Palm Inc on Thursday said its upcoming Pre phone needs more polishing but that it was on track to start selling the high profit device in the first half of the year as it looks to grab back smartphone business from rivals.

The company gave the update while it reported a wider loss and revenue that fell 70 percent from a year ago, in line with its recent warning for a weak fiscal third quarter.

Its shares fell 4.7 percent after the report as some investors may have hoped for a specific launch date for Pre.

The Pre is seen as Palm's best hope to fight rivals such as Apple Inc and Research In Motion, which have hurt Palm's smartphone sales in recent years.

It said it is working hard to have Pre ready for a launch before the middle of the year at its exclusive U.S. carrier partner Sprint Nextel.

There's no showstoppers, said Chief Executive Ed Colligan in a call with analysts. We plan on delivering on the time frame we said we would.

Colligan also told analysts that he already uses Pre as his personal device every day and that it works well but just needs some polishing before it can go on sale. The company also said it has enough money to support the phone's launch.

Pre, which will be up against Apple's iPhone and RIM's BlackBerry, is based on a new software system known as webOS and has touchscreen controls.

Colligan told analysts that the company has a whole set of future products planned for the system.

He said some of these webOS devices could be simpler than Pre and some of them more advanced so that it can target different parts of the market.

There's certainly opportunity for going down stream and taking functionality out and clearly there's things we can do going upscale he said, adding that carrier customers that had seen its future product plans were impressed.

PRE TO HELP MARGINS

Once these new products are on sale the company said it aims to be able to report non-gaap gross profit margins of 30 percent plus, similar to margins it had seen in the past for its Treo smartphone line up.

Palm said its gross profit margin was 5 percent in the third quarter, ended Feb 27 and 20 percent in the second quarter.

In the current quarter it still expects to be hurt by price pressure on its legacy products and weak consumer demand due to the recession.

Palm's loss widened to $98 million, or 89 cents per share for the third quarter ended February 27, from a loss of $57 million or 53 cents per share in the year ago quarter.

Excluding items such as stock-based compensation its loss would have been 86 cents per share, roughly in line with estimates from two analysts contacted by Reuters.

Revenue fell to $90.6 million from $312.1 million, very slightly ahead of Palm's March 3 warning that revenue would be in a range of $85 million to $90 million.

However, it was still well below the $155 million average analyst estimate prior to the early March warning.

The company had warned of a bad quarter as the poor economy aggravated already weak demand for its older phones, and shipments of its new Treo Pro phone were delayed.

The quarter looks very much like what they said, said Avian Securities analyst Matthew Thornton. I've a tough time seeing how many people care about this quarter because the story is about the Pre and fiscal 2010.

Palm's shares fell about 4.7 percent to $7.35 in late trade after closing down another 4.7 percent in the regular Nasdaq session on Thursday.

(Reporting by Sinead Carew; Editing by Bernard Orr)

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