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Good earnings news pushes Palm shares higher

The company posts earnings that narrowly beat expectations, while confirming a memory glitch could corrupt data in some models of its flagship handheld computer.

Palm shares rose today, after the company posted earnings that narrowly beat expectations and confirmed that a memory glitch could cause data errors in some models of its flagship handheld computer.

The Santa Clara, Calif.-based company reported yesterday that for the quarter ended June 2, it earned $16.9 million, or 3 cents per share, excluding costs related to its split from 3Com, on revenue of $350.2 million. Including the separation costs, Palm earned $12.4 million, or 2 cents per share. Analysts had expected Palm to earn a penny per share, excluding separation costs, according to First Call.

Palm shares were bucked an overall market downturn today, closing up $3.31, or 12.6 percent, to $29.69.

In the same quarter a year ago, Palm earned $6.8 million, or one cent per share, on revenue of $174.3 million.

"The impressive year-over-year and sequential revenue growth--from a very strong third fiscal quarter--tells us consumers and businesses believe Palm offers the solutions they need," Palm chief executive Carl Yankowski said in a statement. "What's even more impressive is that we achieved these results despite industrywide component shortages."

The company also issued a software patch yesterday for a problem with a Micron memory chip used in its Palm IIIc, IIIxe and Vx models.

The bug affects models using the 8MB memory chip and has the potential to destroy data including telephone numbers, to-do lists, calendar and data entries, Palm said.

Palm is making a patch available on its Web site for download. The problem also affects similar Handspring and TRG products, because those companies license Palm's underlying technology.

Palm said it shipped a record 1.1 million units in the quarter, despite having trouble getting components such as flash memory and LCD screens.

"This indicates that both Palm and the market are growing faster than previously forecast by industry analysts," Yankowski said in a conference call following the announcement.

Yankowski said the company probably could have sold even more units had it not been for the component shortages, referring to a CNET News.com story that Palms were fetching premium prices on eBay.

"I actually believe we could have sold a lot more products in last quarter if we hadn't had this industrywide shortage," Yankowski said.

Palm officials predicted continued growth ahead.

Chief financial officer Judy Bruner said the company will have revenue of $1.9 to $ 2 billion in the coming 12 months, with sales of $375 to $390 million in the coming quarter.

Bruner predicted revenue from licensing its operating system, selling Internet access and providing other services will make up 5 percent of sales in the coming year, up from about 1 percent in the last fiscal year.

Devices accounted for 98 percent of sales in the June quarter, Bruner said. The average selling price of Palm handhelds rose 5 percent, to more than $260,as the company saw some sales shift to its color Palm IIIc and the high-end Palm VII.

However, the company saw its profit margins decline amid the higher cost of getting components, increased warranty reserves for the memory glitch and an earlier screen problem with the Palm IIIc as well as having a full quarter's impact from a February price cut. Bruner predicted margins will continue to come under pressure in the coming year,as the company introduces cheaper models.

The company also said more acquisitions could be on the way, with Bruner noting Palm expects to use a significant amount cash in the coming months.

Alan Kessler The earnings report caps a heady week for the handheld manufacturer, which turned out to be one of the focal companies at PC Expo. At the trade show, Sony previewed its handheld, which will feature the Palm OS.

Palm also announced support for Secure Digital (SD) expansion technology developed by Panasonic and Matsushita. Sony and Handspring, two Palm licensees, have developed their own competing technologies.

"There are a lot of really big companies behind it," said Alan Kessler, chief operating officer at Palm, explaining that SD is more appealing from a design standpoint than either Handspring's Springboard or Sony's Memory Stick technology. "It's a little, tiny form factor, which is really important. It's really slim and elegant."

The company also unveiled a new Mobile Internet Kit that will allow owners of older Palms to gain the same level of wireless Internet access as is available on the Palm VII. This offers the company's Web Clipping technology, a sort of pared-down Web content and messaging service.

The kit will be priced under $50, Kessler said, and is part of Palm's strategy to make every one of its devices capable of accessing the Internet wirelessly. Palm eventually will offer Bluetooth technology, which is currently being tested. Bluetooth is a standard that allows devices to exchange information using radio waves rather than cables.

"The experience is very compelling," Kessler said, adding that the company's plan is to make every one of its 7 million customers wireless-ready.

Microsoft has offered a similar service on its Pocket PC and older Palm-sized PCs for more than a year, executives from the software company noted. However, the two-piece wireless products have received a fairly lukewarm reaction from customers because of the unwieldy nature of the arrangement.

"I don't know if Microsoft has ever sold enough of anything to know what's popular and what's not," Kessler said.