Personal digital assistant maker Palm Inc. released its much-anticipated earnings report last week, showing better-than-expected revenues and a positive outlook for the coming year.
Wall Street jumped at the news, sending Palm’s stock up about $1 per share. By Friday, the company’s stock was selling at about $6 per share.
Palm executives used an investor conference call to answer some criticism recently leveled at the company. Palm’s Chief Executive Officer Carl Yankowski discussed the market position of the company’s operating system, which is directly competing with Microsoft Corp.’s Pocket PC. Yankowski said the number of applications developed for the Palm OS exceed 10,000, while only a combined 800 have been developed for the Pocket PC and the EPOC operating system from Symbian. In addition, in its release, Palm said more than 16 million Palm-powered devices have been sold to date, a number the company pointedly compared to about 1 million Pocket PC-driven handhelds sold.
Yankowski also alluded to a Data-quest survey that predicted Compaq Computer Corp.’s iPAQ PDA will outsell Palm devices in the business market. Yankowski said Palm’s new high-end PDA, the m500 series, would appeal to tech-savvy businesses and that the company is working with its business partners to develop a variety of flexible, behind-the-firewall applications for security-conscious customers.
Finally, Palm executives gave some additional hints about the company’s planned high-end wireless device, which officials said is still scheduled for release by the end of the year. Yankowski said the device would be a major move for the company and assured investors that it would be on the cutting edge of wireless technology.
“In fact, our next-generation wireless product has more patents filed on its technology than any other Palm product to date,” he said, adding that in the past year, Palm filed 191 patents.
BMO Nesbitt Burns said a lot is riding on Palm’s anticipated wireless device, which is rumored to be the “Skywalker” or m700, and that the company needs to deliver on its technology promises.
“We believe that although Palm can drive positive contribution in the low-end organizer market, the company must look toward wireless technology in order to drive corporate margins back to recent levels,” the firm wrote in a research note. “We remain cautious on Palm’s ability to produce ongoing innovation in the various wireless data protocols, which is a key reason why we are awaiting the release of the m700 to evaluate the investment prospects for Palm.”
For the company’s fourth quarter, ended June 1, Palm exceeded the high end of its recently adjusted expectations of $160 million, bringing in total revenues of $165.3 million. While this is way down from the $350 million the company announced during the same period last year-and half what the company initially expected for the quarter-it is a sign Palm may have regained some control over its spiraling business.
“Although Palm’s Q4/01 results are dramatically lower than original guidance of several months ago, we believe that the company is turning the corner in terms of fundamentals,” BMO Nesbitt Burns wrote. “On balance, we have raised our expectations on Palm as a result of the Q4/01 results.”
While Palm’s revenues were significantly higher than expectations, the company was forced to take a whopping $436.5 million in excess charges. Among the charges are $60.9 million in real estate consolidation costs and employee severance expenses; $106.7 million in a write down on its abandoned 39-acre corporate headquarters and “intangibles” relating to reduced expectations for the company’s AnyDay.com acquisition; and $300 million in excess inventory components, either works in progress or already finished devices, that Palm expects to neither use nor sell.
“While we experienced a significant adjustment in the fourth quarter, I want to point out that our revenue grew 47 percent on a year-over-year basis and our unit shipments grew 75 percent,” said Judy Bruner, Palm’s chief financial officer. “Our licensing and OS revenue grew almost 300 percent, from $7 million in fiscal year 2000 to $27.6 million in fiscal year 2001, and our content and access revenue grew 345 percent.”
The company’s pro forma operating loss for the quarter was $153.6 million and its pro forma operating income was $13.4 million. For the full fiscal year 2001, Palm reported revenues of $1.56 billion and net loss of $28.5 million. The company ended the fourth quarter with $513.8 million on its balance sheet and a newly announced $150 million credit line.
For the coming months, Palm said it expects first-quarter revenues between $200 and $220 million and second quarter earnings of $420 to $440 million. Palm executives said the company will return to operating profitability in the second quarter.
“We’re approaching the next several quarters with cautious optimism, but we remain very encouraged by Palm’s increasingly strong product positioning resulting from our fresh new lineup,” Yankowski said.
“We believe that the company has turned the corner, but we think that investors can prudently forego possible upside over the near term in order to evaluate the company’s position in an increasingly difficult organizer market as well as to assess the company’s ability to innovate and lead in wireless technology,” BMO Nesbitt Burns wrote.
