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To: StockDung who wrote (14374)	10/21/2000 8:53:16 AM
From: Fundamentls	Read Replies (1) \| Respond to of 18998

Good analysis overall on HAND. I agree with your conclusions and doubled my short position at the close yesterday. However, I think you might be stretching on the question of whether HAND loses money on every sale. It looks to me like they're roughly covering their variable costs, or maybe a little more, at this point in time. In the last three quarters, gross profit margin has run about 31-32%. The only other cost item that is variable is a portion of SG&A expense. Total SG&A has dropped steadily from 42% to 36% of sales over that period. If you compare the quarterly change in sales vs. change in SG&A, in the quarter ended 7/1 sales increased $17.5 million while SG&A was up $5 million, suggesting variable SG&A costs at about 28% of sales. This was down from 35% the prior quarter, as one would expect during a product rampup. At 28%, that would leave HAND with a net profit of 3-4% for each incremental unit sold. More likely, we will see the 28% decline a bit more as sales grow, especially into Christmas season. For the sake of discussion, I might think this would settle at 22-25% over the longer term, which would result in a marginal net profit of 6%-10%. Of course the scary part would be that they still have to cover about $93 million a year in fixed costs (broken out roughly as $24 million fixed portion of SG&A, $14 million R&D, $55 million depreciation & amortization). Assuming a marginal net profit of 8%, the midpoint of my range, that means they need to sell $1.175 billion worth of goods, roughly six times the run rate of the July 1 quarter. That's just to break even on the bottom line. With enough volume, HAND could achieve profitability, but to justify the market cap of $11 billion, they will need to be making $400-$500 million a year after tax, maybe $750 million before tax. Even if contribution margin rises to 10%, that means sales of $7.5 billion, or (very roughly) 35-40 million units. Possible? Yes; the global PDA market could get large enough within a few years, and HAND could potentially be a major player even without owning the OS, assuming they do a better job of packaging and marketing than anyone else, don't make any big mistakes, and don't attract credible competition. Likely? Only if you believe in fairy tales. Regards, Fund