Turley Muller

Palm Has a PREcarious Channel Issue

Sell-in is what is counted as sold and recognized in revenue. Sell-through doesn't have any accounting implications in terms of revenue recognition. Certainly it plays a role in what the next quarter's sales or (sell-in) will be.

The accounting rule you are referring to about the six months doesn't apply to Pre, it's for specified elements not yet delivered, but will in six months and it's value is known. An example would be- buying a computer that includes new OS for free when in comes in two months. If management knows that it will sell it for $50 to others, then the revenue from the computer can be recognized, and just the $50 is deferred until delivered. if VSOE can't be established, all of the revenue has to be deferred.

The Pre accounting is totally different. PALM may time to time provide free software upgrades. They are not specified, so the revenue is amortized on straight-line basis for 24 months.

It doesn't matter how long a phone sits in inventory with respect to it's economic life. The economic life is based on concept of how long the device still retains value before it becomes obsolete. New software upgrades might not be supported for older phones, so the rationale is that after 24 months that the device is introduced, OS upgrades will still likely run on that device, but in 3 years? or longer ? no guarantee. OS upgrades are developed around the most recent devices. Like there are features in iPhone OS 3 that only work on 3Gs and some that won't work on the 2G iPhone (MMS) and it's possible that OS 4 won't run at all on 2G iPhones. as iPhone hardware becomes more advanced resulting in more powerful software not capable of running on old hardware.

Apple does the same thing, when iPhones are sold to carriers or resellers, it's a sale and it starts amortizing the revenue even if it's not sold to an end-user for months. There are probably iPhones in Russian carrier inventory that could be 6-12 months old.

I didn't realize, and I would agree many didn't know that Palm's sell-through included sales to non-carrier resellers. In Apple's case, since they distribute direct to Best Buy and Wal-Mart, as wells as carriers, there isn't a 2nd tier distributor, so Apple's sell-through is units sold + change in channel inventory.

I estimated that activations were 600K-650K, not I see why that's too high., Analysts didn't underestimate sales (in the sense of activations), if they based them on in-store activations at Sprint. I knew end-user demand had to be lower. Great find, thanks for pointing this out, terrific analysis.