Palm slashes forecast, analysts worried

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 on Thursday. The move has also led to

speculation among analysts that the handheld computer maker may soon run out of

cash by the year-end.

The warning was compounded by Palm's announcement that the cooler economy has

forced the termination of its planned purchase of software firm 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.

"I think most people were expecting a big write-off, but taking the

revenues down another 50 per cent, and killing the Extended deal, that was

shocking," said CIBC World Markets analyst Tom Sepenzis.

Revenue outlook slashed



Hurt by the delays in the debut of its new, costlier high-end models and a glut
of older devices, Palm had previously cut revenue forecasts for its fourth

quarter, which ends in May, to between $140 million and $160 million, from $300

million to $315 million. 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 firm'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 being exacerbated by the slowing economy, which Palm says it

believes has spread beyond the United States.

Extended systems purchase terminated



Separately, Palm terminated the proposed acquisition of software firm

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 firms said they have "mutually and amicably agreed"

to end the deal. Though Palm will not pay a termination fee, it will continue to

work in close coordination with Extended Systems in this field.

Still, analysts said the deal's death calls into question Palm's overall

strategy. With Extended, Palm had planned to help companies tailor-made software

applications that would run on Palm deceives and other computers using Palm’s

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."

Analysts question remaining cash



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 would 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.

(C) Reuters Limited 2001.