Handspring Takes a Tumble as Handheld Sales Fall Flat

The company warns that revenues will be coming in at under half earlier expectations.
By Tish Williams ,

Updated from 5:32 p.m. EDT

Handspring

(HAND)

is playing demolition derby with its fourth-quarter numbers. The No. 2 handheld maker rear-ended market leader

Palm

(PALM)

after the close of trading Thursday, taking $70 million, or up to 54%, off its fourth-quarter revenue estimates in the great Palm inventory smash-up.

Handspring expects to post $60 million to $65 million in revenue for the quarter ending June 30, a little more than half its previous guidance of $130 million and a demolished finish in comparison to the third quarter's $123.8 million in revenues. On a conference call following the warning, CEO Donna Dubinsky blamed the revenue woes on a trifecta of slowing handheld market growth, price competition and the disappointing performance of its high-end products. Prior to the warning, the Street expected Handspring to drum up $121.47 million in revenue, as reported by

Multex.com

.

"This is disastrous given they've still got Father's Day ahead of them. This quarter is backend-loaded, which speaks to how bad things are right now," says Matt Adams of

Epoch Partners

, who calculates that the company could have sold as little as $20 million to $30 million with a few weeks to go until quarter's end. His firm has done no investment banking for Handspring.

On May 17, Palm slammed on the brakes, warning that its fourth-quarter revenues would be in the $140 million to $160 million range, vs. its March 27 outlook calling for what then seemed a lamentably bad $300 million finish. Palm turned in $471 million in third-quarter revenue. Those poor numbers have been attributed mainly to an ill-timed accumulation of component inventory at the end of last year as well as the delayed introduction of Palm's newest handhelds, the m500 family of products. Palm and Handspring have spent the quarter waging a price war, with Palm heavily discounting its Palm V, as well as its Palm VII. Handspring has responded, including a $100 rebate announced today. Given that backdrop, TheStreet.com

wrote this week that a Handspring warning would be unsurprising. Now, Dubinsky says that Handspring has an inventory problem of its own and will take a $20 million writedown in the fourth quarter, based on excess components it won't be using.

Handspring's difficulties would indicate that Palm's problems aren't entirely related to management slip-ups and that a buying slowdown is hurting both companies. Adams suggests "the revenue cut made today is almost entirely due to a lack of unit sales growth. Maybe this is not as much Palm management's fault." Adams argues that the majority of Handspring's discounts come in the form of rebates, which don't hurt the revenue line and most likely won't hit the books until next quarter.

"Given what's been going on, certainly we would expect the warning," says

US Bancorp Piper Jaffray

analyst Bill Crawford, who's done banking for Handspring. "After Palm's cuts, its preannouncement, the only thing kept Handspring from warning earlier was the fact that so much time was left in their quarter. They thought, 'Why preannounce when there's still time?' It's become more and more clear though."

Dubinsky insists that when the company reports its final fourth-quarter results the week of July 16, it will be putting the worst behind it. "We're trying to get the price protection we need and get inventory where we need it to be, so we can leave the quarter with the sense that we can move forward with our business."

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