Palm (PALM) has a great little business it doesn't seem to know how to run right now.

The handheld maker's austerity measures could return it to stability, but any missteps could have dire consequences. The company is skirting the financial edge while protecting an operating system lead from determined competitors; it is faced with undoing all the trappings of hypergrowth. Management is under the gun for a 69% drop in share price in the past six weeks.

"Obviously, we're frustrated. It was a great company with a great OS, tremendous potential and huge market share," says

CIBC World Markets

analyst Tom Sepenzis. That was true a few months ago when handhelds seemed like they'd weather the economic slowdown better than other tech sectors. Instead, Palm's a $5.05 tragedy. The company is going to have only half the revenue it planned on, will suffer a $170 million to $190 million loss in the quarter, and still isn't shipping the delayed m500 family that caused the shortfall in fully ramped volume.

Palm is trying to stop sinking by taking a $300 million write-off to wipe some of its components off the books. After that whopping charge, however, up to $100 million in inventory still will be cluttering Palm's books. On the bright side, about 75% of those components are for new products, but it's not a given that Palm will need them, because its retail stores and resellers already are carrying what the company's CFO Judy Bruner calls "high" levels of products. Retailers don't need new handhelds right now, but she insists she does not want to yank back product from the sales channel and write down the expense to start anew. When retailers need more handhelds, the components will get off the books.

Lamentably, some of the $300 million write-off is paying off components that were locked into orders and aren't even necessarily shipped to Palm yet. Palm will have to deal with these components when it gets them, which CEO Carl Yankowski says, "may mean placing it into education markets or may mean crushing it."

Ah, to be young and healthy again.

Palm management hedged on any rejuvenation prospects to the point that Bruner said the company would achieve profitability in the fiscal 2002 time frame, but she is "not sure we could achieve profitability for all 2002." Palm expects its newest m500 family of products to account for more sales in 2002, driving up the cost per handheld from currently depressed price-war levels, helping the company's margins.

Palm had $596 million on hand at the end of the third quarter, but analysts such as

Robertson Stephens'

Eric Rothdeutsch estimate the company is going to spend more than half of that in this fourth quarter -- Rothdeutsch pegs the cash burn at $350 million. (He rates Palm long-term attractive and his company has done underwriting for Palm.)

Palm probably will need to get out of a $460 million deal to build a corporate campus in San Jose, Calif., for liquidity. Bruner detailed that in that case,

Societe Generale Financial

keeps the $238 million in collateral Palm already has posted and Palm gets the land. Palm will have to sell the land to recoup that cash, presumably in a better market than the current dour Silicon Valley downturn.

In the meantime, "It certainly is an acquisition candidate now more than ever," in Sepenzis' opinion. He rates Palm a buy and his firm has done no banking for it. On Thursday afternoon's conference call with analysts, many were throwing around November as the likely time frame for Palm to run out of money. Bruner would not agree, but said Palm may have to seek funding.

"Ninety percent of Palm's problems are self-inflicted," says

Needham

analyst Charlie Wolf, who hasn't done banking for Palm. "In terms of a product transition, I have never seen a worse one in the business."

Between now and November, Palm management will have to show greater agility in righting the company than it has in running it in 2001. Yankowski stuck to the facts on Thursday's call, but did offer that he is "quite frustrated to say that, had we executed properly, we would've gained significant market share." Not to mention that it wouldn't be staring so many worst-case scenarios in the face.

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