When Palm (Nasdaq: PALM ) reported first-quarter earnings yesterday, investors cheered. And they're still celebrating today; the shares are up more than 4% as I write.
I can understand why. After accounting for non-cash expenses, the company reported sales and earnings ahead of expectations. Revenue reached $355.8 million, and adjusted per-share net income came in at $0.21.
Plus, gross margin improved for the fifth straight quarter. To me, that suggests pricing strength. Earlier this month, you see, Palm reported that demand for its Treo phone/PDA had slackened thanks to the Treo 650's unceremonious exit from Europe. Call it a good result in a not-so-good situation.
Of course, there was also bad news that was, well, bad. Take guidance, for example. Management plans on booking between $430 million and $450 million in Q2 revenue, which amounts to practically zero year-over-year growth. (It sold $444.6 million worth of Treos and personal digital assistants during last year's Q2.)
What's more, receivables growth outpaced that of sales by roughly 7 to 1. And free cash flow plummeted by 64%. Not good.
To be fair, Palm is in a transitional phase during which it is investing heavily to broaden the appeal of the Treo here and overseas. And it has seen some notable successes. For example, earlier this month it struck a deal with Vodafone (NYSE: VOD ) to distribute the new Treo 750v in the U.K. and elsewhere. Here in the U.S., Palm hooked up with SprintNextel (NYSE: S ) to offer the Treo 700wx.
These and other carrier relationships will aid with growth, obviously. But more is needed. Accordingly, management hinted in the earnings release that it will prioritize market share gains over profitability in the short term.
It's a reasonable gamble -- one that Fool co-founder David Gardner has applauded in the pages of Motley Fool Stock Advisor. I've no doubt he's correct. Investors are always better off focusing on the long-term, and that's especially true with this stock. Spotty service could be the order of the day for at least the next several quarters.
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Vodafone Group is a Motley Fool Inside Value pick.
Fool contributorTim Beyersstill owns a Treo 600, which he beats up every day. Tim didn't own shares of any of the stocks in this story at the time of publication. Get the skinny on all the stocks he owns by checking Tim's Foolprofile. The Motley Fool'sdisclosure policyis never on hold.