Handspring exiting PDA market to stay alive

BY DAVID SPEAKMAN

Bleeding money, Handspring, Inc. is attempting a series of
financial acrobatics to survive.

It recently eliminated 50 jobs, slashed expensive programs and junked plans to move to a new, high-profile Sunnyvale headquarters to give its bet on wireless time to pay off (see related story, page 1).

The company, whose founders pioneered personal digital assistants, will exit the organizer business in the next two months as worldwide demand for handheld computers slumps.

While reporting a second-quarter loss Jan. 16, the Mountain View-based maker of PDAs and cell phones based on the Palm Inc. operating system, announced it will pay up to $80 million to back out of its $350 million, 12-year lease signed in 2001. Moving to the two new office buildings, built by Mozart Development Co., would have made Handspring the main tenant in Sunnyvale’s redeveloped downtown.

Handspring will pay Mozart $61.2 million in cash and an additional $5 million in various debt payments during the next five years. The company also will issue Mozart warrants to purchase 10 million Handspring shares. Because of the settlement, Handspring says it expects to post a charge of between $75 and $80 million in the current quarter.

“Prior to this, Handspring was paying $2.5 million per quarter to service the lease obligations,” says San Francisco-based analyst Jason Tsai with RTX Securities. “Handspring continues to work through tumultuous times.”

Another tourniquet applied to the cash bleedout is a phasing out of the company’s vanilla organizer business. Handspring will bow out of PDAs and focus solely on selling its Treo Communicator family of Palm-enabled cell phones.

Treos are sold mainly by mobile telephone carriers, such as AT&T Wireless, Cingular and Verizon Wireless. The company said it sold 50,000 Treo Communicators last quarter, priced between $450 and $500, bumping up its total Treo customers to 140,000.

“With its business so focused on its Communicator business, Handspring is at the mercy of its carrier partners and their buying requirements,” Tsai says. “Handspring will need to secure new, strategic carrier relationships in order to have a viable long-term business plan. While we do believe Handspring will be able to secure these relationships, timing is critical.”

Handspring has never made a profit and time may be running out. After the $61.2 million payment to Mozart, Handspring’s non-restricted cash balance will be about $50 million, and restricted monies will amount to $2.3 million.

Bear Stearns analyst Andrew Neff says with Handspring currently burning between $10 million and $12 million a quarter, the company is dangerously close to running out of funds. Neff speculates that Handspring could face bankruptcy unless it turns a profit by year’s end, as Handspring management claims it should.

During the company’s earnings conference call with analysts, Handspring CEO Donna Dubinsky said the $61.2 million price tag to buy out the lease is worth it.

“By significantly reducing our original financial obligation, we lower our break-even point, and we are better positioned to achieve our goal of profit by the end of the calendar year,” she said.

New York-based analyst Charles Wolf of Needham & Co. says the continued viability of Handspring depends on its ability to ramp up sales of Treo Communicators.

“The slope of that ramp remains the wild card,” he says.

Even if Hanspring manages the ramp, analysts and investors are waiting to see if the company can stick its landing.