Palm Edges Expectations

Palm on Wednesday reported a lower-than-expected net loss for its second quarter, on higher-than-expected revenues.

Palm Inc., the troubled industry leader for handheld device hardware and software, on Wednesday reported a lower-than-expected net loss for its second quarter, on higher-than-expected revenues. The Santa Clara, Calif., company also elaborated somewhat on its strategy for selling devices for the enterprise, and its plans for structural separation of the hardware and software divisions.

Palm announced that it recorded a pro forma net loss of $36.6 million or 6 cents per share, after amortization of goodwill and intangible assets, restructuring charges and other items. Analysts surveyed by Thomson Financial/First Call expected a loss of 7 cents per share.

This compares to net income of $27.5 million and a loss of 5 cents per share this time last year, and a pro forma net loss of $38.7 million, or 7 cents per share in the Palms first quarter of 2002.

Palm reported revenues of $290.6 million for the quarter ended Nov. 30, compared to revenue of $552.2 million this time last year. Revenue was up 36 percent, however, from the $214.3 million in the first quarter of 2002, much of it on discounted sales of older inventory.

Palm also announced at that time its plans to layoff 250 employees.

The company has been battered by an ongoing price war with rival Handspring, Inc., a bad economy, and a failure to roll out by the end of this year promised new wireless products – such as the i705, which would combine a personal digital assistant with always on e-mail capability.

"This quarters significant increase in revenue and improved results over last quarter reflect that we have gained traction in the marketplace and restored operational rigor," said Eric Benhamou, Palms chairman and chief executive officer in a prepared statement.

Wireless Devices for the Enterprise

In addition, in a conference call with the press following the earnings announcement, Benhamou promised measurable progress on its corporate strategy, including moving toward the release of new wireless devices aimed at the enterprise.

On Monday Palm announced that it would use Texas Instruments Inc.s Open Media Applications Platform (OMAP) chips for the new products, which will allow the new Palm products to take advantage of high-speed wireless networks. Palm also announced last week that it would purchase ThinAirApps, which develops software for secure wireless access to corporate e-mail and other critical enterprise data.

"We now have a new team in place and a tight strategy that focuses on delivering mobile communications solutions that fit within existing IT infrastructures. Our recent acquisition of ThinAirApps completes the software building blocks we needed to deliver the first wave of these solutions," Benhamou said Wednesday.

"You should expect a steady stream of innovative solutions from Palm in the months ahead, starting with several major new products to begin shipment in the current quarter," Benhamou said.

The first such solution would be the introduction of a new enterprise wireless integrated device with secure e-mail, expected to be released during Palms fiscal Q3, the current quarter, according to Benhamou.

The second solution will be "a full, behind-the-firewall server-based corporate e-mail capability to enterprise customers," said Benhamou. "We intend to reach this milestone in our fiscal Q4."

In the meantime however, competitor Handspring is expected to steal some of Palms thunder by unveiling its new Treo line in January; a combination wireless phone and personal digital assistant.

And Microsofts Pocket PC operating system, which is marketed by major manufacturers such as Compaq Computer Corp., Hewlett-Packard Co. and others, also pose a threat to Palms operating system.

"There is one major competitor that Palm has in both of its businesses and our competitor is Microsoft. It is the long-term competitor we have, and it drives a lot of our competitive actions," said Benhamou, in response to an analysts question during the call.

Benhamou added that the final phase of its wireless strategy entailed four strategic alliances with four enterprise partners, the first of which was for Palms use of Seibels Sales Handheld 7 e-business software applications, announced in October. The remaining three alliances, said Benhamou, will be announced before next summer.

Palm OS Subsidiary

During the conference call, the Palm CEO discussed the progress of the companys plan to internally separate its platform software business into a legal subsidiary, separate from the hardware and solutions group.

Benhamou said that the Palm board approved on Tuesday the resolution approving the separation.

He also noted that he expects an "external separation" of the software unit in calendar 2002, either through third-party investments by strategic partners, or through an initial public offering.

Based on its precipitous decline this year, Palms stock was delisted from the NASDAQ 100 index on Monday. Palm Shares closed on Thursday up 0.13 at 3.32, or 4.08 percent before the earnings announcement.