The forecast hit Palm's stock hard. Palm shares had closed up $1.06, or 7 percent, at $15.50 on Tuesday. But in after-hours trading, the stock plunged 35 percent to $10.03.
Palm's news also pulled down the shares of other handheld makers in after-hours trading. Handspring tumbled 26 percent to $12. Research in Motion, maker of the popular BlackBerry pager, fell 18 percent to $20.26.
Palm reported a profit of $9.3 million, or 2 cents per share, on revenue of $470.8 million, excluding amortization and goodwill charges. Analysts had been expecting a profit of 1 cent per share on revenue of about $473 million in Palm's third fiscal quarter, which ended March 2.
In the same quarter last year, the company reported a profit of $15.8 million, or 3 cents per share, excluding charges.
Despite beating estimates, Palm indicated that demand is dropping off. Revenue is now expected to come in at $300 million to $315 million in the current quarter, the company's fiscal fourth quarter. And Palm now expects to report a loss of 8 cents per share for the current quarter.
A consensus of analyst had been expecting Palm to earn 3 cents on sales of $573 million in this quarter, according to First Call.
Palm reported revenue of $350 million for its fourth quarter last year.
On a conference call, Palm Chief Financial Officer Judy Bruner called the revised outlook a "significant decrease from our previous expectations."
CEO Carl Yankowski concurred.
"In the near term, this is a jarring outlook. But we believe this is a sector slowdown," said Yankowski, referring to the U.S. market for handhelds. "We view this as a marathon rather than a sprint."
IDC analyst Kevin Burden agreed. "You can't discount the force of a weak economy on what some would consider luxury items, but the demand will still be there. I don't think the market is anywhere near the saturation point," he said in an interview.
Cost-cutting measures are being imposed at 10 percent to 15 percent of operating costs.
Poor timing for new Palm products
Alex Slawsby, handheld devices analyst, IDC
Bruner said the company is looking to trim about 10 percent to 15 percent of the work force. The company has about 1,500 permanent workers and 400 temporary workers, Bruner said. The cuts are expected to be completed by the end of April, Bruner said.
More layoffs may also be coming. "Further reductions are expected associated with the acquisition of Extended Systems," Yankowski said. That deal, announced earlier this month, is expected to close in June.
Palm has grown quickly. As of June 2000, the company had 951 employees, according to a filing with the Securities and Exchange Commission.
Palm spokeswoman Marlene Somsak said the company has not decided how many of the workers to be cut will be staff and how many will be contract employees. The company did not say which parts of the company will be affected by the cuts. Employees learned of the news at the same time the press release came out Tuesday afternoon.
Although Palm once suffered from a dearth of products due to component constraints, it now faces a glut.
Inventory swelled by $69 million in the third quarter, Bruner said. It could grow by another $200 million this quarter, she added, with at least half coming from excess production of existing models.
Two new models unveiled last week, the m500 and m505, will be available in the middle of the current quarter, Bruner said, but not in volume until the end of the quarter, most likely in May.
The new units are expected to have higher profit margins than entry-level handhelds, such as the m100, but not as high as the Palm V series, which is Palm's most popular product line.
During question-and-answer session at the end of the conference call, a number of financial analysts questioned why the company announced the new units so far in advance of their availability. Yankowski said that part of the reason was because some pictures and details were leaked onto the Internet, which he attributed to the enthusiasm of early adopters.
Despite the poor outlook, all of Palm's news wasn't bad. The company reported a 112 percent increase in the number of handhelds sold in its third quarter, compared with the same quarter last year. This brings to 13 million the total number of handhelds the company has sold.
Including special charges, the Santa Clara, Calif.-based company lost $1.9 million, or less than 1 cent per share, in its fiscal third quarter.
News.com's Ian Fried contributed to this report.