May 30, 2002 2:55 PM PDT

Palm warns of soft sales, revenue shortfall

Blaming weak demand, handheld maker Palm warned Thursday that sales in the current and future quarters will fall short of expectations, and said it won't reach profitability until at least the fall.

After the close of trading, the company said that revenue for the quarter ending May 31 will be approximately $230 million--below its prior estimate of $290 million to $300 million.

"Demand in spring did not materialize as we had previously expected, but rather market conditions deteriorated compared to both the year-ago quarter and recent months," Palm's interim CEO Eric Benhamou said in a statement.

Chief Financial Officer Judy Bruner also warned that sales will fall further in the June-to-August quarter, with projected revenue of $175 million to $185 million. The company predicted a pro forma operating loss of between $40 million and $45 million.

Bruner blamed the lower sales outlook on the fact that the summer months are typically weaker, particularly in Europe. She also pointed to increased inventory.

The loss will result in a further decline of the company's cash reserves, Bruner said, but she added, "We are comfortable with our cash position."

Bruner said the company expected that sales would have improved from January levels, but said the spring improvement never came. Bruner said early data shows end sales down 12 percent from the rates of January and February, with no improvement during the "dads-and-grads" period, which runs from late April to mid-June.

"Demand was particularly weak late in the quarter at a time when we expected a seasonal increase," Bruner said.

Brian Blair, an analyst at hedge fund Bluewater Capital, said Palm is erring by placing the blame on slow demand.

"If the economic data about consumer spending is any indication, people are still buying electronics," Blair said. He said Palm has not come out with devices that are compelling enough to grab those dollars, noting that the last several products from Palm are basically minor tweaks to existing devices.

"They always blame everything except their own lack of innovation and mismanagement of inventory," Blair said.

A representative for rival Handspring declined to comment on that company's business in the wake of Palm's announcement.

Benhamou told analysts that despite the sales shortfall, Palm is meeting other financial goals, such as cutting expenses, preserving cash and improving profit margins.

"What disappointments me the most, is that if not for unanticipated market softness, Palm would have had a great quarter," Benhamou said. "In short, we are executing well in a down market."

The warning marks a major hiccup in Palm's efforts at a turnaround.

Palm suffered through a brutal 2001. After starting the year as a profitable Wall Street darling, the company saw a botched product launch and a downturn in demand lead to a glut of inventory and a tide of red ink.

However, Benhamou had won praise from some analysts for making the company more fiscally disciplined after taking the reins from former CEO Carl Yankowski last November.

In an interview, Bruner told CNET News.com that some job cuts could be part of Palm's effort to control costs.

"You can expect some amount of that, but not across-the-board actions as in the past," Bruner said.

The company is also likely to burn cash beyond the current $280 million in reserves. Bruner said it is not unreasonable to assume that the levels could decline due to the $40 million to $45 million the company expects in operating losses.

Bruner said that although the company will be more aggressive in its marketing in an effort to spur demand, it does not see a price war on the horizon.

"We don't expect that kind of pricing environment," Bruner said, adding that prices have been relatively stable over the last six months and the company has been gaining share.

Benhamou added that the company does see a light at the end of the tunnel.

"We don't think the market conditions will remain lousy forever," he said. "We are clearly going through a difficult period."

Palm shares, which lost nearly 5 percent in regular trading to close at $2.21, headed even lower in after-hours trading. Shares changed hands recently at $1.81 on Island ECN.

 

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