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Palm's Loss Narrows

The handheld maker's loss was lower than expected. Its revenue made guidance but was light of estimates.

Updated from 4:28 p.m. EDT

Handheld device and software maker

Palm

(PALM)

delivered on its own sales guidance, but fell short of Wall Street's forecasts for the first quarter of fiscal year 2004. The company delivered better-than-expected bottom-line improvement but investors, unimpressed, bid down shares after the bell.

The stock fell 98 cents or 4.3% to $21.59 after the bell, reversing some of the gains from a powerful Thursday trading session, when it surged nearly 8%.

Palm reported August quarter sales of $177.4 million, 3% above last year's levels. Though the revenue level falls within the company's guidance for $175 million to $185 million, it was below analyst expectations for $184.1 million.

Software division PalmSource, which will be spun off in the quarter now underway, contributed $17.1 million of total revenue, reflecting growth of 14% from last year's levels. Management said 52% of the unit's revenue came from software licenses sold to customers other than Palm hardware.

Palm's overall net loss totaled $21.7 million or 74 cents a share, according to generally accepted accounting principles. The loss reflects restructuring charges of $2.7 million, amortization of intangible assets of $0.3 million and separation costs for the impending spinoff of Palm's software division of $1.9 million.

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A year ago, Palm reported a GAAP net loss of $258.7 million, or $8.93 a share.

Excluding special charges in the August quarter, Palm posted a pro forma loss of 58 cents a share. That's better than the consensus estimate for a loss of 83 cents a share and marks an improvement from the same quarter last year, when Palm posted a pro forma loss of $1.26 a share.

Profit levels rose from a year ago, with gross margin rising to 34.7% from 30.7%.

The company said blended average selling prices rose 38% from last year's levels, from $167 to $231, reflecting a higher-end mix of products including the Tungsten2 and Zire 71. Those two products, plus the Tungsten C and $99 Zire, were the company's four top volume sellers.

Management said unit demand for Palm's handhelds appeared to be down from last summer, with worldwide unit sellthrough off by 9%. On the call, one Palm exec acknowledged the back-to-school season was "relatively weak for us." But some of the weakness may have been specific to Palm rather than the industry, given that the company didn't launch any major products in the period and thus may have seen some share loss. Separately, an executive commented on the call that there may have been "some shift towards competitive products in the summer, based on production cycles." Palm plans to debut several new products in the fall.

Palm officers guided to November-quarter sales of between $245 million and $265 million for the hardware division. Wall Street expectations are tilted towards the top of that range, at $262 million.

The company added that its software arm, which will be spun off sometime this quarter, will issue guidance separately at a later date; the revenue effect from Handspring isn't yet clear because it's not known when the acquisition will close.

Palm said it expects a small pro forma operating profit in the second quarter. Analysts are gearing for a profit of 5 cents a share.

On a GAAP basis, the bottom line should be between breakeven and a net loss of $5 million.