PalmSource Reports FY05 First Quarter Results

PalmSource today reported revenues of $18.2 million for the first quarter ended August 27, 2004, as compared to revenues of $17.1 million for the same period of the prior fiscal year.

Net loss for the first quarter of fiscal year 2005 was $0.2 million, or $0.01 loss per share. Net loss for the same quarter of the prior fiscal year was $3.8 million, or $0.38 loss per share.

At August 27, 2004, cash, cash equivalents, restricted investments, short-term and long-term investments were $76.6 million. Cash utilized during the first quarter of fiscal year 2005 was $12.2 million.

On a non-GAAP basis that excludes the effect of stock-based compensation, amortization of intangible assets, restructuring, gain on early extinguishment of debt, and separation expenses (related to the spin-off of PalmSource from palmOne, Inc.), net income for the first quarter of fiscal year 2005 was $0.8 million, or $0.05 earnings per share. This compares to a non-GAAP net loss for the same quarter of the prior fiscal year of $1.5 million, or $0.15 loss per share.

"Overall, we are satisfied with our performance in this quarter," said David Nagel, PalmSource chief executive officer. "In Q1, we saw a continued increase in the percentage of units and revenues from smartphones as a percentage of our total units and revenues. This is a continuation of the trend we have seen in recent quarters. In Q1, FY05, as compared to the same quarter of the prior year, smartphone royalties increased significantly, and largely offset the decrease in royalties from the sale of handheld devices resulting from Sony's withdrawal of the CLIE handheld from markets outside Japan."

"We achieved some significant milestones in Q1, FY05," stated Al Wood, PalmSource chief financial officer. "We generated $1.7 million positive cash flow from operations; we prepaid a $15.0 million convertible note at a 12.5% discount, resulting in a $1.9 million gain on early extinguishment of debt on our balance sheet; we improved our gross margins to 93%, as compared to 89% for the same quarter of the prior year; and we continued to manage our expenses, in part through a limited employee reduction in force and curtailment of the use of contractors. Looking forward to Q2, FY05, until we are able to see the impact of Sony's withdrawal from the handheld markets outside of Japan, as well as our licensee's penetration of the smartphone market, our revenues will be difficult to predict."

First Quarter Fiscal Year 2005 Highlights:

• Palm OS licensees reported shipments of 1.4 million Palm Powered units, of which 74% were handheld devices, 21% were smartphone devices and 5% were other devices. In the same quarter of the prior fiscal year, Palm OS licensees reported shipments of 1.2 million Palm Powered units, of which 90% were handheld devices, 7% were smartphone devices and 3% were other devices.
• Gross margin percentage improved to 93%, as compared to 89% for the same quarter of the prior fiscal year.
• Cash flows from operations were positive by $1.7 million.
• Steps were taken to further control costs, including the completion of a limited reduction in force, and a curtailment of the use of outside contractors.

Business Outlook
Management's current outlook for the second quarter of fiscal year 2005 is as follows:

• Revenues are expected to be in the range of $18 million, plus or minus 5%.
• Financial results on a GAAP basis are expected to be in the range of a net loss of $1 million, or $0.07 loss per share, to net income of $1 million, or $0.07 earnings per share; and on a non-GAAP basis, are expected to be in the range of breakeven to net income of $2 million, or $0.13 earnings per share.