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Palm beats estimates but chops forecast

The handheld maker reports a loss that is slightly narrower than analyst expectations but slashes its forecast for the holiday season.

Handheld computing leader Palm on Thursday reported a fiscal first-quarter loss that was slightly narrower than expected, but pulled back on a number of wireless plans and slashed forecasts for the holiday season.

Excluding charges, Palm lost $38.7 million, or 7 cents a share, on revenue of $214 million. That marks a sharp contrast to the same quarter a year ago, in which Palm had a pro forma profit of $23.9 million, or 4 cents a share, on revenue of $401 million.

A consensus of analysts had expected a loss of 9 cents per share, according to First Call.

However, the company slashed its sales forecast for the current second fiscal quarter, typically Palm's strongest, and said it now expects an operating loss, rather than the narrow operating profit it had predicted.

Chief Financial Officer Judy Bruner said during a conference call after the announcement that sales in the current quarter could range anywhere from flat to somewhat higher than the last quarter but will likely not see the 30 percent sequential rise the company had during the same period last year. Further, the company said it expects an operating loss in the current quarter, though somewhat narrower than in the last quarter.

"We now believe it will take beyond Q2 to reach profitability," Bruner said.

Palm CEO Carl Yankowski said during the conference call that the company is pushing back the launch of its new handheld with integrated wireless data access, a device that the company has been promising since last year would debut before the end of 2001.

"We will not release this product during this holiday season," Yankowski said, although he said the company has been testing the device. Palm had received approval from the Federal Communications Commission for a wireless device known as the i705, which offered features such as access to corporate data and always-on e-mail. However, that approval was later withdrawn at Palm's request, according to an FCC official.

"We remain convinced that wireless will take off," Yankowski said.

Palm also said both Motorola and Nokia have scrapped plans for smart phones that use the Palm operating system. Motorola had planned to introduce a jointly developed phone next spring while Nokia had announced plans for a pen-based phone using the Palm OS.

The company said it shipped about 750,000 devices during the quarter.

Bruner said Palm succeeded in reducing the amount of inventory at stores and distributors to somewhere between four weeks and eight weeks but added later that inventories are at the high end of that range. Bruner said inventories are highest in Europe, where demand has been particularly weak.

Consumer sales weaker
Sales to consumers weakened throughout the quarter, Bruner said. June sales were "relatively strong," she said, with July sales weaker, as expected. But an expected pickup in August did not materialize.

Revenue for the first quarter did rise from the $165.3 million Palm took in during the previous quarter.

Palm's operating loss, excluding one-time events, was $59.9 million.

In June, Palm said it expected to post an operating loss of $60 million to $80 million on revenue of $200 million to $220 million for its first quarter ending in August.

Palm also said at the time that it hoped to return to profitability in the September-to-November quarter on revenue of $420 million to $440 million.

Palm's actual net loss, including charges, for its first quarter was $32.4 million, or 6 cents per share. That compares with a profit of $17.3 million, or 3 cents per share, for the same quarter last year.

Dwindling cash
Palm continues to see its cash reserves decline. Palm said its cash dropped to $321.2 million in the first quarter, down from $513.8 million. Bruner said reserves are likely to drop further in the second quarter as Palm posts another operating loss and remains on the hook for some canceled component orders.

One area where Palm has been holding its own has been market share. Research firm IDC had projected that Palm's market share would fall this year because of mounting competition from chief rival Microsoft and its Pocket PC operating system.

"We had forecast that Palm's OS market share would fall to 64 percent (in the United States) at the end of the year. But we've actually seen their share growing slightly. Right now, they have 77 percent market share," IDC analyst Kevin Burden said Thursday.

Burden added that Pocket PC has been too dependent on the corporate market. Although businesses are a promising segment, he said, "the fact that they aren't buying is giving Palm a lifeline."

Needham analyst Andrew Scott said that although Palm cut its sales outlook, he believes the company will withstand the economic downturn and be a long-term player in the handheld market.

"At $2.15 a share, the market basically thinks the company is going to go out of business," Scott said. "I disagree with that. Although they are experiencing hardship both self-imposed and market-related, they have a superb brand, a solid operating system, and good hardware development capabilities."

Separately, Palm confirmed Thursday afternoon that it is postponing its PalmSource conference, a key forum for rallying supporters that was set for next month in San Jose, Calif.

The company said it is delaying the conference out of respect for people affected by last week's terror attacks in New York and Washington, D.C., as well as concerns expressed by sponsors and individuals scheduled to attend. Palm said it plans to reschedule the event for later this year or early next year.

Staff writer Richard Shim contributed to this report.