Palm Slashes Forecast, Ends Extended Pact
NEW YORK – Dark clouds gathered around Palm Inc. on Thursday, after it halved its fourth quarter revenue outlook for the second time due to poor device sales, sending its stock down over 20 percent, and leading analysts to wonder if the handheld computer maker would run out of cash by year's end.
The warning was compounded by Palm's announcement that the cooler economy has forced the termination of its planned purchase of software company Extended Systems Inc., a key step in Palm's strategy to grow sales to corporations.
In addition, the company said it would take an inventory-related charge in the quarter of about $300 million.
The news sent shares of Palm down more than 20 percent in after-hours trade, to $5.47 on Island ECN, down from its Thursday closing price of $7.05 on Nasdaq. Palm's all time low price in the daytime session is a $5.75.
"I think most people were expecting a big write-off, but taking the revenues down another 50 percent, and killing the Extended deal, that was shocking,'' said CIBC World Markets analyst Tom Sepenzis.
Hurt by delays in the debut of its new, pricier high-end models, and a glut of older, cheaper devices, Santa Clara, California-based Palm cut revenue forecasts for its fourth quarter, which ends in May, to between $140 million and $160 million, from $300 million to $315 million previously. Analyst had in March believed Palm would score revenues near $600 million.
Palm reported revenues of $350 million in the fourth quarter of fiscal 2000 and $471 million in the third quarter of fiscal 2001.
The company's now seen its pro forma operating loss for the quarter at between $170 million and $190 million, compared to previous estimates of $80 million to $85 million.
"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,'' said Carl Yankowski, Palm's chief executive.
He added that the delay stalled sales of existing products in all regions, and is exacerbated by the slowing economy, which Palm says it believes has spread beyond the United States.
Separately, Palm terminated the proposed acquisition of software company Extended Systems, a key deal that Palm hoped would help it move beyond singular sales to individuals and on to sales in bulk to companies.
"The slowing economy and market conditions led both companies to conclude that a termination of merger plans would best serve both companies and their respective shareholders,'' the companies said in a joint statement.
Palm's share price has plunged more than 60 percent since the all-stock deal was announced on March 6. At that time, the pact, which was expected to bolster Palm's ability to sell its devices to corporations, was valued at about $264 million.
The two companies said they have "mutually and amicably agreed'' to end the deal. Palm will not pay a termination fee, they added. Palm said it and Extended Systems would continue to work together.
Still, analysts said the deal's death calls into question Palm's overall strategy. With Extended, Palm had planned to help companies tailor software applications that would run on Palm deceives and other computers using Palm operating software.
"The immediate issue now for Palm is about their strategic direction, which was into the enterprise,'' said J.P. Morgan analyst Paul Coster. "We wonder whether they are still going to continue moving in that direction. If so, they have to move pretty quickly with some alternate partner.''
On a conference call with analysts, Palm's Yankowski reminded analysts that despite the problems during the quarter with the getting its new m500 and m505 models to store shelves, Palm continues to dominate the market for handheld computers.
In addition, he said Palm will continue to target the enterprise aggressively via partnerships and alliances.
But with sales and margins seen slumping, and the economy not expected to rebound in the near term, analysts speculated if the company would run short of cash by November.
Palm Chief Financial Officer Judy Bruner, declined to discuss the exact cash position, but said that managing cash was a priority. She said the company would provide further information in June, when Palm reports its quarterly results.
"Cash will be tight and cash preservation will the number one be a priority for us right now, and there is a possibility that we will seek to raise capital,'' she said.
Palm shares on Thursday closed at $7.05, down 6 cents, after closing at $19.375 on March 6. Extended Systems shares closed on Thursday at $9.94, up 15 cents.