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Palm Inc rises on optimism sales will soon improve

Palm Inc shares rose 16 percent on Wednesday after the biggest maker of handheld computers said sales of its new m500 device will help the company have a profit excluding certain costs next quarter.

The shares increased US$0.83 to US$6.02. Volume of 55.5 million was the second-biggest in US markets. The stock had fallen 82 percent this year, the greatest decline among members of the Standard & Poor's 500 Index.

Expected demand for the m500 products, which use removable, postage stamp-size cards to store photos and music, will help the company have profit excluding certain costs in the quarter ending in November, Palm officials said. Sales fell as buyers awaited the April introduction of the US$399 m500 and US$449 m505. The latter features a color screen.

"People are going to be much more comfortable that the state of demand for all things Palm remains strong," said Paul Sagawa, an analyst at Sanford C. Bernstein & Co, who rates Palm "outperform."

Palm stumbled this year because of delays in introducing its m500 line and slow sales of older devices such as the Palm Vx. The Santa Clara, California-based company slashed prices on older computers to clear excess inventory while starting m500 production.

Demand also fell because the US economy declined, company officials said.

Palm plans to offer fewer discounts on older models while promoting the more expensive m500 line, Chief Financial Officer Judy Bruner said Wednesday. That could boost gross margins, a measure of profitability, to 30 percent to 35 percent in the fiscal second quarter from 25 percent to 30 percent this quarter.

Palm's m500 and m505 are now among the best-selling handheld computers at the CompUSA Inc computer store in downtown San Francisco, salesman Ramon Vaquerano said.

Brian Colfer, a 42-year-old engineer, said he bought the color-screened m505 in May and carries digital photos of his wife and daughter on the device.

Still, consumers who have grown used to lower prices for handheld computers because of Palm's discounts may balk at the costlier devices, said Rob Sanderson, an analyst at Banc of America Securities. "It's a tall order," he said. "I remain pretty skeptical."

Palm's inventory levels are at 10 weeks' worth of supply, higher than the target of four to eight weeks, CFO Bruner said.

The company may still have a loss this quarter, which ends in August. The operating loss, which excludes amortization and other costs, is expected to be US$60 million to US$80 million, Bruner said.

Palm's second quarter profit excluding goodwill amortization and other costs will be US$5 million to US$20 million, she said.

Sales in the third quarter will decline from the second quarter, which will include orders from merchants preparing for the holiday shopping season.

Palm's market share is expected to slip to less than 50 percent this quarter from about 70 percent a year ago, said Todd Kort, principal analyst of Gartner's computing platform worldwide group.

Palm's loss in the quarter ended June 1 was US$392 million, or US$0.69 a share, compared with net income of US$12.4 million, or US$0.02, in the year-earlier period. Sales fell 53 percent to US$165.3 million, beating the company's forecast, reduced twice, of US$140 million to US$160 million.

Excluding amortization of goodwill, a charge for excess inventory and other costs, the company said the fourth-quarter loss would have been US$0.16 a share. On that basis, the loss was expected to be US$0.19, the average estimate of analysts polled by First Call/Thomson Financial. Palm cut its fourth-quarter sales forecast after production defects delayed the m500.

First-quarter sales will be US$200 million to US$220 million.

Sales were expected to be US$239 million, according to a First Call poll of six analysts. Second-quarter sales are expected to be US$420 million to US$440 million, Bruner said. The average analyst estimate was US$393.9 million.
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