Palm Reports Q2 FY06 Results

New Palm Inc Logo ~ Click for largerPalm today reported revenue of $444.6 million in its second quarter of fiscal year 2006, ended Dec. 2, up 18 percent from the year-ago period. Palm CEO Ed Colligan stated in the earnings call that Palm will announce three new smartphones next year, in addition to the Treo 700w.

"Achieving the eighth consecutive quarter of year-over-year double-digit revenue growth and growing our converged device market share to 36 percent in the United States (Canalys) are significant accomplishments," said Ed Colligan, president and chief executive officer of Palm. "We'll roll out the Palm Treo 700w smartphone based on Microsoft's Windows Mobile, and we'll announce three additional new smartphones during calendar year 2006."

Net income was $260.9 million, or $5.02 per diluted share. Net income reflected the effect of a partial reversal of a deferred tax asset valuation allowance of $226.3 million. This compares to net income for the second quarter of fiscal year 2005 of $24.7 million, or $0.48 per diluted share.

Net income in the second fiscal quarter, on a non-GAAP basis, totaled $24.4 million, or $0.47 per diluted share, excluding the effects of restructuring charges, amortization of intangible assets and deferred stock-based compensation, the related income tax provision, and the partial reversal of our valuation allowance against our deferred tax asset. This compares to non-GAAP net income in the second quarter of fiscal year 2005 of $27.2 million, or $0.53 per diluted share, which excluded the effects of amortization of intangible assets and deferred stock-based compensation. Non-GAAP net income in the second quarter of fiscal year 2005 was calculated utilizing a tax rate of approximately 19 percent, compared to the 40 percent tax rate in the second quarter of fiscal year 2006.

"During the second quarter, we added seven new carriers to expand the geographic reach of our products, and for the first time we began selling Treo smartphones in China," Colligan said. "We shipped more than 1 million Treo smartphones during the first half of fiscal year 2006, which is just shy of what we shipped in all of fiscal year 2005. With our strong market position, and excellent execution, I have confidence in our long-term growth opportunity."

Fiscal Year 2006 Third Quarter Outlook

Based on current trends, Palm is providing its outlook for financial results in the third quarter of fiscal year 2006, ending March 3, 2006. At this time, the company expects:

  • Revenue in the range of $370 million to $375 million;
  • Gross margin between 33.0 percent and 33.5 percent;
  • Operating expenses between $100 million and $102 million on a GAAP basis and between $99 million and $101 million on a non-GAAP basis; and
  • Earnings per diluted share between $0.46 and $0.49 on a GAAP basis and between $0.31 and $0.33 on a non-GAAP basis, which excludes amortization of intangible assets and deferred stock-based compensation and reflects the difference between utilizing a 40 percent effective tax rate on a non-GAAP basis, compared to approximately 7 percent to 8 percent effective tax rate on a GAAP basis.

Strategic Highlights

During the second quarter of fiscal 2006, the company accomplished the following:

  • Announced the development of a next-generation Palm Treo smartphone, the Treo 700w, which will be introduced to the marketplace in early calendar year 2006. This product is based on Windows Mobile 5.0 and runs on the Verizon Wireless EV-DO network;
  • Announced the availability of BlackBerry Connect capability in early 2006 for current and future Treo 650 smartphone users with service through certified carriers;
  • Opened its European Engineering Centre in Dublin, where engineers will develop custom software for Palm smartphones in close collaboration with mobile operators in the Europe/Middle East/Africa (EMEA) region;
  • Expanded business with seven new carriers during the quarter. They are Hutch in India; TIM in Brazil; TELUS Mobility in Canada; Entel in Chile; Alltel in the United States; and Telefonica/movistar and Iusacell, both in Mexico; and
  • Introduced two new handheld computers, the Palm TX, featuring integrated Wi-Fi and Bluetooth wireless technologies and a large, high-resolution color screen, and the Palm Z22, an easy-to-use and compact color organizer priced to compete with paper organizer systems.

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Tax benefit of more than $200 million - WTF?

Gekko @ 12/20/2005 7:24:20 PM # Q

Palm earnings surge on tax break
Shares soar after Treo smart phone maker says profits climbed to $260.9 million in 2Q.
December 20, 2005: 5:33 PM EST

SAN FRANCISCO (Reuters) - Palm Inc., maker of handheld computers including the Treo smart phone, said Tuesday that its quarterly profit jumped because of a tax benefit of more than $200 million.

http://money.cnn.com/2005/12/20/technology/palm_earnings.reut/index.htm



and what about stock option expenses?
hoodoo @ 12/21/2005 2:52:23 PM # Q
The tax ruling was an extraordinary item and not included in regular EPS, which exceeded analysts expectations. In any case, Palm won't be expensing stock options until Q3 '06, so that could add up if the big kahunas start cashing out.

From a Citigroup comment:

Palm's significant stock option expenses could cause concern for investors once expensed. Palm has historically had significant stock option expense, which we view as a risk factor if investors pay more attention to earnings post stock-
option expense which Palm will start reporting in August of 2006. For example, in Fiscal 2005, pro-forma diluted earnings per share of $1.54 compares to only $0.67 after including the cost of stock options. In Fiscal 2004, pro-forma diluted EPS of $0.19 compared to a loss of ($0.78) after including the cost of stock options. We are currently using Palm's pro-forma earnings excluding stock option expense for two reasons: 1) In general, we believe investors are taking stock-option expense into consideration for current valuations. 2) Palm has not
provided guidance for stock option expense, and will not until it starts expensing options in August of 2006.



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Good news... Bad news...

The_Voice_of_Reason @ 12/20/2005 6:27:32 PM # Q
Good news: $24 million profit + new phones coming.

Bad news: Lost control of PalmOS + about to become JAWL (Just Another WindowsMobile Licensee).

I wonder which is more important...

TVoR

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
freakout @ 12/20/2005 11:26:21 PM # Q
"...about to become JAWL (Just Another WindowsMobile Licensee)."

Agreed that's not a good thing, but they do seem to have a special sway with MS to make changes to WM. Whether or not these changes will actually be significant enough to differentiate Palm from the rest of the WinMob pack is the real question.

Sadly, judging from the 700w manual that was published, it doesn't seem they will be.

Tim Carroll
Your friendly customer service robot
(and big Treo fan)

RE: Good news... Bad news...
The_Voice_of_Reason @ 12/20/2005 11:44:20 PM # Q
but they do seem to have a special sway with MS to make changes to WM.

Do you really believe that? And do you think ANY "unique" features of a Palm WinMob device can't be (or haven't already been) replicated on non-Palm-branded WinMob devices? Don't be naÔve.

The fox is in the henhouse. Incredibly, it was Palm that invited him (Gates) in.

TVoR

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
rasty @ 12/21/2005 4:24:25 AM # Q
Baddest of the bad news: not a single decent (innovative) PDA in sight... :(

RE: Good news... Bad news...
freakout @ 12/21/2005 5:25:39 AM # Q
"The fox is in the henhouse. Incredibly, it was Palm that invited him (Gates) in."

Voice,

But that's just what I don't get! Palm knows exactly what Microsoft is and what they'd be getting into with a WM Treo. Why invite a fox into the henhouse at all?

No. There's *got* to be something more to it, or else Palm are just stupid. They've struck me as foolish at times, but not idiotic.

Then again, maybe they felt they just didn't have a choice.

Tim Carroll
Your friendly customer service robot
(and big Treo fan)

RE: Good news... Bad news...
The_Voice_of_Reason @ 12/21/2005 1:14:49 PM # Q
Why invite a fox into the henhouse at all?

They need the money and were smart enough to realize that there might never be a next-generation version of PalmOS released in time to matter. Palm had to cover themselves for this worst case scenario. Had Palm regained control of PalmOS, they could have been in a GREAT position if PalmLinux developmemt worked out as hoped.

Palm is not run by idiots. There execs are shrewd, calculating individuals that are playing a high stakes poker game despite currently holding a poor hand. Microsoft and Nokia will probably call Palm's bluff in 2006 and I expect them to fold soon after that.

TVoR

TVoR

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
ginsberg @ 12/21/2005 3:11:11 PM # Q
Your henhouse comment makes no sense. Palm is doing what it needs to to continue growing their business, and they can no longer depend on PalmSource/Access to provide a platform that can sustain their growth. Garnet is nearing the end of its lifecycle. Garnet has served the Treo well in attacking the consumer market, but it has not provided much traction in the business market. It was PalmSource that failed to deliver a viable Cobalt, forcing Palm to look elsewhere.

Palm has an outstanding design with the Treo and it makes great sense to extend that to new platforms, such as Windows Mobile.

Windows Mobile is the platform most business users prefer, and it is likely that the Treo 700w and its Windows Mobile descendants will easily outsell the Treo 650 and its Garnet descendants from 2006 onward.

RE: Good news... Bad news...
PenguinPowered @ 12/21/2005 3:16:41 PM # Q
I don't know why Palm did it. But in the '90s, I was directly involved in two companies that did it, and they both had similar reasoning, so I can speculate.

In the 90s it was Win/NT versus company-proprietary Unix-variant. The argument was simple: It cost company X about the same amount to do OS innovation as it cost M$, but M$ gets to spread that cost over tens to hundreds of times more copies, so company X has to charge tens to hundreds of times more per copy to break even.

Company X convinces itself it's not really in the OS business and only does a Unix variant because what they sell needs an OS, but they don't really care whose.

Company X gets into bed wih M$ because, after all, "we're not in the OS business, we're in the business".

For the two companies in question, it was an acceptable choice. They're both doing well today, and neither is in the OS business.

Palm got out of the OS business when they spun off PalmSource. I would guess that they're reasoning is the same as company X's.

We'll have to wait and see how 2006 goes before we can say whether they've made a good choice or not.

Marty Fouts

I survived PalmSource '05

RE: Good news... Bad news...
ginsberg @ 12/21/2005 3:52:57 PM # Q
When Apple licensed the Mac OS to Power Computing & Umax in the 1990s, they did not charge 10X what Microsoft was charging for Windows. In fact, they charged their licensees about the same price Microsoft charged its licensees, even though Microsoft's market was more than 10X the size of Apple's.

Apple (Steve Jobs) pulled the plug on the licensees because they were undercutting Apple's prices. They would not have been able to undercut Apple's prices if the OS cost was anything like you suggest.

Umax and Power Computing cut a lot of corners to reduce their costs and in the process were dragging down the perceived quality that Apple Macs had developed. Jobs did the right thing for Apple, although a lot of people were angry that he stopped the Mac clone business.

RE: Good news... Bad news...
AdamaDBrown @ 12/21/2005 4:24:18 PM # Q
He didn't say he was talking about Apple--indeed, the Mac OS was only based on Unix after 10.0.

RE: Good news... Bad news...
PenguinPowered @ 12/21/2005 5:37:21 PM # Q
Yes, there are a lot of companies that didn't make that decision. Sun, for instance, is still holding out for Solaris. IBM can afford to support AIX no matter what the cost is. (Although, note, they abandoned Mach and OS/2 along the way.) But I was talking about two companies that _did_ make that decision and why *they* made it.

To the vast majority of companies that have an OS to support, the OS is just a necessary evil, and one they would just as soon not spend money on, because it makes them no direct revenue.

Apple in the 90s was an obvious exception, since they made their product differentiation off of MacOS. Palm would have fit that model before they sold off PalmSource, but they don't fit it now.


Marty Fouts

I survived PalmSource '05

RE: Good news... Bad news...
freakout @ 12/21/2005 8:00:57 PM # Q
The first part of the Treonaut's 700w review has been posted at http://blog.treonauts.com.

Initial impressions are quite positive. It seems Palm's customised Today screen is quite handy.

Tim Carroll
Your friendly customer service robot
(and big Treo fan)

RE: Good news... Bad news...
The_Voice_of_Reason @ 12/21/2005 8:41:23 PM # Q
Your henhouse comment makes no sense.

Wrong. It makes perfect sense, because it's the ugly truth. See my previous post for the reasons why Palm did what it did.


TVoR

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
The_Voice_of_Reason @ 12/21/2005 8:44:27 PM # Q
Palm got out of the OS business when they spun off PalmSource. I would guess that they're reasoning is the same as company X's.

We'll have to wait and see how 2006 goes before we can say whether they've made a good choice or not.

Correction: Palm PRETENDED to get out of the OS business when they deviously "spun off" (nudge, nudge, wink, wink) PalmSource. Had they been successful in purchasing back PalmSource (for useless stock + pennies on the dollar) Palm would again own a unique OS that differentiates themselves from the Microsoft hordes (like Apple does) PLUS they would be selling Windows Mobile devices to those who demand the Microsoft seal of approval on their hardware. In other words, Palm would have the best of both worlds.

Palm's bungling of the PalmSource deal leaves them as nothing as JAWL (Just Another WindowsMobile Licensee) with nothing to differentiate themselves from other JAWLs. The Treo 600 design will eventually be copied, advanced and then sold for a lower price by Palm's competition. Then what?

For reasons I've posted elsewhere, I think Palm has little confidence that Access will be providing them with a next-generation OS any time soon. Since Palm lacks the resources to come up with a COMPETITIVE mobile OS on their own, they'll be suckling from Gate's nasty, putrid teat until the Treo line gets suffocated by the competition.

I just wish Samsung or Sony Ericsson could have built the Treos instead of Palm...


TVoR

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
freakout @ 12/21/2005 10:17:02 PM # Q
"....they'll be suckling from Gate's nasty, putrid teat..."

Ew.

Ewwwwwwwwwwwwwwwwwwww.

You certainly have a penchant for gross imagery....

Tim Carroll
Your friendly customer service robot
(and big Treo fan)

RE: Good news... Bad news...
The_Voice_of_Reason @ 12/23/2005 8:57:26 PM # Q
"....they'll be suckling from Gate's nasty, putrid teat..."

Ew.

Ewwwwwwwwwwwwwwwwwwww.

You certainly have a penchant for gross imagery....

Do you find the image of Palm sucking pus from Bill Gates' putrid teats disturbing?

------------------------
Sony CLIE UX100: 128 MB real RAM, OLED screen. All the PDA anyone really ever wanted.
------------------------

The Palm eCONomy = Communismô

The Great Palm Swindle: http://www.palminfocenter.com/comment_view.asp?ID=7864#108038

NetFrontLinux - the next major cellphone OS?: http://www.palminfocenter.com/comment_view.asp?ID=8060#111823

RE: Good news... Bad news...
freakout @ 12/24/2005 4:15:21 AM # Q
Don't we all find *anything* coming from Gates' teats disturbing? ;)

Except of course, his squillions of dollars. Doctors have said they're nothing they can do to stop it...

Tim Carroll
Your friendly customer service robot
(and big Treo fan)

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