Palm's Pre Inventory Glut

Discussing Palm’s first-quarter results earlier this month, the company’s leadership claimed that “the vast majority of new sales” for the quarter were generated by the Pre. Palm sold some 823,000 handsets during that period with sell-through of 810,000 units, so that’s an impressive feat. But only if the sales we’re talking about here were made to on-the-street consumers. And, according to Town Hall research analyst David Eller, it’s not entirely clear that they were.

You see, Palm (PALM) defines units sold as products sold to on-the-street customers or to resellers like Best Buy (BBY) and Amazon.com (AMZN). Which means that Palm can report a unit sold while it’s still sitting at inventory at various retail outlets. In other words, a Pre sold is not necessarily a Pre activated. As Eller notes, that’s problematic.

“We have been perplexed by a disconnect between PALM’s device units sold and our estimates of store level sell through,” Eller writes. “According to PALM’s reported sell through, inventory increased by 13k units and since the ‘vast majority’ of both the device units shipped and the device units sold were units of the Pre, there couldn’t be an inventory problem. The gap between the two is only 13k.”

Continuing, Eller adds a cautionary note: “However, since the company recognizes revenue on sell in to the channel and the company defines device units sold as units that have been shipped from Sprint (their primary customer) to either customers or second tier distributors, PALM could offer investors a high number of units shipped but still have a glut of inventory in the channel. We believe that channel inventory is currently about 11 weeks, which we believe will pressure reorder rates and make it more difficult to sell high ASP products going forward.”

An 11-week glut of inventory in the channel? If that’s the case, it’s certainly cause for concern, more so because many investors are evidently unaware that this is even a possibility. “[Palm’s definition of sold] does not appear to be understood by investors,” Eller notes. “We polled several of the investors who attended the Boston road show lunch and each was under the impression that sell through translated into customer activations. How can this be?”

Good question. Palm and Sprint (S) investors both might want to pay a bit more attention to Sprint’s 10-k in the future.

I’ve asked Palm for comment and will update this post when it responds.

UPDATE: This just in from Palm:

“The sell-through data we post reflects carriers’ sales to their customers. For example, Sprint customers include consumers who buy in a Sprint store, and Sprint retail partners such as Best Buy and RadioShack. We rely on our wireless carriers to provide us with sell-through data, and we note this fact in our 10Q.”

[Image credit: Flickr/Spintar]