John Paczkowski

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Palm Disappoints

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The second-quarter loss Palm reported Thursday afternoon was narrower than the one it reported last year, but still fell far short of what Wall Street had been expecting. The smartphone maker lost 37 cents a share for the period on sales of $302 million. Analysts had been expecting a net loss of 32 cents per share on revenue of $266.2 million.

Palm (PALM) did manage to ship a total of 783,000 smartphone units during the quarter, though, a five percent decrease from last quarter, but a year-over-year increase of 41 percent. That said, the company actually sold only 573,000 units, down 29 percent from the previous quarter and down four percent year-over-year. Seems the launch of the Pixi wasn’t quite as successful as Palm had hoped.

“We are continuing to execute strongly against our long-term strategy with the delivery of Palm Pixi, the new carrier launches completed this quarter, and the upcoming opening of Palm’s full developer program,” said Jon Rubinstein, Palm’s chairman and chief executive officer.

“We’re still in the early stages of a long race,” Rubinstein added, “and we’re energized by the opportunity to compete in this exciting market. We remain confident that Palm’s innovative product design capabilities, integrated cloud services and the differentiated and delightful Palm webOS experience will provide the foundation for our sustained success.”

Once again, Palm did not break out unit sales of the Pre or Pixi in its earnings release, below. At $11.26, Palm shares are down 3.92 percent in after-hours trading.

Palm Reports Q2 FY 2010 Results

SUNNYVALE, Calif.– Palm, Inc. (NASDAQ: PALM) today reported that total revenues in the second quarter of fiscal year 2010, ended Nov. 27, 2009, were $78.1 million. Gross profit was $5.5 million, and gross margin was 7.0 percent. These results include the effects of subscription accounting applied to Palm(R) webOS(TM) products as required by GAAP.(1) In accordance with this methodology, revenues and direct cost of revenues for Palm webOS products (currently Palm Pre(TM) and Palm Pixi(TM) smartphones) are deferred and recognized over the products’ estimated economic lives.

To facilitate comparisons to Palm’s historical results, Palm has included non-GAAP adjusted measures, which exclude the impact of subscription accounting, stock-based compensation and other items detailed later in this release. The company believes this information will help investors better evaluate its current period performance and trends in its business.

Non-GAAP Adjusted Revenues in the second quarter totaled $302.0 million, non-GAAP Adjusted Gross Profit was $77.3 million and non-GAAP Adjusted Gross Margin was 25.6 percent.

“We are continuing to execute strongly against our long-term strategy with the delivery of Palm Pixi, the new carrier launches completed this quarter, and the upcoming opening of Palm’s full developer program,” said Jon Rubinstein, Palm’s chairman and chief executive officer. “We’re still in the early stages of a long race, and we’re energized by the opportunity to compete in this exciting market. We remain confident that Palm’s innovative product design capabilities, integrated cloud services and the differentiated and delightful Palm webOS experience will provide the foundation for our sustained success.”

The company shipped a total of 783,000 smartphone units during the quarter, representing a 5 percent decrease from the first quarter of fiscal year 2010 and a year-over-year increase of 41 percent compared to the second quarter of fiscal year 2009. Smartphone sell-through for the second quarter was 573,000 units, down 29 percent from the first quarter of fiscal year 2010 and down 4 percent year-over-year.

On a GAAP basis, net loss applicable to common stockholders for the second quarter of fiscal year 2010 was $(85.4) million, or $(0.54) per diluted common share. This compares to a net loss applicable to common stockholders for the second quarter of fiscal year 2009 of $(508.6) million or $(4.64) per diluted common share. The company’s second quarter of fiscal year 2009 results included a non-cash charge with a net impact of $396.7 million to the tax provision pertaining to the increase of the valuation allowance for the Company’s U.S. deferred tax assets.

The company’s net loss applicable to common stockholders on a GAAP basis reflects accounting guidance, effective in the first quarter of fiscal year 2010, which requires the anti-dilutive provisions of Palm’s series C preferred shares and related warrants to be treated as derivatives for financial reporting purposes. The fair value of the derivatives were estimated as of the first day of fiscal year 2010 and are marked to market on a quarterly basis, with any change in value reflected in the company’s financial results for the period. The series C derivatives balance was $178.7 million at the end of the second quarter of fiscal year 2010 compared to $235.0 million at the end of the first quarter of fiscal year 2010. This reduction in fair value resulted in a $56.3 million non-cash gain on series C derivatives and was reflected in the company’s second quarter GAAP financial results. With regard to the series C derivatives, any future increases in Palm’s stock price from period to period will be reflected as a non-cash loss on these derivatives in the company’s financial results, and any future decreases will be reflected as a non-cash gain in the company’s financial results.

Non-GAAP Net Loss for the second quarter of fiscal year 2010 was $(59.6) million, or $(0.37) per diluted share. This compares to a non-GAAP Net Loss for the second quarter of fiscal year 2009 of $(80.2) million, or $(0.73) per diluted share.

Earnings before interest, taxes, depreciation and amortization, or EBITDA, for the second quarter of fiscal year 2010 totaled $(70.1) million. EBITDA, adjusted to exclude the impact of subscription accounting, stock-based compensation, net other income (expense), restructuring charges and a gain on series C derivatives, or Adjusted EBITDA, totaled $(48.3) million.

The company’s cash, cash equivalents and short-term investments balance was $590.0 million at the end of the second quarter of fiscal year 2010. This includes net proceeds of approximately $360 million from the company’s public equity offering, which closed on Sept. 23, 2009. Cash from operations for the second quarter of fiscal year 2010 was $16.7 million.

Palm may periodically provide new software features free of charge to customers of its Palm webOS products and currently recognizes Palm webOS product revenues and related standard cost of revenues on a subscription basis based on the applicable product’s estimated economic life, which is currently 24 months. The company records deferred revenues and deferred cost of revenues on its balance sheet, and amortizes them into earnings on a straight-line basis over the estimated economic product life.

Palm announced today that it expects to early adopt two recently released accounting standards related to revenue recognition, Accounting Standards Update (“ASU”) No. 2009-13 and ASU No. 2009-14, effective for its third quarter of fiscal year 2010. These accounting changes will result in a substantial portion of Palm webOS product revenues being recognized upon delivery. The remaining Palm webOS revenues, which are related to future services and deliverables, will be recorded as deferred revenues on the company’s balance sheet, and amortized into earnings on a straight-line basis over the estimated economic product life, which is currently 24 months. Under the new standards, all related cost of revenues will be recognized upon delivery. This change in accounting will reduce the amount of revenues that Palm will defer on its balance sheet but will have no impact on cash flows and does not change how Palm accounts for Palm OS(R) products, like the Centro(TM), or its Treo(TM) line. Consistent with the company’s past practice, Palm will continue to provide non-GAAP, adjusted measures that exclude the impact of deferred revenue accounting, stock-based compensation and other items as appropriate.


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