The Day Ahead: Will Handspring shares fare better than Palm?

After an initial Wall Street honeymoon, will Handspring's IPO be successful?

Palm and Handspring are two handheld personal device makers connected in so many ways they could almost be clones. Both Palm and Handspring are champions of the Palm operating system. Handspring's founders were the brains behind Palm.

And Handspring's IPO may also have a tough time following an initial Wall Street honeymoon.

Handspring, which will make its stock market debut this week, is offering ten million shares expected to price between $17 and $19. The price range was recently lowered from $19 to $22. CS First Boston is the lead underwriter.

Aside from a volatile stock market, Handspring may have had to lower its asking price because investors couldn't find much differentiation from Palm. In fact, Handspring, whose Visor gadgets run on the Palm OS, is a less developed version of Palm.

That fact could make some investors wary. The much-ballyhooed Palm IPO has left some investors with an unpleasant aftertaste. Palm rocketed to $165 on its first day of trading, but now hovers around $28 or so. The stock chart looks like a vicious downhill ski slope.

Yes, there was some arbitrage going on as 3Com released details of its Palm share distribution 27 July, but Palm's outlook wasn't so wonderful either.

The company reported a pro forma profit of $15.5m on sales of $272.3m in its third fiscal quarter. The results sounded great until the Palm conference call. Execs have predicted slowing growth, component shortages, falling margins and operating losses as it fends off competition.

And Palm is a titan in the device market. The company, which hopes to be more than just a hardware company, has said it will boost revenue by licensing its operating system (OS) and wireless Internet service.

Handspring, cooked up by Palm Computing alumni Jeffrey C Hawkins and Donna L Dubinsky, looks like merely a young hardware company because it doesn't own the OS.

For the nine months ended 1 April, the company reported sales of $50m and a loss of $40.7m. The company has an accumulated deficit of $49.2m and expects to incur losses at least into calendar 2001.

In regulatory filings, Handspring acknowledges pricing pressure, component shortages and other hardware problems as risks. It relies on Palm for the OS.

Handspring has licensed the Palm OS until September 2003 with a pact that can be renewed on successive one-year terms. However, Handspring won't get Palm upgrades easily after 2003. "It is possible that Palm will choose not to renew the license at the end of its term for competitive or other reasons," the company said.

Will Palm do to Handspring what Apple Computer did to its clone makers -- pull the OS if competition heats up.

Meanwhile, Handspring is becoming increasingly dependent on the retail sales channel, which will hurt margins. Handspring, which released its first product in October 1999, had brisk Web sales when its product launched, but the site crumbled under the pressure.

Handspring said the problems are resolved, but in April expanded its sales distribution to include Best Buy, CompUSA and Staples. It also expanded in Europe and Japan.

"As revenues through our retail distribution channel increase as a percentage of total revenues, we expect our gross margins will decrease as sales through retailers are made at lower margins than sales through our Web site," the company said.

Handspring is hoping its Springboard modules, add-in products that can turn its Visor into a cell phone or MP3 player, will differentiate the company from Palm. However, the modules are behind schedule and there are only a limited number for sale.

The Springboard modules delay isn't a minor issue. Handspring said the modules are the key to developing alternative revenue streams. The company intends to license its technology and eventually develop wireless services.

Like Palm, Handspring said the competition is fierce. Handspring cited licensees of the Microsoft Windows CE operating system, including Casio, Compaq and Hewlett-Packard; members of the Symbian consortium, including Psion, Ericsson and Motorola; and other Palm licensees, including Nokia, Sonyand Qualcomm, as competition.

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