Palm Cuts Guidance, Blames Tungsten

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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.

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