March 22, 2002 12:25 PM PST

Palm gets analysts' praise

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Palm received a thumbs-up on Friday for its recovery effort, a day after it reported third-quarter results, as investors sent the company's shares up 20 percent.

Analysts also liked what they saw in the company's financial outlook as well as the first detailed look at financial data for Palm's operating subsidiary, PalmSource.

"Palm's new management is delivering on its word," US Bancorp Piper Jaffray analyst William Crawford said in a research note Friday. Crawford upgraded Palm to "outperform" from "market perform," joining a chorus of analysts that upgraded Palm's stock or issued positive comments following Thursday's earnings report.

Palm reported a narrow pro forma loss, excluding a one-time benefit for handhelds sold that were previously given up for dead. The company also said it was on track to turn an operating profit in the current quarter.

The news sent the stock surging Friday. In afternoon trading, Palm shares were up 68 cents, or more than 21 percent, at $3.85.

The company is aiming to rebound from a brutal 2001 in which it went from a moneymaking company that appeared able to do no wrong, to a money-losing company that some feared might run out of cash.

Palm took advantage of the positive news Friday to announce it may sell up to $200 million in stock through what is known as a shelf registration with the Securities and Exchange Commission. Such a move allows a company to raise capital at will when it feels market conditions are right.

As for the PalmSource unit, the company said it generated $19.5 million in revenue as a standalone business. The majority of that--$11.7 million--came from Palm itself. As a standalone business, Palm said the OS unit had a pro forma loss of about $1 million.

Banc of America Securities analyst Rob Sanderson said that those results make it appear that Palm was paying about $9, on average, to PalmSource for each handheld it sold. However, the numbers are tricky because there is a lag time between when Palm and other licensees sell a device and when PalmSource reports revenue from the OS license.

That outlook matches up with what analysts had forecast earlier this year.

"It came pretty much exactly as we were modeling it," Sanderson said. Palm has said that licensees of its operating system typically pay PalmSource a percentage--in the low-to-mid single digits--of the revenue they receive for their Palm-based devices.

Although the OS unit turned a small loss, excluding charges, the unit is close to profitability. In an interview late Thursday, Palm CEO Eric Benhamou said that the OS unit and device business are at roughly similar places.

"As the company as a whole becomes profitable, it is likely both units become profitable," Benhamou said. He also predicted a return to strong growth for the company in the coming fiscal year, with profit margins rebounding and sales up 20 percent from the current one.

Crawford said that valuing Palm as the sum of its parts, the company should be worth about $5.50 a share. Crawford also noted that the company's cash position is looking better as the company burned through just $6 million last quarter, far less than the $68 million he had forecast. Palm benefited from higher-than-expected sales as well as the ability to generate revenue from the inventory it had already written off.

"The quarter wasn't as strong as it appeared, but it does look like things are stabilizing," said Banc of America's Sanderson, who kept his "market perform" rating on the stock.

Although Benhamou said the economy remains fragile, he said Palm's operations are looking far better than when he took over as CEO last year.

"All of the hard work over the last few months is starting to pay off," Benhamou said.

 

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