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Palm Beats, Mum on Buyout

Priya Ganapati

Smartphone maker Palm(PALM), the subject of frenzied buyout speculation for the last two weeks, continued to dance around the question of whether it is in play or in talks with any buyers.

Palm CFO Andrew Brown said the company will not comment on "rumors and speculation" even as analysts peppered Palm executives with questions about possible M&A activity during the company's quarterly earnings conference call.

"We are focused on operating our standalone company and driving our plan," said Brown.

Palm declined to deny or confirm reports that it has hired Morgan Stanley (MS) as its investment banker to explore a sale but seemed to indicate that it would prefer to continue as an independent player.

"We are 100% focused on this management team as an independent supplier of mobile computing products in the marketplace -- end of story," Brown told analysts. Palm also set April 10 as its analyst day, further reducing the probability of a near-term sale.

Palm posted better-than-expected third-quarter fiscal results late Thursday and offered an outlook for the fourth quarter that was in line with analyst expectations.

Shares were up 21 cents, or 1.2%, to $17.95 in extended trading.

Excluding special items, Palm earned $16.5 million, or 16 cents a share, in the third quarter ended March 2. This compares with earnings of $19.8 million, or 19 cents a share, in the same period last year. Analysts were expecting 12 cents a share.

Revenue for the third-quarter was $410.5 million, compared with $388.5 million the year before. Analysts were expecting $403.63 million.

Net income included stock-based compensation expense of $5.7 million, an in-process research-and-development charge from acquisitions during the quarter of $3.7 million and amortization of intangible assets of $300,000.

The stock closed down $1.71, or 8.8%, to $17.74 Thursday, a day after Motorola(MOT) warned that it will miss first-quarter sales targets and post an unexpected loss. Motorola was rumored to be the likely buyer for Palm.

The Sunnyvale, Calif.,-based Palm said it continues to innovate and will offer at least four new "differentiated" smartphone models this year. Palm CEO Ed Colligan said the company, through founder Jeff Hawkins, is developing a new line of products.

"We clearly are working on one major new area that's been speculated in the press and Jeff Hawkins has talked about," said Colligan. "But we are not going to get into details about any of that right now."

Palm also did not act on its stock buyback program in the third quarter because the stock "clearly started to take off," said Brown. The company still has plans to buy back stock worth $219 million.

Palm smartphone business, which was 86% of total revenue in the third quarter, performed well. Smartphone sell-through for the third quarter were 738,000 units, up 30% year over year and revenue from smartphones reached $354 million in the third quarter, up 23% year over year.

For the fourth-quarter of fiscal 2007, Palm said it expects revenue to be in the range of $400 million to $410 million, with earnings between 13 cents and 16 cents a share. Analysts were expecting revenue of $415.9 million and earnings of 15 cents a share.

Gross margin in the fourth quarter is likely to be between 35.9% and 36.4% on a GAAP basis and between 36% and 36.5% on a non-GAAP basis.

Palm also said earlier that a U.S. district court has granted a stay of proceedings in the patent infringement litigation brought against the company by NTP.