Palm warns of lower revenues

Palm alerted investors Monday that its revenues would be less than expected for its third quarter.

In a statement, the handheld maker says it anticipates quarterly revenues will be between $205 million and $210 million, instead of the $230 million to $250 million originally forecasted. The company will also take a charge of up to $2.7 million to settle two unnamed legal matters.

The news is not entirely bad. Pro forma operating expenses will be close to previous estimates as will the product inventory in sales and distribution channels.

 The main reason for the lower estimate, according to the company’s statement, is that product demand in the high end of the U.S. handheld market continues to be lower than expected, as enterprise IT spending remains weak. What that means is that Palm failed to sell as many of its premium handhelds, the Tungsten T, as it had planned. In early February, Palm cut the product’s price to boost demand.

Demand for the entry-level and midrange Palm products is on target for the U.S., and European demand is strong for the entire Palm line.

The statement repeated expectations first cited in December that Palm will take additional third-quarter charges of $40 million to $45 million for ongoing restructuring. It will include costs related to selling off some real estate locations and possibly subleasing others, and severance payments for laying off about 19% of the company’s workforce.

Palm finalized last Friday, the last day of its fiscal quarter, layoffs of 19% of its remaining 1,170 employees, or about 220 people in all areas of the company. In 2001, Palm laid off nearly 500.

J.P. Morgan Securities Analyst Paul Coster cut Palm’s investment rating to “underweight” from “neutral,” citing the reduced demand. Coster wrote in a research note that Palm’s immediate prospects look bleak given the uncertainty in the larger economy and a broad drop-off in demand in PDA sales. “We see no positive catalysts ahead in the next 3-6 months,” he wrote.

Finally, Palm expects an additional non-cash charge of about $100 million to reduce the carrying value of the 39 acres of land it owns in San Jose, to the current fair market value. The commercial real estate market in the Silicon Valley continues to deteriorate, according to the statement, and Palm no longer expects to hold the land as long as would be required to realize the current carrying value.

Palm will announce its quarterly results on March 20, via a public Webcast that will be available here.