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Palm, Inc. (PALM)

F4Q07 Earnings Call

June 28, 2007 4:30 pm ET

Executives

John Shandler - IR

Ed Colligan - President and CEO

Andy Brown - CFO

Analysts

Mike Abramsky - RBC Capital Markets

Luke Lee

Michael Ounjian - Credit Suisse

Jonathan Goldberg - Deutsche Bank

Aaron Husock - Morgan Stanley

Priscilla

Russ Udowski - Lehman Brothers

James Faucette - Pacific Crest

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Palm Fourth Quarter and Fiscal Year 2007 Financial Results Call. My name is Melanie, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session at the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. John Shandler. Please proceed, sir.

John Shandler

Thank you. Good afternoon, everyone. I would like to welcome you to Palm's fourth quarter and fiscal year 2007 financial results conference call. On the call today are Ed Colligan, CEO and President, and Andy Brown, Chief Financial Officer. Today's call is being recorded and will be available for replay on our Investor Relations website at www.palm.com.

I would like to remind everyone that today’s comments including the question-and-answer session will include forward-looking statements, including but not limited to our forecast of future revenue and earnings and other financial and business activity. These statements are subject to risks and uncertainties that may cause actual results and events to differ materially. These risks and uncertainties are detailed in Palm's filings with the Securities and Exchange Commission, including its quarterly report on Form 10-Q for the fiscal quarter ended March 2, 2007 and its annual report on Form 10-K for the fiscal year ended June 2, 2006.

Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after this call. Please note that today's results will be reported on a non-GAAP basis, except where specifically noted in the commentary as GAAP results or estimates.

Non-GAAP reporting is provided to help you better understand our business. However, non-GAAP financial results are not meant to be considered in isolation or as a substitute for or superior to GAAP results. You should be aware that non-GAAP measures have inherent limitations and should be used only in conjunction with Palm's consolidated financial statements, prepared in accordance with GAAP.

Our press release includes a table detailing the non-GAAP measures together with the corresponding GAAP numbers and a reconciliation to GAAP. You can also find this information posted on our Investor Relations website.

The slides that accompany this call include both GAAP and non-GAAP measures and are also available on our Investor Relations website. We encourage listeners to review these items.

And now, I would like to turn the call over to Ed Colligan.

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Ed Colligan

Thank you, John. Good afternoon everyone, and thanks for joining us. I will review some of the highlights of Q4 and our 2007 fiscal year and review plans for the upcoming year. I will then turn the call over to Andy Brown, who will cover the details of our financial performance and our guidance for Q1 2008.

We are proud of our many accomplishments during the last year. First, we are pleased to report smartphone sell-through grew 34% to 2.7 million units for the year and now represents 80% of our total revenue, up from 69% last year. In the fourth quarter, our smartphones sell-through reached a record high, 750,000 units, up 43% year-over-year.

Second, we launched several new smartphone products since last June and are excited about our recent launch of the Foleo. We strongly believe that this will be another major growth category for Palm and the dawning of another major design era of mobile computing.

Finally, we believe our recently announced deal with Elevation Partners, sets us up well to attract the world class talent we are going to need to scale our business and to make the investments in our business for future expansion. We are at the beginning of a major shift in the mobile communications market, as users demand more and more capabilities and performance from their mobile products.

Palm is committed to building the most compelling and intuitive mobile computing solutions in the world. This is going to take extraordinary focus and all the dedicated efforts of our team. Fortunately, we have an excellent team with the experience and knowledge to deliver great solution. And with our recent announcement and expected closing of our transaction with Elevation Partners, we are going to add significantly to our strengths.

I am delighted that my team and I were able to bring the Elevation deal from concept to reality. Elevation will bring a group of partners with the unique perspective in the mobile device, online content and Web 2.0 arena. Jon Rubinstein will bring outstanding experience in small form factor device integration and high volume product delivery capabilities with high quality standards.

I am already consulting with Jon on the plan to build our product delivery capabilities and establish strengthened relationships with key companies in our industry. We expect to schedule our shareholder vote at the end of August or early September depending on various regulatory approvals. We spent several days meeting with investors and are very excited about the response we are getting to the announcement.

For the year ahead we expect to continue to drive for great product execution and differentiation and to build our intellectual property position and defensibility. These efforts will be combined with a relentless focus on continuous improvement on quality, our ability to reach more carriers and more geographies more quickly, and a strong drive for revenue growth and profitability.

As a part of our long-term planning I recently made some changes to increase the effectiveness of our organization and drive our performance. I reorganized our team around two distinctive product lines.

Our Windows Mobile products will be developed under a highly leveraged ODM model where we can take advantage of the strong capabilities of our ODM partners. These products will be designed and specified by our internal Windows Mobile group. But, more execution of the products will be done in conjunction with our ODM partners using their Windows Mobile expertise and radio designed platforms.

We believe this will enable us to get a broader range of solutions to market faster. To leverage our brand and customer connections and deliver more compelling solutions for our medium-sized business and enterprise customers who are demanding Windows Mobile-based solutions.

Our second major product group will be focused on building solutions for our consumer, prosumer and small business customers. This group will focus on leveraging our Palm system software efforts, our in-house hardware platform designs and our services initiatives to create the most compelling end-user solutions.

Our goal is to deliver the best, most flexible mobile computing solution and one which we believe will prove to be more compelling than any other mobile consumer solution on the market.

Finally, as you may know we have recently announced our Foleo mobile companion products. They will work in conjunction with and in support of both our Windows Mobile and Palm OS-based products.

Foleo has had mixed reviews from the pundits, but had extremely enthusiastic response from potential customers. I am completely confident that we have redefined what it is to be a full function mobile computer. You can think about laptops today as the next generation of desktops. Desktops that you dock and take with you, but they are still desktops with all the baggage and complexity of a heavy operating system and hardware computing environment.

Foleo is the first mobile device designed from the ground up as a mobile computing solution focused on the true usage patterns and necessities of the mobile user. It's simple, instant on. Instant application switching environment is based on a small hardware and cost footprint and we believe its simple solid-state design will prove to be the fundamental design center of future mobile computers.

Both the sophisticated and the novice user values simplicity and that is the basis of Foleo, the most simplified yet powerful computing solution for you on the go. Palm has defined two categories of mobile computing in the past and Foleo is the third.

Foleo was designed with significant focus on our ability to develop the best software environment for user and developers. Some of our efforts on both future Treo platforms and for Foleo are already being supported by a broad range of developers and we expect that support to continue to grow.

So today, Foleo is a companion to your smartphone, targeted squarely at robust e-mail access. But, tomorrow it will be a full-fledged mobile computing platform with a broad range of application support. We are very excited about those possibilities and so are our customers.

We have already been approached by a wide range of customers from all walks of life, dying to get their hands on Foleo. Enterprises want a more simplified solution for some of their knowledge workers that they can easily configure and update. Educational institutions feel it truly could be the first accessible computer from a cost and form factor standpoint.

Vertical applications in the military, pharmaceuticals, utilities and other areas find a low-cost, small form factor, Linux-based alternative very attractive. And of course, your average computer user who is frustrated and intimidated by the complexity of standard computing platforms finds it incredibly desirable. All of these will be opportunities for Foleo as the platform matures.

During the year ahead, we will also focus on efficiency and quality. As noted earlier, I have already begun the year by making changes to our organization that I believe will make us more effective in delivering our products to the market. I also recognize that we have to improve our efficiency as our R&D spending has continued to climb as a percentage of our revenue.

We expect it to trend down during this fiscal year, but today this investment is critical for delivering the kinds of products necessary to compete and excel in this very competitive environment. I am incredibly excited about our future products, but to get there we have to make the critical investments and we appreciate your support in making these investments. We believe our investments today will result in significant shareholder value creation in the future.

For our fiscal 2008, you can expect to see a number of major new product deliveries. Of course, the Foleo will be delivered, but also a range of smartphone products that will reach new customers and new demographics, as well as expand our carrier reach.

For this fiscal year, we have set five core objectives and we will track our progress throughout the year based on these objectives.

Number one, we expect to deliver revenue growth and profitability with significant increases in our smartphone sell-through.

Two, we will deliver major new platforms on both the hardware and software fronts to increase our differentiation and build our defensibility.

Three, we will drive hard on improving quality, predictability and time-to-market, while working to drive our costs throughout our supply chain.

Four, we will do a better job of leveraging our ODM partners to more effectively scale our product line, and better leverage our Windows Mobile partnership with Microsoft.

Finally, we will establish Foleo as a new category in computing by creating and nurturing a strong developer community, expanding our distribution and delivering a world-class product experience.

Let me close by saying that we believe we have just thrown out the first pitch in a nine-inning game. The shifts in the computing and communications markets are just beginning. We are energized by the opportunities that our expected partnership with Elevation Partners will bring to the game. Both, we and Elevation, are confident that Palm is in the beginning stages of one of the biggest market and growth opportunities in the history of technology.

We are committed to building the most compelling and intuitive mobile computing products in the world and honoring your investment in us by delivering great long-term shareholder value.

A big thanks to our team, who has stayed focused and continues to deliver great mobile computing solutions, customer support and services to our customers. I know they are reenergized and totally focused on executing at an even higher level this year.

I'll now turn the call over to Andy to discuss the details of our Q4 and FY '07 results and our guidance looking forward to Q1 of FY '08. Andy?

Andy Brown

Thanks, Ed, and good afternoon everyone. Before I start, I would like to reiterate that all the commentary today is based on non-GAAP financial measures, except where specifically identified as GAAP. I encourage you to refer to the reconciliation of GAAP to non-GAAP financial results that is posted to the Palm website and is included in the press release.

Focusing on the full year's results, our revenue for fiscal 2007 declined 1% to $1.56 billion from fiscal 2006. Fiscal 2007 gross margins increased to 37% from 33% in the year ago period, driven by reduced royalty costs and continued reduction of component costs.

Our operating expenses increased year-over-year by 24% to $477 million, as we continue to invest in our product delivery engine and sales and marketing to expand our global presence and brand. This resulted in operating margin of 6.4% versus 8.6% in fiscal 2006, and diluted earnings per share up $0.70 compared to $0.85 in fiscal 2006.

Smartphone revenue grew 15% to $1.25 billion on unit shipments of 2.7 million. Unit sell-through for smartphones grew 34% year-over-year to 2.7 million units, while overall channel inventories remained flat. Smartphones represented 80% of our overall revenues in 2007 versus 69% in fiscal 2006.

The growth in smartphones was more than offset by accelerated declines in the handheld business, where we experienced a 37% year-over-year decline in net revenue. Handheld unit shipped declined 35% and handheld sell-through declined 31%, which accelerated in the second half of the fiscal year to almost 40%. We expect our handheld business to continue to decline at similar rates, as we move into fiscal 2008.

Looking more closely at Q4 of fiscal 2007, revenue was $401.3 million, down slightly from $403.1 million in Q4 of fiscal 2006. During the quarter, we saw a record sell-through for smartphones offset by declines in the handheld business.

Gross margin for the quarter increased to 38.3% compared with 37.2% in the year ago period and 37% sequentially. Gross margin was positively impacted by an update to the redemption rate assumptions for our mail-in rebate reserves based on new data received from our carrier partners. Has this not occurred, gross margins would have been approximately the same as Q3.

Operating expenses for the fourth quarter were $130.4 million, slightly higher than we had expected, primarily due to increased product development costs for future products and legal action settlement costs. This resulted in operating income of 5.8% of revenue and earnings per diluted share of $0.17. Revenue mix for the quarter was 86% smartphones and 14% handhelds unchanged from the previous quarter.

Smartphone revenue for the fourth quarter was $344.2 million on shipments of 730,000 units. Smartphone sell-through continued to be robust at a record 750,000 units. This represents a year-over-year increase of 43% as customers continue to make Treo their smartphone of choice.

Handheld revenue for the quarter was $57.1 million a 43% decline year-over-year, reflecting sales of 298,000 units. Handheld sell-through for the quarter was 314,000 units, a 36% decline year-over-year and inventory held by our channel partners was 6.1 weeks.

In Q4 2007, we generated 76% of our revenues from the US and 24% internationally. Substantially, unchanged from the prior quarter.

Looking at the balance sheet, our cash and short-term investment balance increased from the prior quarter to $546.7 million. The cash balance does not include proceeds from the land sale which closed on June 20 with net proceeds to the company of approximately $64 million.

Cash flow from operations was strong at $42.9 million for the quarter and $168.2 million for the full fiscal year. Accounts receivable decreased sequentially to $204.3 million, and DSOs were 46 days in our expected range. Inventories increased sequentially to $39.2 million and returns decreased slightly to 26 times also in our expected range.

Looking to Q1 fiscal 2008, I will be providing guidance assuming no changes for the recapitalization we expect to complete in August or September. Once that occurs we may update guidance as appropriate.

We currently expect revenue to be between $355 million and $365 million. We expect sell-through for smartphones to have healthy year-over-year growth with handhelds declining at a similar rate to what we experienced in Q4 on a year-over-year basis. Factored into our outlook is the expected seasonal slowdown particularly in Europe and the uncertainty around competitive product launches.

We anticipate gross margin will be in the range of 37% to 37.5% consistent with what we have seen in the second half of fiscal 2007. We do, however, anticipate that gross margin will moderate during the year towards the 34% to 36% range as we introduce new products starting in fiscal Q2.

Operating expenses are expected to be in the range of $125 million to $128 million, slightly lower than Q4 fiscal 2007, as we see savings from recent changes we have made, particularly in the product development area. We expect that product development costs will remain relatively flat on a quarterly basis throughout the year as we leverage our ODM partners more effectively.

The annual tax-rate for Q1 is expected to be 40%, resulting in earnings per diluted share of $0.07 to $0.09. On a GAAP basis, we expect $8 million to $9 million total charge to earnings for the recently implemented organizational changes, which will include severance and facility closure costs. Of this we expect $6.5 million to $7.5 million will be incurred in Q1 with the remainder in Q2.

I will now turn the call over to the operator, for your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Mike Abramsky with RBC Capital Markets. Go ahead.

Mike Abramsky - RBC Capital Markets

Yes, thanks very much. Ed, could you just help us understand why smartphone growth was down 3% quarter-over-quarter, what's happening with regard to sell-in there. We just saw RIM results came up, they've sort of been obviously very strong in terms of their outlook, is there something that, is this situation expected to as you say turnaround in time, what do you see for the next few quarters in terms of momentum and what's going on?

Ed Colligan

Yeah Mike I think, obviously RIMs numbers are impressive I think you got to look at our sell-through which is worth more, tracking almost closely, which is really delivered to end-user customers, and year-over-year they are up 43%, which I think by most measurements would be really healthy growth. I think at the end of the day on the revenue side we did introduce some lower price products the Treo 680 for instance and our ASPs have moderated some also on the cell inside. We continue to manage inventories in the channel, make sure our carriers are in proper position there. Of course we'd like to be selling more, certainly like to drive the growth higher, but relative to where we are in the business, where we are in our products cycles, we were pretty pleased with the 43% year-over-year sell-through growth.

Mike Abramsky - RBC Capital Markets

Do you see this situation getting worse before it gets better?

Ed Colligan

No, I think we are basically, what you are seeing in some of our numbers is that handheld business is declining certainly more rapidly than we had expected early in the year. And so that's certainly putting somewhat of a drag on our top line growth but the smartphone numbers continue to be strong and we hope with new product launches we can even be stronger into this fiscal year.

Mike Abramsky - RBC Capital Markets

Okay. Thank you. And the last for you briefly, there has been speculation I think on some that the pending iPhone will have some headwind effect maybe to your momentum and I'm just wondering if you could comment on that?

Ed Colligan

Well we are certainly taking as we said the competitive product launches into this quarter in the consideration in our guidance, yeah I have almost never seen the kind of feeding frenzy we have in the media right now around anything I can't remember something in any walk of life that is got in quite a level of attention this has. Yeah, we expect it to be a very successfully product. I don't know if we can possibly live up to the hype. But, we're taking into account that certainly there will be some stall for at least a couple of weeks for people to check them out and they will have 30 days to return it. So, we hope we'll benefit from that, if that happens.

Mike Abramsky - RBC Capital Markets

Okay. Thanks very much.

Andy Brown

Okay.

Operator

Our next question comes from the line of Maynard Um. Go ahead.

Luke Lee

Hi, this is [Luke Lee] for Maynard. Can you give us some color, how many new carriers have you got last quarter?

Ed Colligan

New carriers?

Luke Lee

Yeah.

Ed Colligan

I don't know the exact number. I think from 85 to 93 or something was the number I saw. We don't track that too closely. We try to just look at were is our new opportunities for new product growth and that results in new carriers sometimes, but really focused more on the top 10 carriers in the world. This is where we try to put most of our energy.

Luke Lee

In terms of region, were does the strongest growth came from? Can you…

Ed Colligan

The strongest growth region? I would say the strongest growth region is probably APAC.

Andy Brown

Yeah.

Ed Colligan

It was the strongest growth region year-over-year. EMEA did quite well in the smartphone area, but certainly had some significant declines in handhelds.

Luke Lee

Okay. Just another question, during the last quarter can you give us the split between the smartphones, the percentage?

Ed Colligan

Well, last quarter was 86. I am sorry the revenue split?

Luke Lee

No. I mean, I am trying to understand in terms of units, percentage wise, what's the percentage of the smartphone were based on Microsoft Windows system and what's the percentage was based on Palm?

Ed Colligan

Yeah. I mean, approximately at this point were about a little bit less than 50% Windows Mobile and a little bit more than that are Palm OS based products.

Luke Lee

What's the trend that you see? This is sustainable or it would change?

Ed Colligan

Well, if you…

Andy Brown

It comes from 100% smartphone. So, I mean 100% far Palm OS. So, we have obviously seen significant growth in Windows Mobile and we expect to continue to see that. Part of the structuring that I talked about was to invest more in Windows Mobile in the sense of really a dedicated team trying to drive the broader range of ODMs. So, we really think we can leverage our brand even more than we have to date, deliver more products to markets more quickly. Our brand and distribution, our carrier relationships and our brand, are two things that we really think we can leverage on the Windows Mobile side even more effectively than we have.

Luke Lee

Yeah. But, from a margin perspective because you already have a deal to pay a [fat] fee for the Palm OS system, right. So, you should get higher margins. But, on the other hand if you ship more like Windows-based product that the margin will not…?

Ed Colligan

Yeah, it's a part of the fun, but it's reasonably marginal. But the difference and also the reality is we want to do the right thing to serve the most customers. This is a big growth market. We got to look at the right opportunities and make the right decisions relative to mix based on the opportunities that are available to us. We see Windows Mobile particularly playing more strongly in the enterprise, medium businesses and also internationally, and our Palm OS products being more consumer-based. So, we will drive in that direction. But, 2% to 3% difference in the grand scheme of the growth we can have and the dollars we can generate, it's certainly not the only reason to focus more Palm OS products. I think we are going to focus on both platforms.

Luke Lee

All right. Thank you.

Ed Colligan

Thank you.

Operator

Our next question comes from the line of Michael Ounjian with Credit Suisse. Go ahead.

Michael Ounjian - Credit Suisse

Great. Thanks for taking the question. I guess Ed, could you give us an update as to how we should think about the timing of new products coming out, just related to your sort of broader platform strategy and than also related to the new operating system development efforts?

Ed Colligan

Yeah. Well, in general a new platform strategy I think that's, next calendar year is the timeframe. We are not going to get in to specifics on that. I think the reality is we will deliver some new smartphone products through the rest of this calendar year on both our Windows Mobile and Palm OS platforms. And product based on the new Linux-based platform that we are working on, that won't be until some time next year.

Michael Ounjian - Credit Suisse

Okay, great. But, we really should expect to see some more diversification of the product portfolio in terms of price points and tiers of the market is this year or is that?

Ed Colligan

Yes. Yeah, I mean we are absolutely. We are not waiting for next generation platform developments to deliver some great new products.

Michael Ounjian - Credit Suisse

Okay. And Andy, in terms of the smartphone mix this quarter, how much of it was really in the enterprise, small-medium business market?

Andy Brown

Yeah, we don't get precise size data on that as you are aware, but we continue to estimate in the 30%, maybe 35% range is what I'll call going through the B-to-B channels of our carrier partners and the vast majority obviously being through the retail stores.

Michael Ounjian - Credit Suisse

Right. Okay. And then lastly, Andy, looking at the handheld business, I think obviously we are expecting declines. It seems to be declining somewhat faster even then expected. In the near-term that’s having some impact on your profitability. Does that affect anyway your thought process on the capital structure and the last transactions this summer to adequate amount of leverage to the balance sheet?

Andy Brown

No, I mean if you think about the handheld business it's basically about 15% of our revenues, and it is contributing profitably to the business. So, it is generating cash flow at this point in time. Obviously, we are clearly monitoring this very carefully. We've said for many years that our objective here is to maximize our profitability in cash flow and to the extent that we can do that then we could potentially make another decision about this business.

Michael Ounjian - Credit Suisse

Great. Thank you very much for taking the questions.

Operator

Our next question comes from the line of Jonathan Goldberg with Deutsche Bank. Go ahead.

Jonathan Goldberg - Deutsche Bank

Hi, thanks for taking my call. I just wanted to ask quickly about headcount. How is your staffing structure changing right now? What was your headcount at the end of the quarter?

Ed Colligan

At the end of quarter it's somewhere in the range of 1,100.

Jonathan Goldberg - Deutsche Bank

Is that down?

Ed Colligan.

That's down. We had some restructuring efforts during the quarter and we reduced approximately 100 people, but some of those were in transition and so forth. So, it's somewhere in that range.

Jonathan Goldberg - Deutsche Bank

So, could you just give us a sense of where are you cutting people? I think you are also hiring people in other areas?

Ed Colligan.

Yeah.

Jonathan Goldberg - Deutsche Bank

Where are you cutting? Where are you adding?

Ed Colligan.

Well, it's really about effectiveness and efficiency. I mean, at some level not as much driven by cost. I mean, obviously, you want to save cost if there are really some things out of whack. But, really the idea was to flatten the organization. I wanted to essentially get closer to development. So, we've looked at some management ranks in both development and another areas of the company and said, Jesus, do we need all of this and let's make sure that we are being as effective as possible there.

The second thing was the whole reorganization around really a Windows Mobile product group and our Palm OS systems, trying to really get some more leveraged focus around Windows Mobile. So, that was another big change.

Finally, we decided to consolidate our e-mail and messaging development efforts back into Sunnyvale. They were in a facility in Andover and we are making a change there. So, those are the three big actions that we're taking.

Jonathan Goldberg - Deutsche Bank

Okay, and then my last question is on capital structure. Assuming the investment from the recap with Elevation goes through, you are going to have a pretty levered, those who deny pretty levered capital structure. With all the changes and the accelerating changes in the competitive environment does that concern you that you'll be able to keep pace, or it gives you a lot less room to maneuver? Are you confident you'd be able to have the capital you need to expand completely?

Ed Colligan

Yes. And we are supremely confident that we'll have the capital we need. We continue to generate profits. We have had excellent cash flow management. We expect to have somewhere in the range of $400 million of cash on our balance sheet in the timing of the transaction close. And so, we think actually our capital structure is appropriately leveraged to return capital to our shareholders, if there was excess and also allow us to continue to have opportunities to invest in the various things we want to invest in. So, we really think it still looks good. Andy, I don't know if you had any comment.

Andy Brown

Yeah. I mean the other thing to echo Ed's comments the fact is that our net debt to EBITDA is going to be less than one, so I mean I hardly call that a leverage situation. So, we are extremely confident about our ability to operate in this capital structure. We think it's more optimized then it is anything else to be honest with you.

Jonathan Goldberg - Deutsche Bank

Okay. Thank you.

Ed Colligan.

Thank you.

Operator

Our next question comes from the line of Aaron Husock with Morgan Stanley. Go ahead.

Aaron Husock - Morgan Stanley

Great. Thanks for taking my question. So, by my math it looks like your smartphone ASPs were actually up slightly in the May quarter. Can you kind of talk about what drove that? And then the decline in smartphone sales in the August quarter, how should we think of that, is it coming from ASP declines versus unit declines.

Andy Brown

Yeah, Aaron. On the ASP increases you are correct. There was a slight increase in ASPs during the quarter. That was primarily driven by the update that I had mentioned with respect to the redemption rates of the mail-in rebate, which impact both revenues and gross margin. So, that was the primary driver there. Otherwise, we would have been pretty close to flat on the ASPs.

Aaron Husock - Morgan Stanley

Okay.

Andy Brown

Okay. And then on the, I think the question was on the guidance. Like we have said on the guidance I think we are taking prudent measures to take into account all factors in the marketplace. One is clearly that our August quarter is typically the slowest quarter, particularly in Europe, and having lived there for many years I know that. There is lot of vacations taken. And we are also taking a prudent view of the competitive product offerings that are coming into the marketplace, I believe starting tomorrow.

Aaron Husock - Morgan Stanley

But in general you think it will be more units' slowness in Europe and a union impact from competitive offerings rather than some price discounting that you are expecting on your end?

Andy Brown

Yeah. I think that's, yeah, exactly. It's less pricing and more so the other two items that I had mentioned.

Aaron Husock - Morgan Stanley

Okay. Okay, great, and then just one more. It looked like international sales are now flat year-over-year. They had been, you had a period of pretty solid growth there and it looks like you're kind of ramping up smartphone penetration outside of the US. What do you think is going on there, what will it take for you to restart the growth in the international business?

Andy Brown

Well, Ed had mentioned earlier, we saw particular strength in APAC and to a great extent also in the rest of the Americas, which would include Canada, Latin America and so forth. With respect to where, didn't quite meet our expectations, was primarily in Europe. And that's an area, where we continue to increase resources to be able to drive revenues there. But it certainly didn’t quite meet our expectations over the past quarter.

Aaron Husock - Morgan Stanley

Okay. Great, thank you.

Operator

Our next question comes from the line of Vivek Arya. Go ahead.

Priscilla

Hello, this is [Priscilla] calling for Vivek Arya. Can you further discuss what are the implications of the weak guidance to the closing deal of Elevation and potential like raising more debt? Should we still anticipate a close as you will see around the third quarter calendar year?

Ed Colligan

I'm sorry. I didn't understand the first part of your question. Could you restate that?

Priscilla

My question is on the weak guidance for 1Q, would that have any implications on closing the deal, like what take longer as you close the deal with Elevation or raising debt in the future?

Ed Colligan

Well, are you talking about our guidance today, there is no re-guidance on Q1. Are you talking about Andy mentioned that after we closed that deal we might come back with them?

Priscilla

No, I am saying the weak guidance.

Ed Colligan

Weak, okay.

Priscilla

Sorry.

Ed Colligan

Okay. No, we don't expect our guidance today to have any effect on the closure of that relationship.

Priscilla

So, we should still expect to see close some time in 3Q this year?

Ed Colligan

Yes, third calendar quarter. That is correct.

Priscilla

Okay. Can you also discuss the potential impact of the Foleo on the gross margin once its launch?

Ed Colligan

The Foleo on gross margin, really if anything it will be minor up or down. It's certainly in the same line relative to margin of our other products.

Priscilla

Okay. Thanks.

Ed Colligan

Thank you.

Operator

(Operator Instructions). And our next question comes from the line of [Russ Udowski] with Lehman Brothers. Go ahead.

Russ Udowski - Lehman Brothers

Thank you guys for taking the question. Ed, I wanted to ask you a quick question about some of this reorganization within your product lines, particularly around the increased leverage of the ODM partners. How should we think about sort of the product development cycle with that shift and strategy and the potential impact on sort of your margin structure?

Ed Colligan

Well, I mean it's a new development and it's something we need to think about carefully relative to the margins. We believe that we can run that element of our business even more efficiently. We're marking direct R&D investments in that, because the ODM partners have gained a lot of expertise in the areas, particularly in the area of Windows Mobile. So, the thinking here is to leverage that more effectively. We can do a lot of design and specification and ideation around products there and bring some of our secret sauce. And leverage a lot of their expertise for the execution and we think that can be a very leveraged model and also allow us to put a wider range of products out more quickly. One other thing that enabled this over the last year was the fact that we have diversified our ODM partner positions and we now work with four different ODMs and the vast majority of our products year ago were shift to us by one. So, it gives us ability to leverage that broad range of road maps that are already being worked on, and a lot of expertise, has been developed in the last couple of years with those partners. And the one thing that we strongly bring to the party is some software differentiation, some design differentiation and certainly our distributing our brand position. And those are the things, we think we can leverage into driving that business faster and higher.

Russ Udowski - Lehman Brothers

Do you think that the number of ODMs that you currently work with is the ideal number or perhaps we should see additional ODMs added to the mix?

Ed Colligan

I think you may see a mix shift from time-to-time, but I think the number we have is probably a reasonable number to work with.

Russ Udowski - Lehman Brothers

Okay. And then lastly, in terms of the Foleo, I know you had touched on a little bit when it comes to the gross margin structure. How should we think about sort of the contribution to revenue? I mean, not that you've given this guidance.

Ed Colligan

This is really a building year for a deal. I think reasonably low expectations right now around it. Our guidance takes that into account. We've got to build this platform, whatever you define and to develop new categories, it take some time to get those things off the ground. So, we are not putting any big expectation against, that we really think it's a long-term play and a great opportunity.

Russ Udowski - Lehman Brothers

And then lastly on the Foleo side. How should we think about in terms investment dollars that have been allocated to the product. Can you give us the sense in terms of perhaps percentage of R&D, is it a major contributor from that perspective?

Ed Colligan

No, we've really tried to make a prudent investment in it. It is a new category for us and its one of the things where you constantly got to be investing in what you hope is the next big thing, if you are always doing incremental investments against the existing line, you never do break out things, so it's something that we try to do is game changing products, we think this will be one of them overtime.

Andy Brown

Just for clarity sake we have been investing in Foleo for the past three years, so this isn't something, just the investment here is relatively short.

Russ Udowski - Lehman Brothers

Okay. Well thank you very much, guys.

Ed Colligan

Thank you.

Andy Brown

I think we will take one more call.

Operator

Our final question comes from the line of James Faucette with Pacific Crest. Go ahead.

James Faucette - Pacific Crest

Thank you. Thanks for taking my call. Most of my Palm Foleo questions have been answered. But I just had a couple of questions related to the restructuring process. In terms of, can you give a little more granularity in terms of expected timing and what has to happen between now and the shareholder vote as it relates to the recapitalization?

Ed Colligan

Okay the recapitalization, yes we need to file a proxy as I think we have mentioned on June 4 when we made the announcement and depending upon the review by the SEC, it could be as little as a couple of weeks or that could be more extensive review if there is a shorter time period, we would anticipate that there would be a shareholders vote sometime towards the end of August, otherwise its probably going to be sometime in September.

James Faucette - Pacific Crest

Okay and assuming approval, post that what is the lag between the approval and actually executing the transactions?

Ed Colligan

In the neighborhood of a couple of days.

James Faucette - Pacific Crest

Okay. And then finally, back on June 4th when you talked about where you expect your balance sheet this end, part of that was based on the sale of some property for roughly $60 million if I remember correctly. Can you just give us an update if that has closed or is marching towards closure as expected?

Ed Colligan

Actually that property closed on last Wednesday June 20th and a net gain of approximately $64 million.

James Faucette - Pacific Crest

Okay, great. Thank you very much gentlemen.

Ed Colligan.

Okay, thank you.

Andy Brown.

Thank you.

Ed Colligan

Thanks for joining us today on the call. We'd look forward to speaking with you in next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That does conclude the presentation. You may now disconnect. Have a good day.

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Source: Palm F4Q07 (Qtr End 6/1/07) Earnings Call Transcript
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