Both Sides of Palm Reveal a Better-than-Expected Quarter

Palm's slices look fine, and so does the pie.

Palm (PALM Quote) investors got a look at the two pieces of the PDA leader's business Thursday. But Palm eclipsed the historic breaking apart of its operating system and hardware into segmented income statements with bang-up revenue and a net profit in the quarter.

Combining some holiday bonanza with January and February's lull, Palm's total revenues grew 1% sequentially to $292.7 million, trouncing Wall Street expectations of $251 million in revenue and a 4-cents-a-share loss, according to Multex.com.

Palm continued its slow bleed, which analysts expect to last three more quarters, with a $14 million, or 2-cents-a-share pro forma loss for the third quarter of its fiscal 2002, ended March 1. However, factoring in sales of written-off inventory and cuts in component costs, the company notched a $2.9 million, penny-a-share profit as calculated by generally accepted accounting principles.

Despite the boffo quarter, Palm's year-over-year comparison is still punishing, with revenue falling 38% from the third quarter of fiscal 2001's $471 million level. Palm's better-than-expected revenue fall well short of the sales Palm enjoyed before spring 2001 inventory and product rollout mix-ups. Palm reported an enthusiastic uptake of its m515 and m130 products, but described a tougher selling process for its wireless corporate email device, the i705.

Using the improved quarter as a launch pad, Palm CFO Judy Bruner projected that Palm will turn in between $290 million to $300 million in revenues, despite a seasonal slowdown in the period, leading to a breakeven or perhaps even profitable fourth quarter. For the full fiscal year 2003, which begins in June, Palm believes it can produce 20% year-over-year revenue growth and gross margins over 30%. Palm had a combined 29% gross margin in the third quarter.

Working to break out its operating system side in earnest, Palm followed up the operational split of the groups and installation of separate managerial chiefs with its first quarter of separate income statements. Palm's hardware side made up $284 million in revenue, had a gross margin of 24% and mounted $18 million in losses.

Viewing the OS business for the first time, investors got more than expected with $19.5 million in revenue, well above the $5.5 million in licensing revenue posted in the second quarter of fiscal 2002. For a traditional quarter-over-quarter comparison, outside licensees brought in $7.8 million, while Palm's Solutions group, the hardware side, paid its smaller sibling $11.7 million in licenses for the 1.3 million Palm devices it shipped in the quarter.

The cost of PalmSource sales were under $1 million, giving the segment a desirable gross margin of 95%. As believed, the hardware side of the business brought about most of the operating expense, about four times as much as the OS group.

In trading Thursday Palm closed up 19 cents, or 6.4%, to $3.17. Shares continued to climb after-hours, rising 4.1%, according to Instinet.