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I didn't plan on updating my views on Handheld Entertainment (OTC:ZVUE) until after today's conference call, but there appears to be a lot of interest, so here goes:

In a nutshell, I'm still skeptical. I don't see a viable business model for either the hardware or content business. Yesterday's announced acquisition of Putfile does not change anything. ZVUE needs to start generating cash flow, not eyeballs.

Before listening to this conference call, I encourage everyone to read the transcript of the November call. CEO Jeff Oscodar set some specific goals that should give us a clear indication of the company's progress. I'm going to focus on these areas:

  • ZVUE 200/250 sales and margins: last November, management told us that they expect minimum sales of 50,000 units within 12 months (by mid-November 2007), at a gross margin of 18%. Figure that ZVUE is on track if it cleared 27-30,000 by now at those margins. With its problems delivering units ahead of the critical holiday season, I'd say this is a long shot.
  • Cash burn: last fall, Handheld said it would cut its monthly burn rate cash burn to $375,000 through headcount reduction, design outsourcing, elimination of the 450 player line, and other measures. CFO Bill Bush said that the cost saving plan was nearly fully-implemented in November, so any backtracking tomorrow should be seen as a disappointment. The company also said it would be cash flow positive by November 2007.
  • Monetization of content: Over the past 9 months, ZVUE has spent approximately $10.8 million buying what could generously be called third-tier user-generated content sites ($7.1 million on Putfile, Yourdailymedia.com for $1.06 million, Dorks.com for $1.5 million and funmansion.com for $1.1 million). CEO Oscodar said they planned to ramp up advertising revenues on the sites. Take a look for yourself. I don't see a whole lot of advertising on most pages.
  • These are metrics that the company set for itself. Let's see how they did.

    zvue

    Disclosure: Author has no position in ZVUE.

    Source: Previewing Handheld Entertainment's Earnings: Why I'm Skeptical