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Rising revenue narrows Palm loss

The maker of handheld devices says improved revenue led to a first-quarter loss that was less than analysts had expected. It predicts there's growth ahead.

Palm, a handheld device maker, on Thursday reported improved revenue and a lower-than-expected loss for the last three months than analysts had forecast.

The Milpitas, Calif.-based company turned in a loss of $21.7 million, or 74 cents per share, on revenue of $177.4 million for the first quarter of its fiscal 2004, ended Aug. 29. That compares with a loss of $258.7 million, or $8.93 per share, on revenue of $172.3 million in the same quarter a year earlier.

Analysts were expecting a loss of 83 cents per share for the quarter.

"Each business posted year-over-year revenue growth," Eric Benhamou, Palm chairman and interim CEO, said in a statement. "We improved our gross margin, strengthened our balance sheet with an increase in our cash balance...We look to the near and medium term. We notice many indications of a new growth wave in the making for the mobile device industry."

Palm is in the process of acquiring rival Handspring and is planning to spin off its operating system unit, PalmSource, just before that deal is completed later this year. This quarter, Palm revealed a new name, PalmOne, for its hardware division, formerly known as Palm Solutions Group.

The acquisition of Handspring and the spinoff of PalmSource as a separate public company should be completed by the end of the company's second fiscal quarter. The familiar "PALM" ticker symbol will be replaced by PalmSource's "PSRC" and PalmOne's "PLMO."

The company will take a charge of between $3 million and $5 million in separation and restructuring charges of the hardware and software divisions.

For the time being, the company is being run as two separate divisions: hardware and software. There are 642 employees at the hardware group and 309 with the software division, according to Palm Chief Financial Officer Judy Bruner.

The hardware group shipped about 645,000 Palm handhelds in the first quarter, down about 21 percent compared with the same quarter a year ago, bringing its total number of devices shipped to 22.9 million. Average selling prices of devices increased 38 percent, from $167 to $231.

"These results reflect the higher-end mix of products that we emphasized this quarter, including the Tungsten T2 and the Zire 71, and an overall market demand environment that appears to have been down on a unit basis compared to last summer," Bruner said.

The software group reported that about 1.2 million devices using its operating system were shipped in the first quarter, bringing the total number to 30.1 million.

The hardware group had revenue of $168.6 million, and the software group reported $17.1 million in revenue. The company has $266.8 million in cash and cash equivalents, with $227.7 million going to the hardware group and $39.1 million to the software group.

Bruner said that U.S. retail sales were weak in August and added that Palm lost some market share over the summer months amid aggressive pricing by rivals.

She said that the hardware unit should have a small operating profit in the current quarter, excluding certain items, with the unit reporting overall earnings of anywhere from breakeven to a loss of $5 million. However, Bruner cautioned that the forecast does not include the impact of the Handspring acquisition, which is expected to close during the quarter.

Revenue guidance for the hardware division's second quarter is between $245 million and $265 million.

Palm shares closed up $1.63, or about 8 percent, at $22.57 per share. In after-hours trading, Palm shares were down 95 cents, or about 4 percent, to $21.62 per share.

CNET News.com's Ina Fried contributed to this report.