Waiting for Handspring to Do a Backflip

Handspring is living on borrowed time.

Investors and analysts are checking their watches, folding their arms and tapping their feet, waiting for Handspring (HAND) to give up on its quarterly numbers.

They pause in their sweaty exasperation over the handheld market to compliment CEO Donna Dubinsky and Handspring's management team in deferential tones. They sincerely want the company to be able to shake off the effects of industry leader Palm's (PALM) mistakes.

But after Palm cut lowered revenue projections by half, while insisting it is maintaining device market share, Handspring is marked for some downside in the fourth quarter.

In the past two months, Palm has gone from a $471 million third quarter to a $300 million fourth-quarter projection to an eraser-pilled $140 million-to-$160 million final guess on May 17, two weeks before the end of its quarter. Since the latest scribbling, Handspring hasn't gone back to the books for new numbers. Analysts started waving red flags in the past four weeks, ditching last month's credulous $133 million revenue estimates in favor of a skeptical $121.4 million revenue projection for a 9-cent loss, according to Multex.com.

Handspring posted third-quarter revenue of $123.8 million on April 12 and factored in price competition -- Palm issued its warning two weeks prior -- to arrive at lowered fourth-quarter expectations of 5% revenue growth, or between $130 million and $136 million. Fighting has been fierce, with Handspring cutting prices on two of its newer Visor products, outdone by massive Palm cuts on the hot-off-the-assembly-line, m500 family of products. Handspring is competing against newer, cheaper products, leaving it to be damned on the margin side if it does cut prices and/or damned if it doesn't join the price wars.

"The only thing that could save it is if the international channel has taken off like a rocket," says J.P. Morgananalyst Paul Coster, who has not done banking for the company. Given recent comments on the state of European financial affairs made by Sun (SUNW) and cell-phone sellers, it would seem unlikely.

On Tuesday, Credit Suisse First Boston analyst Marc Cabi asked investors to consider a 5% to 10% vertical fall in Handspring revenue for calendar 2001 estimates if Handspring were to warn or miss estimates. Cabi pointed out the color-monitored Sony (SNE) Clie as another, albeit lesser, competitor to Handspring, pinching its revenue.

Lehman Brothers analyst Joe To noted Monday that a sampling of retailers showed them giving further discounts off the retail prices of Palm's m500 line. Neither firm has done banking for the companies.

June is a big consumer-electronics month because of Father's Day and graduation presents, but it might take until Christmas to improve sales.

"Palm's in a horrible hole. If they're not out of [the] hole by the holiday season, they may never get out," Coster says. "Handspring is not in a hole, so it can concentrate on innovative products."

Until it can sell them for a decent margin in a healthy market, however, its revenue and earnings will suffer. Be on Handspring watch as the company finishes up the last few weeks of the quarter.

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