Palm Announces Profit but Gloomy Times Ahead
Palm Inc. has just reported a third quarter profit that beat analyst's estimates, driven by a strong rise in revenues, but said next quarter they will lose money. In response, they will trim costs by cutting staff and delay the construction of the new headquarters.
They said pro forma net income for the third quarter -- which excludes certain special items -- was $9.3 million, or two cents per share. This compares to pro forma net income of $15.8 million, or three cents per share, for the same quarter last year. Analysts had forecast profits of one cent..
Revenues climbed to $470.8 million, up from $272.3 million a year earlier. That compares to analysts' predictions of about $470 million, and second quarter sales of $522 million.
Shipments of Palm handhelds during the third quarter rose 112% over the same period a year ago to 2.1 million handhelds. This brings the total number of handheld devices shipped by Palm to date to nearly 13 million.
Average selling prices eroded to $197 in the third quarter, 7% lower than the previous quarter and 20% lower than the year-earlier period. Gross profit margins came in at 32.5%, lower than the previous quarter's 36.1%, mostly because of a rebate on the IIIxe and price reductions for the IIIxe and VIIx. And they're expected to be in the 25% to 26% range this quarter. The m500 series has a lower profit margin than the V series, though Palm is hoping to reduce the costs to produce them by next year.
In the fiscal fourth quarter, Carl Yankowski, Palm's CEO, said that because of "the effects of the deteriorating macro economic environment," Palm expects flat demand compared with the same quarter a year ago, with revenue in the range of $300 million to $315 million. Palm also expects a fiscal fourth-quarter loss of about 8 cents a share, a drastic contrast to the consensus estimate of a gain of 3 cents.
Ironically, shortages of components, which have hobbled Palm's sales for about a year, have finally begun to ease at the same time that the slowing U.S. economy has begun to reduce demand.
The good news for Palm's customers is that the company plans to offer new sales and discounts for its products to increase sales.
The company said that due to its revised outlook, it would cut some 250 employees and terminate contracts with 400 freelance workers. They will also delay construction of the new corporate headquarters in San Jose which was scheduled to begin this month. They might even move the project to a less expensive location. They are continuing to look for ways to reduce the costs of their products.
Mr. Yankowski emphasized that they would not reduce their research and development budget. Plus, they are going to spend $160-165 million to market the new m500 series.
Update: The lowered projections for Palm's fourth quarter have been a blow to their stock price. Palm shares had closed Tuesday up $1.06, or 7%, at $15.50. But in after-hours trading, the stock plunged 35% to $10.03.
This was also bad news for the shares of other handheld makers. Handspring fell 26% to $12 and Research in Motion fell 18% to $20.26.
Handspring has released a statement that confirmed that its revenue projections for the remainder of its fiscal year ending June 30 were still valid. Donna Dubinsky, co-founder and CEO of Handspring, said, "While no company is immune to current economic conditions, we see continued sales growth in our business at this time. The growing acceptance of the Springboard expansion slot, now with 45 modules available, combined with the positive reception of our recently shipping Visor Edge product, gives us confidence in our continued product and market momentum.''
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