Palm Warns on Revenue, Pushes Out Profitability - TheStreet

Updated from 5:02 p.m. EDT

Handheld-computer maker

Palm

(PALM)

warned after the market closed today, saying it will not reach profitability in the quarter that ends May 31.

Crunched by declining consumer demand and overall slower IT spending, the situation at the company and the handheld-computer sector at large might get worse before it gets better.

In a statement issued after the market closed, Palm said its revenue for the quarter will be more than 20% below earlier forecasts.

Palm shares sank 4.78%, or 11 cents to $2.21 at the close, but plummeted 23.7%, or 55 cents to $1.77 in after-hours trading, as already jittery investors rushed to dump shares.

Rival PDA maker

Handspring's

(HAND)

shares ended the day down 3.81%, or 8 cents to $2.02, but tanked 16.67%, or 35 cents to $1.75 after the markets closed. The announcement was made minutes after the bell.

The beleaguered handheld-computing company reduced projected revenue estimates to about $230 million, from an earlier expectation of $290 million to $300 million, blaming the shortfall on lower-than-expected demand for its products, including an updated wireless device geared to the enterprise market, the Palm i705.

Estimates were for the company to earn $297.06 million in revenue this quarter, according to Thomson Financial/First Call. Palm plans to report its fiscal fourth-quarter earnings on June 25.

"While we remain optimistic about the long-term growth opportunities in the sector, we are disappointed that we will not meet our revenue and profitability goals this quarter," Eric Benhamou, Palm chairman and chief executive officer, said in a prepared statement.

"Despite the down market environment, Palm is executing well. We expect to report improved gross margins, excellent expense management and a good cash position."

He said that while overall sales have not been as optimistic as the company hoped, it gained both hardware- and software-market share. Hardware market share jumped from 40% in the February to 52% this past May, according to a study by the NPD Group. Software shares gained 10% from 78% to 88%.

The company maintained gross margin will come in above 30% in this quarter, while operating expenses will be reduced to approximately $100 million. The company's cash position, which has not been its strongest suit in the past several quarters, will remain flat at $280 million.

To the consternation of some analysts, the company said it will be entering the next quarter with a slightly higher channel inventory of nearly nine weeks, according to Palm Chief Financial Officer Judy Bruner, but plans to reduce that number by as much as two weeks as it heads into the fall.

Palm is entering a critical phase in the company's technology evolutionary cycle, where its devices no longer will carry the

Motorola

(MOT)

Dragonball processor and move to the incrementally faster

Intel

(INTC) - Get Report

StrongARM chip, which will let Palm introduce features never before seen: audio and video functions. "My concern is the market," said wireless device analyst Joseph To at Lehman Brothers. "There has to be a reason for people to buy these products."

Benhamou is betting that when those devices that can finally play music and show videos begin to ship in the fall, the company and its licensees including

Sony

(SNE) - Get Report

and

Handspring

(HAND)

will be able to tap a much broader market beyond mobile professionals.

What's worth noting is that

Microsoft

(MSFT) - Get Report

PocketPC licensees including

Hewlett Packard

(HPQ) - Get Report

and Toshiba have been offering such features at a higher premium to consumers for some time now.

Moreover, the PocketPC camp is close to the next cycle in their product life, as it too will be launching with new technology. Many of the next generation PocketPC-based devices will be using Intel's Xscale processor. At the same time, these licensees, which have ignored the lower reaches of the consumer-spending spectrum, are now planning to court new buyers with lower-priced offerings. That could potentially head off Palm at the pass as it plans to broaden its market.

Still, in the short term, Palm further ratcheted down expectations for its fiscal first quarter of 2003, which begins in June, postponing profitability until the fiscal second quarter, later in the calendar year.

The company expects to post pro forma losses of between $40 million to $45 million, on dramatically lower sequential revenues of between $175 million to $185 million, in anticipation of continued depressed demand in the market. Revenue growth beyond that is expected to be just a notch north of 10%, instead of more ambitious percentages forecast in March, according to the company.

"We're about to move to the second chapter," Benhamou said.