palmOne Reports Q2 FY05 Results

palmOne Reports Q2 FY05 Results

Revenue Up 39%; Operating Margin Is 8.1%

MILPITAS, Calif., Dec. 16 /PRNewswire-FirstCall/ -- palmOne, Inc. (NASDAQ:PLMO) today reported revenue of $376.2 million for the second quarter of fiscal year 2005, ended Nov. 26, which is up approximately 39 percent from the $271.2 million reported during the comparable quarter a year ago.

Net income was $24.7 million, or $0.48 per diluted share. This compares to income from continuing operations in the year-ago period of $2.6 million, or $0.07 per diluted share.

Net income in the second quarter of fiscal year 2005, measured on a non- GAAP(1) basis, totaled $27.2 million, or $0.53 per diluted share, excluding the effects of amortization of intangible assets and deferred stock-based compensation. This compares to a non-GAAP net income in the second quarter of fiscal year 2004 of $5.5 million, or $0.14 per diluted share, which excluded the effects of amortization of intangible assets and deferred stock-based compensation, restructuring charges, and loss from discontinued operations. Operating income was $30.4 million compared with $2.6 million in the year ago quarter.

"Our strategy is working, and this quarter's excellent growth in revenue and a more than tenfold increase in operating income from the year-ago quarter demonstrate we executed well," said Todd Bradley, palmOne chief executive officer. "Our fall products raised the bar for competitors and earned widespread acclaim. And we grew our handheld-computer market share domestically and abroad."

Bradley noted the following financial highlights:

* Revenue grew approximately 39 percent, marking the sixth consecutive quarter of year-over-year growth;

* Gross margin rose to 29.1 percent in the quarter from 27.1 percent in the comparable quarter a year ago;

* Operating margin was 8.1 percent, and non-GAAP operating margin was 8.8 percent;

* Net income was $24.7 million, and non-GAAP net income totaled $27.2 million;

* For the quarter, inventory turns rose to 44 times compared with 26 times in the year-ago period; and

* The company generated $23.7 million in cash from operations in the quarter.

During the quarter, palmOne announced the following:

* The Tungsten(TM) T5 handheld computer, which features 256MB of memory and doubles as a USB drive. Its new non-volatile file structure means data and applications are preserved, even if the battery runs down, and customers can place documents in file folders;

* The Treo(TM) 650 smartphone, which features non-volatile memory, a higher-resolution screen and removable battery. Sprint began carrying this new member of the Treo family, and GSM carriers are expected to begin carrying it in the new year; and

* Integration of the Exchange Server ActiveSync(R) protocol for out-of- the-box compatibility with Microsoft Exchange Server 2003, including wireless email and calendar, for the Treo 650 smartphone and successors.(2)

palmOne shipped approximately 1.6 million Zire(TM), Tungsten and Treo family devices during its second fiscal quarter. Unit shipments to date total approximately 29 million.

Investor's Note

The company will provide a detailed description of its financial results in a conference call and webcast with investors today at 2 p.m. Pacific Time. The dial-in number for the call is 877.825.5811 in the United States and 973.582.2767 for international callers. No pass code is needed. A telephone call replay of the conference call will be available through Dec. 31, 2004, beginning today at approximately 5 p.m. Pacific. The dial-in number for the replay is 877.519.4471 (PIN # 5435468) in the United States and 973.341.3080 (PIN # 5435468) for international callers. The live conference call also will be available over the Internet by logging onto the investor relations section of palmOne's website at http://ir.palmone.com/ . An audio replay and text transcript of the conference call also can be accessed at the same URL beginning today at approximately 5:30 p.m. Pacific.

NON-GAAP FINANCIAL MEASURES: To supplement the company's consolidated financial statements presented in accordance with GAAP, palmOne uses non-GAAP measures of certain components of financial performance, including operating income (loss), net income (loss) and per share data, which are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP measures are provided to enhance investors' overall understanding of the company's current financial performance and the company's prospects for the future. Specifically, the company believes the non-GAAP results provide useful information to both management and investors by excluding certain expenses, gains and losses that may not be indicative of its core operating results. These non-GAAP results are among the primary indicators management uses as a basis for planning and forecasting of future periods and facilitating management's internal comparisons to the company's historical operating results and comparisons to competitors' operating results. In addition, because palmOne has historically reported certain non-GAAP results to investors, the company believes the inclusion of non-GAAP measures provides consistency in the company's financial reporting. These measures should be considered in addition to results prepared in accordance with generally accepted accounting principles, but should not be considered a substitute for, or superior to, GAAP results. These non-GAAP financial measures may also be different from non-GAAP financial measures used by other companies. Consistent with the company's practice, the non-GAAP measures included in this press release have been reconciled to the nearest GAAP measure.

About palmOne, Inc.

palmOne, Inc. -- the leader in handheld computing and communications solutions -- strives to put the power of computing in people's hands so they can access and share their most important information. The company's products include Zire(TM) and Tungsten(TM) handhelds and Treo(TM) smartphones, software and accessories.

palmOne products are sold at The palmOne Store ( http://store.palmone.com/ ) and palmOne Retail Stores, and through select Internet, retail, reseller and wireless operator partners throughout the world.

More information about palmOne, Inc. is available at http://www.palmone.com/ .

(1) GAAP stands for Generally Accepted Accounting Principles.

(2) Requires Exchange Server 2003 and access enabled by IT administrator. An Internet service provider account, data service and carrier subscription may be required for Internet and email access. These services may need to be purchased separately. Access available within network coverage areas only.

NOTE: palmOne, Zire, Tungsten and Treo are among the trademarks or registered trademarks owned by or licensed to palmOne, Inc. or its subsidiaries. All other brand and product names are or may be trademarks of, and are used to identify products or services of, their respective owners.

palmOne, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended Six Months Ended
Nov. 30, Nov. 30, Nov. 30, Nov. 30,
2004 2003 2004 2003

Revenues $376,180 $271,215 $649,325 $439,823
Costs and operating expenses:
Cost of revenues (*) 266,478 197,739 448,281 318,963
Sales and marketing 45,048 43,709 82,603 78,287
Research and development 20,407 14,948 38,975 31,776
General and administrative 11,312 9,355 21,111 18,049
Amortization of intangible
assets and deferred
stock-based compensation (**) 2,527 1,938 4,866 2,059
Restructuring charges -- 918 -- 3,588
Total costs and operating
expenses 345,772 268,607 595,836 452,722
Operating income (loss) 30,408 2,608 53,489 (12,899)
Interest and other income
(expense), net 611 1,608 577 1,451
Income (loss) before income
taxes 31,019 4,216 54,066 (11,448)
Income tax provision 6,328 1,584 9,781 2,782
Income (loss) from continuing
operations 24,691 2,632 44,285 (14,230)
Loss from discontinued
operations (net of taxes of $0,
$4, $0 and $252, respectively) -- (6,750) -- (11,634)

Net income (loss) $24,691 $(4,118) $44,285 $(25,864)

Net income (loss) per share:
Basic:
Continuing operations $0.51 $0.07 $0.92 $(0.43)
Discontinued operations -- (0.18) -- (0.35)
$0.51 $(0.11) $0.92 $(0.78)
Diluted:
Continuing operations $0.48 $0.07 $0.86 $(0.43)
Discontinued operations -- (0.18) -- (0.35)
$0.48 $(0.11) $0.86 $(0.78)
Shares used in computing
per share amounts:
Basic 48,381 36,696 48,005 33,022
Diluted 51,442 38,743 51,223 33,022

(*) Cost of revenues does not include that portion of amortization of
intangible assets and deferred stock-based compensation related to cost of
revenues.
(**) Amortization of intangible assets and deferred stock-based
compensation:

Cost of revenues $351 $84 $663 $88
Sales and marketing 1,714 1,599 3,368 1,657
Research and development 64 37 128 64
General and administrative 398 218 707 250
$2,527 $1,938 $4,866 $2,059



Certain prior quarter balances have been reclassified to conform to the current quarter presentation.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc.
Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements of
Operations
(In thousands, except per share data)
(Unaudited)

Three Months Ended Three Months Ended
Nov. 30, 2004 Nov. 30, 2003
Adjust- Non- Adjust- Non-
GAAP ments GAAP GAAP ments GAAP
Revenues $376,180 $-- $376,180 $271,215 $-- $271,215
Costs and
operating
expenses:
Cost of
revenues (*) 266,478 -- 266,478 197,739 -- 197,739
Sales and
marketing 45,048 -- 45,048 43,709 -- 43,709
Research and
development 20,407 -- 20,407 14,948 -- 14,948
General and
administrative 11,312 -- 11,312 9,355 -- 9,355
Amortization of
intangible
assets and
deferred stock-
based
compensation
(**) 2,527 (2,527) -- 1,938 (1,938) --
Restructuring
charges -- -- -- 918 (918) --
Total costs and
operating
expenses 345,772 (2,527) 343,245 268,607 (2,856) 265,751
Operating income
(loss) 30,408 2,527 32,935 2,608 2,856 5,464
Interest and other
income (expense),
net 611 -- 611 1,608 -- 1,608
Income (loss)
before income
taxes 31,019 2,527 33,546 4,216 2,856 7,072
Income tax
provision 6,328 -- 6,328 1,584 -- 1,584
Income (loss)
from continuing
operations 24,691 2,527 27,218 2,632 2,856 5,488
Loss from
discontinued
operations (net
of taxes of $0
and $4,
respectively) -- -- -- (6,750) 6,750 --
Net income
(loss) $24,691 $2,527 $27,218 $(4,118) $9,606 $5,488
Net income
(loss) per
share:
Basic:
Continuing
operations $0.51 $0.05 $0.56 $0.07 $0.08 $0.15
Discontinued
operations -- -- -- (0.18) 0.18 --
$0.51 $0.05 $0.56 $(0.11) $0.26 $0.15
Diluted:
Continuing
operations $0.48 $0.05 $0.53 $0.07 $0.07 $0.14
Discontinued
operations -- -- -- (0.18) 0.18 --
$0.48 $0.05 $0.53 $(0.11) $0.25 $0.14
Shares used in
computing per
share amounts:
Basic 48,381 -- 48,381 36,696 -- 36,696
Diluted 51,442 -- 51,442 38,743 -- 38,743

(*)Cost of revenues does not include that portion of amortization of
intangible assets and deferred stock-based compensation related to cost of
revenues.
(**) Amortization of intangible assets and deferred stock-based
compensation:

Cost of revenues $351 $(351) $-- $84 $(84) $--
Sales and
marketing 1,714 (1,714) -- 1,599 (1,599) --
Research and
development 64 (64) -- 37 (37) --
General and
administrative 398 (398) -- 218 (218) --
$2,527 $(2,527) $-- $1,938 $(1,938) $--



The above non-GAAP amounts have been adjusted to eliminate amortization of intangible assets and deferred stock-based compensation, restructuring charges and loss from discontinued operations.

Certain prior quarter balances have been reclassified to conform to the current quarter presentation.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc.
Reconciliation of GAAP to Non-GAAP Condensed Consolidated Statements of
Operations
(In thousands, except per share data)
(Unaudited)

Six Months Ended Six Months Ended
Nov. 30, 2004 Nov. 30, 2003
Adjust- Non- Adjust- Non-
GAAP ments GAAP GAAP ments GAAP
Revenues $649,325 $-- $649,325 $439,823 $-- $439,823
Costs and
operating
expenses:
Cost of revenues
(*) 448,281 -- 448,281 318,963 -- 318,963
Sales and
marketing 82,603 -- 82,603 78,287 -- 78,287
Research and
development 38,975 -- 38,975 31,776 -- 31,776
General and
administrative 21,111 -- 21,111 18,049 -- 18,049
Amortization of
intangible
assets and
deferred
stock-based
compensation
(**) 4,866 (4,866) -- 2,059 (2,059) --
Restructuring
charges -- -- -- 3,588 (3,588) --
Total costs and
operating
expenses 595,836 (4,866) 590,970 452,722 (5,647) 447,075
Operating income
(loss) 53,489 4,866 58,355 (12,899) 5,647 (7,252)
Interest and other
income (expense),
net 577 -- 577 1,451 -- 1,451
Income (loss)
before income
taxes 54,066 4,866 58,932 (11,448) 5,647 (5,801)
Income tax
provision 9,781 -- 9,781 2,782 -- 2,782
Income (loss)
from continuing
operations 44,285 4,866 49,151 (14,230) 5,647 (8,583)
Loss from
discontinued
operations (net
of taxes of $0
and $252,
respectively) -- -- -- (11,634) 11,634 --
Net income (loss) $44,285 $4,866 $49,151 $(25,864) $17,281 $(8,583)
Net income (loss)
per share:
Basic:
Continuing
operations $0.92 $0.10 $1.02 $(0.43) $0.17 $(0.26)
Discontinued
operations -- -- -- (0.35) 0.35 --
$0.92 $0.10 $1.02 $(0.78) $0.52 $(0.26)
Diluted:
Continuing
operations $0.86 $0.10 $0.96 $(0.43) $0.17 $(0.26)
Discontinued
operations -- -- -- (0.35) 0.35 --
$0.86 $0.10 $0.96 $(0.78) $0.52 $(0.26)
Shares used in
computing per share
amounts:
Basic 48,005 -- 48,005 33,022 -- 33,022
Diluted 51,223 -- 51,223 33,022 -- 33,022

(**)Cost of revenues does not include that portion of amortization of
intangible assets and deferred stock-based compensation related to cost of
revenues.
(*) Amortization of intangible assets and deferred stock-based
compensation:

Cost of revenues $663 $(663) $-- $88 $(88) $--
Sales and
marketing 3,368 (3,368) -- 1,657 (1,657) --
Research and
development 128 (128) -- 64 (64) --
General and
administrative 707 (707) -- 250 (250) --
$4,866 $(4,866) $-- $2,059 $(2,059) $--



The above non-GAAP amounts have been adjusted to eliminate amortization of intangible assets and deferred stock-based compensation, restructuring charges and loss from discontinued operations.

Certain prior quarter balances have been reclassified to conform to the current quarter presentation.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except par value amounts)
(Unaudited)

Nov. 30, May 31,
2004 2004
ASSETS
Current assets:
Cash and cash equivalents $236,146 $203,069
Short-term investments 76,737 49,382
Accounts receivable, net of allowance for
doubtful accounts of $8,702 and $8,317,
respectively 219,427 120,757
Inventories 29,119 14,030
Investment for committed tenant improvements 6,956 7,197
Prepaids and other 9,970 8,067
Total current assets 578,355 402,502
Restricted investments 775 1,175
Land not in use 60,000 60,000
Property and equipment, net 18,620 19,425
Goodwill 253,372 257,363
Intangible assets, net 7,104 10,979
Deferred income taxes 34,800 34,800
Other assets 1,575 1,694
Total assets $954,601 $787,938

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $184,548 $112,772
Accrued restructuring 20,909 27,156
Provision for committed tenant improvements 6,956 7,197
Other accrued liabilities 155,360 112,679
Total current liabilities 367,773 259,804
Non-current liabilities:
Long-term convertible debt 35,000 35,000
Other non-current liabilities 1,300 1,600
Stockholders' equity:
Preferred stock, $.001 par value, 125,000 shares
authorized; none outstanding -- --
Common stock, $.001 par value, 2,000,000 shares
authorized; outstanding: 48,723 shares and
47,032 shares, respectively 49 47
Additional paid-in capital 1,399,346 1,383,630
Unamortized deferred stock-based compensation (3,576) (1,995)
Accumulated deficit (846,353) (890,638)
Accumulated other comprehensive income 1,062 490
Total stockholders' equity 550,528 491,534
Total liabilities and stockholders' equity $954,601 $787,938



Certain prior year balances have been reclassified to conform to the current quarter presentation.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.

palmOne, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

Three Months Ended
Nov. 30, Nov. 30,
2004 2003
Cash flows from operating activities:
Income from continuing operations $24,691 $2,632
Adjustments to reconcile income from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation 3,728 5,701
Amortization 2,527 2,411
Changes in assets and liabilities, net of
effect of business acquisition:
Accounts receivable (85,802) (67,372)
Inventories (9,967) (8,238)
Prepaids and other (2,095) 1,585
Accounts payable 56,217 30,214
Accrued restructuring (1,174) (4,517)
Other accrued liabilities 35,550 8,370
Net cash provided by (used in) operating
activities 23,675 (29,214)

Cash flows from investing activities:
Purchase of property and equipment (4,853) (1,818)
Acquisition of a business, net of cash acquired -- 16,114
Spin-off of PalmSource -- (6,000)
Purchase of short-term investments (13,029) --
Sale of short-term investments 15,062 --
Sale of restricted investments -- 1,896
Net cash provided by (used in) investing
activities (2,820) 10,192
Cash flows from financing activities:
Proceeds from issuance of common stock; employee
stock plans 4,325 9,516
Net cash provided by financing activities 4,325 9,516

Change in cash and cash equivalents 25,180 (9,506)
Cash and cash equivalents, beginning of period 210,966 227,701

Cash and cash equivalents, end of period $236,146 $218,195

Other cash flow information:
Cash paid for income taxes $(2,005) $(731)
Cash paid for interest $(33) $(21)
Fair value of stock options and warrants
assumed in business acquisition $-- $28,064
Common stock issued for a business
combination $-- $209,173



Certain prior quarter balances have been reclassified to conform to the current quarter presentation.

palmOne's fiscal periods are generally 13 weeks in length and end on a Friday. For presentation purposes, the periods are presented as ending on Aug. 31, Nov. 30, Feb. 28 and May 31.


Source: palmOne, Inc.

CONTACT: Dave Vadasz, investor relations, +1-408-503-7200, or
dave.vadasz@palmOne.com, or Marlene Somsak, media relations, +1-408-503-2592,
or marlene.somsak@palmOne.com, both of palmOne, Inc.

Web site: http://www.palm.com/


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