.2 million in its quarter that ended June 1. But the company, which laid off about 100 workers earlier this year and closed the quarter with about 1,100 employees, reported sharply rising costs.

"General and administrative" expenses — which range from consultants to outside legal fees — were $1.53 million last quarter, compared with $207,000 in the year-ago period. The company spent $2.1 million on research and development last quarter, compared to a negligible amount a year ago.

RIM earned $223.2 million, or $1.17 per share, up from $128.8 million, or 67 cents per share, in the year-ago quarter. Adjusted net income, which excludes a $5.3 million stock option expense, came to $228.5 million, or $1.20 per share.

The results easily topped analysts' expectations for earnings of $1.06 per share on sales of $1.05 billion, according to a survey by Thomson Financial.

Palm said it earned $15.4 million, or 15 cents per share in the quarter. Revenue was $401.3 million, down slightly from $403.1 million a year ago.

Excluding $5.4 million in stock-based compensation and other one-time charges, Palm said it earned $17.8 million, or 17 cents per share, compared with $30.6 million, or 29 cents per share, in the year-ago period. That beat analysts' expectations by 2 cents per share, according to Thomson Financial.

Although executives often refrain from publicly discussing rivals' offerings, analysts say Palm and RIM would be foolish to take their eyes off the iPhone anytime soon.

"Anyone who is being dismissive of Apple's entry into the cell phone market this week is probably not planning effectively," said Michael Gartenberg, an industry analyst with Jupiter Research.

Balsillie said he won't be nervously watching iPhone sales figures.

"We're really focused on our business and what we do," he said.