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Palm to axe 250 jobs as it dips into the red

Desperate cost cutting to offset zero sales growth

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Palm posted its latest financials last night, and while its revenues continue to grow - up 73 per cent year on year - they haven't kept its profits up - quite the reverse - or convinced the company that the outlook for the rest of the year is as rosy as it has been.

Indeed, the PDA pioneer is sufficiently worried about growth though 2001 that it's going to cut 250 full-time jobs and contract workers in a bid to cut costs.

So, for the three months to 2 March - Palm's third quarter of fiscal 2001 - the company reported revenues of $470.8 million, up from Q3 2000's $272.3 million.

Operationally, the company made profits of $9.3 million (two cents a share), but factor in exceptional items and the figure drops to a $1.9 million (break-even on an earnings-per-share basis). This time last year, Palm recognised earnings of $15.8 million (three cents a share) before one-offs and $11.0 million once they were taken into account.

Hitting the latest-completed quarter's earnings were the cost of rebating buyers of Palm's PDAs. Palm refused to recognise this cost last quarter - provoking not a little criticism of its accounting practices because it presented an arguably inaccurate picture of that quarter's earnings. Instead, Palm chose to take the hit this quarter, a traditionally poor-performing one.

Palm also took a hit from its acquisition of WeSync, part of its plan to take its HotSync technology to the Web, to free the PDA from the need to be regularly connected to a host PC. Palm's enterprise drive also saw the proposed acquisition of Extended Systems, but that's not due to be completed until June, so won't impact Palm's earnings until Q1 2002.

That said, Q4 isn't looking too healthy, either. Palm is predicting zero year-on-year growth for the period, with revenues set to come in at around $300-315 million, a quarter-on-quarter fall of over 36 per cent. That's a significant dip, and marks a major shift from Palm's bullish messages last quarter.

That's expected to lead to a loss of eight cents a quarter, driven by a $160-165 million marketing spend to drive sales of its recently released but not yet shipping (ie. not revenue earning) high-end m500 and m505 PDAs.

These are key to Palm's attempt to win back sales at the high margin end of the business, which has been hit by low-cost PDAs from Handspring and Palm's own consumer-oriented m100.

The success of Compaq's iPaq PDA hasn't helped matters either. Sales of this devices have grown significantly over the last three months, so expect Palm to promote the m505 vigorously. With its colour screen and shiny silver shell, seems designed to take the iPaq on head-to-head.

To help pay for all this, Palm will axe 250 full-time jobs and contract workers. Again, that's going to hit the company's Q4 bottom line, but it should contribute to the 10-15 per cent cut in costs it's hoping to realise in Q1 2002. Palm is also exploring flogging off real estate assets. ®

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