May 17, 2001 4:00 PM PDT

Palm halves revenue forecast, exits deal

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Palm issued a double dose of bad news after the bell Thursday.

The handheld maker warned that revenue in its current quarter will come in at roughly half its forecast, which had already been sharply curtailed. In addition, Palm said it will not acquire Extended Systems.

Palm now expects revenue in its fiscal fourth quarter to range between $140 million and $160 million, compared with its previous revenue outlook of $300 million to $315 million.

The company expects its operating loss for the quarter to be between $170 million and $190 million, more than double its prior projection. Its quarter ends June 1.

"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," Palm CEO Carl Yankowski said in a statement. "In addition, we believe that this delay stalled sales of our existing products in all regions."

As a result, Palm said it was forced to cut prices on its existing products by a larger amount than they had planned.

Palm shares closed down 6 cents to $7.05 in regular trading. They fell to $5.71 in after-hours trading, according to Island ECN.

The company has been plagued by a glut of inventory recently. The company said Thursday that it will take a charge of roughly $300 million to write off both excess components and finished goods. Palm also said it will take an unspecified restructuring charge for job cuts and other cost cuts.

Palm said slow sales are intensifying the inventory problem.

"The channel inventory is high," Bruner said. "It is, on average, over a quarter's worth."

Even with the $300 million charge, the company said it still could have up to $100 million in inventory by the end of the quarter, with about three-quarters of that being stock of its new products.

Earlier this month, Palm Chief Financial Officer Judy Bruner said that April retail sales had been weaker than the company hoped, but she did not provide new financial guidance.

"It's been fairly weak and getting a bit weaker from February to April," Bruner said during a question-and-answer session at the J.P. Morgan H&Q technology conference.

On Thursday, Palm said it expects to return to profitability some time in its next fiscal year, which starts in June.

In a conference call, Bruner did not give a full forecast for the following quarter but said Palm does expect revenue in the company's next quarter to be greater than in the current quarter. Bruner also said Palm expects its average selling prices for the coming quarter to be higher than for either the current or prior quarter because of sales of the m500 and m505 handhelds.

As for the deal with Extended Systems, the companies said the agreement to end the acquisition was mutual and based on the slowing economy and other market conditions. The deal was announced in early March.

The value of the deal, which was originally to give Extended Systems shareholders $22 a share in Palm stock, had fallen precipitously, but analysts had expected the deal to go through anyway. Based on where Palm's stock was trading Thursday, the deal was only worth about $9.35 per share to holders of Extended Systems stock because of a clause that was activated if Palm's stock fell below $16 a share.

"While this turn of events is disappointing, Palm and Extended Systems agree that this is the right thing to do at this time," Yankowski said in a statement. "Palm will continue to target the enterprise aggressively via leveraged partnerships and alliances with a number of companies including Extended Systems."

At Palm's analyst meeting last month, Extended Systems CEO Steve Simpson appeared with Palm executives and said that shareholder approval was the only remaining hurdle to closing the deal.

Extended helps large companies give employees access to corporate software via wireless devices. Palm said acquiring Extended Systems was critical to its efforts to expand sales of its handhelds to large businesses.

"We are still strongly committed to the enterprise market," Yankowski said on the conference call, adding that the company will outline a revamped strategy to sell to businesses when the company announces earnings in June.

The two companies said they will continue to work together.

"The executives of both companies agree that offering enterprise customers a combined solution of Palm's handheld devices and Extended Systems' mobile infrastructure software will continue to be a priority," the companies said in a joint statement.

 

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