Handspring Makes This Quarter, but Sees Tougher Landings Ahead

Updated from 4:37 PM

Like a teenager, Handspring (HAND Quote) would rather Papa Palm (PALM Quote) drop her at the corner rather than drive her Uncle Buck-style all the way up Wall Street.

Thursday Handspring met the Street's expectations for the third quarter ended March 31, losing 6 cents per share on $123.8 million in revenue, just as it promised it would do March 27. Unswayed by Handspring's protests that it was fine financially, analysts lowered their revenue estimates for the upstart after fatherly Palm lamented a softening macro-economic environment.

According to Multex.com, consensus revenue expectations dropped from $120 million to $118 million over the past four weeks, with earnings estimates holding steady at a 6-cent loss. You'd think blowing away Street predictions for the past three quarters in a row (9 cents in Q2, 4 cents in Q1 and 5 cents in Q4, working backward) would give you some credibility.

With a roll of its eyes, Handspring cranked up the volume on its Discman, stuffed its hands in its pockets and assured everyone they'd see.

If only we'd seen a little bit more.

Handspring wasn't able to totally blow off the handheld authority in giving future guidance. Given what CEO Donna Dubinsky described as "some softening, but not a precipitous decline" in demand, management projected a slow September quarter -- followed by a strong holiday season. Altogether, the slow September quarter will lop 5% off calendar year revenue, management cautioned. While CFO Bern Whitney kept June quarter revenue and earnings guidance steady at $130 million to $136 million, with a 6-cent to 8-cent loss, he estimated that sales would be at the lower end of the range.

Dubinsky pinned the newer, slightly more conservative approach to Handspring's growth on the recent Palm announcement that it would be flushing $200 million in excess inventory out into the market. A soft market with margin pressure because of sales competition -- not the best environment for explosive growth.

"In this type of market, meeting your numbers and keeping forward guidance constant is rewarded," says Matt Adams, research analyst at Epoch Partners, which has not done banking for Handspring or Palm.

Investors shouldn't be flustered by the small revision, if they truly are comparing Handspring's numbers to Palm's. Last month, Palm drastically reduced revenue estimates for its fourth quarter to the $300 million to $315 million range, after posting third-quarter revenue of $471 million. Add to that product delays and a $466 million cash burn in the past year, including $238 million toward a 38-acre San Jose, Calif. campus.

But Handspring isn't willing to cut itself loose from the Palm family tree yet. Dubinsky ended her formal remarks by reaffirming Handspring's affection for the Palm OS and developer community. Handspring just reupped its licensing agreement, signing on until 2009, and Dubinsky quelled rumors that the non-exclusive agreement hinted at Handspring's displeasure. She said Handspring's ability to license other operating systems gives it options in the future when new opportunities arise, but does not signal dissatisfaction with the operating system or pricing terms now.

If only it could say the same about Palm's inventory overflow. Parents can be so embarrassing.