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Palm earnings: Thumbs up
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September 25, 2000: 6:07 p.m. ET
Personal digital assistant maker's revenue more than doubles
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Palm Inc., the leading maker of personal digital assistants, reported first-quarter earnings that were double analysts' expectations, as its revenue more than doubled.
Palm (PALM: Research, Estimates) reported Monday that its first-quarter net income, not including certain non-cash and one-time charges, rose 140 percent to $23.9 million, or 4 cents per share, compared with $10 million, or 2 cents per share, for the same period last year. Analysts had expected the company to earn 2 cents per share, according to earnings estimate tracker First Call.
Palm reported record revenue of $401 million, up 127 percent from year-ago revenue of $176.5 million. Sequentially, revenue was up 14 percent in the quarter ended Sept. 1, from the $350.2 million reported in the fourth quarter of fiscal 2000.
Including all charges, net income for the first quarter was $17.3 million, or 3 cents per share, compared with $9.7 million, or 2 cents per share, for the first quarter of fiscal 2000.
"The Palm team again delivered stellar results on multiple fronts: revenue, units shipped, profitability, and content and platform momentum," said Carl Yankowski, Palm's chief executive officer, in a statement. "This is our third consecutive quarter of 100-percent-plus year-over-year revenue growth, and we achieved it in an environment of increased competition and continued component constraints."
Palm shipped approximately 1.5 million devices in the quarter, which increases its shipments since inception to more than 8.7 million.
Gross margin deteriorates
While Palm's revenue and earnings were in line with analyst expectations, the company's gross margins deteriorated substantially versus the same quarter last year, as the PDA market has become more competitive and component prices have risen. Palm's gross margin declined to 38.3 percent from 44.3 percent in the same period last year.
On the other hand, sales and marketing expense as a percentage of revenue dropped to 19 percent in this year's first quarter from 24.1 percent last year, offsetting the deterioration in gross margin.
"Our gross margin forecast is 38.3 percent," Merrill Lynch analyst William Crawford said in a research note before the earnings were released. "However, we think this could be lighter as the company has been aggressive on acquiring components that have been in shortage and is paying up to do so. If gross margins are lighter than our forecast, we would not view it negatively and not as a deterioration in the product line."
Palm's PDAs compete against ones made by Handspring (HAND: Research, Estimates) and Sony. Handspring licenses its operating system from Palm. Palm announced earlier Monday that it would join with communications equipment company Motorola to create a new "smart phone" that "blends the functionality of a Palm handheld computer with the simplicity and compact form factor of today's mobile phone." The two companies will produce a tri-band GSM wireless smart phone, expected to be available early in 2002.
However, Merrill's Crawford said that Palm may be getting into the voice business too late.
"At a time when Research in Motion (RIMM: Research, Estimates) and Handspring have clear paths to add voice to their data handsets, in our view, Palm's evolving strategy is to partner with existing cell phone makers and sell them its operating system," Crawford said. "We are concerned that the 2002 timeframe will be a year to year-and-a-half behind Research in Motion and Handspring."
Looking forward
Judy Bruner, Palm's chief financial officer, said that the company has been unable to obtain an adequate supply of two integrated circuits for its Palm VIIx units. As a result, it will not be able to produce enough of those Palms to meet demand in the second fiscal quarter.
Bruner told analysts that Palm expects its revenue for fiscal 2001 to be about 88 percent above fiscal 2000's, or $1.9 billion to $2 billion. She said that fiscal second quarter revenue is expected to be $500-$530 million. Gross margins for fiscal 2001 are expected to be between 35 percent and 40 percent, with operating income in the "low single digits," she said.
Roller coaster stock
Palm's stock has been on a roller coaster ride since the company was spun off from networking company 3Com. The company's stock plunged to around $21 in late May from $95 on March 2. After reaching that nadir, it climbed to the $54 range last week. After gaining 44 cents during the regular session Monday ahead of the earnings release, Palm shares slipped 50 cents to $51.75 in after-hours trade.
At its current price, Palm sells for more than 500 times what analysts expect the company to earn in the fiscal year ending May 2001. Palm's current market capitalization of $29.5 billion is only slightly lower than that of Ford Motor. Put another way, Palm's market cap is equal to $3,300 for every Palm unit sold to date. 
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