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Strong sales push Handspring past estimates

Buoyed by stronger-than-expected handheld computer sales, Handspring posts a second-quarter loss that is several cents narrower than Wall Street estimates.

Buoyed by stronger-than-expected handheld computer sales, Handspring on Tuesday posted a fiscal second-quarter loss that was several cents narrower than Wall Street estimates.

Excluding the amortization of deferred stock compensation, the Mountain View, Calif.-based company reported a loss of $7 million, or 7 cents per share, on sales of $115.6 million. The company had been expected to lose 16 cents per share and had earlier guided analysts to expect sales of $95 million to $105 million.

In the same period a year earlier, the company lost $3.84 million, or 12 cents per share, on sales of $15.8 million. The company launched its Visor handheld in fall 1999.

For its most recent quarter, several analysts had predicted better sales and a narrower loss than the company had forecast. Analysts based their assessments on reports of strong holiday sales.

"We found the holiday season came a bit late, but it came with great gusto," CEO Donna Dubinsky said on the company's conference call Tuesday.

Including the compensation costs, Handspring lost $15.2 million, or 15 cents per share.

Handspring boosted its sales outlook for the current quarter, which it had previously said could be below the $95 million to $105 million it was expecting for the October-to-December quarter.

"However, given the continued strong reception of our product, we now believe revenue for the March quarter...should slightly increase (to) the range of $117 million to $123 million," Bernard Whitney, Handspring's chief financial officer, said during the company's conference call.

With the new, higher priced models, Handspring's gross margins increased to 31.4 percent, up slightly from the prior quarter.

Whitney now expects gross margins to rise to 31.8 percent in the March quarter.

For this calendar year, Whitney said the company now predicts a revenue of $560 million to $590 million with gross margins averaging 32.5 percent to 32.8 percent. That translates to a loss of 10 cents to 16 cents for the calendar year, Whitney said, adding that the company expects to have its first profitable quarter by the end of 2001.

Merrill Lynch analyst Melanie Hollands said Handspring will need to release new products that appeal to a broader audience if it hopes to increase sales, including in the typically slow January-to-March quarter.

"That's what's going to driving revenue this quarter," Hollands said. "Valentine's Day is not a big handheld holiday."

In other news, Dubinsky said that the component crunch is easing.

"In general we have seen improved supply conditions," Dubinsky said. "We continue to feel our business is not constrained by component shortages."

In contrast to the rather dire reports of PC stocks, handheld sales appear to have been strong and analysts say that the devices continue to remain popular.

"Post-Christmas sales remain strong as Handspring continues to see strong demand for its product," Lehman Brothers analysts Joseph To and Dan Niles said in a research report last week.

Dubinsky said Handspring will expand nationwide the launch of VisorPhone, an add-on module that turns its handheld computer into a cell phone. The company will do so this month by adding support for VoiceStream and Powertel wireless networks.

The VisorPhone is already offered on Handspring's Web site for customers in California, Nevada, North Carolina, South Carolina, Georgia and Tennessee. These states are served by Cingular Wireless, the company formed by the merger of Bell South and SBC's wireless operations.

The company plans to begin selling the VisorPhone in U.S. stores later this quarter and expects to sell the devices in Europe by mid-year.

In an interview, Dubinsky also hinted at the possibility of a new services business, built on the foundation of the company's recent acquisition of Bluelark Systems, but said no specific plans are ready to announce.

Dubinsky said she doesn't see the company's current advantage of add-on modules going away when Palm debuts its first handhelds with a Secure Digital (SD) slot later this year. Dubinsky said that expansion port is better suited to memory and content than adding items such as a wireless modem or cell phone.

"SD, in my view, is a very reasonable solution for content and memory," Dubinsky said. "If you want more than that, SD is going to fall short."

In response to an analyst's question on the conference call, Dubinsky said it probably is technically possible to make a Springboard module that can read SD cards.

Palm has touted the slot as capable of adding short-range Bluetooth wireless connections or a digital camera, in addition to being a good way to add memory and software.