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Executives

Terri Klein - Vice President, Investor Relations

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

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

Analysts

Vivek Arya - Merrill Lynch

Matthew Hoffman - Cowen & Company

Mike Abramsky - RBC Capital Markets

Tavis McCourt - Morgan Keegan

Michael Walkley - Piper Jaffray

James Faucette - Pacific Crest Securities

Ben Bollin - Cleveland Research

Analyst for Paul Coster - J.P. Morgan

Jim Suva - Citigroup

Amir Rozwadowski - Lehman Brothers

Maynard Um - UBS

Jonathan Goldberg - Deutsche Bank

Palm, Inc. (PALM) F1Q09 Earnings Call September 18, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2009 Palm Incorporated earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Ms. Terri Klein, Vice President of Investor Relations. Please proceed.

Terri Klein

Thank you and good afternoon, everyone. I would like to welcome you to Palm's fiscal year 2009 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 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 annual report on Form 10-K for the fiscal year ended May 30, 2008.

Palm undertakes no obligation to update forward-looking statements to reflect events or circumstances occurring after this call.

Please also 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 IR website. We encourage listeners to review these items.

Thank you and now I would like to turn the call over to Ed Colligan.

Edward T. Colligan

Thank you, Terri and thanks to everyone for joining us for the Palm Q1 earnings call. As you’ve seen by now, we’re off to a good start in fiscal 2009 as the hard work of the team at Palm paid off with greatly improved performance versus Q4. As encouraging as our August quarter was, we are still solidly in the midst of a transformation with some significant hurdles yet to come.

As we do the work to get back on track, we continue to focus on our primary goals -- to establish Palm as the leading innovator in the global smartphone marketplace and to provide and outstanding and differentiated mobile experience. And of course, we want to do all of this with a financial discipline that allows us to translate strategic success into financial success.

About a year ago, I outlined our plan to meet these goals by focusing on three areas -- people, products, and platforms. And this quarter, we continue to see signs that we are making great progress.

On the product front, the continued popularity of the Palm Centro drove record sell-through. We crossed the 1 million mark this quarter for the first time in Palm's history. This is an exciting milestone but the real success story of the past few months is our execution on our commitments as planned and on time.

Since our last earnings call, we introduced an unlocked GSM version of the Centro and announced the availability of Google maps for mobile with My Location on the device. We launched the Centro with a number of new Latin America carriers and introduced it into Puerto Rico and New Zealand, making it available in approximately 30 countries around the world.

We introduced the Treo 800W for Sprint, which was the first business smartphone shipped by Sprint that supports their high speed, EVDO Rev A network, and we most recently launched the Treo Pro to great acclaim in international markets.

In Europe, both O2 and Vodafone will be carrying the Treo Pro. Vodafone in particular is providing some very effective pricing support and even offering the phones for free in some markets.

In Australia, Telstra began selling the Treo Pro this month. They recently recognized the device as the first smartphone on their NEX-G to receive their blue tick mark of approval, an aware given to handsets that they deem to be signal strength monsters. We love the fact that the Treo Pro can keep our enterprise customers connected from the boardroom to the outback.

The Treo Pro is receiving great reviews in markets around the world, including the U.S., which doesn’t surprise us. We have great confidence in the quality of this product. The out-of-box experience is unprecedented for a Windows mobile-based product. We also brought significant Palm differentiation to this device. Not only does it have a beautiful, sleek design, but it’s market-leading form factor is packed with a high-speed 3G radio that delivers outstanding voice and data capabilities, GPS location-based capabilities, and WiFi, with a unique Palm instant-on design. And it does all this while providing outstanding battery life, even for the most demanding user.

We plan to release an unlocked version of the Treo Pro in the U.S. before we release carrier-supported versions. The unlocked device will provide value for business users and the hardcore international traveler who wants to use their product globally and still control their usage costs. The total cost of ownership for a Treo Pro user is significantly less if they can switch to local carriers while traveling abroad. In addition, we are bundling the Treo Pro with significant value-added services for our key business customers.

With the launch of the Pro and the 800W, we have refreshed the Treo line as we said we would, moving quality Palm products to market. The Treo refresh will also be a critical driver of margin improvement, one of the financial metrics we are most focused on.

Great products like the Centro and Treo are ultimately the result of the work of great people and with this in mind, Palm is recruiting the best people in the industry. This quarter, we named Jeff Devine as Senior Vice President of Operations. Jeff joined Palm from Nokia, where he served as Vice President of Global Customer Logistics. Jeff will focus his efforts on developing a best-in-class supply chain model.

We’ve also bolstered our Windows Mobile team, with some great new hires from Microsoft and Motorola, and as you heard earlier, Terri Klein has joined Palm as our Vice President of Investor Relations from Disney.

Our growing team knows we have a lot of work to do but we also know that Palm is about to take a big step forward by capitalizing on our company’s competitive advantage as an innovator -- in fact, the first successful developer of mobile computing software. We believe that a seamless, spectacular integration of software and hardware will emerge as the most important differentiator of smartphones and will ultimately determine who succeeds and who gets left behind.

We think Palm excels in this field and we’ll be pressing this advantage in a big way with the release of Palm's next generation devices on our new Palm platform. This platform development is firmly on track to be completed by the end of this year, with next-gen handsets to follow in the first half of calendar ’09.

We are looking forward to these exciting developments but we’ve got challenges to manage over the next two quarters, given the maturing Centro lifecycle and the time it will take to ramp our Windows Mobile based product sales worldwide. Revenues will still be under pressure and profits elusive, so we are managing expenses carefully and driving the company to keep our cash burn as low as possible through our transformation.

Fortunately, our cash position remains sound and will allow us to navigate this period while still positioning Palm for a timely launch of future products. After that, we look forward to delivering consistent and growing revenue, profits, and cash flow.

We are a company engaged in an exciting and challenging transformation amidst one of the most fundamental changes ever in our industry, a change we have played a seminal part in creating -- the shift of the center of gravity of all personal computing and communications to the mobile device. We defined this era at Palm and we intend to play leading role in continuing to define it as it changes people’s lives in the future. Even though this period is undeniably difficult in this short-term, we are excited to meet the future and we are more committed than ever to building a company that represents the very best in the industry.

Thank you and I’ll now turn the call over to Andy to review the financials in detail. Andy

Andrew J. Brown

Thanks, Ed and good afternoon, everyone. Before I start, I would like to reiterate that all of 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.

As Ed mentioned, in Q1 we made notable progress towards our long range development goals and we saw some promising financial trends emerge in our financial results as well.

In our first quarter versus Q4 of ’08, we narrowed our bottom line loss, improved EBITDA and reduced our use of cash and delivered revenue of $366.9 million, a more than 20% increase over Q4, as well as a modest gain versus Q1 of last year.

Of course, Palm's smartphones accounted for the vast majority of Q1 revenues. During the quarter, we saw record smartphone sell-through of 1,029,000 units, a 49% increase year over year and a 6% increase from the prior quarter. This performance was driven primarily by continued robust sell-through of Centros.

Smartphone revenue reached $333.8 million on record shipments of 1,170,000 units and smartphone ASPs declined somewhat versus Q4 to $284 per unit.

Our handheld business delivered $33.1 million in revenue. We saw handheld sell-through fall to 166,000 units, representing a 49% decline year over year and as we look ahead, we expect this trend to continue.

Inventory held by our channel partners was 7.5 weeks at the end of the quarter.

On the revenue front, it’s also worth noting that 90% of our total revenue came from the U.S. as the product introductions at Verizon and Sprint gained momentum, while international sales, particularly in Europe, reflected the usual summer slowdown.

Gross margins for the August quarter came in at 26.6% versus 25.3% in Q4. Margin expansion remains one of our most important goals and we expect to deliver measured margin improvement throughout the next several quarters. To do this, we are working to reduce Centro costs but the primary driver of margin improvement will be a change in mix, as Treos contribute more to the business.

Operating expenses for the quarter came in at $113.6 million, somewhat higher than Q4 because of increased marketing expenses associated with the launch of the Centro at Verizon and the Treo 800W at Sprint. As we look ahead and drive for profitability, our goal is to contain core operating expenses to roughly $110 million per quarter, even as we invest in our business for expanded growth. As you saw in Q1, this operating expense number will increase a bit when we undertake marketing initiatives to support product launches.

Our operating loss for the quarter was 4.3% of revenue and a loss per common share of $0.12 in Q1. However, these results show a significant improvement over the operating loss of 11.6% of revenue and a loss per common share of $0.22 in Q4. In addition, the adjusted EBITDA for the quarter was a negative $7.4 million versus the Q4 figure of negative $26.4 million. While we are clearly not satisfied with our bottom line performance, we are nonetheless trending in the right direction and believe that we are on the right path to meet our financial goals.

As Palm proceeds through the transformation Ed described, we are making every effort to improve cash flow while still adequately funding our transformation. Our cash and short-term investments decreased $10.4 million from the prior quarter to $248.3 million, and cash flow used by operations for the quarter were $3.6 million.

Inventories decreased to $35.2 million from $67.5 million in Q4, while inventory turns increased to 21 times, up from 16 in Q4. This decrease primarily reflects shipping inventory that was in transit at the end of Q4 for the launch of Centro at Verizon. Accounts receivable increased to $141.6 million, driven by higher revenues and DSOs with 35 days, the same as they were in Q4.

On a whole, our company had a promising August quarter, but we will continue to face pressure on our operating results for the next couple of quarters until we introduce our new platform and next generation devices and add carriers to distribute our Treo products.

Looking ahead to Q209 specifically, you should expect to see the dynamics that Ed mentioned play out, including Centro’s maturing lifecycle and the time it will take to roll out and ramp up our two new Treo products in both the U.S. and global markets. We also expect to reduce our overall inventory position with our carrier partners. In light of these factors, we are currently expecting Q2 revenues to be down versus Q1.

As you can see, we have a couple of quarters of Palm's transformation left to navigate. We are closely managing our business for sustained profitability once we get through this transformational period. Our company is focused on maximizing margins, containing costs while making investments to secure long-term success, improving our cash flow, and driving for profitability. We expect that our work in these areas will translate into improving returns for our shareholders.

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

Question-and-Answer Session

Operator

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

Vivek Arya - Merrill Lynch

Just two questions; one is, Ed, as you get closer to the finish line with this next-gen operating system and the hardware, can you give us some sense of how you expect those products to be differentiated from what say an Apple or a RIM or HDC or others are offering in the market?

And secondly, your November quarter where you expect sales to be down sequentially, is that more due to macro issues, is that more due to product maturity, product transition? If you could just give us some more color around how your November quarter is shaping up. Thank you.

Edward T. Colligan

Okay. On the next gen platform differentiation, obviously I don’t want to go into great detail about what areas of application focus and so forth but Palm has millions of customers in the marketplace that love how we have helped them manage their lives. This is a key area that we think with this platform being designed from the ground up as really integrating well into the web that we can extend that position to social networks and other services and continue to build differentiation around that.

We obviously have to compete in the marketplace as a whole around a range of applications that we need to deploy on the device, so you can expect it to be a very robust, well-integrated capability in both hardware and software that we think will be quite compelling but that’s as far as we’re going to get into it just because obviously we are in a very competitive market.

On the revenue in Q2, our fiscal Q2, what we are seeing is basically -- I think it’s more driven, at least from our perspective at this point more driven by product transitions. Of course we won’t necessarily get the holiday bump we used to get from handhelds that -- we don’t imagine that business will rebound any and we are planning to do promotional and refresh things around some of our product line. Those things -- we’ll be transitioning those things. That’s some of the things that Andy is talking about relative to inventories and inventory management and it is going to take us some time to get the Treo Pro and the 800W deployed at other carrier partners just through the standard certification efforts that need to happen there.

So I think the reality is it’s mostly driven by just continued execution against those things and our take today on where we are at on delivering against those different efforts and less macroeconomic things.

Now, clearly we are seeing unprecedented macroeconomic things out there right now and so that could have additional impact that we’re not seeing yet. We still feel great about sell through this quarter and how well we did, of course, record sell-through, so not seeing a lot of macro impact yet but I think the recent events over recent days, I think we are certainly trying to be cautious.

Operator

Your next question comes from the line of Matthew Hoffman with Cowen & Company.

Matthew Hoffman - Cowen & Company

Good afternoon, gentlemen and nice job on the quarter. A question for you on the split of Treos right now. You’ve got the HSDPA version going into Europe and the ANRW going into the U.S. primarily. What’s the split on the revenue there, or the units? Can you give us some type of idea of where your volumes are heavier right now? Are you seeing a nice up-tick of the HSDPA here in the current quarter, the November quarter? And also give us an idea about what it was back in the August quarter. Thanks.

Andrew J. Brown

We don’t give specific breakouts for our products but if you think about it, the 800W was introduced at Sprint in July and we’re just now shipping the Treo Pro but we don’t give specific volume numbers out on any of our products.

Edward T. Colligan

The Treo Pro is literally just being delivered into the marketplace right now so we don’t have a lot of breakout data just yet.

Operator

Your next question comes from the line of Mike Abramsky with RBC Capital.

Mike Abramsky - RBC Capital Markets

On the Centro sell-through and your general outlook slowing, for slowing Centro, just -- it just seems like when it was launched at $99, that price point was kind of a key advantage at the time. Then subsequently we had iPhone 3G at $199 and potentially now Android at $199, Blackberry Curve and Pearl at $99/79, Instinct at $129, et cetera. So do you think that the kind of $99 price point for that market, $199 price point is going to be necessary for you with your existing and new products to sustain momentum? Does that kind of price point reset the bar and how much is that playing into your thinking around where you are going to have to price your products?

And on a related point, would that continue to pressure your GMs, which don’t seem to be improve despite the 800W selling. So are those -- how are those two factors going to play in would you say going forward?

Edward T. Colligan

Mike, I think you just outlined the very competitive market out there and it will continue to be and we don’t anticipate anything less. We have to create products that will excite our users and hopefully demand premiums in the marketplace. That’s all we can do. We clearly set a price point at $99 with the Centro. Of course, a lot of that and the other prices you cited are driven by carrier subsidies and relative subsidies on different products and what they decide to promote at any point in time versus anything else, and so we have to do I think two things. One is obviously create products that create end user demand, so end users really demanding the products that we want to have, and also continue to work with our carries partners on promotional programs, refreshes to that line, to keep the fresh and to keep it growing and do that in the face of a lot of competitive pressure.

So we -- our projections on gross margin are taking into account that macro environment that we are operating within and also our projections on pricing going forward is taking that into account, relative to next generation products. But as you just cited with all the products you listed, it’s a very dynamic market.

Operator

Your next question comes from the line of Tavis McCourt with Morgan Keegan.

Tavis McCourt - Morgan Keegan

Thanks. I really just want to confirm a couple of comments. Ed, in your opening comments I think you kind of mentioned the Treo Pro at some point will be available through U.S. carriers. I just wanted to confirm that.

And then the commentary on November for the channel inventory, would you expect the sell-through in November to be greater than the sell-in? Thanks.

Edward T. Colligan

On the Treo Pro, the answer is yes, I do expect it to be available through U.S. carriers. And Tavis, on the sell-through, yes, I mean, our current expectations is that sell-through will exceed sell-in in the November quarter and as you know, I mean, we saw -- we approached 50% year-over-year sell-through growth in Q1 and we would anticipate something in that range also in Q2.

Tavis McCourt - Morgan Keegan

Thank you.

Operator

Your next question comes from the line of Michael Walkley with Piper Jaffray.

Michael Walkley - Piper Jaffray

Thank you. Just to go back to the comments on the maturing Centro product cycle, anymore color just as -- are you seeing shifts of carriers to new products in terms of their subsidy dollars, or is it just on your weekly sell-through rate you are starting to see it slow down a little bit in the marketplace? I’m just trying to get a little color around Centro as we try to bridge the gap to your new products.

And then on your new Palm branded products, not the Treo line but the future new products, any color at all from carriers responsiveness to those products that you can share with us?

Edward T. Colligan

Sure. On the Centro, I think the big thing is both maturing in the sense of the existing product was sitting on the marketplace so we have plans to make sure that we refresh those products and are bringing that out and we’ll do that in both promotional ways and other ways. And so that’s some of our planning that’s going into this season and through this quarter.

We also see additional pricing actions happening from both our competitors and through carrier-focus on some other products that are coming out that certainly gives us pause as to what’s going to happen going forward and makes us think hard about exactly what the opportunity and ongoing sell-through of Centro will be and whether we can maintain that consistent momentum.

So we’re obviously going to do everything we can to maintain that and work with our carrier partners as aggressively as possible to make sure that we keep the momentum going but we are planning for some impact there.

On the new products, with regard to carriers -- well, we’re not out showing it around to a bunch of carriers because of, of course, the confidentiality that’s related to but we do have some key partners that we have communicated with and I would say that generally the response has been overwhelmingly positive, so we’re excited about what we are working on.

Operator

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

James Faucette - Pacific Crest Securities

Thank you very much. I wanted to ask a couple of questions related to the -- also related to the Centro and the pricing environment in general. Ed, you had mentioned that you guys are watching obviously some of the things your competitors as well as your carrier partners are doing with pricing, and you mentioned that in the context of the Centro. Are you seeing that just in the price range where the Centro is or are you also seeing that on up to the higher price points where you are launching the 800W and the Treo Pro, and we would assume ultimately the new platform? That’s my first question.

My second question is Andy, can you just talk a little bit about what drove the drop in inventory this quarter and what we should expect for that going forward, particularly as you do have the Treo Pro now starting to ramp? Thank you.

Edward T. Colligan

I would say that in general, it’s a very competitive environment and pricing always comes into play but it certainly has a bigger impact at the low end. There is just -- the average consumer who is walking in considering a Centro versus any other product at that price point, even against feature phones, is a little less driven by features and functionality and the capabilities of the product.

I think as you go upstream and people are considering a business tool, for instance, which is where the 800W and the Treo Pro are positioned, businesses are clearly price sensitive but more driven by the ultimate productivity the device brings. I think both those products with the full QWERTY keyboard, 3G radios, WiFi -- I mean, these kinds of things are fundamental things that they want in the products, well-executed with long battery life and nice form factors. I mean, those are all -- those are big drivers and I think businesses and high-end consumers will generally pay a bit of a premium to get the right thing, or a little more discerning purchasers.

So you see pressure there just because there’s competition there but I would say a little less so at the high-end, just because people have higher demands on the product.

Andrew J. Brown

And James, on your inventory question, the large decrease in inventories this quarter was principally due to the inventory we built for the launch of Centro at Verizon. If you’ll recall, that was launched by Verizon in the second week of June, I believe, and we had built some inventory in advance of that, that was on our books at the end of Q4.

And secondarily as far as looking at inventory balance as we move forward, clearly that’s an area where we would like to carry less inventory. It has an impact on our cash management and as such, we would anticipate that we’d see some additional declines, certainly not to the extent we saw last quarter in Q2.

Operator

Your next question comes from the line of Ben Bollin with Cleveland Research.

Ben Bollin - Cleveland Research

Thank you. First question -- when you look at your carrier partners, I apologize if I miss this -- how many do you have now, where do you anticipate you will be towards year-end and how do you see the timing of those additions?

And then my second question, when you look at the mix of your products between the Treo and Centro, what would you say the biggest difference is in the margins are between those products? Not in percentage terms -- is it purely ASP? Are there major bill of material variations? How do you see that mix changing? Thanks.

Edward T. Colligan

Carrier partners, the only numbers we stated in the release was 30 countries. We didn’t talk about total number of partners. It’s in the range globally, it’s certainly near 100 partners that we’ve worked with over the years on various different products. What I referenced earlier in the script was 30 partners with the Centro deployed -- 30 countries that the Centro had been deployed in.

And then the second question was --

Andrew J. Brown

-- on gross margin and the component differences between the Centro and the Treo line, and it’s really not just one thing, right? It’s a combination of both -- you know, part of what you are seeing on the Centro is you are driving to that $99 price point and that’s always a challenge, of trying to drive to price points like that and so it’s a combination of ASPs and the costs that we associated with those products, and likewise with the Treo product. So it’s not one thing that you can point to but there’s clearly a difference, as you are aware, at the gross margins we have on Centro and Treo and to the extent that, as I’d mentioned earlier, that we see a bigger percent of Treos as we move forward, which we expect. We would anticipate a gradual increase in our overall corporate gross margins.

Operator

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

Analyst for Paul Coster - J.P. Morgan

This is actually [Sandeep Mador] on behalf of Paul. Just a couple of questions -- first I guess on the Centro side, what is your best estimate for when the 3 millionth Centro will ship, as well as when do you think you are going to reach the optimal margins on that in terms of the gross margin perspective?

And then the second question on Treos, when we are doing our channel checks we found out that the 800 was quite thinly stuffed in the channel. I mean, it was only about five to eight units per week or so. Is there some sort of supply issue there or is it just the way you are selling? Are you selling direct to business? And what’ going to be the selling procedure for the pro as well? Thanks.

Edward T. Colligan

I think the only thing we can say on the Centros and the only number we are reporting today is a million for the quarter sell-through relative to total units that we’ve done and Centro is clearly a big part of that. We’re not going to predict the 3 millionth yet.

And I think it was gross margin on the --

Andrew J. Brown

I think the question was optimizing -- when do we think the optimal gross margin on the Centro is and hopefully we just continue to try to drive costs out of the Centro to improve our gross margin, I think we’ll see improvements this quarter and hopefully as we move into Q3 also.

Edward T. Colligan

And then the 800W, that is -- at least within business stores at the Sprint locations is certainly intended to be broadly distributed and we believe is distributed well relative to total sell-through opportunities there. So I’ll go check into that and -- but the Treo Pro would be distributed broadly as well as carriers bring it online. Right now what we are doing with the Treo Pro day one, since we haven’t announced any carrier relationships yet, is selling it through both direct through the web and also our end user -- I mean, our business-to-business sales capabilities that we have direct, and then of course it’s distributed through our carrier and channel partners throughout Europe who have brought on the product, including Vodafone and O2 and as we bring up carrier partners in the U.S., you will see it distributed through both B2B stores and I think broadly carrier stores throughout the marketplace.

It’s also about to be available in Australia as well and as I said earlier, it’s been very well-received there by Telstra, our partner there, and you will see it distributed broadly there too.

So I’ll go do a quick channel check on the 800W and make sure that I don’t see what you are seeing but in general, that’s intended to be distributed broadly, certainly through the Spring business stores.

Operator

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

Jim Suva - Citigroup

Thanks very much and congratulations on the great results. On the outlook, I guess I had a question on the sales outlook being down. Are we talking like low-single-digits, middle-single-digits, high-single-digits? Or can you help us just understand the magnitude of that because to me it just seems a little odd for the quarter for it to be coming down, unless maybe it’s increased competition or like you said, the Centro peaking.

And then the second part of the question, the follow-up would be on gross margins. I believe you said that you expected them previously to grow quarterly sequentially like 50 to 100 basis points quarter over quarter. Is that still kind of what we are looking for? Thank you very much.

Andrew J. Brown

On our Q2 comments, we’re not going to get into specific numbers and we’ve, as you probably know, we’ve decided to not give specific numerical guidance but the things we said earlier I think are appropriate and that is we’ve got some product transitions that are going on, we’ve got -- we’re still working to ramp both of our newly introduced Windows Mobile products and, as I’d mentioned earlier, we are looking at taking some of the inventory down in the channel.

Now, having said that, we continue to expect robust sell-through in Q2 and I think that’s the really key business indicator for us is the sell-through of our products. We saw almost 50% this past quarter. We would anticipate something in that range in Q2 but the inventories and the other factors are having an impact on our overall net revenues.

On the gross margins, yes, we’ve continued to say since last quarter that we will see a gradual increase in the gross margins. I think that what we saw this quarter is a reasonable proxy for what we are hoping to achieve over time but we don’t anticipate any large increases. As I said earlier, the biggest part of this is a function of mix and we anticipate that we will see the mix towards Treos, which are higher gross margins, gradually be a bigger contributor to our overall revenues.

Operator

Your next question comes from the line of Amir Rozwadowski with Lehman Brothers.

Amir Rozwadowski - Lehman Brothers

Thank you very much for taking the question, Ed and Andy. I wanted to just circle back on sort of the strategy with the Treo Pro and sort of -- Ed, you had mentioned that you expect it to be launched with certain carrier partners. Can you discuss sort of the decision to go ahead with out a carrier partner during the initial launch, and sort of what the factors were in governing that decision?

And then just in terms of a follow-up, I may have missed it. I don’t know if you folks had provided a sell-in number for the smartphone units. Thank you very much.

Edward T. Colligan

So the Treo Pro, I think in general we tend to be very U.S.-centric in this country and the reality is we launched it with Vodafone and O2 and Telstra and so we do have carrier partners and we are launching it globally. We didn’t announce a U.S. partner so since that wasn’t ready at that point in time, we decided and I think it makes sense, to still provide the product in an unlocked version to our customers and it’s a great product that people love. It’s getting great reviews so if they want to buy it without a subsidy, let’s let them.

And I’ve seen some amazing statistics actually which show that the average business traveler who uses their phone on a U.S. SIM and travels internationally with a smartphone can see bills upwards of $700. You may have seen something even -- I mean, I think that was on average, which is amazing and this way, they can go to the U.K. and buy a Vodafone SIM and spend quite a bit less money than getting the roaming charges that they have. And there are a lot of companies have become very savvy to this and are interested in buying an unlocked product, so we just decided hey, let’s bring that product to our customers, let’s enable them to have it and as we get carrier relationships done and online, then that will be launched as well and that was the decision.

Andrew J. Brown

And actually I might add, Amir, one other thing is that most of our GSM products we have made available unlocked. I think this past quarter we made the Centro available unlocked, so it’s not something that’s -- it’s something that’s relatively common practice for us.

The other question I think you had was on the total sell-in. The total sell-in units for our smartphones this past quarter were 1,170,000, in case you missed that.

Operator

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

Maynard Um - UBS

Thanks. I just want to clarify what the increase in G&A was related to and I guess specifically, why OpEx will be increasing next quarter if presumably sales and marketing for the Centro tales off and the number of operators selling the Treos, the new Treos, are in the magnitude less than the number of Centro operators.

And then a follow-up, in terms of the new products, you indicated a first-half launch. Can you just talk about what things have to happen to drive a Q1 launch versus a Q2 launch? I guess I was just hoping you might be able to kind of give us the puts and takes and help us to understand how that -- how you could maybe narrow that range a bit. Thanks.

Andrew J. Brown

On the operating expenses, we actually didn’t state that the operating expenses were going up. What I stated was that we are trying to keep the core expenses at about $110 million and then the variability behind that is potential product launches, and you saw that this past quarter, for example, when we launched the Centro at Verizon and the 800W at Sprint.

And with respect to the G&A, one of the things we had last quarter that we actually talked about on the last call is we did get a one-time benefit from a reduction in our overall bad debt, which contributed to a lower G&A number last quarter and we didn’t get that benefit this quarter.

Edward T. Colligan

And with respect to the next-gen product launches, I think we are just basically giving a window of time. We didn’t say Q1 or Q2, we said first-half and that’s what we are doing right now. These products are incredibly complex to put together, to design and develop a whole entire platform and the application suite and the hardware and everything else that goes around it, and I think allowing ourselves a little flexibility around that is exactly what we are doing right now. We don’t want to over-promise and under-deliver -- we want to do the opposite, and so we’re just giving a window there that we think makes sense at this time.

Andrew J. Brown

We’ll take one more question.

Operator

Thank you. Our final question comes from the line of Jonathan Goldberg with Deutsche Bank.

Jonathan Goldberg - Deutsche Bank

I had a question about your -- again about the new product but if it’s available sort of the middle of next year, when do you anticipate having a software developer kit available? My concern being is if it’s not available when the product launches, it takes a while for developers to get interested. By the time you have a development community -- I mean, will you be able to develop or maintain the existing community you have now or are you worried that you are going to sort of lose interest through attrition over the years as developers go to new platforms?

Edward T. Colligan

Jonathon, we’re not going to get into any dates on any pieces of the platform. We’re very excited about the product that we are developing. We think we’ve been down this road before. We did develop and many of the people here developed the Palm OS and developed not only that platform but the SDKs and the developer community and everything around it. We have a lot of loyal and excited developers looking towards the release of a new platform and a lot of customers that are excited about it and so we are -- and we are selling millions of Centros today based on our existing platform, so we don’t think we are going to lose any momentum there. We think the right thing to do is do a world-class design that is going to knock people’s socks off and excite the overall end-user community to want to buy that product even beyond Palm zealots but people who are just interested in their next generation product, something they can be very excited about.

So that’s what we are charging towards and we’ll release the various elements of it at different points in time. We understand how to build and develop a developer community and we have every intention of doing that.

So with that, I would just like to say thank you for being part of our call today and we look forward to talking to you again next quarter. Thanks very much.

Operator

Thanks, everyone, for your participation in today’s conference. This concludes our presentation. You may now disconnect and have a good day.

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Source: Palm F1Q09 (Qtr End 8/31/08) Earnings Call Transcript
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