Palm posts slim profit

The handheld maker said it had net income of $2.9 million for the quarter, or a penny per share, on sales of $292.7 million. That compares with a net loss of $25.2 million for the prior quarter and a net loss of $1.9 million for the same quarter a year ago.

On a pro forma basis, excluding various charges and benefits, the company said it lost $14 million, or 2 cents per share, in the third quarter. That was narrower than analysts' estimates of a loss of 4 cents per share.

Palm's net results include a roughly $28 million benefit from handhelds sold that had previously been written off as excess inventory, resulting in the profit. The pro forma numbers excluded that benefit as well as various charges.

"We're pleased to report our third consecutive quarter of improved financial results, despite the traditional post-holiday seasonal slowdown," Palm CEO Eric Benhamou said in a statement. "Tangible progress across virtually every aspect of our income statement and balance sheet gives us increased confidence in our ability to execute and to return to profitability."

Also, for the first time the handheld maker separately accounted for revenue taken in by its PalmSource subsidiary, which develops and licenses the Palm operating system.

Palm said the PalmSource subsidiary had about $19.5 million in revenue as a standalone business. As Palm is the largest licensee of the Palm OS, $11.7 million of the unit's revenue was from Palm itself. As a standalone business, Palm said the OS unit had a pro forma loss of about $1 million.

In December, Palm predicted it would have revenue of $250 million to $260 million in the third quarter. At that time, the company also predicted it would break even in the fourth quarter, with revenue of $290 million to $300 million.

Benhamou recommitted to turning a profit in the current quarter, and Chief Financial Officer Judy Bruner reaffirmed the revenue target of $290 million to $300 million.

"The handheld industry is growing again in 2002," Benhamou said on a conference call with analysts, adding that the company expects industry growth rates back in the double digits on a percentage basis.

Although Palm sold fewer handhelds in the third quarter than in the prior quarter--1.3 million devices vs. 1.5 million--the company saw its average selling price increase as it introduced several higher-priced models, including the m515, m130 and i705.

J.P. Morgan H&Q analyst Paul Coster said Palm's results, which met or exceeded all of his targets, were encouraging. "The forward guidance was solid," Coster said. "I wouldn't say it is spectacular." He added that a return to profitability will help the company get back on the radar screens of large investors.