Net income in the fiscal quarter totaled $11.8 million, or $0.11 per diluted share. Net income included stock-based compensation expense of $5.7 million, an in-process research and development charge from acquisitions during the quarter of $3.7 million and amortization of intangible assets of $0.3 million. This compares to net income for the third quarter of fiscal year 2006 of $29.9 million, or $0.28 per diluted share.
Net income for the quarter, on a non-GAAP(1) basis, totaled $16.5 million, or $0.16 per diluted share, excluding stock-based compensation expense, an in-process research and development charge and amortization of intangible assets, and adjusting the income tax provision to 40 percent. This compares to non-GAAP net income in the third quarter of fiscal year 2006 of $19.8 million, or $0.19 per diluted share, excluding the effects of amortization of intangible assets and deferred stock-based compensation, the related income tax provision, and the partial reversal of Palm's valuation allowance against its deferred tax assets.
"We delivered solid results in the third fiscal quarter and continue to expand our global market presence," said Ed Colligan, Palm president and chief executive officer. "Treo smartphone sell-through and revenue reached record levels, and Palm products were available to smartphone customers through seven of the top 10 carriers in the world."
Fourth Quarter Fiscal Year 2007 Outlook
Based on current trends, Palm provided its outlook for financial results in the fourth quarter of fiscal year 2007, which ends June 1, 2007. The company expects the following:
- Revenue to be in the range of $400 million to $410 million;
- Gross margin to be between 35.9 percent and 36.4 percent on a GAAP basis and between 36.0 percent and 36.5 percent on a non-GAAP basis;
- Operating expenses to be between $130 million and $135 million on a GAAP basis and between $124 million and $129 million on a non-GAAP basis;
- Annual tax rate on a GAAP basis of 40 percent and, on a non-GAAP basis, 40 percent;
- Earnings per diluted share to be between $0.10 and $0.13 on a GAAP basis and between $0.13 and $0.16 on a non-GAAP basis; and
- SFAS 123R stock-based compensation expense, before taxes, to be between $5.0 million and $5.5 million and amortization of intangible assets to be $1.0 million. These amounts and the related income tax amounts are excluded from Palm's fourth quarter of fiscal year 2007 outlook on a non-GAAP basis.
The company will hold a conference call for the public today at 1:30 p.m. Pacific / 4:30 p.m. Eastern to discuss matters covered in this news release. Investors and other interested parties are encouraged to listen to the call by logging on to the conference call webcast prior to the start of the conference call at Palm's Investor Relations website http://investor.palm.com.
Participants will be able to simultaneously view the slides during the call. Investors wishing to listen to the conference call via telephone may dial 800.819.9193 (domestic) and 913.981.4911 (international). There is no passcode required for the call. A telephone replay of the conference call will be available through April 5, 2007. The dial-in number for the replay will be 888.203.1112 (domestic) and 719.457.0820 (international), passcode 1855744. An archive of the audio and visual portion of the conference call will be posted on Palm's Investor Relations website at http://investor.palm.com.
NON-GAAP FINANCIAL MEASURES: Palm utilizes a number of different financial measures, both GAAP and non-GAAP, in analyzing and assessing the overall business performance, for making operating decisions and for forecasting and planning future periods. Palm considers the use of non-GAAP financial measures helpful in assessing its current financial performance, ongoing operations and prospects for the future. Ongoing operations are the ongoing revenue and expenses of the business, excluding certain costs that Palm does not anticipate to recur on a quarterly basis. While Palm uses non-GAAP financial measures as a tool to enhance its understanding of certain aspects of its financial performance, Palm does not consider these measures to be a substitute for, or superior to, the information provided by GAAP financial measures.
Consistent with this approach, Palm believes that disclosing non-GAAP financial measures to the readers of its financial statements provides such readers with useful supplemental data that, while not a substitute for GAAP financial measures, allows for greater transparency in the review of its financial and operational performance. In assessing its business during the third quarters of fiscal years 2007 and 2006, Palm excluded or adjusted items in the following general categories, each of which are described below:
Acquisition-related Expenses.
Palm excluded amortization of intangible assets and in-process research and development resulting from acquisitions to allow more accurate comparisons of its financial results to its historical operations, forward-looking guidance and the financial results of peer companies. In recent years, Palm has completed the acquisition of Handspring, the acquisition of the Palm(R) brand and the acquisition of other assets and technologies, which resulted in operating expenses that would not otherwise have been incurred.
Palm believes that providing non-GAAP information for expenses related to acquisitions allows the users of its financial statements to review both the GAAP expenses in the period, as well as the non-GAAP expenses, thus providing for enhanced understanding of historic and future financial results and facilitating comparisons to peer companies.
Additionally, had Palm internally developed these intangible assets or incurred the expenses related to the development of the in-process research and development, the amortization of intangible assets and the research and development expenses would have been expensed historically, and Palm believes the assessment of its operations excluding these costs is relevant to the assessment of internal operations and comparisons to industry performance.
Stock-based Compensation. Palm believes that the exclusion of non-cash stock-based compensation expense allows for more accurate comparisons of its operating results to peer companies. Further, Palm believes that excluding stock-based compensation expense allows for a more accurate comparison of its financial results to previous periods. In addition, Palm prepares and maintains its budgets and forecasts for future periods on a basis consistent with this non-GAAP financial measure.
Income Tax Provision (Benefit). Palm believes that excluding the partial reversal of the valuation allowance on its deferred tax assets during fiscal year 2006 provides its senior management as well as other users of its financial statements with a valuable perspective on the performance and health of the business. This partial reversal relates to realization of tax losses incurred in prior periods and is not indicative of current or future operations and expenses. Further, the Company believes that assuming a 40 percent effective tax rate provides a better indication of the income tax expense Palm will experience in future years. Prior to the partial reversal of the valuation allowance on its deferred tax assets, Palm's tax rate consisted primarily of foreign and state income taxes.
Other Expenses. Palm excludes certain other expenses that are the result of unplanned events to measure its operating performance. Included in these expenses for the nine months ended Feb. 28, 2006 are items such as restructuring charges. Palm assesses its operating performance excluding restructuring charges as these amounts relate to costs that are unplanned and are not expected to recur on a quarterly basis. Therefore, by providing this information Palm believes its management and the users of its financial statements are better able to understand the financial results of what Palm considers to be its current financial performance, ongoing operations and prospects for the future.
Each of the non-GAAP financial measures described above, and used in this press release, should not be considered in isolation from, or as a substitute for, a measure of financial performance prepared in accordance with GAAP. Further, investors are cautioned that there are inherent limitations associated with the use of each of these non-GAAP financial measures as an analytical tool. In particular, these non-GAAP financial measures are not based on a comprehensive set of accounting rules or principles and many of the adjustments to the GAAP financial measure reflect the exclusion of items that are recurring and will be reflected in the company's financial results for the foreseeable future.
In addition, other companies, including other companies in our industry, may calculate non-financial measures differently than the company does, limiting their usefulness as a comparative tool. Palm compensates for these limitations by providing specific information in the reconciliation included in this press release regarding the GAAP amounts excluded from the non-GAAP financial measures. In addition, as noted above, Palm evaluates the non-GAAP financial measures together with the most directly comparable GAAP financial information - Palm.
