Palm Beats Lowered Estimates

Lucky for Palm (PALM - Cramer's Take - Stockpickr), it's moving in the right direction -- at least for one quarter.

The handheld device maker managed to turn itself around this summer, eking out a sequential improvement and besting Street estimates after a shocking spring-quarter slip that had investors worrying about Palm's viability. In its first fiscal quarter of 2002, ended August 31 and reported after the bell Thursday, the company put together $214.3 million in revenue for a 7 cents a share loss.

Back in June, it wasn't a sure thing that Palm would be able to pull out of an inventory binge that set off a chain of price wars that caused revenues to tumble 65% sequentially to $165 million. Palm took huge charges to get its balance sheet back in order, and insisted it would be able to turn in $200 million to $220 million in revenue in this quarter. Investors weren't confident Palm could do so, docking the stock 14.34% to $2.15 in trading before the announcement.

Palm's $214 million in revenue compares with the $401 million in revenue it notched a year ago in the seasonally weak fall quarter. Hard times brought on a disastrous reduction in sales in the fourth quarter of fiscal 2001, leaving Palm with only $165 million in the quarter. Today's results stack up favorably on a sequential basis.

The key for the stock tomorrow will be management's outlook for the upcoming second quarter. Before the earnings release, analysts showed faith in Palm's June assurance of a holiday quarter resurgence, with consensus estimates resting at $421.9 million revenue for the final quarter of the calendar year, good for a break-even earnings performance. When it reported earnings on June 26, Palm was hopeful that it could turn in $420 million to $440 million in revenues in its fiscal second quarter.

"Our focus during the just-ended quarter was on improving operational efficiencies, and the same goal will remain foremost in the current and future quarters," said CEO Carl Yankowski in a statement.

Palm is in pain after months of a debilitating price war brought on by an overzealous pre-booking of components back when consumers couldn't get enough of the company's zippy handheld organizers. As demand began showing the faintest signs of fading, Palm found itself on a stockpile of parts that led it to take a $436.5 million write-down last quarter to get them off the books. Additionally, the company worked to get out of plans to build a large corporate campus, which contributed to $106.7 million of the write-down.

As the inventory issues work through Palm's system, it is faced with a market of apathetic consumers who shrug off its many discounted charms. The company went so far as to mark down the m500 that has only been out since spring to $329, trying to make it more attractive to consumers. It's more beautiful older sibling, the color-screened m505, retails for $449. A consumer slowdown coincides with a gap between those m500s, released in the spring, and the upcoming wireless email-capable device Palm should have out by Christmas. Thursday morning it announced a new member of the low-end m100 family, the m125, to spruce up its handheld line. The starter PDA has a respectable amount of memory, has the newest 4.0 version of the Palm operating system, has a newer chip than its siblings' and can be expanded. It sells for a $249, $50 higher than other low-end competitors, including the $199 Visor Neo unveiled earlier this week by Handspring (HAND - Cramer's Take - Stockpickr).