Palm: Operating loss to double in fourth quarter

May Wong

Monday, May 21, 2001 | 11:04 a.m.

SANTA CLARA, Calif. -- Shares of Palm Inc. tumbled 28 percent Friday after the handheld computer maker warned investors that its balance sheet will get worse before it gets better.

The stock rebounded somewhat this morning, trading up 16 percent.

The company said Thursday it expects its operating loss for the current quarter to be twice as much as previously projected, blaming shipment problems that resulted in stalled sales.

The Santa Clara-based company, the world's leading provider of personal digital assistants, said it expects its operating loss to range between $170 million and $190 million for the fourth quarter ending June 1. The company previously projected a loss of $80 million to $85 million.

Revenues now are expected to range between $140 million and $160 million, compared to previous estimates of $300 million to $315 million, the company said.

"Our new m500 family of handheld computers is shipping in volume later than we had hoped, precluding the opportunity for distributors, retailers and resellers to reorder in our fourth quarter," said Carl Yankowski, Palm's chief executive.

"The shipment delay accounts for the bulk of our reduced revenue outlook and is exacerbated by the slowing economy, which we believe has spread beyond the U.S."

In trading Friday on the Nasdaq Stock Market, Palm's stock fell $2 to close at $5.05.

Also Thursday, Palm announced a mutual agreement with Extended Systems to terminate their proposed merger.

Palm said it is continuing with the plan it announced in March to cut 250 jobs and save $34 million. Other cost-cutting measures in the works include consolidating facilities and a possible termination of a lease for a future corporate campus in San Jose.

Palm said it expects a one-time inventory charge of $300 million as well as other severance- and real estate-related restructuring charges for the quarter.

Palm plans to report its fourth-quarter and year-end results during the week of June 25.

Analysts traced Palm's gloomy bottom line to circumstances that started last year.

A year ago, Palm faced a component shortage and couldn't meet the demands of retailers and consumers. Then when the component issue disappeared toward the end of the year, shipment orders jumped, in part to make up for the earlier shortage.

In the beginning of this year, the slowing economy started to take its toll and Palm and its channel partners had more Palm devices than they could sell.

And in March, Palm announced a new line of products, the m100, m500 and m505.

"So now you have all these retailers sitting on this enormous stash of older Palms and everyone knows there are these new, sexier products coming out," said Bernstein analyst Paul Sagawa.

"This is really a product transition problem for Palm rather than a demand problem," he said.

Palm has since dramatically slashed prices and given discounts of its older models, but that has only further cut into its revenues.

In a conference call with analysts, Palm officials said the company remains committed to achieving profitability some time within its 2002 fiscal year.

They also said the company expects volume shipments of the new products to catch up with demand by the end of June.

Judy Bruner, Palm's chief financial officer, also acknowledged that Palm is running low on cash and that it is "very possible" the company will seek to raise more money.

"Cash preservation is a number one priority for us right now," she said.

Though Bernstein's Sagawa expects Palm's channel problem to linger at least into the next quarter, he remained optimistic about the company's long-term prospects.

"This is a company that owns an incredible product and technology," he said. "A year from now, this channel problem will be a distant memory and hopefully Palm would have learned their lesson about channel inventory."

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