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Palm, Inc. (PALM)

F1Q08 Earnings Call

October 1, 2007 4:30 pm ET

Executives

John Schaumburg – IR

Edward Colligan - President & CEO

Andrew Brown - CFO

Analysts

Tim Long - Banc of America Securities

Tavis McCourt - Morgan Keegan

Analyst for Michael Walkley - Piper Jaffray

Mike Abramsky - RBC Capital Markets

Larry Harris - Oppenheimer

Maynard Um - UBS

James Faucette - Pacific Crest Securities

Jim Suva - Citigroup

Jeffrey Kvaal - Lehman Brothers

Benjamin Bollin - Cleveland Research Company

Michael Ounjian - Credit Suisse

Jonathan Goldberg - Deutsche Bank

Vivek Arya - Merrill Lynch

Andrew Neff - Bear Stearns

Paul Coster – JP Morgan

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Palm's first quarter 2008 financial results conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. John Schaumburg. Please proceed.

John Schaumburg

Thank you. Good afternoon, everyone. I would like to welcome you to Palm's fiscal year 2008 first quarter 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, a 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 annual report on Form 10-K for the fiscal year ended June 1, 2007 and its definitive proxy statement filed on August 10, 2007. 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.

Now I would like to turn the call over to Ed Colligan.

Edward Colligan

Thank you, John. Good afternoon, everyone. Thank you for joining us today. I will provide you with a brief update on Palm's quarterly performance, the progress towards finalizing our transaction with Elevation Partners, and our efforts to transform Palm into a higher growth and more profitable company.

In Q1 fiscal 2008, Palm had revenues of $361 million, at the mid-range of our guidance, and earnings per share of $0.09, slightly above our expectations. Our gross margin at 36.3% remains strong and Smartphone sell-through of 689,000 units was up 21% year-over-year.

Last week we launched our Palm Centro product, which was received very positively by our customers. The Palm Centro, a product with a significantly streamlined form factor, is focused on expanding our market to end users who may have previously considered only a 12-key feature phone but now have the option to get a full-featured Smartphone within their price range. With fun colors, enhanced web and media applications, and support for a 3G broadband network all for $99, we think Centro will be the choice of Sprint customers this holiday season for this target market.

Also in September we delivered the Palm Treo 500v to our European customers in combination with our partners Microsoft and Vodafone. The 500v has 3G performance, easy web and email solutions, and a unique user interface deployed in partnership with Vodafone and only available today on Microsoft-based Smartphones from Palm. It also comes with a very low data tariff of 7.5 pounds for virtually unlimited data access. The Treo 500v will appeal to consumers looking to get email and do messaging and small and medium businesses looking for a compelling Microsoft-based email solution.

Both of our new products significantly expand our market reach and strongly enhance our ability to compete. We now have one of the most robust product lines in the Smartphone market: the Treo 750 and the Treo 700wx which provide 3G performance and enterprise class email for our top end business customers; the Treo 755p, for email focused small and medium businesses; the Treo 700wx for the same customer that also desire a Windows Mobile experience; the Treo 680 and the Treo 500v for prosumers; and now the Palm Centro, which should bring a whole new set of traditional cell phone customers to the Palm brand. Our products support all major radio technologies, two of the leading open software platforms, and now serve 98 carriers worldwide.

Going forward, we are focused on two major development areas and go-to-market initiatives and we have structured our teams and our efforts to pursue each opportunity most effectively. First, we intend to deliver the best, most highly integrated solutions for our traditional prosumer and small and medium business customers to help them more effectively manage their business and personal lives. We will continue to concentrate our development efforts on bringing Palm solutions to these customers.

Our Palm systems team has just delivered the Palm Centro, the highest quality Palm Smartphone solution we have ever produced. This team is now totally focused on delivering our next generation platform, which we expect to be available by the end of the next calendar year.

Part of that focus is making sure we do not lose the incredible ease of use and developer support we have had for more than a decade with the Palm OS. Our customers are our most important asset and we want to be sure their transition to our next generation system, which will extend Palm's rich heritage of innovation, is seamless.

Our second major focus is the business-to-business email market in close partnership with Microsoft. We believe the days where a CIO feels the need to install a third party server to deliver secure and reliable email are quickly coming to an end. Today if your organization has installed Exchange 2003 with Service Pak II or Exchange 2007 you can receive secure, behind the fire wall email without third party server software directly to any Palm device, either Palm OS or Windows Mobile-based, right out of the box. We will continue to partner with Microsoft to improve these solutions and to market and sell the ease of setup and lower total cost of ownership.

In partnership with our expanded ODM relationships, we can deliver compelling, high-value solutions like the Treo 500v and we will do this at a more rapid clip, leveraging the Palm brand, design skills, and software differentiation to stand out in the Windows Mobile world.

Our enterprise customers appreciate our deep understanding of Smartphones and email solutions, our seasoned enterprise sales team, and our broad enterprise-grade service and support solutions. We believe Palm can build a unique and lasting position in this market space.

Last, let me update you on our efforts to recapitalize and transform our company. We've received fantastic support from our shareholders for our plans with close to 100% of those voting, voting yes, so thank you for that. We now expect to close the transaction before the end of October. We are looking forward to closing the transaction, but be assured we have already moved into full gear enhancing our team, strengthening our ability to grow, and are totally focused on delivering great, long-term shareholder value.

I want to thank you for your support as we work through our transformation. I am more confident than ever that we are on the right track and that shareholders, employees, and loyal customers of Palm will be greatly rewarded.

I'll now turn it over to Andy for his comments.

Andrew 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 included with the press release.

For Q1 of fiscal 2008, revenue was $360.8 million, a 1% increase from Q1 of 2007. During the quarter we saw Smartphone revenue increase 12% from the prior year, which was offset by continued declines of 33% in the handheld business. Gross margin for the quarter decreased to 36.3% compared with 37.1% in the year-ago period and 38.3% sequentially.

During the quarter, we implemented additional mail-in rebates for older products and hit lower volume-based pricing tiers on recently introduced product that resulted in gross margin being slightly less than we had originally anticipated.

Operating expenses for the quarter were $122.1 million, lower than we had expected, the result of continued expense management and higher than originally anticipated savings from the restructuring action taken early in the quarter. This resulted in operating income of 2.4% of revenue and earnings per diluted share of $0.09.

For this period and future periods, we will be reporting adjusted EBITDA information as this is important to our future debt holders. For Q1 the adjusted EBITDA was $16.7 million. Please refer to the press release or our website for the components of this financial measure.

Revenue mix for the quarter was 84% Smartphones and 16% handhelds. Smartphone revenue for the first quarter was $302.2 million on shipments of 690,000 units. ASPs for Smartphones declined during the quarter to 431 per unit due to higher mix of newer products that command lower prices and additional mail-in rebates for older models. Smartphone sell-through increased 21% year-over-year to 689,000 units. Smartphone inventories held by our channel partners remained essentially flat from the prior quarter.

Handheld revenue for the quarter was $58.6 million, reflecting sales of 318,000 units. Handheld sell-through for the quarter was 325,000 units, a 34% decline year over year and inventory held by our channel partners was 6.7 weeks at the end of the first quarter.

In Q1 fiscal 2008, we generated 79% of our revenues from the U.S. and 21% internationally. The higher proportion of U.S. revenue was driven by the impact of newly introduced products in the U.S. and seasonal declines in the international markets.

Looking at our balance sheet, our cash and short-term investment balance increased $80.4 million from the prior quarter to $627.1 million. Cash flow from operations was $18 million and we netted $64.4 million from the sale of our land early in the quarter. Accounts receivable decreased sequentially by $25.3 million to $179 million and DSOs were 45 days, in our expected range. Inventories decreased sequentially by $5 million to $34.2 million and turns decreased slightly to 25 times, also in our expected range.

Looking to Q2 fiscal 2008, the guidance I will be providing assumes no changes for the recapitalization that we currently expect to close before the end of October. Once this happens, we will update guidance to reflect the capital structure changes.

We currently expect revenue to be between $370 million and $380 million. With the introduction of the Palm Treo 500v with Vodafone and the Palm Centro with Sprint, we expect Smartphone sell-through to grow at a slightly faster pace on a year-over-year basis than we saw in the first quarter.

We also expect to see a sequential decline in Smartphone ASPs of at least 10%, as these products were designed with new, lower price points in mind. We expect handheld sell-through to decline at a rate similar to what we experienced in Q1 on a year-over-year basis.

We anticipate gross margin for Q2 to be in the range of 33.5% to 34% and expect to be in this range for the remainder of 2008. This reduced level of gross margin is primarily the result of new products being introduced at aggressive price points to expand our reach into the market.

Operating expenses are expected to be in the range of $120 million to $123 million, slightly lower than Q1 as we realize the savings from the recent changes we have made, particularly in the product development area.

We anticipate adjusted EBITDA in Q2 to be between $13 million and $16 million and the annual tax rate is expected to be 40%, resulting in earnings per diluted share of $0.06 to $0.08.

On a GAAP basis, we expect a charge to earnings of between $8 million and $10 million related to the organizational changes we announced in Q1 that are being implemented in Q2 and costs associated with the postponement of the Foleo product.

I will now turn the call over to the operator for your questions. Question-and-Answer Session

Operator

Your first question come will come from Tim Long - Banc of America Securities.

Tim Long - Banc of America Securities

Just a few questions on the gross margin line, if I could. You talked about the 33.5%, 34% level being good through the end of the year. Could you just talk to us a little bit about how we should think about the business going forward? Do you see this as more of a run rate that the company is going to be at as the handset or device market has changed, or is this just this product cycle? What could be done to get the gross margin profile back to the level that you enjoyed at the end of last fiscal year? Thank you.

Andrew Brown

A couple of things. First thing is we've always said that our target gross margin range has kind of been the mid-30s, 33% to 36%. We have enjoyed slightly better than that for three or four quarters now. That was a combination of things, whether it being last quarter we had some adjustments to our mail-in rebates that had an impact on that. Secondarily, if you recall, one of the impacts that we've had over the past 12 months is when we did the access deal we had a nice uptick in gross margins, but those weren't planned, right? Our general plan is to be at around 33% to 36%. We think that's a reasonable rate that you guys should be planning at and we think that certainly through the end of this fiscal year, which ends in May, that is going to be in that 33.5% to 34% range.

Tim Long - Banc of America Securities

Generally, new products come out and they're towards the higher end of the target ranges and then work down. Should we look at this as basically entering a new market where despite it being a new product that may be differentiated, has to come towards the lower end of that band anyway? Is there something special in this product?

Edward Colligan

Obviously one of the things we are doing right now is trying to drive for more customer acquisitions and more growth. We expect to have higher sell-through with regard to our new products coming out, which will bring more customers to the Palm brand and we are going to have a product line with a range of margins within that line and as Andy said, we expect that to result to the mid-30s relative to the ultimate outcome of that.

So I don't think this is a big change. Obviously, we want to drive for higher gross margins over time, but it's what we've been expecting, margins in this range, and we've enjoyed a little higher margins in a couple of quarters. We will continue to drive for higher margins, as we can, but we think this is the right range to be planning at.

Operator

Your next question comes from Tavis McCourt - Morgan Keegan.

Tavis McCourt - Morgan Keegan

First, in terms of your guidance for next quarter, is there anything explicitly you guys are counting on or looking for in terms of channel inventory, specifically on the Smartphone side? Or should we expect it to be relatively stable, or is that how you assumed your guidance?

Secondly, when talking about the wireless email market, specifically for enterprise, you kind of really focused on Microsoft this time, historically, you guys have been a pretty big partner of [Good], which is now Motorola. Is it you're just seeing Microsoft putting more marketing dollars towards this solution now, is that the reason for that focus?

Andrew Brown

On the inventory question, Tavis, we would expect a slight increase in our channel inventories. First thing is because it's supporting higher sell-through, right? The second thing is we're actually got two new products that are being introduced, so you'll always get some level of that. I wouldn't consider it a large bump, but there'll be a slight increase in channel inventories to support both of those actions.

Edward Colligan

I expect us to continue to partner with Good. There's a whole range of solutions, I don't try to mention everybody in every earnings call, but the reality is I do see at least for broad-based email deployment that the Microsoft solution is going to continue to gain momentum. We're seeing that among our enterprise partners that we have and so our team is focused on taking advantage of that. We really do believe our relationship with Microsoft at this stage, especially from a go-to-market standpoint, is in a great position and we expect to be able to leverage that quite effectively.

Tavis McCourt - Morgan Keegan

In terms of new product introduction, you mentioned being able to launch some new products a little more aggressively on the Windows Mobile platform now that you're ODMing the hardware on that product. Can you quantify that at all? Are we going to see things in the U.S., not just in Europe, or was this kind of a one-off situation?

Edward Colligan

You'll see things in the U.S. and in Europe. We have a very robust road map on our Windows Mobile side and you'll see a number of products come out next year and we're excited about those. We did our launch in Europe recently in partnership with Vodafone, but we have a number of other offerings coming down the pipeline which we're excited about. Operator

Your next question will come from the line of Mike Walkley - Piper Jaffray.

Analyst for Michael Walkley - Piper Jaffray

Could you give us an explanation of the exclusive with Sprint? Why Sprint? Also, how long that exclusive might last?

Edward Colligan

Yes, the exclusive with Sprint is for 90 days, and I'm not going to comment exactly on how much it will last beyond that, but that's the exclusive timeframe. Why Sprint? They've been a great partner of ours for a lot of years and they were very excited about the Centro design center and so we partnered with them initially. It's not exclusive over the long term. You can expect to see that form factor on a broader set of carriers, but that was our first launch partner.

Operator

Your next question will come from the line of Mike Abramsky - RBC Capital Markets.

Mike Abramsky - RBC Capital Markets

I just would like to understand a little bit more about what assumptions are embedded in your guidance. It looks like you're expecting shipments up around 10%, but ASPs as you said, I think down 10% as well. Is that based on your assumption on what the market elasticity will be to the $99 price point? Is that based on firm orders that you have or your estimates as to what you think the increased shipments are going to come from the new products like Centro?

Andrew Brown

Well, Mike, it's really a couple of things. One, is obviously, we've got firm orders at this point because we've already shipped one month of the quarter. So part of it's that and part of it is estimates that we're expecting between now and the end of the quarter.

I think the important thing is that when you look at Centro we think it's hitting a different demographic. As I'd mentioned in my prepared remarks, we're expecting sell-through to increase on a year-over-year basis, more rapidly than we saw in Q1 and we think a big part of that is Centro being launched and attracting new customers.

Mike Abramsky - RBC Capital Markets

The Treo 680 I think is $149 out there and the 700w and 755p are $199. So I'm just trying to understand your thought processes on the Centro at $99 offering with what appears to be stronger demand given those products are priced higher, but not that much higher.

Edward Colligan

Mike, we've seen pretty significant shifts in total sell-through based on those major pricing tiers. We've taken our other products down to $99 from time to time on a promotional basis. This is the first one we've ever launched at this price point, which in general when you go out the door, we get more demand day one and especially if those prices are set into consumer's minds, you get more demand over time at that price point.

So you know certainly as well as I do, if you look at the pricing tiers in the market, there's a significantly different volumes when you do hit those different windows and we're expecting this, having launched it at that price. And with a new design center in the sense of a much more streamlined form factor that will appeal to that customer a little more, that we'll see some more significant volumes.

Mike Abramsky - RBC Capital Markets

Ed, could you talk a little bit about what assumptions you might be making on Centro cannibalizing Treo that is embedded in your guidance or not?

Edward Colligan

Sure. We have estimated what we believe will happen relative to Centro and the 755p for instance or the 700p. That's all part of our guidance. Again, we're going to really try to target a different customer set, different audience to try to expand our reach. There are definitely customers who still would prefer the larger keyboard, larger battery, more robust expansion capabilities and the bigger screen. So we think all those things will come into play as people consider their purchases.

Mike Abramsky - RBC Capital Markets

Have you seen any pause in the 680, 700w or 755p orders in advance of Centro?

Edward Colligan

Not that we didn't plan.

Mike Abramsky - RBC Capital Markets

Not that you haven't planned.

Edward Colligan

Certainly, we were working with our carrier partners up to this point, but, no, I think we'll continue to see demand for both products.

Operator

Your next question comes from the line of Larry Harris - Oppenheimer.

Larry Harris - Oppenheimer

Thank you and good afternoon. Have you seen any impact in terms of the price reduction on the iPhone relative to the Treo sales say over the last few weeks or so?

Edward Colligan

We have not. It's hard to estimate whether or not there would have been more upside in our volume without the iPhone, but I can tell you that through the weeks that that was coming out and shipping initially and lately, that we have seen very little change in our sell-through volumes and in fact even at AT&T very little change. So I'm sure it's had some impact, but not anything that is significant.

Larry Harris - Oppenheimer

I understand. When you're talking about the new platform before the end of the next calendar year, is that incorporating the Linux software?

Edward Colligan

Yes, that would be. That's what I'm referencing there.

Operator

Your next question comes from the line of Maynard Um - UBS.

Maynard Um - UBS

I just wanted to follow up on a previous question. It seems like based upon your at least down 10% on ASPs, you would think that at $99 you would be selling a much greater volume. Can you talk about that more specifically?

Andrew Brown

Yes, obviously the new Centro product is untested in the marketplace and we've taken what I will consider a prudent approach with respect to our forecast and guidance. Sure, if the product really takes off and it really lights on fire, then it would be a different story, but from a forecasting and guidance standpoint, we thought this was more prudent.

Maynard Um - UBS

In terms of rebating, what are your current rebate take rates? Because it does seem like you'll be doing some aggressive rebating throughout the rest of this fiscal year based on your gross margin guidance. What's the level of take rates and do you anticipate any changes there?

Andrew Brown

Maynard, if you've got about 45 minutes, I can go through that with you, but it will take you that long. In all seriousness, it all depends upon the product, the mail-in rebate, the amount, the channel it's going through.

However having said that, in general since we started doing more mail-in rebates more pervasively, I would say that in general we're seeing slightly lower take rates than we'd originally anticipated, but it's not just a one-number question, it's more complicated than that, but generally the take rates have been a little bit lower than we originally anticipated.

Maynard Um - UBS

On the cost side, obviously you guys have done a good job. In terms of on a go-forward basis, if you look at other things, kind of like your retail stores, do you still think that's core to your strategy, or do you anticipate additional cost cuts related to the retail stores and those types of things? Thanks.

Edward Colligan

Certainly, we review every one of our programs on a consistent basis, we want to be as profitable as possible. We also don't want to undermine our brand position as we continue to transform the company, but nothing's off the table. We'll continue to look to make sure we're spending our money wisely is all I can say to that.

Operator

Your next question comes from the line of James Faucette - Pacific Crest.

James Faucette - Pacific Crest Securities

First in terms of developing the new Linux-based OS, can you just give an update on how that's proceeding versus your targets and expectations? Basically, are you hitting your milestones on time, or is the development proving to be a little bigger and more ambitious than maybe you thought originally?

Secondly on OpEx, I know you talked about operating expenses outlook for the November quarter, but how should we think about those developing through the rest of the fiscal year? Thank you very much.

Edward Colligan

I would say that the operating system, the platform development effort has gone as well as could possibly be expected and we're excited about how that's been coming along and feel like it is on schedule. Everyone always would like to do things faster, of course, like to have it yesterday, but it's certainly within our expectations of what we expected and part of the reason why we've even focused more energy on it is because we are more excited about it than ever before, and that's when you start really seeing it working in devices and so forth.

So it's coming along. I would say we're pleased with that development and I think that timeframe is a reasonable one to put out there to say that we'll have products in the market by then.

Andrew Brown

On the OpEx side of things, we had commented last quarter, I believe, that we anticipated, for example, that R&D was going to basically be flat throughout the year and we continue to anticipate that. We're also continuing to just monitor all of our operating expenses and really taking a critical look as we want to drive greater profitability. I would just in general anticipate that operating expenses are probably not going to vary a lot during the year. Once again, like I said, we're taking a critical eye to pretty much everything that we're doing right now.

James Faucette - Pacific Crest Securities

So on the OpEx, looking at the sales and marketing side, should we then anticipate that there will be less seasonal fluctuation, or should we still expect a seasonal advertising fluctuation?

Andrew Brown

You have a little bit of seasonality and quite frankly on the sales and marketing line, I think that has more variability with revenues than any other line, right? Certainly more so than the G&A and the R&D line. So that will have some variability with revenues.

Operator

Your next question comes from the line of Jim Suva - Citigroup.

Jim Suva - Citigroup

Can you walk us through a little bit about what really happened on the rebate? What I mean by that is it seems like something changed during the quarter that dramatically impacted the rebate or gross margins, as I believe gross margins were supposed to be 37% to 37.5% and then forward-looking, kind of 34% to 36%. Was the rebating in reaction to the competitive environment? Because definitely everyone knew Centro was coming. I'm just trying to triangulate around the forecast versus what actually happened and now what we're seeing.

Andrew Brown

There's really no magic as to what happened this Q1. We decided that we wanted to hit some more aggressive price points on some of our older products and so we implemented some additional mail-in rebates on those products. That was the primarily impact of being off of our guidance on gross margins. You're correct. What we said last quarter was that we thought our gross margins would get into the 34% to 36% range.

We've decided to be quite frankly, more aggressive on pricing, as you can see. The Centro is coming out of the chute at $99 and part of that is us trying to drive our position in the marketplace. We think that's the right thing to do right now for the company, while still maintaining, like we've said in the past, maintaining what we've targeted as that mid-30% gross margin.

Jim Suva - Citigroup

On Foleo, is Foleo 1 basically completely stopped now? You'd mentioned, I think the word was a little bit of postponement and I know that you're talking about Foleo 2. How much effort and what can we expect from a timeline from those?

Edward Colligan

Well, I think the biggest issue around Foleo was in combination with our excitement around the next generation platform, and as we were going down the process of releasing that product, we recognized that the right thing to do going forward is have one Palm user experience. The Foleo development had been underway for some period of time and it just was at a point where we were going to have to continue to invest more in it and continue to update and so forth as you would any new products and we just decided, you know what, the right thing to do here is have one platform, one Palm user experience, and that platform was starting to really come to fruition. So you could see that in the mirror there.

We said that's what we're going to do and so we took all the resources or a lot of the resources that had been working on Foleo, some of them Linux experts and other application development experts that we really felt like, boy, if we could take these and deploy them on our core future system we could have a higher probability of hitting those dates and assuring that delivery and we can deliver any products in the future, a whole range of form factors on top of that platform, including something that looks a lot like Foleo.

So it was obviously a heart wrenching decision because I love the product, actually, and I miss using it. In fact, I still use it all the time when I travel because it is one of those really great small form factor instant on, instant access devices that you just fall in love with; but it just wasn't totally right and we're going to make it right going forward but the first thing we're going to do is make sure we nail the platform.

Operator

Your next question comes from the line of Jeff Kvaal - Lehman Brothers.

Jeffrey Kvaal - Lehman Brothers

Thanks very much. Andy, I was wondering if I could ask you a bit about the ASP trajectory. Should we expect further declines in the ASP over time as you reorient your product portfolio, or perhaps another way to ask that is what the mix of new versus old products is in the quarter?

Andrew Brown

Well like I said, we anticipate ASPs to drop by at least 10% this next quarter, and part of that is just broadening the product portfolio. So if you think about most of our history we've been really at the high end of the market and what we're doing now is introducing products that are more consumer-oriented, not just from a feature standpoint, but also from a price standpoint.

I would anticipate that as we fill out the product portfolio, I would anticipate that we would continue to see ASPs decline, maybe not as aggressively as this quarter as we've got two pretty major product introductions, but you've also got to remind yourself that we're actually designing these products with cost structures, right, that are built around that as we continue to drive to that mid-30s gross margin.

Edward Colligan

Let me just add in Jeff, to make this clear, we are not ceding the high end or the innovation side of the marketplace to anybody. This is an execution today. We wanted to broaden our portfolio and our position. We think there's an opportunity to drive some volume and to reach more customers here, but the whole point of our next gen platform and the innovation that we're doing there is to really bring out revolutionary products that are going to continue to drive the innovation side of our business too, which I would expect to be at higher price points. So over time what we hope to do is drive down our cost structure, as Andy said, and be able to leverage that, both to do more and more innovative products at premium prices with great gross margins and have a broad line even with lower-priced products that still have really solid gross margins. So that's the intent.

Jeffrey Kvaal - Lehman Brothers

Makes sense, Ed. I was wondering also if you might broaden into the changes that you referenced were underway since the approval of the Elevation deal?

Edward Colligan

Just really gotten some excitement from new employees we're able to go and recruit and hire. So we're augmenting our team and building our team. I think we're aggressively and carefully looking at the road map, and those decisions are being made now. The Foleo decision is made now, we're not waiting for those changes to happen, we're taking a hard look at everything we're doing and making sure we're executing more effectively. That's really what I'm referencing.

Operator

Your next question comes from the line of Benjamin Bollin - Cleveland Research.

Benjamin Bollin - Cleveland Research

If you look at the new product, the new Centro, what's the list price that Sprint will actually pay Palm for that device? It looks like in the press release it's $100 after a $50 instant savings and then another mail-in rebate. I want to know the actual list price that Sprint will pay?

Andrew Brown

We don't get into specific customer pricing, that's confidential. I can't get into that. Sorry, Ben. What was your other question?

Benjamin Bollin - Cleveland Research

Can you talk a little bit about data traction of your products? What percentage of the devices that you do sell do you see a data attachment with? What type of data plan?

Edward Colligan

Extremely high percentage of them. It's in the 90% range, kind of percentage. So almost all of them.

Benjamin Bollin - Cleveland Research

If you look at the carrier partners, you announced you have 98 right now. Where do you anticipate that will trend if you look forward in the next one to two years?

Edward Colligan

We aren't driving really to expand that greatly. What we really are driving on first and foremost is making sure that we effectively serve our current carrier customers--eight of the top ten carriers in the world we have relationships with -- we want to make sure those are great. There's an enormous amount of volume that goes through just those top ten carriers and the 98 is a broad set around the globe. We expect to expand that, but it's not a real core driver to necessarily expand that as opposed to really driving volume and the relationships at the top ten.

Operator

Your next question comes from the line of Michael Ounjian - Credit Suisse.

Michael Ounjian - Credit Suisse

I just wanted to clarify and make sure I understood something from an earlier question. So you mentioned Windows Mobile products, more products expected to launch sometime next year. I just wanted to clarify whether there were plans to launch any new products with carriers other than Sprint here in the U.S. for the holiday season beyond what you already have out there? And then also for the Centro, just get a sense of when we might expect to see that in regions other than the U.S.?

Edward Colligan

I'm not going to get into exact product announcements or timing through the rest of the year. We've just recently announced the two products that we have, the 500v and the Centro. Those are obviously going to be in market and will be in market for the holiday season and you'll just have to wait and see if we announce other new products before the end of the year.

Operator

Your next question comes from the line of Jonathan Goldberg - Deutsche Bank.

Jonathan Goldberg - Deutsche Bank

On the Centro and the new product, the 500, just real quick, first, who is the target demographic for the Centro? You talked a lot about this being a new group. How exactly do you define it?

Edward Colligan

Well, I think in its broadest sense, we believe there has become a greater and greater interest in Smartphones in general among a broad segment of the consuming population, most of which today are spending some amount of money between free and $99 on standard feature phones. We believe there are more and more people who are going to want demand for web and media applications and that if we can hit a form factor and design center at the right price point with the right functionality and package that correctly, we can break into that market more and more. So the intent here is not necessarily to go after the 5% of the market that is Smartphones today, but the 95% of it that are other folks .

Now within that segment, I would say that our core target or the number one target is 25 to 34-year-olds. A lot of first-time job people from the standpoint of positioning from a lifestyle standpoint, that's the position we will go after and that's where our marketing spend will happen. But I expect a broad set of the population who is just interested now in Smartphones to take a look at Centro as one of the solid options at the right price

Jonathan Goldberg - Deutsche Bank

You mentioned that sales of international had slipped to 21%, I think?

Edward Colligan

Yes.

Jonathan Goldberg - Deutsche Bank

You cited the launch of the Centro as part of the reason for that, but you've also launched a new product in Europe as well, the 500v. Why wasn't there an offsetting bump or channel stocking taking place in Europe to keep them at least at parity, because it was down quarter on quarter?

Andrew Brown

Jonathan, actually we're talking apples and oranges here because actually the quarter ended in August and we weren't actually shipping the Centro or Treo 500v. What I was really referencing to when I spoke about that was really the Treo 755 that was shipping in the August quarter, and we typical have a downtick internationally in that August quarter. To put it in perspective, while international is 21% of our revenues in the last quarter it was only 17% the prior year. So it's pretty normal for us to have at least a seasonal upswing in the U.S. or a seasonal down swing in the international market.

Jonathan Goldberg - Deutsche Bank

Just real quickly on the 500v, you're shipping that to all Vodafone countries or into specific geographies?

Edward Colligan

It's in five countries initially and then we'll roll to the rest of the Vodafone properties as quickly as we can.

Operator

Your next question comes from the line of Vivek Arya - Merrill Lynch.

Vivek Arya - Merrill Lynch

Andy, you mentioned that Treo shipments were 690,000 and ASP was 431. I get to $297 million from that so I want to make sure my math is right.

My real question is on this ASP progression, you're guiding to ASP being down 10% sequentially, and when I just hear this commentary on ASP, I'm reminded of what Motorola went through when they discounted the Razr heavily or the Razr platform to maintain their market share.

Ed, my question to you is how do you think of your ASPs going down in the context of the timing of launch of new products and also where your competition, like RIMM? How do you think of ASPs over the longer term for Palm?

Andrew Brown

The first question, Vivek, is very simple. When I said 431, that's the device ASP, does not include any accessories or services revenue that's included in the total Smartphone revenue. So it's strictly the device revenue. That's why your calculation is different.

Vivek Arya - Merrill Lynch

The 10% down is compared to 431.

Andrew Brown

Yes. The reason is that's how we actually reported in our SEC documents. It would be at least -- in fact, let me reiterate. I said at least 10% down from the 431, that is correct.

Edward Colligan

Vivek, on the broader question, I think the way we're looking at ASPs is having products in different segments and ranges over time and we're anticipating new products coming out in some other segments of the market going forward. So this $99 product that we just put out, obviously we don't sell it for $99, so that's the first thing; but just relative to market pricing, that $99 product is saying, okay, here's the position we want to take at this segment of the market and we will have new products with different features and functionality, you can imagine more capable, that we'll be selling at higher price points going forward so that we end up with a mix of products across a broad set of segments in the market going forward.

One of the things we're really trying to do is drive down the fundamental platform costs of our product so that we can bring out different products at different price points and some of them will be significantly more profitable than others.

Vivek Arya - Merrill Lynch

Ed, again this progression of ASP, let's take next year. Do you expect ASPs to be closer to say, 340, 350 or closer to this 380, 390 that you're guiding to for the next quarter?

Edward Colligan

Well, we're not going to comment on that right now. We gave the guidance for the first quarter and that's what we're going to do today. As I said, I think we're going to roll out products. They're not going to all be rolled out at $99 going forward.

Vivek Arya - Merrill Lynch

Handheld sales were actually up surprising 6% to 7% sequentially and I think your normal seasonality is for sales to be down in the August quarter. So I'm just curious why handheld sales were up sequentially in this quarter and what do you see the impact on those as the Centro product takes off? Thank you.

Edward Colligan

Well, we might just be seeing that inevitable hopefully soft landing we had talked about, but the reality is I think we're doing a good job on positioning those products in the marketplace and we continue to have very competitive products and continue to be the number one provider of those. There's been less and less competition out there in the marketplace in that category and so the products did okay. That's good, those are good things. We're planning going forward to continue to see the declines. That is part of the guidance here is anticipated declines to continue at the rate they have in the past. We're not going to take one quarter and say, okay, that's a big seachange here. We're going to continue to plan prudently.

Edward Colligan

Okay.

Operator

Your next question comes from the line of Andrew Neff - Bear Stearns.

Andrew Neff - Bear Stearns

I wonder if you can give any initial comments on what the impact of Jon Rubinstein is going to be on the board or on that group. Any chance you can give any sense about what changes are going to be made or anything like that?

Edward Colligan

Jon is, I think, from my experience so far and certainly the experience of Fred Anderson, who worked with him very closely for a lot of years over at Apple, just a premiere development executive and someone that I'm very excited to partner with here at Palm. Jon will be the Executive Chairman. His role will be Chairman of the Board, but also have an operating role here to drive our product development and our product engine.

I expect to work with him very closely on setting the road map and driving developments of our products out the door. I've already been working with Jon on a consulting basis for a few months now and the relationship is going great and I really expect him to have a very positive impact on Palm's development capabilities.

I don't think there are any specific comments on other changes. We've announced the changes to the board that we're making relative to the transaction. We will continue to strengthen our team, as I said, but nothing to announce today around that.

John Schaumburg

We'll take one more question, please.

Operator

Your final question will come from the line of Paul Coster – JP Morgan.

Paul Coster - JP Morgan

Can I just make sure that the next generation platform comes out at the end of next calendar year, but it's not going to hold up product introductions in the first half of next year, is it?

Edward Colligan

Absolutely not. We are continuing to deliver products throughout the year and I'm just trying to give a timeframe so that people have a reasonable set of expectations as to when that be available.

Paul Coster - JP Morgan

Should we expect the R&D line to stay flat, therefore, through the first half of fiscal year '09?

Andrew Brown

Well, that's a little far out there, we haven't even done our planning for fiscal year '09, Paul. I would say through the end of fiscal year '08, yes. Like I'd said earlier, you'll see that reasonably flat. Through '09 is just a little bit earlier to tell.

Paul Coster - JP Morgan

You've already said that you're going through the end of calendar year '08, which is middle of fiscal year '09.

Andrew Brown

I'm sorry, then I spoke incorrectly. Thank you for allowing me to correct myself. I meant through the end of fiscal year '08. Thank you.

Paul Coster - JP Morgan

Fiscal year '08 flat, but not into the first half of fiscal year '09; i.e., coinciding with the calendar year '09 investment in the OS?

Andrew Brown

No, we have not made any comments around that, but I do thank you for allowing me to correct myself.

Paul Coster - JP Morgan

Ed, you mentioned that you see the end of the third party solutions for the enterprise email market. Can you just tell us what you're seeing that sort of goes behind that statement? Thank you.

Edward Colligan

Well, I guess I said that I believe there's going to be a big change there and there will certainly be room at some level for third party solutions. I just think more and more CIOs will recognize that they can get a very robust email solution direct from Microsoft Exchange-based technologies and that we are aligning with that relative to our road map and our partnership, our go-to-market strategies around that. Again, we have consistently supported a broad range of email solutions over the years and we want to do that. I'm just saying I'm seeing some element of change here that lead me to believe that if we really partner closely with Microsoft, we can have some significant success there in driving our business higher into that segment of the market in partnership with them from a go-to-market standpoint, and that's what we're going to do.

Will some companies still want RIMM and will some companies still want Good? Of course they will. Those guys are providing some value to the marketplace, but I think as more and more companies look again at deploying their next generation email system or upgrading to a broader set of users, I think the Microsoft solutions will come to play.

That is really not a seachange in anything, really, because I've said that before. I am starting to see more and more momentum around that. We have a strategic accounts group, I consistently meet with large accounts that come into our company and I'm seeing more and more of them talk to us about their deployments of those technologies in lieu of other things. I think that's a positive opportunity for us and we should just go after it.

All right. Well, thank you very much for your attention today. We appreciate it and I will look forward to talking to you again in the near future. Bye.

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