PalmSource Announces Q2 FY04 Results

PalmSource today reported revenues of $16.8 million for the second quarter of fiscal year 2004, ended November 28, 2003, shortly after the market closed. The company posted a slight loss in its first quarter after the spin off. Revenue grew 13% over the same fiscal quarter a year ago as 1.3 million palm powered devices shipped.

Based on generally accepted accounting principles (GAAP), the net loss for the second quarter of fiscal year 2004 was $9.1 million or $0.89 per share. This compares to a GAAP net loss for the second quarter of fiscal year 2003 of $8.3 million or $0.83 per share.

On a non-GAAP basis that excludes the effect of stock-based compensation, amortization of intangible assets, restructuring, and separation (related to the spin out of PalmSource from palmOne), net loss for the second quarter of fiscal year 2004 was $0.3 million, or $0.03 per share. This compares to a non-GAAP net loss for the second quarter of fiscal year 2003 of $6.0 million or $0.60 per share. At November 28, 2003, cash, cash equivalents and restricted investments were $35.7 million.

"The second quarter was an exciting and historical time for PalmSource. In this quarter, PalmSource was spun out from palmOne and launched as an independent public company with the mission of powering the next generation of smart mobile devices," said David Nagel, PalmSource, Inc. president and chief executive officer. "As these exciting events were occurring, we maintained our focus on operational excellence and continued with the execution of our plan to achieve profitability."

In the second quarter, the company announced PerComm, Inc. as a Palm OS licensee. PerComm plans to integrate Palm OS 5 to create new smart mobile devices that operate on wireless networks including ReFLEX, GSM and CDMA. Additionally, the company recently announced that Founder Technology Group, Corp. (Foundertech), a leading computer manufacturer in China, has licensed Palm OS to distribute Foundertech-branded Palm Powered devices in China. During the second quarter, the company launched the Palm Powered Mobile World program, connecting mobile operators, infrastructure providers and software developers in a wireless ecosystem that capitalizes on the growing smartphone market. The Palm Powered Mobile World program was joined by Sprint as a charter carrier member and Pumatech and Visto as charter infrastructure members.

Second Quarter Operational Review
Comparing the second quarter of fiscal year 2004 to the same quarter of the prior year:

• Total revenues grew by 13% to $16.8 million.
• License and royalty revenues increased by 14% to $15.5 million, while the number of units shipped decreased by 10% to 1.3 million.
• Gross margin percentage improved from 81% to 94%.
• Total operating expenses on a non-GAAP basis decreased by 9%.
• Non-GAAP net loss decreased by 95% to $0.3 million.

Business Outlook
Management's current outlook for the third quarter is as follows:

• Revenues are expected to be in the range of $21 million, plus or minus 5%.
• Financial results on a GAAP basis are expected in the range of a net loss of $2 million to breakeven; and on a non-GAAP basis, net income in the range of $1 million to $3 million.
• Cash flow used by operating activities is expected in the range of $2 million to $4 million.