Good news, bad news. I think.

Shares of PalmSource (NASDAQ:PSRC) are down 17% to $20.80 today after the company reported its first-quarter results yesterday afternoon. The good news is that the maker of Palm OS software -- used in handheld devices and smartphones from companies such as palmOne (NASDAQ:PLMO), Sony (NYSE:SNE), and Samsung -- cut its losses to near break-even and beat both revenue and loss expectations for the quarter. The bad news is that Sony's decision to exit markets outside of Japan (see Sony Clie to Fade Away) has left PalmSource unable to offer much confidence in the way of a forecast for the second quarter.

In the first quarter, PalmSource revenues climbed 7% to $18.2 million. Meanwhile, the net loss fell from $3.8 million in last year's quarter to $200,000, or $0.01 per share. On a non-generally accepted accounting principles basis, the company earned $0.05 per share, reversing last year's non-GAAP loss of $0.15 per share.

On another positive note, the software maker generated $1.7 million in operating cash flow, gained $1.9 million from the early retirement of $15 million in convertible debt, and improved gross margins to 93% from 89% in last year's first quarter.

According to PalmSource, Palm OS licensees reported that shipments of Palm-powered units grew from 1.2 million last year to 1.4 million. There was significant growth from smartphone devices, helping offset the loss of Sony's business in handhelds. Overall, smartphone devices grew to account for 21% of Palm OS shipments from 7% last year; conversely, handhelds only made up 74% of shipments, down from 90% last year.

The first quarter didn't look bad, but it's the second-quarter guidance that's the story here.

For the second quarter, PalmSource expects revenues to be "in the range of $18 million, plus or minus 5%." Meanwhile, the company might show a net loss as big as $1 million or a net profit as big as $1 million, which comes to plus or minus $0.07 per share. On a non-GAAP basis, the company forecast break-even to a profit of $2 million, or $0.13 per share.

At any rate, the top end of the revenue forecast is also short of the $19 million analyst estimate. So for PalmSource, it's good news on the first quarter and bad news on the second quarter, give or take a couple million dollars.

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Fool contributor Jeff Hwang owns none of the companies mentioned above.