Handspring Still Stings From Palm's Slap

Handspring's (HAND Quote - Cramer on HAND - Stock Picks) fourth-quarter results are going to be sadder than Mother's Day at Bambi's house.

The Street expects tear-jerking revenue of $60.8 million for the handheld maker in the quarter ended June 30, along with a 32 cent-a-share loss, as gathered by Multex.com, compared with the $123.8 million in revenue it mustered in the third quarter. All the more tragic because the tough stretch for the young company comes at the hands of its rival and operating-system supplier Palm (PALM Quote - Cramer on PALM - Stock Picks).

Tumbling Handspring It's been a tough two quarters for the handhelds

Palm spent the quarter clearing out hundreds of millions in inventory by slashing its prices, forcing Handspring to answer with its own cuts. On June 7, Handspring reacted to melting industry prices and consumers' kick-to-the-gut move to low-end purchases by reducing its fourth-quarter expectations by 50% to the $60 million to $65 million range. (Palm halved its fourth-quarter revenue predictions on May 17 and beat them by $5 million on June 26 with $165 million in revenue, complemented by a $436.5 million charge.)

Soon Handspring's troubles spread beyond pricing pressure and falling average selling prices as Palm and Sony (SNE Quote - Cramer on SNE - Stock Picks) put out new higher-end models that cut into Handspring's big-ticket models. According to NPD Intelect consumer electronics sales research, Handspring's market share fell from 19.2% in April to 15.3% in May, at the same time Palm jumped from 62.1% share to 69.4% overall.

Palm gave investors a little hope in its fourth-quarter earnings report with what CFO Judy Bruner called "significant improvement" in May sell-through after several months of declines. Handspring is not expected to show matching improvement in the latter weeks of its quarter. The Street will press Handspring on timelines for snazzy additions to its product line. As of Monday, Handspring was discounting yet again, cutting prices on its VisorPhone to $299.

Credit Suisse First Boston's Marc Cabi expects Handspring's average selling price on its handhelds to drop from $270 to $240 in the fourth quarter, while J.P. Morgan analyst Paul Coster looks for Handspring's 30% margin on handhelds to slip to 20%. The Street is not optimistic about Handspring's ability to bounce back to full pricing if and when Palm shakes off its inventory problems for good.

Handspring can thank its lucky stars that investors aren't fretting about its cash stability. The company lost $27 million on operations in the third quarter. The Street doesn't expect the fourth quarter to tax the $107 million in cash and equivalents and $52 million in short-term investments Handspring had at the end of the third quarter.

The Street has faith in the Handspring management team, but the handheld slowdown has spread from a one-quarter phenomenon to a deceleration that won't see more action from the gas pedal until the holiday season.