Palm Turns Profit In 2nd Quarter on Declining Sales and Volumes

[Ed Hansberry]

<div class='os_post_top_link'><a href='http://pressroom.palm.com/InvestorRelations/PubNewsStory.aspx?partner=Mzg0TlRFMU1BPT1QJFkEQUALSTO&product=MzgwU1ZJPVAkWQEQUALSTOEQUALSTO&storyId=77959' target='_blank'>http://pressroom.palm.com/InvestorR...O&storyId=77959</a><br /><br /></div>Palm's 2nd quarter ended November 29, 2002 and they trounced earnings estimates. Analysts were expecting them to lose 15 cents a share, or roughly $4.3M. They instead made 12 cents a share, or $3.5M. Net sales dropped 9% from the same quarter last year from $291M to $265M. This quarter they sold 1.4M devices compared to <a href="http://news.com.com/2100-1040-277251.html?legacy=cnet&tag=nbs">1.51M units</a> last year. It is obvious they have cut a ton of fat and/or unnecessary costs as Palm positions itself to sell in the mid $200M range instead of the $522M range at its peak from November 2000.<br /><br /><img src="http://www.pocketpcthoughts.com/images/hansberry/2002/20021219-palmearnings.gif" /><br /><br />Interesting items in the numbers:<br />• Gross margin percentages went from 35.7% in Q2 2002 (last year) vs 32.8% in Q2 2003, however last year had an inventory adjustment of &lt;$43M> that artificially increased gross margins. Take that out and they did 20.1% last year, so increasing it to 33% this year is a marked improvement.<!><br />• Sales and marketing expenses dropped from $61M to $45M.<br />• Research and Development dropped from $37M to $27M.<br />• Operating income was $389,000 this year. They got to $3.5M of income with the interest their cash account.<br />• Cash flows from operations was &lt;$10M>, much of that due to a $70M increase in Accounts Receivable, partially offset by an increase in Accounts Payable of $43M. Trust me, this isn't a bad thing having this decrease. If you want more details, ask in the thread and I'll go into the gore of a Cash Flows Statement. They sold $20M in preferred stock though which made their cash position grow $10M from the last quarter. Get it while you can. At some point they will have to make money on their own.<br />• Their PalmSource division is sort of sliding sideways, even with the OS5 launch. Revenues were $15.1M in Q2 2002 and are $14.8M in Q2 2003. They lost $8.7M last year and $7.6M this year - a decent improvement on virtually flat sales.<br /><br />We probably won't see any good market share numbers until January. Analysts pay more attention to calendar quarters, not fiscal quarters a company uses. Will Palm gain share this quarter? Their sales and volumes are off from last year. The question is, will the overall handheld market show a decline and will Palm decline faster or slower than the overall market?

[Andy Sjostrom]

• Research and Development dropped from $37M to $27M.

$27M in R&D is virtually nothing. Two comments on that:

1. It's impressive that they still can be a player with that budget
2. Too bad, really, that they can't spend more. This market needs a lot more R&D from everyone involved, not less!

[Foo Fighter]

They aren't looking too bad. I agree, they need to pour more money into R&D. But otherwise, I have positive feelings that Palm will persevere. The bigger question is how, or even if, Palm will compete with Dell in high-end pricing. Tungsten is terribly over-priced. I see online vendors are already offering $50 rebates. Try slashing that price down to $399, then we'll talk.

[mookie123]

The need more ARM models and start retiring the dragonball for the sub$99 market. The Tungsten price will kill the OS5.0 acceptance.

[JonnoB]

Spending $10million less on R&D means that much less innovation. This is an illustration in management's lack of foresight and an indication they are forfeiting the future for short term margin. Microsoft has always done it right with smart investments in development as first financial priority in expenditures.

[Foo Fighter]

The need more ARM models and start retiring the dragonball for the sub$99 market.

Agreed. And monochrome is no longer justifiable over $99. Palm and Sony had better retire those $199 grayscale models and replace them with color offerings right away.

The Tungsten price will kill the OS5.0 acceptance.

Not kill its acceptance, but it will certainly slow adoption.

[Foo Fighter]

This is an illustration in management's lack of foresight...

Not really. I think it has more to do with the fact that Palm has to live on a tight budget. I'm sure management would much rather poor MORE money into R&D than LESS.

[Ed Hansberry]

The need more ARM models and start retiring the dragonball for the sub$99 market. The Tungsten price will kill the OS5.0 acceptance.
Their new Tungsten W model is a OS4.x based device. I think OS4 will be around for another year or so at least, especially for the cheap devices.

[JonnoB]

This is an illustration in management's lack of foresight...

Not really. I think it has more to do with the fact that Palm has to live on a tight budget. I'm sure management would much rather poor MORE money into R&D than LESS.

I am not so sure about that... I think they would rather spend marketing money giving away Creative mp3 players to say that they can play mp3 files :D

[Ekkie Tepsupornchai]

They already have their major innovations with Palm OS 5.0 and the Tungsten, right? By the law of averages, wouldn't that mean they could go another 3-5 years w/o significant R&D?

[Ed Hansberry]

By the law of averages, wouldn't that mean they could go another 3-5 years w/o significant R&D?
They tried that from 1997-2001 with little success. They can't rest for 3-5 months, much less 3-5 years.

[Ekkie Tepsupornchai]

By the law of averages, wouldn't that mean they could go another 3-5 years w/o significant R&D?
They tried that from 1997-2001 with little success. They can't rest for 3-5 months, much less 3-5 years.
Yeah... it was a thinly veiled joke (though not a good one).

The Tungsten is a more viable alternative at $500 than the m5xx series once was, but the m5xx didn't have to compete with this new breed of PPC. I really think this wave of PPCs stand a very strong chance of tilting the scales into the PPC camp.... especially with the 1910, V35, X3/X5 options all competitively priced at under $300. Palm has their work cut out.

[the411]

By the law of averages, wouldn't that mean they could go another 3-5 years w/o significant R&D?
They tried that from 1997-2001 with little success. They can't rest for 3-5 months, much less 3-5 years.
Yeah... it was a thinly veiled joke (though not a good one).

The Tungsten is a more viable alternative at $500 than the m5xx series once was, but the m5xx didn't have to compete with this new breed of PPC. I really think this wave of PPCs stand a very strong chance of tilting the scales into the PPC camp.... especially with the 1910, V35, X3/X5 options all competitively priced at under $300. Palm has their work cut out.

Yea I know. The only thing those non-innovating idiots at Palm do is dominate the handheld market. So now it's price that will kill Palm? Can we now add this to the list of:

1) Microsoft never loses.

2) The PPC OS is just superior. Look at the features!

3) Enterprise is the future and enterprise users only pick the PPC.

4) "I can simultaneously VPN, listen to MP3's and Audible, use MS Messenger, all while making love to my PPC".

:roll: :roll: :roll: :roll: :roll:

[Kathy_Harris]

Someone above needs a life :wink:

Didn't palm just lay off a bunch of people? I thought when that happens, it is usually followed by the ghost effect of increased earnings. I would imagine that in the long run, it may hurt them, however (overworked, less people to innovate, etc).

[Janak Parekh]

:roll: :roll: :roll: :roll: :roll:
Hey Ed, I think we found Bond/lowtech101's new name. ;)

Seriously, you're reading a different site than me...

--janak

[Jonathon Watkins]

4) "I can simultaneously VPN, listen to MP3's and Audible, use MS Messenger, all while making love to my PPC".

And THAT's why we like them so much! :wink: :lol:

[Ekkie Tepsupornchai]

4) "I can simultaneously VPN, listen to MP3's and Audible, use MS Messenger, all while making love to my PPC".
And THAT's why we like them so much! :wink: :lol:
So where's the link to that KILLER app that allows me to make love to my PPC?

Ooohhh... maybe I shouldn't be asking that on a public forum... :oops:

[Timothy Rapson]

Thanks for all the work keeping us up to date on Palm's finances.
I would say that Palm is doing what it must, what is the most straightforward, what makes sense.

Then they are hoping for the best. They are really squeezed. Their dream of PDAs in every hand is just not coming to fruit. Talk to any of the thousands of companies who thought the Internet was going to be the place for all banking, buying, and communicating. Many would love to be in Palm's high defense position, rather than being out of business.

With the overall market falling what will happen is anyone's guess. I hate to admit it, but it may be that phones will make PDAs as we know them as lost in history as typewriters.

I would hope to find Dell selling $200 Palm OS units next Spring. Or see Sony and Palm release models with all the features of a Tungsten T for $200. I have to suppose that if Dell can do it with a PPC model, then it can be done by Dell, or someone else, on Palm OS.

I really thought that far more would be settled in the PDA market by now, that cheaper, smaller PPC models would be out and sales figures known; that OS 5 models for various price/feature market niches would be out and some sales pattern emerging. So, without those things available here in this crucial Christmas selling season, we may have to wait until next Christmas to know if PDAs as we know them disappear, Microsoft gets the upper hand for good, or Palm models find OS 5 success over PPC 2002 models; encouraging everyone to jump on board with software and peripherals for the new OS and models.

Next year.

[Jonathon Watkins]

4) "I can simultaneously VPN, listen to MP3's and Audible, use MS Messenger, all while making love to my PPC".

:twisted: Actually, you’ve just jealous cause you can only enter details into your notepad and can’t even make it to first base with your Palm. :splat: