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Investors were not too impressed with Handheld Entertainment's (OTC:ZVUE) conference call last week, driving the stock down over 15% in response. I wasn't impressed either.

There was some good news. The company has reduced cash burn to $400,000 per month. That's better than last fall's $750,000 but not sustainable over the long term.

Never fear. The company says it will be able to fulfill its projection of positive cash flows in Q4 if it is able to sustain a price point near $149 for the upcoming 260 model, if it continues to enjoy similar marketing deals with WalMart, and if it can grow its revenue-per-user on the online businesses by 400-500% from .5 cents per user per month to 2.5-3 cents. For the sake of investors I hope its right, but those are some pretty big "ifs."

zvueOn the hardware side, the 260 is a marked improvement over current models. With a 2.5" screen it looks a bit like a video iPod knockoff (pictured right) and weighs in at about an ounce lighter than Apple's (OTC:APPL) hard drive models (though much heavier than the equivalent flash-based nanos).

Notice the price creep though...when announced in January it was $99 now its "less than $149." I know, I know, multiple configurations, different SD cards, blah, blah, blah. But at the end of the day I don't think they will be able to sell a ZVUE flash player into the 2007 back-to-school/holiday season for $149 even with a 512MB or 1G SD card. WalMart currently sells the Zen 1GB flash video/MP3 player for $89, and the Sandisk 2GB for $125. A 2GB Apple Nano is currently only $175.

Can there be any doubt that a price war is underway in the low end flash video players? Or that prices will drop further over the next four to six months before ZVUE ships the 260 (if it executes as planned, something I wouldn't take as a given after last Christmas)? In a decaying price environment, I don't see how ZVUE can gain any ground on these better-equipped, higher volume competitors, much less achieve its goal of sustainable positive cash flow from the hardware biz. My guess is that ZVUE will exit the hardware business by this time next year, having nothing to show but losses.

The online business has a better chance, but I don't think it can justify ZVUE's current market cap. Again the company is showing signs of weak execution. Oscodar admitted the recently acquired sites had tons of unmonetized pages that could "easily" yield revenue by plugging in a third party ad network like AdWords or Kanoodle. Well, if that's the case, why don't they do it?

Execution aside, I simply don't think that the sites that ZVUE was able to buy for just over $10 million can suddenly justify a $40+M market cap. I'm not even sure they are worth $10M. GoFish.com's recent acquisition of Bolt Media, another network of sites targeting the same demographic, provides a good comp. GoFish (OTC:GOFH) paid "up to $30M" for Bolt, or about 4.5x trailing 2006 revenues. ZVUE said that the sites it acquired had 13.8M unique visitors each generating $.005/month as of the conference call. Lets be generous and assume that the sites also had that traffic throughout 2006 and that not one of the 13.8M "unique" visitors was double counted across the sites. Multiply those numbers out and you get a best-case estimate of $822,000 in revenues over the last 12 months. It looks like ZVUE paid over 11x revenues in the aggregate, or more than twice the going rate.

zvue

Disclosure: I have no position in ZVUE or GOFH.OB. I am long one 60GB video iPod.

Source: HandHeld Entertainment: Too Many 'Ifs'