June 26, 2001 6:05 PM PDT

Palm earnings beat lowered expectations

Handheld maker Palm on Tuesday narrowly topped already slashed estimates for its fiscal fourth quarter but also took more than $435 million in charges after writing off a glut of unsold products.

Palm said its pro forma loss, which excludes the charges, totaled $89.2 million, or 16 cents per share, on revenue of $165.3 million for the quarter ended June 1. Its operating loss of $153.6 million was narrower than the company forecast in its most recent earnings warning.

After twice cutting estimates for the quarter, Palm had been expected to report a pro forma loss of 19 cents per share, according to First Call, on revenue between $140 million and $160 million.

In the same quarter a year ago, Palm had pro forma earnings of $17.2 million, or 3 cents per share, on revenue of more than $350 million.

Palm hopes to return to profitability in its second fiscal quarter.

The company expects an operating loss of $60 million to $80 million on revenue of $200 million to $220 million in the current quarter, Palm Chief Financial Officer Judy Bruner said during a conference call.

Bruner said Palm has pared its channel inventory from more than a quarter's worth of goods to about 10 weeks' worth. The company plans to further trim the amount of products in the hands of stores and distributors, she added.

Judy Bruner By the end of the current quarter, she said, "we expect channel inventory to be in our desired range of four to eight weeks." As a result, Palm will sell fewer products into the channel than it expects to actually sell.

CEO Carl Yankowski also noted that, after two months of steep declines, sales to consumers improved in May to their level in February.

"We're approaching the next several quarters with pragmatism and cautious optimism," Yankowski said during the conference call.

For its second quarter, Palm is targeting a narrow operating profit of $5 million to $20 million on revenue of $420 million to $440 million, as the company stocks stores and distributors for holiday sales.

In regular trading, Palm shares dropped 4 cents, or less than 1 percent, to $5.19. The stock rose to $6.09 in after-hours trading, accoring to Island ECN.

As for the charges in the quarter that just ended, Palm took a $268.9 million write-down on components, partially built handhelds and completed devices that it does not expect to be sold. The company said last month that the charge would be in the neighborhood of $300 million.

Palm took a $60.9 million charge for the costs of halting construction on new headquarters and for cutting 500 jobs in two separate rounds this spring, or roughly 25 percent of the company's work force.

The company also took two charges totaling $106.7 million to account for a drop in the value of the land that was to be used for the headquarters and to account for "reduced expectations" for the Web calendar business that Palm got with its AnyDay.com acquisition.

"This is an area we have scaled back our investment as we make tough choices," Bruner said of the calendar business.

Palm's actual net loss for its fourth quarter was $392.1 million, or 69 cents per share, compared with net income of $12.4 million, or 2 cents per share, for the same quarter last year.

Earlier Tuesday, Yankowski announced a new strategy for selling to large businesses built around partnerships with companies such as PricewaterhouseCoopers.

Palm is trying to reassure critics that it can return to strong growth. The company said it ended the quarter with $513.8 million in cash and that it has obtained a $150 million asset-backed credit line from a group of lenders. Palm said it has not drawn on this line of credit.

Bruner said the company expects its cash to decline over the next two quarters as the company has $158 million in costs that it expects to have to pay, including $126 million worth of unneeded components that it has committed to buy as well as severance and real estate costs. Nonetheless, Bruner asserts that the company has enough cash on hand.

"The credit line we have put in place is an insurance policy to protect against timing issues," Bruner said.

Andrew Scott, an analyst with Needham & Co., said Tuesday's news from Palm was fairly encouraging after several disappointments.

"They did a good job with cash management," Scott said, adding that a renewed focus on operations seems to be bearing fruit. Scott said he was encouraged by Palm's intent to further reduce inventory, saying such a move should benefit Palm as well as other handheld makers, including Handspring.

However, Scott said Palm may not be out of the woods.

"If there is another unforeseen event, the inventory situation at the end of the quarter may still be challenging," Scott said.

He added that Palm's new strategy to team with other companies in an effort to crack the corporate market makes sense but noted that Microsoft still has the upper hand.

"I view Palm as the underdog," Scott said.

Others are less optimistic.

"We believe that Palm shares are fully valued at current levels based on the company's declining growth, negative returns on capital, and significant execution risks," Robertson Stephens analyst Michael Kim said in a research note Tuesday.

 

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