Palm in the black

Palm Wednesday announced a $5.7 million profit in its second quarter earnings and called it an endorsement of both their low-cost Zire product for consumers and the enterprise Tungsten T device.

Combined revenues for its two operating units, Palm Solutions Group and PalmSource Inc., were $265 million for the second quarter of Palm’s 2003 fiscal quarter ended Nov. 29, 2002.

Although revenues were down 9 percent from second quarter earnings in fiscal year 2002, they were up 54 percent from first quarter 03.

Pro forma net income in the second quarter using GAAP (Generally Accepted Accounting Principles) were $5.7 million or 19 cents per share as compared with a pro forma net loss in second quarter 02 of $36.6 million.

After expressing his pleasure with the turnaround in Palm’s fortunes, Chairman of the Board and CEO Eric Benhamou at first listed the factors that were not responsible for Palm’s return to black for the audience of financial analysts and tech media.

“This is not a reflection of rapid change in market conditions,” said Benhamou, who pointed out that handheld industry growth rates were still declining, although the rate of decline had slowed, he said.

The chairman also said the return to profitability does not reflect less intense competition or indiscriminate cost-cutting on the part of Palm. Rather the profitable second quarter was mainly due to improved execution.

Among the components reflecting that were increased gross margins, from 20.5 percent to 32.8 percent quarter over quarter; reduced operating expenses, from $113 million down to $84.3 million; and reduced inventory from $78.6 million on hand to $38.5 million and a cash to cash cycle that went from 14 days to three days.

Another key driver toward profitability was the introduction of the Zire and Tungsten products, said Benhamou.

Gerry Purdy, principal analyst at MobileTrax LLC in Cupertino, Calif., described his view as “cautiously optimistic” over the long-term growth of the company.

“This is the first time they have had a product set that will both meet consumer price point needs, the Zire, and is dealing head-on with enterprise requirements, the Bluetooth-enabled Tungsten T with GPRS [General Practice Radio Service] coming in the Tungsten W,” said Purdy.

According to Purdy the sleeper is how well OS 5 development efforts play out with licensees.

“If those licensees can keep Palm’s ease of operation so it continues to have an edge over the Pocket PC while developing similar capabilities to the Pocket PC, it is going to be a very interesting battle with Microsoft and the Pocket PC in the enterprise,” said Purdy.

During the financial teleconference, Palmsource President David Nagel listed some recent milestones including the 25th million Palm OS handheld sold, the 250,000th developer, and a total of 16,000 applications available.