Novatel: Comparing 'Sell Through' vs. 'Sell In' Numbers

We, as analysts, can learn a lesson from Novatel’s (NVTL) financial report that applies to PALM as well. Novatel, facing deteriorating financial results from a dated product line, released a new product (Mifi) that created overly optimistic expectations and dramatically disappointed shareholders.

NVTL released Mifi, a device that combines a 3G data access with a wifi hub in the June quarter. Consumer response has been strong, reviews have been good and in its first full quarter shipping, accounted for 40% of revenue. This success has led to nosebleed high earnings growth rates for 2010. However, these expectations were based on continued revenue contribution based on sell in.

The company has been seeing increasing sell through each month since launch. This success has attracted many additional carriers leading to 11 new customers for Mifi in C3Q09. However, this success does not mean sell through has kept up with sell in. The company owned up to this issue and guided C4Q09 results below consensus leaving shareholders with a 20+% overnight decline. From our perspective, management should be commended for providing conservative guidance rather than aggressively anticipating new relationships to make up for a longer sales cycle which may lead to disappointing financial results. Despite today’s sell off, if there are indications that sell through picks up as we enter the Christmas season, the stock will likely begin to recover quickly.

Not all companies take this approach to financial visibility however. PALM launched the Pre in June and has led people to believe the discrepancy between sell in and sell through are negligible. We have a contrary opinion and believe that the gap is much more substantial than PALM’s “devices sold” metric would indicate. The belief that additional products, sold through additional carriers will cushion the blow of lower than expected sales, is a pipe dream based on Ponzi-like distribution. We believe that holders of PALM into the November quarter financial results risk a negative surprise similar to what holders of NVTL are experiencing today. Consider the comparison of the two companies:

• Product launch - NVTL launched with Verizon (VZ) and Sprint (S) in May and June, PALM launched with Sprint in June
• Follow on customers - NVTL signed 11 additional customers since the initial launch, PALM signed 5 additional carriers
• Sell through - NVTL has seen increasing sell through in every month since launch, PALM has seen slowing sell through (based upon our channel contacts) since the initial launch.
• Customer concentration - NVTL had 3 customers that accounted for 70% of revenue in the quarter, PALM had 1 customer that accounted for 85% of revenue
• Valuation - NVTL is trading at 1.5x book value, PALM is trading at -5x book value per share

We highlighted Mifi as one of the most important products to come out of this spring’s CTIA and are in the process of determining the natural level of sell through. If we find that sell through is accelerating and sustainable, we will be publishing an investment opinion on NVTL in the near future. Currently we have an Unfavorable Opinion on PALM.

Disclosure: I have no investments in either NVTL or PALM.

Comments

[Solow46:]

You still did not clearly defined in both examples the sell through and the sell in concepts....

Nov 13 08:52 AM

[RK:]

Sell-in refers to shipment to distributors or carriers.
Sell-through refers to shipment to end customers.
Sell-through is a more accurate depiction of real demand.

On Nov 13 08:52 AM Solow46 wrote:

> You still did not clearly defined in both examples the sell through
> and the sell in concepts....

Nov 13 07:00 PM

[Yagottabe K...:]

Understand that =PALM's= definition of "sell-through" is NOT, repeat NOT, "sales to end customers".

Palm's definition of sell-through is "sales by those to whom we have sold-in" (*).

Why is this of import?

Because, as noted above, Palm had an 85% customer, Sprint, that served as a wholesaler to other venues like BestBuy, Walmart, Radioshack, etc.

That is, when Sprint turned around and sold Pres to, say, BestBuy, those Pres were counted =by Palm= as "sold-through" even though they were in warehouses and on shelves yet to be sold to end customers.

We don't know what wholesale customers Sprint has other than the above; they COULD include even other wholesalers - thus Palm sells to Sprint (that's "sold-in"), Sprint sells to Wholesaler X (Palm counts that as "sold-through"), Wholesaler X sells to Retailer Y, Retailer Y can't sell the device and it sits on a shelf.

Sold-through.

------

(*) There's a very small and insignificant "sell-through" that goes directly to end customers from Palm via Web sales with no "sold-in" in-between.

Nov 14 04:23 PM

[Jim Van Mee...:]

Regardless of the definition I'm selling this stock

Nov 15 06:56 PM

[David Eller:]

Selling PALM or NVTL?


On Nov 15 06:56 PM Jim Van Meerten wrote:

> Regardless of the definition I'm selling this stock

Nov 18 08:29 AM