Palm Cuts Guidance, Blames Tungsten

Feeling the pinch due to a dearth of enterprise IT spending, Palm Monday warned investors that its third quarter revenues will
fall short of guidance given in December.

The company explained that demand for its entry-level and mid-range
products has been in line with expectations, but lower-than-expected demand
for its high-end products, particularly its Tungsten T handheld, means
revenues are likely to come in at between $205 million and $210 million
rather than the $230 million to $250 million it projected in December.

Palm said it now expects gross margins to come in close to 30 percent,
compared to the low 30 percent range it reported in the previous two
quarters.

Analysts, surveyed by Thomson First Call, had forecast revenue to come in
at around $241.5 million.

Palm laid the blame on its high-end market, saying that its premium
Tungsten T product accounted for a lower-than-expected percentage of the
mix during its third quarter. However, it added that a price reduction on
the Tungsten T, implemented in February, helped to spur demand but not
enough to ward off weakness in the enterprise market.

“Economic uncertainty weighed more heavily than we originally anticipated
on both the consumer and enterprise segments of the hand-held industry,”
said Palm Chairman and CEO Eric Benhamou.

The company also noted that it plans to take a non-cash charge of about
$100 million in the third quarter to write down the value of 39 acres of
land it owns in San Jose, Calif. The land’s value has plunged with the
deterioration of the Silicon Valley commercial real estate market, and the
company said it no longer expects to hold the land as long as it would take
to realize the current carrying value.

On Friday, the company revealed that it will lay off more than 200
employees, or about 19 percent of its workforce.

While Tungsten T took the blame for Palm’s shortfall, the company also
announced a win for its premium handheld Monday. Tire giant Michelin’s
Michelin North America unit purchased more than 500 Tungsten T’s for its
commercial fleet sales force.

Michelin’s sales consultants are using the handhelds to collect tire data
while onsite at customer locations, including data on tire wear, age and
mileage recorded. The data is then analyzed and used to keep commercial
customers aware of tire performance.

Meanwhile, on the software side, Palm’s Palm OS subsidiary PalmSource
brought Samsung into its Palm OS Ready Program, under which Palm licenses
components of its Palm OS platform to silicon providers. Samsung, a leading
provider of system-on-a-chip technology, has been hedging its bets in the
smartphone space. In February, it took a five
percent stake in Palm rival Symbian.

Samsung’s decision to join PalmSource’s program indicates the company is
likely to continue supporting both Palm OS and Symbian. The company noted
that is application processor and reference board, based on its S3C2410
chip, have already passed the Palm OS Ready certification. The
certification is the final step silicon providers must take before their
chips can be included in new Palm Powered devices.