palmOne Again Slashes Guidance
Updated from 5:36 p.m. EST
palmOne
(PLMO)
took another step backward Thursday by slashing its expectations for its fiscal fourth quarter. The shares plunged in after-hours trading.
The handheld device and smartphone maker warned that earnings in its current quarter would be well below its previous outlook. In recent after-hours exchanges, the company's stock was off $3.72, or 15.5%, to $20.33.
On a conference call with analysts, company executives blamed the reduced outlook on delays in the introduction of its Treo smartphones to the major cell phone carriers. Instead of releasing new phones early in the current quarter, palmOne now expects those phones to debut at the end of the quarter or early in its next fiscal year, executives said. Ed Colligan, the company's interim CEO, said palmOne is stepping up its investment in research and development to speed future rollouts.
The Treo 650 that the company offers for Sprint's network may look similar to the one it offers for
Cingular's
, but inside, the phones are "really different," Colligan said.
"Customization
for each wireless carrier is a huge undertaking. It's difficult to ship to multiple carriers simultaneously," he said, adding, "We must deliver more phones on more networks faster."
The company did have some good news for investors, though, in meeting the Street's revenue and earnings expectations for the current quarter. But it had already lowered those expectations in December with its previous quarterly report.
In its fiscal third quarter, palmOne earned $4.4 million, or 9 cents a share. That was a turnaround from the year-ago period, when it lost $9.3 million, or 20 cents a share.
The company's sales rose 17.6% from the year-ago quarter to $285.27 million.
Excluding amortization, stock-based compensation and severance costs, palmOne would have earned $10.6 million, or 21 cents a share, in its current quarter, up from pro forma income of $600,000, or 1 cent a share, in its third quarter a year ago.
On this basis, sell-side analysts, on average, were calling for earnings of 21 cents a share on $281.69 million in sales, according to Thomson First Call. In December, the company
predicted it would earn 17 cents a share -- 21 cents a share excluding expenses -- on $280 million in sales. That outlook was considerably below analysts' estimates at the time, and the Street consensus dropped in response.
In what could be considered a recurring theme, management at the time blamed its lowered third-quarter outlook on delays in rolling out its smartphones to new carriers. At the time, the company said it expected to announce those carrier relationships in palmOne's fourth quarter instead of during its third quarter.
palmOne repeated that bad habit again with its current report. The company predicted that it would earn 20 cents to 27 cents a share -- 25 cents to 32 cents a share on a pro forma basis -- in the fourth quarter on sales ranging from $320 million to $330 million.
On both a revenue and an earnings basis, that guidance is down considerably from the outlook the company gave last quarter. Then, the company predicted it would earn 45 cents to 55 cents a share in its fourth quarter -- or 50 cents to 60 cents a share on a pro forma basis -- on sales ranging from $360 million to $380 million.
And it's also far below consensus estimates. Wall Street had predicted 52 cents a share in earnings, excluding expenses, on sales of $353.67 million.
palmOne's report came after the bell on Thursday. The company's shares finished regular trading up $1.16, or 5.1%, to $24.05.
The quarter saw a further evolution of palmOne's business, from handheld computers toward its Treo smartphones. In its third quarter, Treo sales accounted for 46% of palmOne's total revenue, up from 39% in its second quarter and 28% in the year-ago period.
Treo sales grew 92% year over year but slipped 10% in the quarter, when compared to sales recorded in the second quarter, to $131.2 million. Company CFO Andy Brown said the sales tally was "in line" with palmOne's expectations.
One factor that may have affected the company's smartphone sales is the inventory overhang leftover from last quarter. At the end of last quarter, the company and its carrier partners were holding nearly 21 weeks worth of smartphone inventory. At the time, the company attributed the backlog to the product transition it was undergoing, as it introduced its new Treo 650 phones.
Company executives declined to estimate how many weeks worth of inventory it and its carrier partners now hold and said they would no longer provide that statistic. Not only are the phones palmOne provides to each carrier substantially different, but so, too, are their sales trends, said Brown.
The weeks' worth of inventory statistic "is less relevant to the smartphone business," Brown said.
Nevertheless, Brown did acknowledge that palmOne's own inventories surged in the quarter. At the end of the third quarter, the company held $45.6 million worth of inventory, up from $14 million at the end of the company's last fiscal year in May, and up from $29.1 million at the end of the previous quarter.
In the meantime, the company's inventory turns in the quarter declined to 21 times from 44 times in the second quarter. The decline was due to the company's inventory build in the quarter, which was related to the rollout of the GSM version of its Treo 650, Brown said.
The decline is "not a concern," he said, adding that palmOne expected its inventory position to fall in its fourth quarter as it ships the smartphones to its carrier partners.
"We believe our current inventory levels are appropriate given the carriers' business objectives," Brown said.
Meanwhile, the company's handheld sales slipped 12% from the year-ago quarter and 33% sequentially to $154 million.
Sales of traditional personal digital assistants have been slipping for years, but palmOne has seen its market share fall even faster as it has shifted its focus to smartphones. The company plans to step up its smartphone development in coming quarters, Colligan said. But it doesn't plan to abandon its handheld line.
Indeed, palmOne plans to introduce new handheld products later this quarter, he said.