Report: Compaq to overtake Palm in revenue

iPaq sales could surpass Palm Todd Kort, principal analyst, Gartner

Palm continues to hold the No. 1 position for market share and will ship more units in the current quarter than Compaq and other rivals, according to Gartner analysts. However, a higher average selling price for Compaq's iPaq handheld devices will lead to significantly higher revenue for Compaq, said Gartner, adding that the shift could happen as early as the current quarter.

Gartner analyst Ken Dulaney said the data reflects the increasing popularity of handheld devices in the enterprise market--a market "Palm has failed to put roots into." Handhelds using Microsoft's Pocket PC operating sytem, such as the iPaq, have had better success among corporations, he added.

Gartner expects that Palm shipments will drop significantly compared with the same quarter last year and that shipments of Compaq's iPaq devices will increase.

Palm shipped about 1.18 million units during the second quarter of last year, but the handheld maker is expected to ship only 622,000 units in this year's second quarter. The average selling price for its devices will also drop significantly from $262 to $209, Gartner said. Overall revenue is expected to reach $145 million, Gartner said, and revenue from hardware will hit $135 million.

Compaq will ship 450,000 to 500,000 units this quarter with the average selling price of about $500, Gartner said. Revenue from the PC maker's handhelds will be in the $200 million to $250 million range. Because Compaq began shipping iPaqs in May 2000, no comparison figures were available for the second quarter of last year.

However, not everyone is accepting the Gartner report as gospel. Pacific Crest Securities analyst James Faucette called the the report misleading. Gartner analysts are relying on different types of prices to compare Palm devices with Compaq iPaqs, Faucette wrote in a note to investors Monday.

"Palm's reported average selling price in the Gartner report is more in line with wholesale prices, while Compaq prices are closer to retail prices," Faucette said. Retail prices tend to be 15 to 20 percent more than wholesale prices.

The Gartner figures also only look at the current quarter shipments and do not take into account prior shipments, Faucette said.

"Palm has built up inventory with retailers and distributors so the company has not needed to ship as many units this quarter" as in the same period a year ago, Faucette said.

Faucette added that, according to retail channel reports, iPaq handhelds are also building up inventory and that retailers as well as Compaq are beginning to cut prices to make the handhelds more attractive to buyers.

Still, Dulaney said he expects Compaq's iPaq handhelds to beat Palm in revenue for several quarters to come. Dulaney noted that Compaq can justify the higher selling prices because its devices perform more functions that large businesses want, such as editing Word documents and Excel spreadsheets.

"Palm devices have to get closer to offering what Pocket PC devices can do now, and I don?t see that happening until at least the third quarter of next year," Dulaney said.

Palm has stated that it will begin using an ARM-based processor similiar to those in devices using Pocket PC--a move that will provide more horsepower for supporting a higher-end version of the Palm OS. Motorola, the primary provider of Palm's processors, just introduced two new processors for handhelds, including one based on ARM technology. Palm has not announced whether it will choose Motorola's ARM-based processor or another company's.

Meanwhile, momentum is building for devices such as the iPaq that use Pocket PC. Late last month, Microsoft announced that in the first year of availability, 1.25 million devices that use Pocket PC shipped. Selling to large businesses is the main reason for the high volume of shipments, analysts say. Corporations tend to buy in large volumes, whereas Palm and Handspring focus on single-device sales to individual consumers.

Also included in Gartner report were predictions for Handspring, which licenses the Palm operating system. Handspring is expected to ship about 330,000 units with an average selling price of about $190 in the current quarter, Gartner said.

Handspring warned earlier this month that sales will come in at $60 million to $65 million for the current quarter, which is roughly half of what the company told investors in May. In the same quarter last year, Handspring shipped 225,000 units at an average selling price of $230 and had revenue of about $52 million, according to Gartner.