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Palm beats 3Q estimates, sees slower growth ahead

Palm (Nasdaq: PALM) topped analyst estimates in its last quarter as a privately held company, but expects slower growth in the near future.

After market close Tuesday, the maker of handheld computers reported pro forma fiscal third quarter net income of $15.5 million, or 3 cents per share, excluding one-time events. First Call's survey of six analysts predicted a profit of a penny per share for the quarter ended Feb. 25.

Including $8.2 million in separation costs, Palm earned $11 million, or 2 cents per share.

Shares of Palm rose as high as 56 3/8 in afterhours activity on the Island electronic communications network, although the price retreated from that level subsequently. The stock closed Tuesday's regular trading at 54 13/16, down 9/16 for the session.

Third quarter revenue increased $272.3 million, up 116 percent from $125.9 million in the year ago period, and a 5 percent gain sequentially. "Our third quarter revenue growth was particularly impressive because this quarter is traditionally our seasonally slowest and has typically been down sequentially from the second quarter," CFO Judy Bruner.

Gross margins of 43.6 percent represented a decline year-over-year but an improvement from the second quarter. "The strength in gross margins came primarily from our growth in licensing and growth in Palm.net revenue," Bruner said.

Don't expect Palm to maintain those margins or level of revenue growth, Bruner said during an afternoon conference call with analysts. "We are also cognizant that growth rates are unlikely to continue at current levels," she said.

Palm expects fourth quarter revenue ranging between $280 million to $295 million, or year-over-year growth of 61 to 69 percent. Fiscal 2001 will likely see growth between 40 and 45 percent, Bruner said.

The company faces a larger revenue base, more difficult year-over-year comparisons, increased competition and tight supply of key components.

The company faces a larger revenue base, more difficult year-over-year comparisons, increased competition and tight supply of key components.

Demand from wireless phone manufacturers has created as shortage of flash memory and LCD displays. Palm does not expect industry suppliers to be able to meet demand for several quarters. "Recently we've seen it tightening dramatically," CEO Carl Yankowski told analysts.

Palm is well-positioned compared to its competitors when it comes to buying parts, Bruner said.

But the industry-wide shortage means higher component costs even as Palm sells cheaper devices. The company cut prices only last month, so the fourth quarter will be Palm's first full quarter for its new pricing structure.

As a result, Palm's gross margins will fall in the future, Bruner said. The company sees gross margins between 35 and 40 percent.

Operating expenses will grow in the fourth quarter and next fiscal year as the company boosts spending to reach new customer markets and expands internationally, Bruner said.

Palm also will needs to build its administrative and back office operations to replace those currently being provided by 3Com (Nasdaq: COMS). In the fourth quarter and fiscal 2001, some corporate functions will be duplicated as Palm continues paying 3Com for those items while training new personnel and establishing its own operations.

"We are consciously bringing our operating margins down over the next 12 to 18 months," Bruner said.

Expect operating losses from Palm over the next few quarters as the company increases investments, executives said. Cash from the recent IPO and private placements will generate "significant" interest income, Bruner said, but she added the company will use some of that cash for other investments.

Tuesday's announcement is Palm's first earnings report as a public company. Since going public in early March, shares of Palm have fallen more than 40 percent from their first-day close.

• THE DAY AHEAD: End of Palm's quiet period should cheer investors
• Palm snaps out of post-IPO malaise
• Palm's IPO soars while 3Com wilts

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