Pixi discounts seen hurting Palm profits

A promoter holds the Palm Pixi at Palm's promotional booth during New York Fashion Week September 15, 2009.

NEW YORK (Reuters) - Sprint Nextel Corp (S.N) started offering a 50 percent discount on Palm Inc's PALM.O Pixi phone on the same day the handset maker cut its revenue target, raising profitability concerns.

Palm shares fell 4 percent on Friday, following a 19 percent drop on Thursday when the company issued its warning for current-quarter and full-year revenue [ID:nN25246210].

Sprint, Palm's closest U.S. service provider partner, began to sell the Pixi for $49.99 on Thursday.

That is not even the lowest price for the Pixi. Wal-Mart (WMT.N) is giving the phone away on its Website to customers who sign a contract with service providers the retailer has agreements with.

Sprint's bigger rival, Verizon Wireless, already offers a 20 percent discount on its version of the Pixi just a month after it started selling the device. Verizon also offers a second Pixi free to families who sign up for two contracts.

It is unusual for mobile operators to discount phones so soon after launch.

"Inevitably this will hurt Palm's profits," said CL King analyst Lawrence Harris. "If it's not in the February quarter, it'll be in May."

Pixi, Palm's second phone based on its webOS software, first went on sale at Sprint November 15. It also sells Pre, whose sales disappointed after an enthusiastic industry response when it was first unveiled in January 2009.

BMO Capital Markets analyst Tim Long questioned Palm's prospects in the coming months as carriers already appear to be having trouble getting rid of Palm inventory.

"We think Palm now has sizable channel inventory issues at Sprint and Verizon, which will make for an even tougher fiscal fourth quarter as their lineup ages," said Long said in a research note. The fiscal fourth quarter starts in March.

Palm partly blamed poor marketing of its phones at Verizon Wireless, a venture of Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L), for its lowered outlook.

"Dave Whalen and I just returned from a very successful meeting with Verizon Wireless, where they acknowledged that their execution of our launch was below expectations and recommitted to working with us to improve sales," said Chief Executive Jon Rubinstein in a memo to employees. Whalen is Palm's senior vice president for global sales.

He also said that 200 "Palm Brand Ambassadors," including Palm employees are now working on training Verizon sales representatives and that these efforts were beginning to show an improvement in sales week over week.

Analysts say that this might not be enough. They said Palm needs to offer new phones with bigger screens and keyboards than the Pre and Pixi.

Multiple sell-side analysts downgraded their estimates for Palm after the warning. Canaccord Adams analyst Peter Misek bet that the shares could fall even further as he cut his price target for the shares to $4 from $8.50.

UBS analyst Maynard Um also cut his price target for the stock to $4.50 from $10 and downgraded the shares to a sell rating from Neutral

Palm shares were down 26 cents at $6.27 on Nasdaq. The stock had already lost half its value since mid January on investor impatience for a new device.

(Reporting by Sinead Carew; editing by Gunna Dickson)