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Executives

John Shanburg - Investor Relations

Edward T. Colligan - President, Chief Executive Officer, Director

Andrew J. Brown - Chief Financial Officer, Senior Vice President

Analysts

Vivek Arya - Merrill Lynch

James Faucette - Pacific Crest Securities

Tavis McCourt - Morgan Keegan

Paul Coster - J.P. Morgan

Jeff Kvaal - Lehman Brothers

Maynard Um - UBS

Jim Suva - Citigroup

Larry Harris - C.L. King & Associates

Jonathan Goldberg - Deutsche Bank

Palm, Inc. (PALM) F3Q08 Earnings Call March 20, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the Palm Inc. quarter three fiscal year 2008 earnings conference call. My name is Michelle and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. John [Shanburg]. Please proceed.

John Shanburg

Thank you. Good afternoon, everyone. I would like to welcome you to Palm's fiscal year 2008 third 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 guidance on future 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 November 30, 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.

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

Edward T. Colligan

Thank you, John and good afternoon, everyone. Today I will discuss the state of Palm as we power through our transformation of the company. We’ve come through a tough quarter and continue to have a lot of work ahead of us but I am more confident than ever that we are on the right track to build long-term value.

This quarter we report record sell-through of 833,000 smartphones. A huge chunk of that sell-through is the result of the Palm Centro getting off to the best start of any smartphone in Palm's history. We could not be more pleased by the reception of the Palm Centro.

We have consistently sold more than 30,000 Centros per week and as we add carrier partners, that number continues to grow. In fact, the usual pattern with a new product is an initial burst of volume at any individual carrier which fades over time as the product ages. With the Centro, we are seeing the opposite, with volume growing over time. This volume is building our already strong customer base and it is expanding it to new demographics.

Centro’s success last quarter did not offset the continued declines in our traditional handheld business and the fact that our Windows Mobile product line is aging. The combination of these factors and a mix shift toward lower margin Centros resulted in revenue of $312 million and a loss of $0.16 a share. As we continue to increase Centro volume and rebuild our product line at the high end, we expect to see a shift back to higher margins and a return to sustained profitability.

The Centro has played a critical role in moving our transformational efforts along at a fast pace. This little product delivers all the power of an incredibly well-integrated and easy-to-use smartphone in a very compelling package, all at a breakthrough sub-$100 price point.

It comes preconfigured with e-mail, calendar, and contacts, real web access from anywhere on a high speed network, and an unmatched messaging environment made possible by a physical keyboard experience.

This combination of capabilities, positioning, design, and price have resulted in a winner in the marketplace.

Centro is also attracting non-traditional customers to smartphones. More than 70% of Centro buyers are traditional cell phone users who are buying a smartphone for the first time. In addition, compared with Treo buyers, twice as many women and twice as many customers under 35 are buying Centro. And our carrier partners love the fact that these new customers are signing up and using data at unprecedented rates. In fact, 95% of Centro customers are signing up for data plans and there is a 13% increase in text messaging usage relative to their previous cell phone.

Centro is also driving the highest net promoter scores we have ever had for any smartphone, showing that our improvements in quality and the out-of-box experience are working.

When we completed our recapitalization transaction, we recognized that the cell phone industry transition from feature phones to smartphones was beginning to accelerate and that Palm's success depended on product innovation. We knew that we could not transform the company overnight but we also knew the business opportunity justified the effort. The mobile device market is getting more compelling all the time and will deliver tremendous growth for another decade or more.

Today we are almost five months into this transformation and I am happy to report that I believe we are ahead of schedule. We have three major thrusts to drive our transformation -- people, products, and platforms. Let me touch on our progress in each of these areas.

On the people front, the first and most important development is the outstanding working relationship that John Rubinstein and I have built. John is making an amazing impact on the quality and time to market of our products and I know his work on the road map will result in the delivery of a compelling product line in the future.

In addition, John has been instrumental in attracting people like our new SVP of Product Development, Mike Bell. Mike has a stellar track record of product delivery and between John and Mike, we are rapidly building and strengthening a world-class product development team.

On the product front, in addition to our great success with the Centro at Sprint, we recently shipped the product to AT&T and early sales out data with AT&T is promising. Over the next few months, we intend to expand our carrier relationships further and to deliver the Centro globally, which should continue to build market momentum for Centro as we enter the back to school and the holiday timeframes.

We are also increasing our Windows Mobile efforts targeted at the enterprise. We expect to refresh our Windows Mobile product line before the end of the summer, with exciting new products which will be targeted at business customers. And as Microsoft delivers its latest Exchange-based device management solutions, you will see the combination of our efforts reach a new pitch.

We strongly believe that we will have the best all around offering for any enterprise customer, based on the most efficient and cost-effective industry-standard architecture and delivered on top of a keyboard based device designed to deliver a great experience to the most demanding enterprise customer.

Lastly on the platform front, we expect to renew our design innovation leadership position with our new system software. We believe that the enhanced functionality of this new platform and its accessibility to the developer community combined with the exciting products designed for it will usher in a new era for Palm. This platform development effort is proceeding well, meeting its major milestones and we are very excited about the ultimate outcome.

All this progress is great but it will not deliver revenue growth and profits just yet. While we expect Centro to drive volume increases in Q4, we do not anticipate Centro growth will be enough to offset revenue declines in older Windows Mobile products. We will refresh our enterprise product line early next year, which -- next fiscal year, which should be a turning point as we drive into fiscal year ’09 a much strong Palm, much better positioned to compete and to increase market share and on a strong trajectory to profitability.

In summary, our transformational efforts are working. The exact reason we initiated the recapitalization transaction was to enable us to retool our team and increase our ability and capability to deliver world-class high quality product solutions. We have made great progress towards our goals and I expect you will see our efforts deliver positive results over the years to come.

I’ll now turn it over to Andy to provide you with more financial detail. Andy.

Andrew J. 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 Q3 fiscal 2008, revenue came in at $312.1 million, declining both year over year and sequentially. While we achieved record smartphone unit shipments, the lower revenue performance was mainly attributable to a continued shift in our product mix to lower ASP Centro and slowing sales of our older Windows Mobile Treo products. When we introduce new Treos this summer, we expect to begin the return to a more favorable product mix that will include higher ASP products at higher gross margin.

In addition, in Q3 we continue to see the handheld business decline at 35% year over year.

Gross margin for the quarter was 30%, essentially flat compared to last quarter and down from 37% in the year-ago period. The decrease from the year-ago period is primarily the result of strong demand for Centros, which carry lower gross margins, and the previously mentioned decline of the older Treo products, which typically carry higher gross margins. In addition, warranty cost increase compared to the year-ago period, primarily due to an increased repair cost per unit and increase of smartphone units.

Operating expenses for the quarter were $111 million, lower than we had anticipated earlier in the quarter, as we were able to execute on our cost reduction initiatives quicker than originally thought. This resulted in an operating loss of 5.6% of revenue and a loss per common share of $0.16.

In addition, for Q3 the adjusted EBITDA was negative $9.5 million.

Smartphone revenue for the third quarter was $275.4 million on shipments of 826,000 units. Smartphone ASPs decreased during the quarter to $331 per unit. This was the result of the change in the mix of products previously mentioned.

While we expect ASPs to rebound in the first half of next fiscal year as new Treos are introduced, we do expect to see additional declines in ASPs for Q4 as a result of the continued mix shift towards Centros.

During the quarter, we saw record smartphone sell-through of 833,000 units, a 13% increase year over year and a 21% increase from the prior quarter, driven by robust sell-through of Centros.

Handheld revenue for the quarter was $36.7 million, reflecting sales of $198,000 units. Handheld sell-through for the quarter was 282,000 units, a 38% decline year over year and inventory held by our channel partners was 7.9 weeks at the end of the quarter.

In Q3 fiscal 2008, we generated 82% of our revenues from the U.S. and 18% internationally. The strength in the U.S. is the result of continued Centro momentum and the introduction of the Treo 755 at Verizon.

Looking at the balance sheet, our cash and short-term investments decreased $21 million from the prior quarter to $272 million. Cash flow used by operations was $8.5 million, much of this attributable to the operating loss, offset by decreased accounts receivable and inventories.

Accounts receivable decreased to $158 million and DSOs were 46 days, in our expected range. Inventories decreased to $40.9 million while inventory turns decreased to 19 times.

As we discussed on our Q2 conference call, we reclassified our auction rate securities to non-current assets, which is $74.7 million at the end of Q3. We believe our existing cash and expected future cash flow provides sufficient liquidity, both in the short-term -- in the short- and long-term. However, our auction rate securities are currently illiquid and as a result we are in the process of completing an impairment analysis and expect to record an impairment charge, which we will make available in our quarterly report on Form 10-Q.

I will now turn the call over to the Operator for your questions. Michelle.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Vivek Arya of Merrill Lynch. Please proceed.

Vivek Arya - Merrill Lynch

Thank you. A couple of questions; Ed, just a high level question -- when do you think you will achieve EBITDA break-even? Can it be in Q4 of fiscal this year, Q1, Q2? And what kind of sales level will be needed to achieve that point?

Edward T. Colligan

Vivek, as you know we are not going to give specific guidance. We stated that in the last call, that that’s what we were going to do this time. We’re really trying to stay focused on the long-term right now as we go through this transformation. I mean, I think you can get from my comments in the script that we believe as we come out into fiscal ’09, in the first half of fiscal ’09, we really do believe we will see a turning point in the business but that’s as much color as I can give you right now.

Vivek Arya - Merrill Lynch

I see. The next question is about the new system software or I think what people are referring to as a new operating system that you are working on. What is your level of confidence that you will be able to get that done sometime this year, maybe towards the end of this year? And is that really what is standing between your delivering more breakthrough high margin, high ASP products, or that is just one of the things that’s required?

Edward T. Colligan

I believe -- well, first of all, I think we are on track on that development and I believe we will deliver that product as stated. You know, really platform, hopefully this year and then real products based on it early next year. But the biggest thing that I would want to note from your question is there -- we are not dependent on that to return to higher margins and profitability.

We really believe that that will be an accelerator out of what will be a growing business in the first half of ’09, driven by continued Centro success. We really believe the momentum behind that is just starting to happen. We are really starting to see acceleration at our carrier partners around that product and we haven’t really distributed it to all the places we can and we haven’t distributed it globally all the places we can, so we believe that will continue to drive, momentum will drive from that.

And then in addition to that, we will have new Windows Mobile products that we think will also be successful in the marketplace and will be placed, targeted more at enterprise businesses and at a higher price point and margins for us.

Vivek Arya - Merrill Lynch

And one last question for Andy; Andy, I think in the last quarter you had mentioned that you were expecting to get OpEx down to $110 million in the May quarter and I think in the February quarter, you came close to achieving that benchmark already. Is it possible we see more operational improvement in the May quarter?

Andrew J. Brown

Yeah, I think we will continue to see core expenses, see some improvements in core expenses but one of the things that we are certainly looking at and contemplating is continued, variable marketing dollars to drive the top line, particularly on the Centro. So I think that’s another thing that we are contemplating as we move into Q4 and even into Q1.

Vivek Arya - Merrill Lynch

So can OpEx go down or stay sort of flattish in the May quarter?

Andrew J. Brown

I think you will see more marketing activities out of the company as we move into the May quarter and potentially into Q1 as we get more carriers taking the Centro.

Vivek Arya - Merrill Lynch

Thank you.

Operator

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

James Faucette - Pacific Crest Securities

Thank you. I just wanted to go back and touch on your comments on the first half of 2009 and your feeling that you’ll start to see stabilization and improvement in the smartphone. How much of that do you think will be dependent on the Centro getting into new carriers and continued improvement at its existing carriers versus how much are you expecting that the new Windows Mobile Treo products will be the driver there?

Edward T. Colligan

James, I think it’s a real combination of both. You know, we are seeing Centro momentum increasing. Now, that is at a lower margin, lower ASP so to drive margins higher, we need the Windows Mobile products to be successful. We’re excited about the designs we have on the table. We believe they will compete very well in the marketplace and so I think it’s a combination of both products hitting the market and growth happening on both sides of the line.

James Faucette - Pacific Crest Securities

And as far as -- then moving on to the next generation platforms, and I guess the work that you and John Rubinstein and the whole team have been doing, you mentioned that you have seen some of that work start to come in ahead of your projected schedule. Can you give us a little insight into where you are seeing better-than-expected progress and what you think that means for your ultimate turnaround timing?

Edward T. Colligan

Well, I don’t want you to misconstrue my comments. I believe that the fundamental software work and the platform work is on schedule, is what I was saying. I think the things I’m talking about ahead of schedule are retooling the team and building the team. I think we’ve hired a whole host of really talented new people here, beyond just John and Mike at the top. You know, people throughout the engineering organization I think are adding value immediately in marketing and operations and other places, so I think we are -- the team, the strengthening of the team and the retooling of the team that we’ve had as a main goal in the transformation is happening quickly.

I also think we’ve gotten our costs in line more quickly. We went through that process of part of the transformation. I think we’ve made the tough decisions on the product road map and the things we aren’t doing now and the things that we are, and getting those out to market in a high quality way. The Centro is a product that we are extremely proud of in relation to how it’s performing in the field and that’s something we really needed to get back to. I think that is happening and the new products we have coming down the pipeline, we are very excited about and those are tracking very well to schedule, if not ahead of schedule.

So there’s a whole host of things that are happening in the company that I feel like is gathering momentum here. And then you throw on top of that the new developments that we have going, which I would call on schedule but still anything of this complexity of doing a whole new operating system and a whole new device designs around that and really retooling our core technologies, having that even on schedule is quite an achievement.

So combine all that together, it does provide me with a lot of optimism and as I said at the start of my statements, I’m more confident than ever that we did the right thing here and that we are charging down the path to really bring Palm back to its rightful position as a leader in this segment of the marketplace.

James Faucette - Pacific Crest Securities

Great, and then just one, or I guess two quick follow-up questions on comments; first, you mentioned that the Centro has kind of ramped as availability has gone on, or that is that from its initial launch that its sell-through has tended to ramp. Is that something that you are seeing even at AT&T in the better part of a month since that product launched? And then my second question is just if you could provide sell-through data for just the previous two quarters. Thanks.

Edward T. Colligan

Well, at AT&T, as you said, it is very early there. Yes, it is ramping there but those are off of early numbers so I can’t read too much into that. I think at Sprint, we have seen very consistent growth over a longer period of time and in general what you see is a big initial ramp and then somewhat of a fall-off and then it will kind of trend off of that and we haven’t seen that at all. We’ve really seen it continue to trend up. We’ve seen more and more interest from various retail and distribution partners to carry the product and as I said, we are just really getting launched at AT&T. I see the same kind of dynamic happening. We will be bringing more carriers on through the next couple of quarters globally and we hope to see a similar success from those.

I think in the end, we will see a significant upside in sell-through on Centro. That’s what I see today.

Andrew J. Brown

And James, I think your question was what was the sell-through of smartphones for the past couple of quarters. It was an 833,000 units in Q3, 686,000 units in Q2, and 689,000 units in Q1.

James Faucette - Pacific Crest Securities

That’s great. Thank you.

Operator

Your next question comes from the line of Tavis McCourt of Morgan Stanley. Please proceed.

Tavis McCourt - Morgan Keegan

First, Ed, I think you mentioned in the first sentence of your opening remarks something about Centro sell-through per week. Could you repeat what you said there?

Edward T. Colligan

Thirty-thousand.

Tavis McCourt - Morgan Keegan

And is that an average or that’s where it is today?

Edward T. Colligan

That’s an average and it’s growing above that.

Tavis McCourt - Morgan Keegan

Okay, so that was the average for the February quarter?

Edward T. Colligan

I don’t know if it’s for the whole quarter. We were averaging that for a number weeks. We’ve now passed that as a sell-through number and, you know, it continues to accelerate.

Tavis McCourt - Morgan Keegan

Okay, and then I wanted to follow-up on a couple of operational issues from last quarter. Andy, you mentioned the warranty expense was up year over year. Can you comment on where it was sequentially?

Andrew J. Brown

Yes, so if you’ll recall on the warranty expense last quarter, we had some issues with our reverse logistics operation with respect to getting product back to our carriers and we had what we called kit breaks. That essentially went away and what you are seeing with the warranty expenses right now in our third quarter is that the average cost to repair is slightly higher than a year ago period and we are clearly seeing more volume, more smartphone volume.

Tavis McCourt - Morgan Keegan

And then the Centro supply issues on the CDMA during the February quarter, can you give us an update on where that stands? Are you back to full production capacity or still somewhat constrained there?

Edward T. Colligan

Production capacity on Centro?

Tavis McCourt - Morgan Keegan

No, I’m sorry. There was a component issue which I think hindered your ability. It wasn’t your production but --

Edward T. Colligan

You know, based on ramping volume and carrier demands, I’d say things are still tight. We’re chasing it as hard as we can. There are -- there’s still a component and there are a couple of components that could constrain this quarter, depending on how much that growth exceeds our expectations, frankly. Right now we are starting to see early demand from carriers that would push right up against the wall relative to today’s committed supply.

So we are out working with all our supply partners right now to try to increase our availability of various components and see if we can beat the numbers we have on the table today and really drive Centro even higher.

Tavis McCourt - Morgan Keegan

Good luck.

Operator

Your next question comes from the line of Paul Coster of J.P. Morgan. Please proceed.

Paul Coster - J.P. Morgan

Thanks very much. Now, as you ramp up the volume on the Centro, given the fact that it’s an outsourced model, will we see margin improvement and as -- well, first of all, that.

Edward T. Colligan

Well, certainly we are going to do everything we can to improve Centro margins. We are pushing right now on a number of the supply chain, not only the ODM partner but throughout the component base to drive margins higher on that product. We are clearly seeing higher volumes, so that should justify some cost benefits.

On the other hand, as you know, in the global market that we are living in we are seeing other costs being driven higher, including transportation and other things. So we are having to deal with that at the same time but we are going to work very hard to continue to drive down COGS rates, including warranty costs and other things on that side, and core component costs and transformation costs to try to increase Centro margins.

So we aren’t predicting anything there today but we’d like to see that get better and maybe Andy has some more comments.

Andrew J. Brown

Paul, clearly like I said we’re trying to drive costs out of the Centro but we are also trying to drive for higher volumes, as you’d mentioned earlier. I think the biggest swing in the short-term, quite frankly, as we roll into the first half of fiscal year 2009 is really improving the product mix as we get new Centros out that do command higher gross margins. That’s more likely to have a larger impact as we move into both 2009 than anything else.

Edward T. Colligan

I think you meant as we get new Treos out.

Andrew J. Brown

New Treos. Excuse me, new Treos. Yeah, new Treos, excuse me.

Paul Coster - J.P. Morgan

Is it possible though with the volume increase that you can get the gross margin on that product line up to the corporate average in that timeframe or is that unrealistic?

Andrew J. Brown

We would certainly like to but I don’t -- I think it’s more realistic that the bigger contribution is going to be from new Treos.

Paul Coster - J.P. Morgan

Okay, got it. How many channel partners do you have now globally? And are we going to be seeing the Centro going out to the existing channel or are you going to see an expanded channel as well?

Edward T. Colligan

I think right now we are just working real hard to get it across the existing channel today, so not looking at any initial expansion right now.

Numbers -- boy, I don’t know off the top of my head the total number of carriers that we have Centro in today but I think it’s in the range of approximately 20 globally.

Paul Coster - J.P. Morgan

Okay, got it. Thanks very much. Appreciate it.

Operator

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

Jeff Kvaal - Lehman Brothers

Thanks very much. Following on the international theme, I was wondering, Ed, if you wouldn’t mind giving us a flavor of where you think international expansion and improved distribution is most likely to help you?

Edward T. Colligan

That’s a really good question, Jeff. You know, as we went through the transformation, one of the things was cut the expenses right. We had to cut back because we knew we were making some roadmap changes and so forth and that the revenue was going to be challenged here in the short-term, so some of that cut-back went into international market expansion and even our presence in various international markets. So I think right now our best opportunities is where we’ve hung in there relative to resources, which is mostly in EMEA.

I think there’s also upside in Canada. We have opportunity there and in Latin America. APAC, the Asia-Pacific region, less likely. We’ve really pulled back there and essentially are strongest in the [ANZA] region right now, so I don’t see a lot of growth there but I do think we could see some reasonable Centro success in Europe and maybe -- probably even more likely in Latin, Canada.

Jeff Kvaal - Lehman Brothers

Okay. That makes sense. Obviously the Centro isn’t fully distributed here in the U.S. too. There are a couple of carrier holes --

Edward T. Colligan

Sure. Those are opportunities.

Jeff Kvaal - Lehman Brothers

Okay, opportunities -- not necessarily anything that we should have on the radar screen at the moment but more to come?

Edward T. Colligan

Those are opportunities. I mean, we obviously don’t announce any new carrier partners until they are available.

Jeff Kvaal - Lehman Brothers

Okay, and then Andy, anything you want to tell us about possible new Centros to come, just to follow on that?

Edward T. Colligan

No, I think that was just a misstatement.

Andrew J. Brown

Yes, exactly.

Jeff Kvaal - Lehman Brothers

Okay. Should we expect customer concentration for you guys to decline in coming quarters then, or should we wait for the new Treos really before that happens?

Andrew J. Brown

Jeff, that’s a good question. I’d say it’s more likely to happen when we get new Treos into the marketplace.

Jeff Kvaal - Lehman Brothers

Okay, perfect. Thank you both very much.

Operator

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

Maynard Um - UBS

Thanks. So it sounds like based on what you are saying in terms of the demand, you are not really seeing anything from a broader economy kind of slowing the consumer sales, or -- can you just talk about what your partners are seeing there? And then I have a couple more after that.

Edward T. Colligan

I’m not seeing that with Centro at all and I think one of the things is -- you know, two things; one, the market we’re in, I think people’s cell phones is probably the last thing they are giving up, the way that’s become such an integral part of people’s lives at this point, all the way down to children. So I think we’re in a good space relative to any kind of economic downturn. And you throw on top of that that we have all the power of a Centro, of a smartphone in a $99 package certainly makes us a very viable choice in a more strained economic environment. So I think the combination of those two things will help -- it could, if things continue to deteriorate, certainly could play to our favor relative to our price point in this segment.

Maynard Um - UBS

Okay, and Ed, when you say that -- you made comments a little earlier that the Centro won’t drive revenue just yet to offset the aging Windows Mobile line. Just to clarify, are you saying that we could see the full fiscal year revenues decline on a year-over-year basis, or a calendar year? Could you just clarify what I guess that statement was pointing towards?

Edward T. Colligan

I think what it’s pointing towards is we’re seeing a lot of success with Centro but it has -- it is bringing that success at a lower margin and a lower ASP line, and so the good news is that sell-through is growing. We are reaching new customers. We are extending the Palm brand to those customers. But until we fix our mix, essentially, until we get new Windows Mobile, new Treo products out at a higher price point and higher margins, it’s difficult to make up all the revenue between those two and I -- and those products aren’t coming out this quarter, so we are going to do everything we can to drive the top line on Centros as high as we can get it but we’re trying to just, I guess without giving direct guidance, make sure that everyone is being prudent about this quarter, is going to continue to be a tough quarter relative to top line pressure.

Maynard Um - UBS

Got it. Okay, thanks, that’s helpful. And then the last one for me, just on the impairment charge, just to clarify; you’re not necessarily saying that you are writing off the full amount. You are kind of in the process and we’ll see when you come out with the 10-Q what that impairment charge will be, or are you saying that it’s this full $74 million? Thanks.

Andrew J. Brown

No, Maynard, it’s not likely to be the full $74 million certainly, but as you know this is somewhat of a -- if you’ve been falling the auction rate securities and there’s what, $350 billion out there and -- I don’t know. The last I saw there was 30% to 40% of all companies out there have some type of auction rate securities on their balance sheet.

And so it’s something that we are evaluating. We clearly believe that with the cash that we have on the balance sheet, along with our future cash flows that both from a short-term and a long-term liquidity needs, we have sufficient liquidity and we are evaluating them at this time and we believe that by the time we file our Q, which is in the first part of March, we will have the analysis completed and we’ll report it then.

Maynard Um - UBS

Great. Thanks, Andy.

Operator

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

Jim Suva - Citigroup

Great. Thanks very much. Can you maybe comment about if we were to look at say hypothetically a break-even analysis, what type of unit volumes do you need to break even?

Andrew J. Brown

Jim, to some extent that’s tantamount to giving guidance and we’re right now in the process of kind of a mix shift, certainly in the short term for Centros and then post that, we’ll see probably more of an equilibrium as we get the portfolio more balanced. So I don’t think it would be appropriate for me to discuss that at this point, but I think we will see more of an equilibrium in the portfolio as we move into the first half of next year which clearly has an impact, a positive impact, I should say, on ASPs and gross margins.

Jim Suva - Citigroup

So does that equilibrium also play into both for the warranty costs or are we still seeing a mix shift for a little bit of time until we get the equilibrium on the warranty costs?

Andrew J. Brown

Well, I think the warranty costs are a couple of things. I think that’s clearly an area where we can just improve as a company and be able to drive our gross margins. Mix is having some impact on that but one of the things that we are diligently working on is a couple of things. First thing is driving down returns, clearly bringing quality products into the marketplace and then working with our reverse logistic partners to drive down the overall cost to repair. I think those are the bigger issues that we are working on that I think are longer term and more sustainable, potentially sustainable gross margin, positive to the gross margin line.

Jim Suva - Citigroup

Okay, and a quick follow-up; what’s the real reason for no outlook? Companies tend not to be shy when things are progressing well, especially with different products. And so why stop giving outlook at a time when visibility would help out investors? And are there any debt covenants we should be aware of?

Edward T. Colligan

I’ll just -- debt covenants I’ll let Andy talk about but I think really, Jim, it was driven by a total and relentless focus on the long-term. We’re just not trying to stay focused on as much quarter to quarter. We obviously want to hit the best possible metrics we can. We are going to do that but right now I want this team and I want the company as a whole just absolutely focused on the long-term, and so we are not going to give guidance right now. That’s all there is to it. Staying long-term is the way we want to go.

Jim Suva - Citigroup

And debt covenants?

Andrew J. Brown

With respect to the debt covenants, the debt has no financial maintenance covenants. There certainly are some incurrence covenants should we do things like acquisitions or things like that, but as far as financial maintenance covenants, no, the debt doesn’t have any financial maintenance covenants.

Jim Suva - Citigroup

Great. Thank you very much, gentlemen.

Operator

Your next question is from the line of Larry Harris of C.L. King. Please proceed.

Larry Harris - C.L. King & Associates

Thank you. Recently there’s been a little bit of concern regarding the high end and 3G device market in Europe, and I know you’ve got some exposure there through the Treo 500V and the 750 and I guess perhaps the Centro going forward. I was wondering if you’ve seen any changes in terms of trends in Europe over the last few weeks or last month or so in terms of demand.

Edward T. Colligan

Not over the last few weeks or month or so. I mean, I’d say in general part of our international revenues are certainly lower than what we would have hoped for. The 500V has not done as well in Europe as we would have liked. I think Centro will actually help that in the sense that it is a lower price point product that has an awful lot of functionality packed into it. And in a form factor and design center that I think will be more appealing in Europe, but as we are just launching there, it’s too early to tell.

But I will say that in general, our products that we’ve launched there recently haven’t really driven the kind of volumes that we’d like and we are still trying to fix that with both promotional efforts and in combination with our carrier partners.

Larry Harris - C.L. King & Associates

Okay. Thank you.

Operator

Your next question is a follow-up from the line of James Faucette of Pacific Crest. Please proceed.

James Faucette - Pacific Crest Securities

Thank you. I just wanted to go back and in terms of thinking about the handheld business, that is obviously one that’s been rolling off and you’ve said that you expect that to continue but I’m just wondering at what rate we should expect that to continue. And looking at the next couple of quarters, you’ve talked about the growth in Centro not being able to offset the growth in, or the decline in the Windows Mobile product. Should we then expect the combination of those two things to lead to revenue declines that potentially could be on par with what we’ve seen in the past couple of quarters, or less? I know that you don’t want to give specific guidance. I’m just trying to gauge.

Edward T. Colligan

Yeah, I mean -- I don’t know how to say it other than saying we believe that Centro growth will help us to some extent offset the declines in some of our older aging product lines, including Windows Mobile and older Treos, for that matter, you know, older Palm OS Treos. And it’s a very dynamic market right now, James.

I mean, one of the big things is there’s also to a certain extent some positive upsides here, right? Centro volume is driving even harder, so putting a number on the table right now I don’t think is going to help a lot. I think right now what we are saying is we see another quarter, not necessarily down at any rate like this one but in a similar kind of vein as this one. We are not going to return to profitability next quarter. There’s a high probability of that and so it’s kind of in this range and we are going to push. We believe that will be the turning point. Q1 will be really a turning point and we’ll start to climb out here and that will be a combination of having been more fully distributed in Centros and Centro momentum and getting those Windows Mobile products, new Windows Mobile products that are higher margin products into the mix.

And so that’s how we see it and I don’t know how much more color I can give than that.

James Faucette - Pacific Crest Securities

That’s useful. Thank you.

Edward T. Colligan

Okay, we’ll take one more question.

Operator

Your final question comes from the line of Jonathan Goldberg of Deutsche Bank. Please proceed.

Jonathan Goldberg - Deutsche Bank

Thanks for taking my call. I just had a question on the Windows Mobile line. You mentioned that this is going to be focused on the enterprise and I was wondering if that’s going to come with any new services or features that aren’t available yet on the existing products.

Edward T. Colligan

Well, we’re not going to talk about specific features and functionality on future products. I will say that we will of course support Microsoft’s latest offerings from an operating system standpoint, which would in theory then support their back-end services in relation to device management, security, and so forth that they are extending right now. And my belief and the belief of our enterprise sales team is adding that all up with a very nice design from a product standpoint and features and functionality standpoint on the hardware side, we really believe we will have the most competitive enterprise solution on the marketplace.

And I am working hard with Microsoft right now to make sure that we’re -- as these products come out, we’re ready to aggressively come to market with them and market them effectively to really make an impact on the business.

Jonathan Goldberg - Deutsche Bank

Okay, but you -- is it safe to categorize this as a refresh or an upgrade of existing products, rather than something truly new? That’s stronger than I meant, but you don’t get it yet.

Edward T. Colligan

Well, it’s targeted at the enterprise, so you know, I don’t think it’s going to be something that’s radically off what we think is a core design center that makes sense there. For instance, it has a keyboard. We think it’s critical to have a keyboard in enterprise, so that’s -- does it have similarities to other Treos? Yes. Will it be great? Yeah, we think so. So those are the things that we are doing.

Jonathan Goldberg - Deutsche Bank

And then on the new operating system, you are standing by your target -- you said it would be finished by the end of this calendar year.

Edward T. Colligan

Standing by my target.

Jonathan Goldberg - Deutsche Bank

Okay, great. Thank you.

Edward T. Colligan

All right. Thank you. We’re going to wrap now and so I just want to thank everybody for being on the call today and for joining us and I look forward to talking to you again next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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