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Guidance Pelts Palm

Sales jump at the handheld devices maker, but shares sink on second-quarter outlook.

Updated from 9:46 a.m. EDT



earnings fell in the gadget maker's fiscal first quarter despite a 25% jump in sales.

While those results topped the Street's expectations, on Thursday the company offered a disappointing outlook for its current quarter. Investors seemed to focus on that disappointment, pummeling the company's stock.

In recent Friday trading, shares were off $5.78, or 16.5%, to $29.19.

In the quarter ended Sept. 2, the Treo phone maker earned $18.2 million, or 35 cents a share, on $342.2 million in sales.

In contrast, in the same period a year earlier, the company earned $19.6 million, or 38 cents a share, on sales of $272.1 million.

Excluding certain amortization and stock-based compensation expenses, Palm would have earned $21.1 million, or 41 cents a share, in the just-completed period, compared with $21.9 million, or 43 cents a share, a year earlier.

On this basis, analysts were expecting the company to earn 38 cents a share in the quarter on $341.4 million in sales, according to Thomson First Call.

In June, Palm executives projected that in the second quarter the company would earn 30 cents to 35 cents a share on a pro forma basis on sales ranging from $330 million to $335 million.

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But the company offered more cautious -- and complicated -- guidance for its second quarter than analysts had predicted.

Palm expects to receive a tax benefit in the quarter of $240 million to $250 million, which will be partially offset by a higher tax rate, thanks to the windfall. On the bottom line, the company expects to post a profit of $5 to $5.20 a share in the quarter, or, if it is unable to record the benefit, earnings of 55 cents to 60 cents a share.

On a pro forma basis, which excludes the windfall, amortization and stock-based compensation costs, the company expects earnings of 38 cents to 43 cents a share, assuming the benefit-induced higher tax rate, or 60 cents to 65 cents a share, assuming the company doesn't get the benefit and thus continues to pay its current tax rate.

On the top line, the company expects to record revenue of between $435 million and $440 million.

Wall Street had projected that Palm would earn 66 cents a share on sales of $450.16 million in the current period.

Palm's revenue surge was led by a jump in demand for its Treo smartphones. During the quarter, 470,000 Treos were sold to businesses and consumers, the company said, which was up 160% from the same period a year earlier.

Palm also said its share of the handheld computer market rose in the quarter.

But those gains were more than offset by rising costs.

Palm's cost of sales, which represents the direct expenses the company incurs to manufacture its products, rose 31% in the quarter, or by nearly 3 percentage points as a portion of sales.

As a result, the company's gross margin fell to 30.5% of sales from 33.4% a year earlier. Operating expenses at Palm's grew 26% in the quarter, or about 15 basis points as a portion of sales.

A previously announced rise in research and development spending more than accounted for the overall increase in operating expenses, as such costs grew 56% to nearly $29 million.