Palm Reports Q3 FY06 Results

Palm, Inc. (Nasdaq:PALM - News) today reported revenue of $388.5 million in its third quarter of fiscal year 2006, ended March 3, up 36 percent from the year-ago period.

"We delivered strong results this quarter, a result of solid execution against company objectives," said Ed Colligan, president and chief executive officer of Palm. "We extended our record of double-digit year-over-year revenue growth and profitability gains. Smartphone sell-through reported by our carrier partners more than doubled over the year-ago period, validating our strategic decision to support multiple open platforms and offer a choice of smartphones based on either Windows Mobile or Palm OS."

Net income in the third fiscal quarter was $29.9 million, or $0.28 per diluted share. Net income reflected the effect of a partial reversal of a deferred tax asset valuation allowance of approximately $13 million. This compares to net income for the third quarter of fiscal year 2005 of $4.4 million, or $0.04 per diluted share.

Net income for the quarter, on a non-GAAP(1) basis, totaled $19.8 million, or $0.19 per diluted share, excluding the partial reversal of the company's valuation allowance against its deferred tax assets and amortization of intangible assets and deferred stock-based compensation, and adjusting the income-tax provision to 40 percent. This compares to non-GAAP net income in the third quarter of fiscal year 2005 of $10.6 million, or $0.10 per diluted share, which excluded employee separation costs and amortization of intangible assets and deferred stock-based compensation.

Fourth Quarter Fiscal Year 2006 Outlook

Based on current trends, Palm provided its outlook for financial results in the fourth quarter of fiscal year 2006, ending June 2, 2006. At this time, the company expects the following:

- Revenue in the range of $400 million to $405 million;
- Gross margin between 33.5 percent and 33.7 percent;
- Operating expenses between $101 million and $103 million on a GAAP basis and between $100 million and $102 million on a non-GAAP basis; and

- Earnings per diluted share between $0.33 and $0.34 on a GAAP basis and between $0.22 and $0.23 on a non-GAAP basis, which excludes amortization of intangible assets and deferred stock-based compensation and reflects the difference between utilizing a 40 percent effective tax rate on a non-GAAP basis compared to an effective tax rate of approximately 7.5 percent to 8.5 percent on a GAAP basis.

Highlights of the Quarter:

During the third quarter of fiscal year 2006, the company accomplished the following:

- Shipped a total of 564,000 Treo smartphones. Treo sell-through reported by the company's carriers and other smartphone distributors was a record-high 569,000, up 102 percent from the year-ago period, reflecting strong demand for the Treo 650 and Treo 700w smartphones;

- Grew Palm's share of the U.S. converged smartphone/PDA market to 30 percent, up from 22 percent a year ago, according to Canalys. Palm's unit shipments grew by 111 percent compared to the overall market growth of 56 percent, according to Canalys;

- Began selling the company's first smartphone that uses the Microsoft Windows Mobile operating system. The Palm Treo 700w smartphone is the first of four new smartphones the company will introduce this calendar year;

- Delivered the first Treo smartphone built to take advantage of high-speed EV-DO (Evolution Data Optimized) radios. The Treo 700w runs on the Verizon Wireless network;

- Created additional breakthrough software differentiation by providing a Palm experience on the Windows Mobile operating system. Features include the ability to dial by name or image, perform a Google web search from the Today Screen, manage multiple voicemail-box commands with VCR-like icons, and decline an incoming phone call with a quick text message;

- Increased its carrier business for Treo 650 smartphones in Latin America with Telefonica/movistar in Argentina, Chile, Colombia and Venezuela; Vivo in Brazil; and CTI Movil in Argentina. In the United States, Cellular South introduced the Treo 650 to its customers, and Verizon Wireless began selling the Treo 700w in addition to the Treo 650; and

- Hired Ronald R. Rhodes as senior vice president of Global Operations, who brings to Palm 30 years' experience in operations and manufacturing, and promoted Roy Bedlow as vice president, Europe, Middle East and Africa.

(1) GAAP stands for Generally Accepted Accounting Principles.

INVESTORS' NOTE: The company will hold a conference call for the public today at 2 p.m. Pacific/5 p.m. Eastern to discuss matters covered in this news release. The dial-in number is 866.510.0710 for callers within the United States and 617.597.5378 for international callers. The passcode for both is 90593474. A replay of the conference call will be available through March 30, 2006 beginning today at approximately 6 p.m. Pacific. The dial-in numbers for the replay are 888.286.8010 (domestic) and 617.801.6888 (international), passcode 88212503. The live conference call and slide presentation will be available over the Internet by logging onto the investor relations section of Palm's website at http://ir.Palm.com. An audio replay and text transcript of the conference call also can be accessed at the same URL beginning today at approximately 6 p.m. Pacific.

NON-GAAP FINANCIAL MEASURES: To supplement the company's consolidated financial statements presented in accordance with GAAP, Palm uses non-GAAP measures of certain components of financial performance, including operating income (loss), net income (loss) and per share data, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. The presentation of non-GAAP financial results is not meant to be considered in isolation or as a substitute for, or superior to, GAAP results. Investors should be aware that non-GAAP measures have inherent limitations and should be read only in conjunction with Palm's consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures may also be different from non-GAAP financial measures used by other companies.

Palm believes the non-GAAP measures that it presents enhance investors' overall understanding of the company's current financial performance, ongoing operations and prospects for the future. These non-GAAP results are among the primary indicators management uses as a basis for planning and forecasting future periods because they provide meaningful supplemental information regarding the company's operational performance, including the company's ability to provide cash flows to invest in research and development and fund acquisitions and capital expenditures. These non-GAAP results also facilitate management's internal comparisons to the company's historical operating results and comparisons to competitors' operating results. In addition, because Palm has historically reported certain non-GAAP results to investors, the company believes the inclusion of non-GAAP measures provides consistency in the company's financial reporting. Consistent with the company's practice, the non-GAAP measures included in this press release have been reconciled to the nearest GAAP measure.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS: This press release contains forward-looking statements within the meaning of the federal securities laws, including, without limitation, statements regarding Palm's expected fourth quarter of fiscal year 2006 revenue, gross margin, operating expenses and earnings per share, its tax rate and the introduction of new product and service offerings. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially, including, without limitation, the following: fluctuations in the demand for Palm's existing and future products and services and growth in Palm's industries and markets; Palm's ability to forecast demand for its products; possible defects in products and technologies developed; Palm's ability to introduce new products and services successfully and in a cost-effective and timely manner; Palm's ability to timely and cost-effectively obtain components and elements of its technology from suppliers; Palm's ability to obtain other key technology from third parties free from errors and defects, integrate it with Palm's products and meet certification requirements, all on a timely basis; Palm's ability to compete with existing and new competitors; Palm's dependence on wireless carriers and ability to meet wireless-carrier certification requirements; Palm's ability to utilize its net operating losses. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in Palm's most recent filings with the Securities and Exchange Commission, including its Quarterly Report on Form 10-Q for the fiscal quarter ended Dec. 2, 2005 and its Annual Report on Form 10-K for the fiscal year ended June 3, 2005. Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this press release.

CAUTIONARY NOTE REGARDING REPORTED SELL-THROUGH: Palm generally records revenues for its smartphone products based on sell-in to carriers and other distributors. To facilitate investors' understanding of end-user demand for the company's products, Palm also reports smartphone sell-through information in this press release and its earnings conference calls. Palm relies on reports from carriers and other distributors for its smartphone sell-through and inventory information. This information is subject to variance, and Palm can not assure investors of its accuracy, although Palm believes it to be accurate in all material respects.