Q2 Earnings Call: Palm Inc Retuns to Profitability

Palm, Inc. which consists of two operating units – Palm Solutions Group and PalmSource -- today reported revenues of $265 million for the second quarter of fiscal year 2003, ended Nov. 29, 2002, down 9 percent from the $291 million reported during the comparable quarter a year ago, and up 54 percent from the first quarter of fiscal 2003.

Pro forma net income in the second quarter -- which excludes the effects of amortization of intangible assets, separation costs, and restructuring charges -- totaled $5.7 million, or $0.19 per share. This compares to a pro forma net loss in the second quarter of fiscal 2002 of $36.6 million, or $1.29 per share, which excluded the effects of the reduction in special excess Inventory costs, amortization of intangible assets, and restructuring charges. Pro forma net loss in the first quarter of fiscal year 2003 was $36.4 million, or $1.26 per share, which excluded the effects of the change in the valuation allowance for deferred tax assets, amortization of intangible assets, separation costs, and restructuring charges. All earnings-per-share figures have been adjusted for the 1-for-20 reverse stock split effective Oct. 15, 2002.

Net income, as measured by generally accepted accounting principles (GAAP), for the second quarter of fiscal year 2003 was $3.5 million, or $0.12 per share, compared with a net loss of $25.2 million, or $0.89 per share, for the second quarter of fiscal year 2002 and a net loss of $258.7 million, or $8.93 per share for the first quarter of fiscal year 2003.

"Palm has continued to raise its level of execution in the quarter. Our return to profitability fulfills a commitment we made to our shareholders a year ago," said Eric Benhamou, Palm's chairman and chief executive officer, "and we view it as a major milestone."

He noted the following year-over-year improvements in the Palm Inc Earnings Call:

• Pro forma gross margins of 32.8 percent vs. 20.5 percent;
• Pro forma operating expenses of $84.3 million vs. $113.7 million;
• Pro forma net income of $5.7 million vs. a net loss of $36.6 million
• Inventory of $38.5 million vs. $78.6 million; and
• Cash-to-cash cycle of 3 days vs. 14 days.

"A key driver behind our performance this quarter was the successful introduction and favorable market acceptance of two major products under our new subbrands Zire and Tungsten," Benhamou said. "Together with our new Palm OS 5 operating system, we're demonstrating how Palm's tradition of innovation continues and how our new product engine is executing with renewed vigor."

Solutions Group Update
During the quarter, the group responsible for the world-leading Palm branded handhelds, accessories and add-on hardware and software saw good progress and momentum on a number of fronts. The group announced:

• Two new subbrands -- Zire(TM) for Palm's new family of consumer products and Tungsten(TM) for mobile professional and business solutions;
• Three new products -- The Palm Zire handheld at $99 (suggested U.S. retail) is aimed at the untapped entry-level consumer market. The Palm Tungsten T handheld at $499 (suggested U.S. retail) is a premium product made for mobile professionals and businesses. Both have earned high marks in product reviews. In the first calendar quarter of 2003, a third product, Tungsten W -- aimed at data-centric wireless communication with voice capability -- will be available with service from leading carriers around the world; and
• Commercial availability of Palm's Tungsten Mobile Information Management solution, Palm's behind-the-firewall, push email server software for businesses.

During the quarter, Palm Solutions shipped approximately 1.4 million Palm branded handhelds, bringing cumulative shipments to more than 20 million (see separate news release). Palm Solutions market share in U.S. retail, according to NPD, was approximately 60 percent for the week beginning Nov. 24, 2002, the last week of the fiscal quarter and the Thanksgiving holiday week that initiates the holiday buying season.

Earlier this month, Palm Solutions Group also announced that it will begin selling handheld computers in China during the first half of calendar 2003.

PalmSource Update
During the quarter, PalmSource, the Palm, Inc. subsidiary with responsibility for developing and licensing the Palm OS (R), the world's most popular software for handheld computers and smartphones, achieved the following:

• Shipment of the first PalmSource ARM-native, proxyless Web browser to Palm OS licensees, providing unprecedented security, speed and graphics capability;
• A $20 million equity investment from Sony Corp., resulting in about 6 percent ownership of PalmSource and Sony becoming the first outside investor in the subsidiary that is expected to be spun off from Palm Inc. in the first half of 2003; and
• Announced Fossil, Inc., as a new licensee, which will make a Palm Powered device, the WRIST PDA, and also announced an extension to Samsung Electronics' license of Palm OS for its leading smartphones.

In addition, this month PalmSource announced major initiatives to enter the China market. They include the opening of its subsidiary in Hong Kong and plans for a representative office in Beijing; two new licensees who will develop Palm Powered products for the Asian and Chinese market, Legend Group Limited and Group Sense Limited; and a partnership with Portable Innovation Technology, the first Palm OS System Development Partner.

The quarter ended with more than 250,000 registered Palm OS developers. Those developers created about 16,000 commercially available software applications (http://www.palmgear.com) and thousands of proprietary applications, many used in enterprises. According to IDC's study in the United States, Palm Powered(TM) handhelds accounted for 79 percent of all personal digital assistants shipped as of the third quarter calendar 2002. Palm Powered smart phones lead the U.S. converged handheld space with a projected market share of 75 percent in 2002, IDC said. As of Nov. 30, 2002, the cumulative number of Palm Powered devices that have been shipped was more than 25 million.