Palm Reports Higher Q2 FY07 Results

Net income in the fiscal quarter totaled $12.8 million, or $0.12 per diluted share. Net income included stock-based compensation expense of $6.5 million and amortization of intangible assets of $0.3 million. This compares to net income for the second quarter of fiscal year 2006 of $260.9 million, or $2.51 per diluted share. The second quarter of fiscal year 2006 net income reflected the effect of a partial reversal of a deferred tax-asset valuation allowance of $226.3 million.

Net income for the quarter, on a non-GAAP basis, totaled $17.6 million, or $0.17 per diluted share, excluding stock-based compensation expense and amortization of intangible assets, and adjusting the income tax provision to 40 percent. This compares to non-GAAP (Generally Accepted Accounting Principles) net income in the second quarter of fiscal year 2006 of $24.4 million, or $0.24 per diluted share, excluding the effects of restructuring charges, 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 asset.

"We are pleased to report strong Treo sell-through this quarter, which is one of the most important metrics. More customers throughout the world bought Treo smartphones than ever before," said Ed Colligan, Palm president and chief executive officer. "In addition, we accomplished a number of strategic objectives during the quarter: shipping two new Treo models to expand both geographically and demographically, securing perpetual rights to the Palm OS source code, and diversifying our manufacturing partners to strengthen our cost position and our product pipeline."

Third Quarter Fiscal Year 2007 Outlook

Based on current trends, Palm provided its outlook for financial results in the third quarter of fiscal year 2007, which ends March 2, 2007. The company expects the following:

- Revenue to be in the range of $400 million to $410 million;

- Gross margin to be between 35.8 percent and 36.3 percent on a GAAP basis and between 36.0 percent and 36.5 percent on a non-GAAP basis;

- Operating expenses to be between $134 million and $139 million on a GAAP basis and between $128 million and $133 million on a non-GAAP basis;

- Annual tax rate on a GAAP basis of 41 percent and, on a non-GAAP basis, 40 percent;

- Earnings per diluted share to be between $0.08 and $0.10 on a GAAP basis and between $0.11 and $0.13 on a non-GAAP basis; and

- SFAS 123R stock-based compensation expense, before taxes, to be between $5.5 million and $6.0 million and amortization of intangible assets to be $0.3 million. These amounts and the related income tax amounts are excluded from Palm's third quarter of fiscal year 2007 outlook on a non-GAAP basis.

Highlights of the Quarter

During the first quarter of fiscal year 2007, the company accomplished the following:

- Began selling the five-band Treo(TM) 750v smartphone using Windows Mobile 5.0 Pocket PC Edition on Vodafone's 3G/UMTS network. That smartphone now is available in nine European countries: Austria, France, Germany, Ireland, Italy, Netherlands, Spain, Switzerland and the UK. It also is available in five countries in Asia Pacific: Hong Kong, Indonesia, Malaysia, New Zealand and Singapore;

- Launched the Treo 680 smartphone using Palm OS(R) on Cingular Wireless' network in the United States and also in a GSM model around the world through Palm online sales and Palm retail;

- Announced the sale of four Treo smartphone models on a total of 20 carrier networks. Six carriers are new to Palm: Movistar Peru, Vodafone Austria, Vodafone Germany, Vodafone Netherlands, Vodafone Switzerland, Vodafone UK;

- Announced the availability of the Treo 700wx on the Sprint Power Vision network in the United States;

- Began manufacturing the Treo 680 smartphone through a China-based partner enabling Palm to deliver that product to more regions faster. Palm plans to offer the Treo 680 on 20 carrier networks around the globe by the company's fiscal year 2007 end;

- Begun investing in a $25 million marketing campaign, made public Dec. 11, that is focused in the United States but also reaching to Europe and other regions. The "passion brands" campaign intends to generate mainstream awareness of the Treo smartphone line by helping new and potential users appreciate how their personal and work lives can be enriched with a mobile computer that also is a great phone. Campaign partners include eBay, Fandango, Google(TM), The Onion, Orbitz(R) and Yahoo!; and

- Hired Brodie Keast as Palm senior vice president, marketing. Keast is responsible for product strategy and the mobile-computing roadmap for consumers, mobile professionals and businesses, as well as for marketing and brand-building.

By Palm