Palm slashes sales forecast, cancels merger

Palm Inc. warned Thursday that revenue for its fourth fiscal quarter would come in at approximately half its original forecast, and said it has agreed to cancel its proposed merger with wireless infrastructure provider Extended Systems Inc.

Palm now expects revenue for its fourth quarter, ending June 1, to be in the range of US$140 million to $160 million, down from its previous forecast of $300 million to $315 million, the company said in a statement. Palm reported revenue of $350 million in the fourth quarter of fiscal 2000.

The company’s new m500 line of handheld computers is shipping later than planned, so distributors, retailers and resellers cannot reorder in Palm’s fourth quarter, Carl Yankowski, Palm’s CEO, said in a statement. That delay stalled sales of existing products in all regions, he said.

The delay in shipments accounts for most of the revenue shortfall, but the problem has been compounded by the slowing U.S. economy, which has spread beyond the United States, he added.

Palm also reduced the outlook for its pro-forma operating results. The company now expects to report a pro-forma net loss of between $170 million and $190 million, down from its previous forecast of a loss of $80 million to $85 million. The pro-forma estimate excludes expenses such as the amortization of goodwill and intangible assets, purchased in-process technology, legal settlements and other one-time charges.

For the fourth quarter of fiscal 2000, Palm reported a pro-forma operating profit of $13 million.

The Santa Clara, Calif.-based company is due to report its results during the week of June 25.

Palm’s agreement to cancel its merger with Extended Systems of Boise, Id., is a further setback. The merger had been valued at $264 million and was expected to help Palm boost the popularity of its handheld computers among corporate users. In a joint statement Thursday, the companies said they have “mutually and amicably” agreed to call off the merger. They cited the slowing economy and market conditions, and said canceling the merger is in the interests of the companies and their shareholders.

Palm announced its plan to acquire Extended Systems in March, part of an ongoing effort to extend sales of its handheld devices beyond individual users and into large corporate accounts. Extended Systems makes infrastructure software that helps make corporate software applications accessible from portable devices like Palm’s handheld computers.

At the time, Palm said the acquisition would drive the popularity of its computers by making it easier for workers to access corporate data from their Palm devices while on the road. The deal also would have given Palm access to engineers with experience in its enterprise markets, as well as to Extended Systems customers including British Airways PLC, Cadbury Schweppes PLC and DaimlerChrysler AG.

The decision to cancel the merger is “disappointing,” Yankowski said in a statement. The company will continue to target the corporate market through partnerships and alliances with vendors, including Extended Systems, he said.

The deal had been expected to close in June. Under terms of the cancellation agreement, neither company will be required to pay a merger termination fee, the companies said.

Palm and Extended Systems will continue to jointly promote the use of Palm’s devices and Extended Systems’ mobile infrastructure software to corporate customers, and Extended Systems remains committed to its business, Steve Simpson, Extended Systems’ chief executive officer, said in the statement.

The news was announced after the U.S. markets closed. Palm’s shares ended the regular trading session down 0.84 percent, at $7.05. In after-hours trading the stock slid further, to $5.39, according to Instinet Corp.

Palm, in Santa Clara, Calif., can be reached at