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Palm, Handspring shares sink

Shares slump after a Lehman Brothers analyst downgrades Handspring, and Palm says U.S. retail sales slipped further in April.

Shares of Palm and Handspring fell Thursday after a Lehman Brothers analyst downgraded Handspring, and Palm told investors that retail sales of handhelds dropped further in April.

Lehman Brothers analyst Joseph To cut his rating on Handspring, saying the No. 2 handheld maker could be hurt by pricing pressures as the two companies try to move inventory through seasonal promotions. Late Wednesday, Palm said U.S. retail sales were slipping.

Palm shares closed down $1.51, or 15 percent, to $8.24. Handspring shares were off $3.05, or 17 percent, at $14.45.

"We believe Handspring may look to take a more proactive approach to the situation after having been held hostage to Palm's pricing actions over the last month," To said in a report.

In April, Palm slashed prices on its older models in an effort to deal with a glut of inventory. The company said at the time that it could have an additional $200 million in unsold inventory this quarter, based on current demand, on top of $100 million in inventory still left from the end of last quarter.

Speaking Thursday at a Merrill Lynch conference in New York, Handspring CEO Donna Dubinsky said it was too early in the quarter to tell whether Palm's price cuts would hurt her company. "We don't know what impact Palm's inventory will have on us," she said.

Dubinsky also reiterated the company's revenue forecast. She said she still expects the company to report revenue in the low end of a range between $130 million and $136 million for the quarter ending in June.

"We are certainly seeing some softness, but we wouldn't characterize it as a precipitous decline," Dubinsky said.

Lehman downgraded Handspring from "strong buy" to "buy," although To noted that he still likes the sector in the long term. Pricing on the very low end of the market would "have to come down even further in order to right the ship," he said.

"As it stands right now, 2MB products are selling in the $130 to $150 price range, whereas 8MB products are selling as low as $179," he wrote. "Consumers are not stupid and have been willing to pay the extra $20 to $40 for the extra memory."

Price cuts could come as early as next week, To said, but would be more likely later in the month to match up with Father's Day and graduation promotions.

A Handspring spokesman would not comment on the timing of price cuts but said the company does plan to reduce prices at some point. "We will over time have price cuts," he said Thursday.

Pricing for low-end products could get as low as $100, he said, adding that those products make up as much as 60 percent of sales for Handspring and Palm.

Palm Chief Financial Officer Judy Bruner said Wednesday that market research data showed U.S. retail sales had slipped 20 percent from January to April.

Bruner, speaking at the J.P. Morgan H&Q technology conference, said that the company expects to take a one-time charge, likely this quarter, to write off up to $300 million in inventory. The write-off would probably include both components and finished products, she said.

U.S. Bancorp Piper Jaffray analyst William Crawford said that a fairly bad quarter for Palm was already predicted.

"I don't think this is significantly worse than what we should be expecting," Crawford said. Nonetheless, he said, if products aren't moving off shelves, the companies may have to chop prices further.

"We might see another round of price cuts," he said.

Handspring executives said in April that they saw "softness" in demand for handheld products amid the economic slowdown.

News.com's Ian Fried and staff writer Larry Dignan contributed to this report.