Palm slashes Q4 forecast, shelves planned acquisition

Palm slashes Q4 forecast, shelves planned acquisition

Palm on Thursday slashed its fourth-quarter revenue projections in half, to between $US140 million and $160 million, down from previous revenue estimates of $300 million to $315 million. Final results for the quarter will be released late next month.

The company also announced that its planned acquisition of Extended Systems, an enterprise middleware company, has been terminated by mutual agreement.

Carl Yankowski, CEO of Palm, blamed the drop in revenue on a delay in ramping up to volume shipments of the company's new line of m500 handheld computers. The m500 family offers larger screens than previous handhelds from Palm, as well as postage-stamp-size expansion slots designed to make it easy for users to add memory and other wireless communications modules.

Yankowski said in a statement that the shipping delays accounted "for the bulk of our reduced revenue outlook . . . exacerbated by the slowing economy, which we believe has spread beyond the US." Yankowski said Palm has now resolved its production problems with the m500 computers.

Shares of Palm and its prime competitor, Handspring, tumbled to all-time lows on the stock market this morning in the wake of the revised projections. Just last month, Palm announced plans to cut its workforce by 13 per cent.

Earlier this week, Palm tried to prime the sales pump for its older VIIx model with a price cut of $US100. That dropped the handheld's price to $199. Coupled with a $100 rebate for users who sign up for the company's Palm.Net service, the hardware price dropped to $99.

Elliott Hamilton, an analyst at the Strategis Group, said Palm faces more than just production problems with its new line of computers. "They're facing more competition in a market that's becoming crowded, plus a softening of the market," he said.

Palm's acquisition of Extended Systems, announced March 6, went south with its stock price. When the two companies agreed to the merger, Palm stock was selling for $US22 per share. Yesterday, it was trading at $7.05 per share and this morning sank to $4.95 per share. The merger agreement called for Extended Systems shareholders to receive more Palm shares if the handheld maker's share prices fell. But the agreement didn't anticipate a drop much below $16 per share.

Steve Simpson, Extended Systems' CEO, said in a conference call yesterday that the current low price of Palm stock played a roll in terminating the planned merger. "Obviously, valuation becomes a factor in a transaction such as this. . . . We decided it did not make sense to move forward at this point," Simpson said.

Palm viewed the acquisition as a key move to shift its focus from individual users to enterprise users. Extended Systems' product line includes mobile data management software that helps users synchronize handhelds -- Palms as well as the PocketPC developed by Microsoft -- with corporate information systems. The company also produces wireless connectivity tools and other software aimed at the handheld market.

Both Palm and Extended Systems said they plan to continue to work together to serve the enterprise market. Simpson said that going into the merger, "Palm realised we had to support Windows CE [the PocketPC OS], but as a stand-alone company, it's a little easier for some partners to believe we can do that."

Doug Dedo, lead product manager in the Microsoft Mobility Group, agreed. "We're delighted for enterprise customers to have Extended Systems play an unbiased role in creating mobile device solutions," Dedo said.

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