Palm Falls On 3Q Warning; 2Q Results Meet View

Shares of Palm slumped in after-market trading after the company projected fiscal third-quarter results well below expectations as the company's second-quarter results met lowered targets.

In the second quarter, which ended Nov. 30, the struggling maker of smartphones and hand-held wireless devices reported a net loss of $9.6 million, or 9 cents a share, compared with net income of $12.8 million, or 12 cents a share, a year earlier.

Excluding the effect of stock options and one-time items, including a $24.4 million tax benefit, the Sunnyvale, Calif., company had a loss of $7.8 million, or 7 cents a share, compared with earnings of $17.6 million, or 17 cents a share, a year earlier.

Revenue fell 11% to $349.6 million.

Palm last week warned that it expected a loss of 8 cents to 10 cents a share on revenue of $345 million to $350 million.

Gross margin fell to 29.7% from 35.4%. Palm said in its warning it expected a gross margin between 29.3% and 29.8%.

The company had said the reduced outlook reflected an "unforeseen increase in warranty repair expenses during the quarter," a shift in the product mix to more of the cheaper Centro smartphones and the delayed product shipment. In September, Palm unveiled its first major hardware redesign in years, the Centro, which retails at $99 with a two-year contract.

Chief Executive Ed Colligan said Tuesday, "We've taken actions to align our expenses to the current operating environment and are focusing on core initiatives that will have the greatest impact on achieving our long-term success. We are pleased with the early success of the Palm Centro and intend to deliver more Windows Mobile and Palm-based products throughout the next year."

The company expects a fiscal third-quarter net loss of 31 cents to 33 cents a share, and a loss of 14 cents to 16 cents, excluding items. Revenue was projected to come in between $310 million and $320 million, with the gross margin being 30.3% to 30.8%.

Analysts, on average, expect a third-quarter loss of 4 cents a share on revenue of $358 million.

Palm also said it will not provide specific financial guidance in future quarters but will provide general business guidance and comments on industry trends.

On Monday, Palm and Verizon Wireless announced the immediate availability of Palm's Treo 755p smartphone, widely believed to be the device that Palm said missed its projected shipment date during the second quarter.

Also last week, the Associated Press reported that Palm laid off about 100 people, or 10% of its work force, to cut expenses. The company has been re-vamping its line of wireless devices as it faces growing competitive pressure from rivals, such as Research in Motion with its Blackberry and Apple with the iPhone. A new laptop-like Palm product, the Foleo, was canceled in September as it was about to be shipped.

There are reasons to hope for a turnaround.

In October, Silicon Valley private equity firm Elevation Partners paid $325 million a 27% stake in Palm. Before that, the company had been the subject of takeover speculation, with potential acquirers ranging from Motorola to Nokia and private equity firms. Also, former Apple product guru Jonathan Rubinstein has joined Palm as executive chairman and head of product development. He was instrumental in developing Apple's iPod and iMac lines.

Palm's shares, which reached their lowest point in nearly four years earlier this month, traded at $5.41 in late trading, down from its Tuesday closing price of $5.93.

-By Kathy Shwiff, Dow Jones Newswires; 201-938-5975; Kathy.Shwiff@dowjones.com

(END) Dow Jones Newswires

Posted to the site on 19th December 2007