Calluses for Handheld Makers

Baldwin Louie — Thu, 03 May 2001 15:00:00 -0700

The companies that rise together, often fall together.

Handheld organizer makers Palm and Handspring, once high-flying stocks, dipped in unison Thursday as each suffered unpleasant news that weighed on their share prices. An influential analyst downgraded Handspring, while a ranking Palm executive acknowledged that sales are continuing to slow.

The news spurred speculation that both companies would have to trim prices on their low-end products, even while they – and their competition – roll out new high-end models. The handheld makers now find themselves in a pinch: Margins on their fastest-selling products are slipping in an environment that could crimp demand for their high-margin goods.

Early Thursday, Lehman Brothers analyst Joseph To downgraded his rating on Handspring from "strong buy" to "buy." The report ascribed the downgrade to the near-term pricing pressure on Handspring as a result of price cuts that Palm instituted last month.

"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 the report. According to To, price cuts from Handspring could come as soon as mid-May to coincide with Father's Day retail promotions.

Handspring would not confirm whether it had any price cuts planned for the near future. Aside from a $50 rebate on its Visor Deluxe, the company has never cut prices on its product line. A company spokesperson would say only that Handspring is "analyzing what we have to do to retain the customer base and the good sell-through that we've had."

Meanwhile, Palm revealed that it continues to suffer from a sales slowdown despite having slashed prices across its product line. At the J.P. Morgan H&Q technology conference Wednesday, Palm CFO Judy Bruner said the company's U.S. retail share had dropped 20 percent from January to April, and that it's likely to take a one-time charge this quarter to write off as much as $300 million in excess inventory.

Palm shares slipped 15 percent to $8.24, while Handspring's share price fell 17 percent to close at $14.45.

The fact that price cuts have not had a huge impact on the inventory of low-end products like the Palm m100 means Palm might have to lower prices to the $100 level, according to the Lehman Brothers report.

All this comes as the companies and their competition roll out high-end products. Earlier this week, Sony announced its forthcoming Clie device, a $499 Palm operating system unit with a high-resolution color screen. Handspring launched the sleek, $399 Visor Edge in March, and announced it is working on a new line of products that will feature built-in wireless capabilities. And Palm's recently announced m505 will sport a $450 price tag.

The prices of these high-end models could begin to appear excessively expensive, as the low-end of the market slides to the $100 point.

If the market doesn't pick up, said Gartner Research Fellow Martin Reynolds, handheld makers might be forced to extend the price cuts to the newer, high-end models. "If the economy is slowing down, then the higher end models are going to either sell at a lower price point or sell fewer units."

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Calluses for Handheld Makers