Palm reports loss, delays PalmSource spin-off

Third-quarter revenue at Palm Inc. fell sharply compared to the third quarter of last year, and the company posted a loss even after excluding a pair of charges, the company said Thursday in a release.

Palm also announced that the spin-off of its PalmSource Inc. operating system division will be delayed through the summer, as the amount of time needed to complete the split will be longer than the previous expectation that the two companies would separate by midyear, said Eric Benhamou, chairman of the board and interim chief executive officer at Palm, on a conference call Thursday after the earnings release.

The company posted revenue of US$209 million, in line with reduced guidance provided last month, but down from last year's third-quarter revenue of $293 million. Net loss was $172 million, which included a restructuring charge of $40 million and impairment charges of $102.5 million. For the third quarter of 2002, net income was $2.9 million.

The impairment charge consisted of a $100 million reduction of the carrying value of 39 company-owned acres in San Jose, California, and $2.5 million in impairment of intangible assets. Silicon Valley real estate prices aren't what they used to be, as that land was worth $160 million in early 2001, and the charge reflects the current appraised value of $60 million, said Judy Bruner, senior vice president and chief financial officer, on the conference call.

Excluding the charges, Palm lost $26.5 million, or $0.91 per share, in line with analyst expectations as surveyed by Thomson First Call.

Expensive handhelds have not sold very well as companies and consumers have cut back on their spending. In its third quarter, Palm introduced the Tungsten W, a $549 handheld with GSM/GPRS (Global System for Mobile Communications/General Packet Radio Service) voice and data capabilities. And despite a price cut of $100 in the price of its sister Tungsten T handheld, sales of both handhelds were not strong enough to generate a profit.

Palm had forecast stronger demand for the high-end handhelds, and while that didn't materialize, the Tungsten T price cuts did spur an increase of 75 percent in sales of the unit in February as compared to January, Bruner said.

The average selling price of Palm handhelds was $169, Bruner said. The Tungsten T currently sells for $399, while Palm's lowest-priced handheld, the Zire, sells for $99.

Palm took in 57 percent of its revenue from sales of its handhelds in the U.S., but growth was strong in Europe, she said.

The financial situation at Palm will get worse before it gets better. Palm expects fourth-quarter revenue to be between $185 million and $200 million, down 15 to 20 percent year over year, Bruner said. New handhelds will come out in the spring, but that launch will occur in the middle of the company's fourth quarter and probably have limited impact on its financial results, she said.

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