Handheld Entertainment Not Getting the Credit it Deserves

Ant & Sons submits: Handheld Entertainment Inc. (NasdaqCM: ZVUE) got into the online digital media business by being a hardware company, building a series of iPod like devices. But now the company is shifting its focus elsewhere, hoping to build a network of websites that will generate a consistent stream of revenue and in turn, spur demand for its portable media players.

The company recently acquired PutFile, a website that garners an audience of nearly 9.5 million monthly unique visitors and has 1.4 million registered users. The content side of the business is growing, with Handheld's property of websites now having 13.7 million monthly unique visitors, on track to record 1 billion page views this year. The increased monetization of these sites is likely to increase revenue at a good clip. The company says that its current revenue per user is about $.005, but estimates that a realistic goal for revenue per user is more around $.025 to $.03 cents. This would equate to at least $500,000 a month in revenue for the content side of the business alone. This could increase even more as the company is targeting a total of 17-20 monthly million visitors across its network of websites by the end of the year, according to a recent conference call.

On the financial side, the company has made significant strides, aiming to be cash flow positive by the end of the year. Handheld has reduced its operating expenses through some layoffs, and more recently, announced that monthly cash burn has been reduced to $400,000 from approximately $700,000.

The real variable here is the hardware side of the business. Management is banking on its recent acquisitions to help solidify their brand, a move that should help to increase sales of its portable media devices. Overall, it is a very clever business model because the websites the company has acquired are all complimentary and can be used to promote each of the Handheld web properties, and in turn, spur interest in purchasing music and the company's portable media players. Their Wal-Mart distribution is certainly crucial, but their growing base of web users will really be instrumental in fueling the demand for their portable players.

With this in mind, it is difficult to believe that the market is not awarding the company with a higher share price. Rather, the market has doubted the company's potential for future earnings growth, evidenced by the 1 million shares, or nearly 25% of the publicly traded float, held short. When the naysayers are proved wrong, this will make the move to the upside only that much quicker.

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