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Palm beats the Street
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December 20, 2000: 7:22 p.m. ET
Handheld computer maker beats estimates by a penny
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NEW YORK (CNNfn) - Handheld computer maker Palm Inc. on Wednesday reported a fiscal second-quarter profit that beat analysts' expectations on revenue that more than doubled from the same period a year earlier.
Separately, Palm said it would acquire WeSync, a wireless service vendor based in Portland, Ore., for between $40 million and $45 million.
Excluding one-time charges, Palm (PALM: Research, Estimates) said it earned $27.5 million, or 5 cents per share, during the period ended Dec. 1. That's up from $15.5 million, or 3 cents per share, during the same period last year.
Wall Street had generally expected Palm to post an operating profit of 4 cents per share, according to a survey of analysts polled by earnings tracker First Call.
 At $522.2 million, revenue was up 102 percent from the $258.6 million Palm reported during the same period last year.
Palm shares fell $5.44 to $38.19 in Nasdaq trade ahead of the news. They fell to $32 in after-hours trade.
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In an interview on CNNfn's Street Sweep program, James Faucett, an analyst who tracks the handheld computing industry for Pacific Crest Securities, said the concern on Wall Street may be stemming from the increasing portion of revenue Palm has been deriving from its low-end products, including the recently introduced m100, which retails for $149. (160K WAV) or (160K AIFF)
Indeed, executives at Palm in Santa Clara, Calif., acknowledged that demand for the company's lower cost products had been greater than expected, a trend they see carrying over into the next two quarters.
During the quarter, the m100, which are designed and priced, to appeal to the mass market, "solidified its standing as most successful new product in the company's history," Carl Yankowski, Palm's chief executive, said in a teleconference Wednesday evening.
He said unit volumes of m100 devices shipped during the quarter approached that of its highly-popular Palm V devices.
Largely as a result of the larger proportion of lower-cost devices such as the m100 as well as the Palm IIIe, which sells for $129, the average selling price of all the handheld computers Palm sold during the quarter dropped to $212 from $240 during the previous quarter, according to Judy Brunner, Palm's chief financial officer.
Brunner also noted that sales of the Palm VII, a high-end product which has wireless Internet and e-mail functions built in, were held back by a shortage of key components for which Palm had relied on a single supplier. The company has since redesigned that product to be able to use an alternate supplier and plans to begin aggressively marketing those devices in the latter half of the fiscal third-quarter.
Looking ahead, Brunner said sales in the fiscal third-quarter will fall to between $465 million and $490 million, a decline that is typical after the strong holiday season. She also said she is comfortable with Wall Street's current earnings estimates for a penny per share in the fiscal third quarter and 3 cents per share in the fiscal fourth quarter.
However, continuing shortages of components and an increasing percentage of revenue coming from low end products will weigh on the company's gross margin in the fiscal third quarter. She told analyst to expect a third-quarter gross margin between 30 percent and 35 percent, compared with 36 percent in the most recent quarter.
Revenue may not thrill the Street
While the latest results represent the fourth consecutive quarter in which Palm achieved more than 100 percent year-over-year sales growth, that just might not have been enough for some on Wall Street, noted C.E. Unterberg Towbin analyst Jason Tsai.
"I think the initial read of the numbers was disappointing for a lot of people. Guidance as of last quarter was $500 (million)-to-$530 million," Tsai said. "With typical analyst and investor behavior, we expect companies to upside from what their guidance is."
But Palm executives focused instead on the company's strong performance in the holiday season relative to the PC industry, which has been struggling through what is shaping up to be one of the worst on record.
 "The overall demand for Palm-brand handheld devices remains robust," Yankowski said. "From our vantage point, Palm and others in the [handheld computing] space are in a perfect position this holiday season."
He said that demand, compounded with improvements the company has made in its supply-chain management, are what enabled the company to meet its profit targets while so many other high-tech companies are warning of shortfalls.
Palm is the leading supplier of handheld computers, although it is facing increasing competition from new entrants such as Handspring as well as a series of new "PocketPC" devices being offered by several PC vendors which are based on Microsoft's latest version of Windows CE.
During the most recent quarter, Palm said it shipped more than 2.1 million handheld computers, up 45 percent from roughly 1.5 million in the prior quarter. That brings the total number of Palm handheld computers sold since they were first introduced in 1996 to 10.9 million, the company said.
Some analysts have pointed to the PocketPC devices as a real competitive threat to Palm's dominance, primarily because they think corporate information technology managers will use them as handheld computing becomes integrated into corporate networking environments.
Yankowski said the company has been making good progress in marketing the Palm to corporate buyers, citing contracts with mortgage lender Countrywide Home Loans, which deployed the Palm VII family for its sales force to generate real-time rates and qualification results; and healthcare research firm PHT Corp., which is deploying 5,000 Palm IIIxe handhelds to run clinical trials for pharmaceutical companies.
Including amortized good will and intangible assets, purchase in-process technology and separation costs, Palm's net income rose to $20.3 million, or 4 cents per share, from $12.9 million, or 2 cents per share, a year ago.
As for the WeSync acquisition, the company said it is buying the company to support its strategy to make all of its products wireless enabled.
WeSync, which was founded three years ago and employs 27, makes software that will enable Palm users to wirelessly share information, including contacts, lists and calendars, on the Internet, over mobile phones or on corporate network servers.
"This is another important step on our strategic roadmap as it will allow users to share information beyond the PC," Yankowski said.
He said that deal is expected to close sometime in the next three months.
-- Reuters contributed to this report. 
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