Palm Announces Latest Quarterly Earnings

Palm, Inc. has just reported that revenue for its most recent financial quarter was $233 million, which is slightly more than analysts had predicted. During the same quarter last year, the company had just $165 million in revenues. The company had a pro forma net loss of $18 million, or 3 cents per share.

Palm shipped approximately 900,000 Palm-branded handhelds during this quarter. This is down from the 1.3 million shipped last quarter.

Palm ended its fourth fiscal quarter of 2002 with $297 million in cash and short-term investments, which is up from the prior quarter.

"Palm executed quite well in a down market. Over the quarter, our pro forma gross margins grew to nearly 35 percent, we generated positive cash flow from operations, and channel inventory remained within our desired range," said Eric Benhamou, Palm chairman and chief executive officer. "And we have positioned the company to address broader market opportunities with innovative new products this fall and when the industry moves to a new growth phase."

As Predicted
Last month, Palm announced that demand for handhelds was weaker than expected this quarter and it would only have revenues of around $230 million. Previously, it had expected $290 million to $300 million in revenues. The company had also hoped to turn a profit this quarter, but said this was no longer possible with reduced demand.

Palm isn't the only company to announce that demand for computer products this quarter was less than expected. Apple Computer and Intel have complained of the same thing.

A House Divided
Palm reports separately the results for its two divisions, the Palm Solutions Group, which makes the hardware, and PalmSource, which develops and licences the Palm OS.

PalmSource had revenues of $18.7 million and a loss of $1.4 million. Palm plans to spin PalmSource off as a separate company before the end of this year and announced its Board of Directors yesterday.

Fiscal Year 2002
This marks the end of Palm 2002 Fiscal Year. Revenue for the full year was $1.03 billion, down 34% from the $1.56 billion reported in fiscal 2001. Pro forma net loss for fiscal 2002 was $107 million, or 19 cents per share, compared with pro forma net loss of $29 million, or 5 cents per share, in fiscal 2001.

The early part of this fiscal year, the last 6 months of the 2001 calendar year, was one of the worst in the company's history. It was suffering from a surplus of unsalable handhelds and in a price war with its competition.

Palm shipped more than 4.4 million Palm-branded handhelds during the last year. That brings the total number of Palm branded handhelds shipped to-date to more than 18 million. Approximately 23 million Palm OS handhelds, including those sold by Palm licensees, have been shipped to date. This compares with approximately 5 million handhelds shipped based on the Pocket PC operating system, according to IDC.

The Future
In a conference call after these results were announced, Judy Bruner, Palm's Chief Financial Officer, predicted the company would lose between $40 million and $45 million. Its revenues will be about $180 million.

For, the quarter after that, which has most of the holiday shopping season in it, she predicted the company will come close to breaking even. The company hopes sales of OS 5 handhelds will help, too.

Ms. Bruner went on to predict that revenues for all of Palm's current fiscal year be close to $1 billion.

Hail to the Chief
Palm took this opportunity to announce that it had picked Todd Bradley to the the Chief Executive Officer of its hardware unit, the Palm Solutions Group. This is almost a non-story as Mr. Bradley has been head of this group since last year but it is significant that he won't be replaced. The company had been conducting a search for a CEO for the last six months.

"Following four consecutive quarters of strong operational improvement, it became clear that Todd and the team he assembled have what it takes to lead the handheld solutions side of Palm," said Palm's CEO Eric Benhamou. "Following a thorough and comprehensive search, Todd emerged as the strongest candidate for the position."

After PalmSource is spun off, the Palm Solutions Group will be the whole company. Mr. Bradley will be the CEO. Mr. Benhamou will be the Chairman of the Palm Solution Groups Board of Directors and Chairman of PalmSource's Board, too.

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thats a lot

mentalsrule @ 6/25/2002 4:43:05 PM #
god thats a lot of handhelds...

its hard to believe people are still buying stuff from palm or any company seeming as if tons of people already have one.

anyway good job palm for making it over what they predicted.
now only if to hear from sony.

---------------------
They say when you play a Microsoft CD backward you can hear satanic messages...but that's nothing, if you play it forward it will install Windows
www.pratorian.net

RE: thats a lot
I.M. Anonymous @ 6/25/2002 4:48:30 PM #
you have to remember that "shipped" can mean a lot of things. You gotta read the fine print, which will tell you what really happened.

Even then my guess, from their last few statements, it looks like they would have actually 'shipped' 780,00 or so. Not bad for a company that is dying a slow death.....

RE: thats a lot
I.M. Anonymous @ 6/25/2002 4:53:04 PM #
>>>Even then my guess, from their last few statements, it looks like they would have actually 'shipped' 780,00 or so. Not bad for a company that is dying a slow death.....

If MS PPC group had to stand on it's own 2 feet with out the bottomless resources of the whole company, they would have been dead 4 yrs ago. PPC does not make $$ for MS - but hey they can continue to pour millions into this money loser for years until they drive the competition out, or give up. Of course, this is not likely, they know this is the future, so they will continue to build marketshare (even if that means as slowly as they have been doing so far) by being willing to lose billions if they have to.

RE: thats a lot
I.M. Anonymous @ 6/25/2002 6:17:25 PM #
Palm is big in the US of A, but over here in Europe there is still a growing market. And don't forget China with the coming Chinese versions!
Greetings from Europe.
RE: thats a lot
I.M. Anonymous @ 6/26/2002 1:04:06 AM #
Greetings back. :)

Early report?

Scott R @ 6/25/2002 4:49:11 PM #
I thought all of this was going to be discussed via a live webcast at 5PM EST. Did they release this info ahead of time the last time around, too?

Scott

no reports from sony?
I.M. Anonymous @ 6/25/2002 4:54:37 PM #
well like the old saying goes "if you have nothing good to say then keep your mouth shut".


RE: Early report?
I.M. Anonymous @ 6/25/2002 4:58:00 PM #
Huh !?
Just because Palm announced their earnings today doesn't mean every body needs to announce it today.
RE: Early report?
Ed @ 6/25/2002 5:04:50 PM #
Palm always issues a release with its financial report at 4 PM EST followed by a conference call at 5 PM. Nothing different here.

---
News Editor

OK - considering last years mistakes and the current market

I.M. Anonymous @ 6/25/2002 4:44:25 PM #
I know lots of people will sooning be trolling their naive opion about how losing money means its the end of the world for Palm, so let me pre-empt this be saying - 'grow up kids and go to business school'. Considering that popular press had basically written this company off last year, assuming that they were going to be just another company steam-rolled by microsoft (these same media analysts are still in some sort of denial about the actual failure of PPC to meet predicted market growth), Palm is doing OK. We all know about last years inventory debacle, but since then they are running a pretty prudent ship. Yes, the geeks out there (myself included) are disapointed at the lack of inovation in this spring models (m130/m515), but from a business stand-point, Palm is making the best moves it can considering the resources of this company (compared to the deep pockets and resources of MS and Sony). They have - for the most part - out-performed analyst expectation, which is what counts if you want increased outside investment.
RE: OK - considering last years mistakes and the current market
I.M. Anonymous @ 6/25/2002 4:56:29 PM #
Remember, people reading/posting here at PIC only constitute a minute fraction of the PDA market. Palm's recent efforts such as the Grad pack M125, and the buy an m500 get m105 for free are designed to lure in the Sunday circular-reading general public, or the slightly Ludditish executive that just wants to do basic PIM stuff.

I think that Palm is doing a nice job by (apparently) splitting their product line into 3 groups to target the hip young kids/first time buyers, the executives who want a slim, sleek form factor and then the wireless sector, which will only grow in the coming months/years.

They are using their meagre resources wisely and, once the m100 and 105 are finally put out to pasture in favor of the new OS5 units this fall, will have a pretty nice product mix. Heck, it's already looking pretty good as most of the major "price points" are already covered (albeit all about 10-15% higher priced than they should be)

RE: OK - considering last years mistakes and the current ma
I.M. Anonymous @ 6/25/2002 5:36:11 PM #
> once the m100 and 105 are finally put out to pasture
> in favor of the new OS5 units this fall

The m100/m105 are much more likely to be replaced by something akin to the m125/m130 than any OS 5 unit.

Accounting Jargon

Ed @ 6/25/2002 5:09:14 PM #
If anyone out there with experience in accounting wants to explain some of these numbers, I'd be really happy. I know the basics but I don't understand why there are two sets of numbers for the two divisions, one labeled "Segment Results Reconciled to Reported Net Loss" and one not. Sorry, I have no idea what that means.

You can find the numbers here:
http://makeashorterlink.com/?E41265221

---
News Editor

RE: Accounting Jargon
I.M. Anonymous @ 6/25/2002 7:39:28 PM #
Actually one set of numbers is marked "pro forma", the other actual. The reconciliation numbers show you how to get from the actual numbers to the pro forma.

The original intent of "pro forma" was to eliminate certain costs from the income statement that mask the underlying profitability of the ongoing business. For example, generally accepted accounting principles (GAAP in CPA talk) require a company to record certain non-cash events as a charge to profit. As a result, a company can actually be taking in more cash than it spends and sell its products for more money than they cost to produce but show a net loss using GAAP.

Pro forma financials were all the rage during the dot com bubble, when the amortization of acquisition costs and depreciation of capital investments made many companies' financials look awful (and not without justification in most cases.) Unfortunately, there is no standard definition of "pro forma" and it is frequently abused by companies that are losing money but want to look like they are profitable.

In Palm's case, their pro forma adjustments look to be largely one-time costs from last year's inventory glut and breaking the company into two pieces. They are still losing money on the fundamentals (sales vs. cost of goods sold, R&D, and S&GA) but it's getting better. Let's hope they have their problems behind them and are back on solid footing for the future.

By the way, I am not an accountant so nothing in here should be construed in any way, shape, or form as accounting or financial advice...

RE: Accounting Jargon
I.M. Anonymous @ 6/26/2002 8:47:18 AM #
Good thing we have "plain English" accounting rules now, isn't it? :)

I think all those amounts are getting to the same place, Ed.

First we have the 4th quarters for 2002 and 2001, then the year-end totals for 2002 and 2001, by segment (hardware and software being the two segments, obviously).

RE: Accounting Jargon
I.M. Anonymous @ 6/30/2002 4:10:58 AM #
Nice summary of the accounting issues.

One thing to watch out for though: so-called 'one-off' charges have a habit of being repeated. Be extra careful with this stuff.

You know, I have a book published in 1934 which warns about this sort of thing. But people never learn. When I read the newspaper headlines, it looks to me like history repeating ...

PalmSource losses

Scott R @ 6/25/2002 5:21:41 PM #
I guess the part that looks concerning to me is the loss by the PalmSource division. Any additional explanation regarding that? Considering that they don't have the same kind of expenses as the hardware division, shouldn't this division be much leaner and meaner? A significant losss here would seem to point to too much money spent on salaries and/or advertising, IMO.

Scott

RE: PalmSource losses
I.M. Anonymous @ 6/25/2002 5:34:38 PM #
Hmm, well, they still have to pay thousand of employees, but they only make a few dollars for every Palm OS device sold. If Palm Inc sold 5 million devices this year, then all other palm os licensees (by my very rough estimate) couldn't have sold more than a few million more. So - assuming around 8 million (i am just pulling this figure out of my butt for the sake of argument), and assuming $10 each for palm os liscense fee (anybody know the actual fee? i think PPC is around $10 a unit so i am assuming similar here), that's only $80 total. Now, i only read the article above and don't know the actual numbers for PalmSource, but it seems to me that PalmSource is really a long-term $$maker - no real chance of making big $$$ in the short-term, they are counting on long term growth of PDA sales (and subsequent PalmOS share of those sales). A simple estimate like mine shows that its not really possible for this unit to rake in billions anytime soon.
RE: PalmSource losses
I.M. Anonymous @ 6/25/2002 6:29:09 PM #
Let's do some calculation.

For this quarter:

Palm sold/shipped 0.9 million units
PalmSource's revenue = 18.7 million
My *rough* guess: using market share as a reference, total PalmOS PDA sold/shipped this quarter = 1.3 million

Assuming PalmSource's only revenue comes from PalmOS license, for each PalmOS PDA sold, PalmSource gets $18.7 / 1.3 = $14.3.

The actual figure would probably be $12 to $15.


RE: PalmSource losses
I.M. Anonymous @ 6/25/2002 7:10:52 PM #
yeah - i just clicked the link to palm and saw the palmsource numbers - $18.7 mil in revenues. but why do you estimate 1.3 million total palm os pdas last quarter? Palm Inc itself claims 1.3 million units - and based on relative marketshare, sony, handspring and others (depending on which market numbers you believe, would account for another 400,000-800,000 units. are you saying the Palm Inc number (1.3 mil units) is off by that much? I know there is quite a discrepany between units shipped versus units sold - but palmsource gets paid the OS fee for each unit regardless.
RE: PalmSource losses
I.M. Anonymous @ 6/25/2002 7:10:52 PM #
>>Again, my concern is that PalmSource should be pretty lean. They should be enjoying profitability, not losses.

To be going to war with MS in the OS game and having to put resources into such major OS upgrades - not just OS 5, but already prepping OS 5.5/6 (if we can trust there road-map), costs a lot of bucks considering the meager licence fee they get for each palm os pda sold. There are only (at best) a couple of million palm os pdas sold each quarter, and with approx $10 a pop - how do expect them to be rolling in profit?

RE: PalmSource losses
Scott R @ 6/25/2002 7:11:53 PM #
Well, PalmSource makes money off of their reader software and books as well, so you'd need to factor that in.

Again, my concern is that PalmSource should be pretty lean. They should be enjoying profitability, not losses.

Can anyone else add some insight as to why the losses of PalmSource could be so significant?

Scott

RE: PalmSource losses
I.M. Anonymous @ 6/25/2002 7:31:08 PM #
Yes, it is really easy to see why PalmSource is losing so much money. How much in revenues? $18.7 million. How much does a small handful of programmers cost? Easily a $1 million. Multiply that by several times to what is needed to maintain the Palm OS, add an entire management team, accounting, marketing, pr, customer relations, building upkeep costs, IT, etc. and you begin to see why. In a company of that size and clout, 19 million is nothing.
PalmSource Inc. Expenses
Palm_Otaku @ 6/25/2002 7:43:51 PM #
Among their operating costs, I believe that the annual PalmSource developers conference is also in their budget. I'm pretty sure that even after fees from registration / exposition / sponsorship are taken into account it still costs them a lot of money.

RE: PalmSource losses
Scott R @ 6/25/2002 8:13:48 PM #
I guess I still don't get it. IMO, the poor quarter of PalmSource had less to do with the economy and more to do with them still running too fat. Was the quarter (sales-wise) great? Maybe not. But, IMO, it still should have been profitable for the PalmSource division. Palm's hardware side is another story. There's a lot more expenses, advertising, and competition from the other PalmSource licensees.

I also hate to see PalmSource trim the fat by cutting jobs. Too often companies "save" money by cutting lower-level jobs while the CEOs keep their inflated salaries. Then projects have to get cut or end up getting done late and/or shoddily. I'm sure they have some great cost saving opportunities with the CEO positions (either by eliminating some of them entirely or just cutting the salaries).

Am I insane here?

Scott

A tough road to hoe...
I.M. Anonymous @ 6/25/2002 9:25:22 PM #
But this isn't too bad for a start-up. BTW, I heard at the last PalmSource that their headcount is closer to 300, hardly the thousands that someone else has posted.

(BTW, speaking of the developer conference, anybody know when the next one is? This is a great place to learn a lot of things that are posted as "breaking" news months later :) )

Road to hoe
I.M. Anonymous @ 6/25/2002 9:55:53 PM #
I believe that is "row to hoe." Hoes are of limited value on asphalt.
RE: PalmSource losses
I.M. Anonymous @ 6/26/2002 12:14:18 AM #
PalmSource also bought Be Inc.
That had to cut into profitability.
RE: PalmSource losses
I.M. Anonymous @ 6/26/2002 6:33:40 AM #
>>BTW, I heard at the last PalmSource that their headcount is closer to 300, hardly the thousands that someone else has posted.

Hmmm - there you go. 300 x $60,000 (lets pretend they pay these guys peanuts) = $18 mil. Of course, i dont know but i am assuming the average Palm employee makes atleast more than $60,000. So to the guy who keeps posting about 'not getting it' - whats to get. palmInc (hardware guys) charge a hell of a lot more than $10 per unit sold - their profits (even w/price war) on each unit are much higher than this. So what is so confusing about PalmSource not raking in the $$$ ?? basic math - even if these estimates are wrong it still doesn't add up to large profits for PalmSource. A lot of news and attention because of the platforms success & ubiquity - but that doesn't nescesarily translate to profit.

RE: PalmSource losses
Scott R @ 6/26/2002 7:01:24 AM #
>> Hmmm - there you go. 300 x $60,000 (lets pretend they pay these guys peanuts) = $18 mil. Of course, i dont know but i am assuming the average Palm employee makes atleast more than $60,000. So to the guy who keeps posting about 'not getting it' - whats to get.

OK, let's assume these numbers were all that there were (which, of course, they're not). The problem I have is that based on their 300 employees at average $60,000 and based on them charging $10/license, they would need to sell a significantly larger number of licenses in order to turn a profit. In other words, the business model is flawed.

But, I don't think that the business model _is_ flawed, because I think that it is, in fact, _very_ possible for them to turn a very nice profit even selling the licenses at $10. The reason being that I don't think that the numbers that we're playing with here are accurate. I think that there's a lot more to what comes in (reader software, ebooks, etc.) and an even larger amount of fat that can be trimmed (high-ranking salaries & positions).

Off topic, but I guess I never really understood the Be aquisition, either. I'm not saying that it wasn't a great idea to hire all of these Be execs/employees, just that considering that the company was bankrupt anyway, why buy it instead of just courting the employees? I still find it difficult to believe that they would be able to use enough of what the BeOS was in a PDA that purchasing the intellectual rights to it was necessary, but with a StrongARM processor and larger RAM, maybe I'm wrong.

Scott

RE: PalmSource losses
I.M. Anonymous @ 6/26/2002 7:32:30 AM #
> 300 x $60,000 (lets pretend they pay these guys peanuts) = $18 mil.

By the time you tack on overhead it typically costs 2x to 3x their salary, so say 2.5 (probably too low). 2.5 x 300 x $60,000 = $45 mil.

I didn't think they paid very much for Be. Things like OS 4.1 upgrades add to the profits. They get money from Handango for web software sales. On top of all that, they probably make large sums off of enterprise related applications and development.

RE: PalmSource losses
I.M. Anonymous @ 6/26/2002 11:05:04 AM #
Don't forget these are quarterly numbers. $60,000 per employee per quarter would mean $240,000 anualized.

Palm does well!

I.M. Anonymous @ 6/25/2002 5:43:08 PM #
Even with all the palm bashing and hatred going on, palm still managed to pull off a fairly decent result. Congrats to palm! Keep up the fight against the evil ones.............
RE: Palm does well!
I.M. Anonymous @ 6/26/2002 5:29:40 AM #
after the WorldCom fiasco, can you trust this one?
This is why ''quality of earnings'' matters
I.M. Anonymous @ 6/26/2002 9:08:07 AM #
Anytime you see swings in the company's reserves of over $100 million, be a little skeptical.

Question for ED!

I.M. Anonymous @ 6/25/2002 6:06:46 PM #
Do you have any idea of when palm will announce these new products that are supposedly coming this fall? Any clues other than those found in the earlier PIC story about 3 new palms would be appreciated. I love this site!!!
RE: Question for ED!
I.M. Anonymous @ 6/26/2002 12:29:26 AM #
I'm shooting in the dark, but I reckon the devices due for this fall will arrive sometime during fall... so that's after summer in case you're having trouble keeping up...

<sheesh>

RE: Question for ED!
wilco @ 6/26/2002 1:27:58 AM #
The fact the CFO announces that sales in this current quarter will fall to 180 million from 230 million means that no new Palm PDA will see the light for at least two more months. It's good that newer PPC with Xscale had been hampered by performance issues, otherwise Pocket Pc will surely grabs a bigger share of the market. Here's hoping the other Palm licensees will come out with OS5 PDA sooner...

Not bad

PIC mobile user @ 6/26/2002 7:19:13 AM #
Palm did some magic tricks to get this to happen, my hat goes off to them.

Looks like awfully low-quality earnings to me

I.M. Anonymous @ 6/26/2002 8:59:32 AM #
Or losses as the case may be.

Look at the very end of the release, at the caption headed "Reconciliation of segment operating loss to net loss"...

Last year they wrote down inventory $268 million dollars. Now this year they have written inventory back up $101 million. Basically it looks like they "overestimated" their writeoff in 2001, which they knew would be terrible, and "borrowed" some income for 2002.

If you shift that "overestimate" back to 2001, where it really belongs, you have a 2001 after-tax loss of roughly $280 million (still terrible) and a 2002 loss of roughly $150 million -- almost double the current year loss.

Cookie jar accounting strikes again.

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