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A long time ago, we thought the Palm (PALM) Pre and WebOS would meet with modest success at best. Subsequent channel checks and other field observations told us otherwise.

One of the problems we encountered was that Palm management repeatedly indicated that business was much better off than any of our work indicated. While we endeavored to explain Palm's highly discretionary revenue recognition, we see its pre-announcement of weak February 2010 results as resulting more from over ambitious revenue recognition in prior periods rather than recent setbacks.

Palm’s products have met with weak market acceptance. Despite a disappointing launch of the Pre, we believe Sprint’s (S) current weekly volumes have dwindled to less than 5,000 units. We believe Sprint sold less than half the number of units it needed to maintain exclusivity and that it and its resellers are still holding considerable inventory. Our best intelligence indicates sell through at both Telefonica/O2 and Verizon (VZ) has been less than stellar.

At $29, the Pixi is a good phone for distributors willing to take a modest penalty on a subscriber commission.

We expect Palm’s Pre and Pixi will be available to AT&T (T) later this year. While this may turn into a positive, market experience and management’s dedication to deception keep our expectations low.

Disclosure: No position in Palm, continue to rate unfavorable

Source: Palm: Aggressive Revenue Recognition Is the Problem