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Palm's sales slide
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June 26, 2001: 6:20 p.m. ET
Handheld computer maker beats lower targets; sees profit in two quarters
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NEW YORK (CNNfn) - Handheld computer maker Palm Inc. on Tuesday reported a fiscal fourth-quarter operating loss that was slightly narrower than its sharply reduced forecasts on sales that fell more than 52 percent from the same quarter a year ago.
And executives of the world's largest handheld computer supplier said they expect the company to return to profitability within six months, a forecast that sparked a rally in its shares during after-hours trade.
After the closing bell, Palm said it lost $153.6 million, or 16 cents per share, during the quarter ended June 1. That excludes restructuring and other extraordinary charges and compares with a profit of 3 cents per share during the same period last year. Analysts polled by earnings tracker First Call had generally expected the company to report a loss of 19 cents per share.
At $165.3 million, Palm's fiscal fourth-quarter revenue was down 52.7 percent from $350.2 million during the year-ago quarter.
Accounting for a slew of one-time charges -- including a restructuring charge of $60.9 million relating to real estate consolidation costs and employee severance expenses as well as an inventory write-down of $268.9 million -- Palm's net loss for the quarter was $392 million, or 69 cents per share.
The latest results are slightly better than the expectations the company set last month, when it substantially lowered its sales and profit targets for the quarter. The company blamed a delay in volume shipments of its latest line of devices as well as the slowing global economy.
On May 17, Palm (PALM: Research, Estimates) cut its fiscal fourth-quarter sales target in half, saying it expected revenue for the quarter to range between $140 million and $160 million, where previously it had anticipated revenue ranging between $300 million and $315 million.
At that time, executives said they expected to log an operating loss ranging between $170 million and $190 million, compared with a previous forecast of a loss ranging between $80 million and $85 million, or 8 cents per share.
Executives at Palm in Santa Clara, Calif., attributed the shortfall to a confluence of company specific and economic factors.
They said a delay in volume shipments of its latest m500 family of devices had precluded the opportunity for distributors, retailers and resellers to reorder during the fourth quarter. They also said the delay stalled sales of existing products and the situation was exacerbated by the slowing economy, which was showing signs of spreading beyond the United States.
Faced with these circumstances – as well as an increased competitive threat from rivals such as Handspring (HAND: Research, Estimates), whose "Visor" products are based on the Palm operating system, and vendors such as Compaq (CPQ: Research, Estimates), whose "iPAQ" line of PocketPC devices have become increasingly popular – Palm has been aggressively cutting its prices and offering promotions and discounts for its services.
The company said the average selling price, or ASP, of a Palm device in the fiscal fourth quarter was $177. That's 10 percent lower than an ASP of $197 in the prior quarter and 32 percent below the ASP of $262 million during the same period a year earlier.
Palm also has been cutting costs. Already, the company has laid off roughly 300 employees, and Carl Yankowski, Palm's chief executive, told analysts during a teleconference Tuesday evening that the company's total workforce reduction would amount to 500, or roughly 25 percent of its total work force.
"It was clearly a demanding quarter for Palm, our shareholders and our employees, but thankfully not for our customers, who continued to receive the best handheld solutions and services on the market," Yankowski said.
He said the company entered the quarter knowing that the slowing economy would affect the handheld computing market on the eve of the largest product transition in Palm's history, but exited the quarter a leaner and more focused organization.
More shipments, lower inventory will yield 2Q profit
Yankowski said volume shipments of the m500 series and close collaboration with its channel partners helped spur end-user demand for Palm products, resulting in an overall reduction of inventory levels. He said the company ended the fiscal fourth quarter with 10 weeks of channel inventory, and is aiming to reduce inventory levels to between four weeks and eight weeks during the current quarter.
"These accomplishments, and other initiatives under way, position us to return to profitability in the second quarter of the new fiscal year," Yankowski said.
Specifically, the company is aiming to increase its revenue to a range between $200 million and $220 million and log an operating loss ranging between $60 million and $80 million in the fiscal first quarter, according to Judy Bruner, Palm's chief financial officer.
In the fiscal second quarter, Bruner said Palm expects revenue to rise to a range between $420 million and $440 million, and the company will record an operating profit ranging between $5 million and $20 million. She did not provide earnings estimates on a per-share basis for either quarter.
Analysts most recently had expected the company to log a fiscal first-quarter loss of 11 cents per share and a fiscal second-quarter loss of 6 cents per share, according to the First Call survey.
Shares of Palm fell 4 cents to $5.19 on Nasdaq ahead of the earnings news. They soared 91 cents to $6.05 in extended-hours trade.
Still, not everyone was convinced that Palm has gotten past its obstacles. Michael Kim, an analyst at Robertson Stephens who recently initiated coverage of Palm with a "market perform" rating, told CNNfn's Street Sweep it remains to be seen whether the company really is on the short road to financial recovery. (164K WAV) or (164K AIFF)
"I think its going to take a couple of quarters to really see if we have any sustained return in consumer demand," Kim said. "We are of course heading into the seasonally slower summer months, and we may begin to see some uptick with back-to-school and possibly the holiday season. However, if macroeconomic conditions continue to soften ... we could be in for more."
For the full fiscal year, Palm's net loss was $28.5 million, or 5 cents per share. That compares with a net profit of $58.4 million, or 11 cents per share in the prior fiscal year.
Palm's revenue for the full fiscal year was $1.56 billion, up 47 percent from the $1.06 billion reported in fiscal 2000. The company finished the year with $513.8 million in cash and cash equivalents. 
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