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Palm In The Black, But Q2 Sales Dip 9%

Milpitas, Calif. – Successful introduction and favorable market acceptance of its entry-level Zire handheld helped Palm move into the black in its fiscal second quarter, with net income hitting $3.5 million, compared with a $25.2 million loss in the year-ago period.

However, sales dropped 9 percent in the three months, down to $264.9 million, from the $290.6 million recorded in the same period a year ago.

Palm said it would have earned a pro forma net income of $5.7 million in the second quarter, ending November 29, except for restructuring costs, which included separating the company into the Palm Solutions Group, or hardware segment, and PalmSource, the software segment. This compares to a pro forma net loss in the second quarter of last year of $36.6 million.

Palm’s earnings results far exceeded analysts’ expectations, and, even with the drop in sales, the company’s stock enjoyed an initial 12 percent gain.

Cost cutting and the positive debut of the low-cost Zire and high-end Tungsten handheld computer lines, were said to play key roles in boosting quarterly numbers.

Palm reported it had cut pro forma operating expenses to about $83.4 million in the three months, compared with $113.7 million year-on-year, and had improved pro forma gross margin to 32.8 percent for the period, compared with 20.5 percent a year ago.

However, the company expects weaker seasonal demand and softer margin will put third quarter revenue at about $230 million to $250 million, a drop from the $292 million it posted in the same three months in 2001. It also anticipates a modest pro forma operating loss in the third quarter, as well as a larger operating loss based on consolidated results.

Palm, which is expected to set up its Palm Solutions and PalmSource units into independent companies early next year, said it cumulatively has sold more than 20 million handhelds globally, shipping about 1.4 million units alone in the second quarter.

For the six months, revenue dropped to $437.2 million, down from $504.9 million in the year-ago period.

The company more than cut its pro forma loss for the six months in half, with this dropping to a negative $30.7 million for the period, excluding separation costs and restructuring charges, compared with a loss of $75.3 million in the same nine months in 2001.

Net loss in the six-month period, based on generally accepted accounting principles, soared to $255.2 million, up from a loss of $57.6 million in the same six months last year.