Palm Announces Profit but Gloomy Times Ahead

Posted By: Ed Tuesday, March 27, 2001 5:03:07 PM

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.''

Economic Slowdown to Hurt Handheld Sales (Updated)

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Palm CEO Knows We're Here

Ed @ 3/27/2001 10:54:19 PM #

At the conference call today someone asked Carl Yankowski why they had announced the m500 series so far ahead of the date they could ship them. He listed as one of the reasons the fact that so much of the information about them had already leaked out on sites like this one. The questioner then wanted to know what were going to try to prevent future leaks but Mr. Yankowski didn't answer them directly.

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RE: Palm CEO Knows We're Here

Nate @ 3/28/2001 1:03:45 PM #

That doesn't seem right - didn't he pretty much announce a few months ago that Palm was going to announce the new units at CeBit? It seems more likely that they have had delays in production, or that it was part of their marketing strategy. Saying they had to announce the product because a couple of pics showed up is just scapegoating.

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RE: Palm CEO Knows We're Here

Ed @ 3/28/2001 3:45:21 PM #

Well, he did list it as just one of a couple of reasons. The other two were they wanted to show it off at CeBit, and they wanted their retailers to be ready.

BTW, if you want to hear it for yourself, the recorded call is available here: http://biz.yahoo.com/cc/2/3902.html
The question is about 40 mins into it.

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Poor decisions at Palm

I.M. Anonymous @ 3/28/2001 11:21:47 PM #

Palm's slow introduction of new models and features are to blame for their slow sales. Where they announced the introduction of the m50x this March, it will not be available until end-April. This will cut into demand, as buyers wait for new models. If they plan to undercut Handspring's Edge. The effect's likely to be minimal. As aside from the color screen and SD, most of m50x features are available in the Edge. Finally blaming the Palm community for premature releases of info is childish on Palm's part. It's shows their lack of vision. There's a huge demand for new devices which is why there's a demand for info on new devices. Palm's late to the ballgame. Hopefuuly, they will learn from this debacle and speed up Products and OS updates.

Palm eliminating jobs

I.M. Anonymous @ 3/30/2001 1:02:56 PM #

Ed... anyone... wondering where the termination of 400 contract employees figure came from. It didn't say anything about 400 contract workerse in Palm's release.

Thanks...

RE: Palm eliminating jobs

Ed @ 3/30/2001 1:25:57 PM #

Here it is from a Reuters article:

http://dailynews.yahoo.com/htx/nm/20010327/tc/palm_earns_dc_6.html

Here it is again in The Register:

http://www.theregister.co.uk/content/7/17933.html

However, it occurs to me that the way the Reuters article is phrased can be read in two ways, one saying that the 400 contractors are being let go and the other that the contract workers are just part of the total number of employees. Both I and The Register may have misread this.

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