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PalmOne Hammered on Guidance

The hand-held device maker beats second-quarter estimates but warns about the current one.

Updated from 12:17 p.m. EST

PalmOne

(PLMO)

shares nosedived 19% in midday trading as investors shrugged off solid results for the fiscal second quarter and fixated on weak guidance.

Following its first showing as a standalone company, the stock sank $2.64 to $11.21.

In the wake of this morning's earnings report, J.P. Morgan analyst Paul Coster acknowledged in a note that the handheld device maker had exceeded expectations in the second quarter, reporting operating expenses significantly lower than the bank anticipated.

But he added that guidance was "very disappointing, going beyond anticipated seasonality." Despite quickly rising sales of the Treo 600 smartphone, he said there appears to be an inventory build in the channel and suggested the company may need to reduce prices to flush it out.

J.P. Morgan reiterated an underweight rating on the stock, noting the company doesn't expect to reach sustainable profitability until fiscal 2005. The firm hasn't done investment banking for palmOne.

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Thursday morning the handheld device maker reported that it handily beat earnings estimates. Net income, based on continuing operations, fell to $2.6 million, or 7 cents a share in the quarter ended Nov. 28, compared with $9.5 million, or 33 cents a share, a year ago. Analysts expected a loss of 2 cents a share, according to Thomson First Call. Revenue rose 5% to $271.2 million from $257.9 million last year.

The results reflect the effects of Palm Inc.'s Oct. 28 spinoff of

PalmSource

(PSRC)

and its Oct. 29 acquisition of Handspring, a former rival in the hand-held devices market. During the quarter, the Milpitas, Calif.-based company sold 1.4 million handheld computing and communications units.

Including discontinued operations, the company, which consists of Palm Inc.'s former Solutions Group and Handspring businesses, had a loss of $4.1 million, or 11 cents a share, compared with a profit of $3.5 million, or 12 cents a share a year ago.

Also Thursday morning, PalmOne guided for sales in the range of $200 million to $215 million in its fiscal third quarter, far below the analyst consensus estimate of $235 million.

"Our revenue is typically down sequentially from the second quarter to the third quarter as is this guidance, but it's up on a year-over-year basis," said chief financial officer Judy Bruner. She said that last year Palm alone reported sales of $198 million in its fiscal third quarter. However, that result does not include sales from Handspring, now a part of palmOne. Handspring operated on a slightly different quarterly schedule.

Bruner said palmOne expects a non-GAAP operating loss of $12 million to $18 million and a non-GAAP net loss of $14 million to $20 million. The company also expects to take some restructuring charges in the third quarter that are not reflected in the non-GAAP figure.