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BlackBerry (NASDAQ:BBRY) pre-announced that it was about to report a dismal quarter with virtually no sales of BB10 devices and a loss of $250 odd million from operations before an inventory write down approaching $1 billion. The report is not consistent with the evidence many have discussed on SA regarding BlackBerry sales intelligence including but not limited to StatCounter data that suggest BlackBerry sales are increasing.

I read the BlackBerry release in detail today and then went and read their published policy on revenue recognition. I did so because in the release today they reported that 5.9 million BlackBerry handsets were sold to end users but only 3.7 million were being recognized in revenue because 2.2 million of these sales came from inventory shipped in the first quarter.

The BlackBerry revenue recognition policy reads as follows:

Hardware

Revenue from the sale of BlackBerry wireless hardware products (e.g. BlackBerry® handheld devices and BlackBerry® PlayBook™ tablets) is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been transferred. For most of the Company's product sales, these criteria are met at the time the product is shipped. For hardware products for which the software is deemed essential to the functionality of the hardware, the Company recognizes revenue in accordance with general revenue recognition accounting guidance.

The Company records reductions to revenue for estimated commitments related to price protection, right of return and for customer incentive programs. Price protection is accrued as a reduction to revenue based on estimates of price reductions provided the price reduction can be reliably estimated or based on contractual caps and all other revenue recognition criteria have been met. The Company also records reductions to revenue for a right of return based on contractual terms and conditions and, if the expected product returns can be reasonably and Company recognizes revenue when the product sells through the distribution channel. The estimated cost of customer incentive programs is accrued as a reduction to revenue and is recognized at the later of the date at which the Company has sold the product or the date at which the program is offered. If historical experience cannot support a breakage rate, the maximum rebate amount is accrued and adjusted when the incentive programs end.

What I get out of this policy is that management will decide when it has enough evidence that the ownership and risk of a sale has been transferred to a buyer who will pay their bill. Not that complicated, but a lot of room for judgment.

In Q1 of this fiscal year, BlackBerry reported sales of 6.8 million handsets of which it says 40% were BB10 devices. It now says 2.2 million of those sales were into inventory but were not sold through to end users until this quarter. Most observers assumed the 40% BB10 devices were about 2.8 million users buying a BB10 handset. It seems that more like 600,000 users bought a BB10 handset and 2.2 million handsets were shipped to carriers and retailers that BlackBerry was confident would ultimately find their way into the hands of users.

If BlackBerry only reported its revenue when devices were actually sold to end users, my sense is that in Q1 it sold 4.6 million devices of which 4 million were BB7 devices and 600,000 were BB10 devices.

Since the Street was expecting 3 to 4 million BB10 devices in Q1 as read the blogs at the time, investors were disappointed. They may have been even more disappointed if they read that BlackBerry users had bought only 600,000 BB10 units in that quarter.

Let's move fast forward to the current quarter. BlackBerry says 5.9 million units were purchased by end users during the quarter. 5.9 million is a lot more than 4.6 million. It also says most of the 3.7 million units it recognized as revenues were BB7 devices, say 3.6 million. That makes sense to me since one would expect BB7 sales to decline and a decline from 4.0 million in Q1 to 3.6 million in Q2 would not be alarming.

More importantly, BB10 devices finally start to take off, selling 2.3 million of the 5.9 million units taken up by end users, almost 4 times the number sold to end users in Q1.

This might explain the sharp rise in BlackBerry usage data reported on StatCounter mentioned earlier.

Maybe BlackBerry management were just applying their revenue recognition policy and it produced an odd result. Alternatively, BlackBerry management may have wanted to report higher BB10 sales in Q1 than were taken up by end users because the Street's expectations were very high and management did not want to disappoint. I don't know.

What I do know is that 5.9 million devices sold to end users in Q2 is not a disaster. I also know that if BB10 devices are gaining traction and almost quadrupling sales in Q2 over Q1, the product is selling well. Maybe not as well as many who compare BlackBerry to Samsung or Apple would like, but pretty well for a new platform in a competitive market period.

A factual analysis of what happened here is above my current pay grade, but some explanation is necessary. A lot of people lost money today, and a lot of confusion exists about whether BlackBerry is dying or thriving. We deserve better.

I am long BBRY calls.

Source: BlackBerry Q2 Results Are Not What They Seem To Be; We Deserve An Explanation

Additional disclosure: I hold calls on BlackBerry