Palm Will Have Its Hands Full Explaining This Quarter - TheStreet

(Updated from 6:30 p.m. EDT Monday)

After the bell,

Palm

(PALM)

brings a close to a quarter that defies the imagination.

In the third quarter ended March 2, the handheld-device platform leader's revenue grew 73% year over year to $471 million, but it will report its fourth quarter with analysts expecting a mere $145.52 million in revenue and a 19-cent per-share loss, according to

Thomson Financial/First Call

.

No one's anticipating great news from Palm management. Expect the Street to pose heated questions about the company's cash position, its inventory levels and its time frame for recovery. If there's any shred of good news in tomorrow's results, it's that it would take a propane tank and a blowtorch to spook the stock's price much lower.

However, the stock managed to trickle down further today: At midday, it was off 26 cents, ot 5%, to $4.97.

Palm let on that it had an inventory problem on March 27 when it reported third-quarter results -- basically, it secured lots of components with long lead times last fall when that market was extremely tight, only to see demand turn south because of slowed spending and a delayed launch of new products. Palm updated that outlook on May 17, when it warned that in the fourth quarter it would see $140 million to $160 million in revenue and would lose $170 million to $190 million. (On March 27 Palm put out depressed numbers of $300 million to $315 million in revenue.) Investors are expecting Palm to take a $300 million writedown on those excess components.

Cash flow is another big concern. The device maker finished the third quarter with $596 million in cash and equivalents, after ending the second quarter on Dec. 1, 2000, with $743 million. Palm bailed out of one of the costlier items in its future, a $460 million planned corporate campus in San Jose, Calif., applying its $216 million down payment to buy 39 acres of land it will sell. "That's $220 million less in cash. Losses are increasing, and considering the drop-off in revenue, there is some liquidity concern," says

CIBC World Markets

analyst Tom Sepenzis. His firm has not done banking for Palm.

"I'd like to hear a decent burn rate," says

Lehman Brothers

analyst Joe To; Lehman hasn't done banking for Palm. "

Handspring

(HAND)

burns $16 million a quarter. Palm is maybe four times Handspring's size."

Palm's new m500 family of products can take some pressure off the cash and inventory concerns if the new line manages to overcome early delays and a slow ramp-up to post strong sales. Palm needs good revenues and fatter margins than it's getting by selling older models at reduced prices.

Now trading in the high $4 to low $5 range, Palm's stock has already lost 68% since the close before its last quarterly earnings report and lowered projections. The stock's 52-week low is only a breath away at $3.91. Sepenzis says "it's hard to be surprised at this point" on the downside. As for when Palm climbs again, he doesn't expect much for three to six months.