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  1.    #1  
    Palm Has a PREcarious Channel Issue -- Seeking Alpha

    Yesterday morning, our teammate and partner, David Eller downgraded Palm (PALM) stock to Unfavorable from Neutral. Simultaneously, I published a report examining how this problem will likely disappear inside of Sprint (S). We maintain our favorable opinion on Sprint.
    PALM Pre: more than a handful in the channel

    Since Palm reported its August quarter losses, we have been perplexed by a disconnect between PALM’s device units sold and our estimates of store level sell through. 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. 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.

    Sprint’s acts as PALM’s sole distributor in the United States accounting for 85% of revenue. Each of the second tier distributors such as Best Buy or Amazon.com buys inventory from Sprint rather than from PALM. PALM is accounting for this as devices sold. This does not appear to be understood by investors. 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? Its documented on page 41 of Palm’s 10-k which states, “VSOE is based on the price determined by management having the relevant authority when the element is not yet sold separately, but is expected to be sold in the marketplace within six months of the initial determination of the price by management.” Of course his brings up two side issues -- how does a phone sitting on a distributor's shelf have an economic life, and -- FASB is likely to change subscription accounting rules for Smartphones and PDAs so that Palm will be able to bury this problem with new policies and in restatements.

    We believe this means to PALM is that there is a glut of inventory in the channel that will prevent reorders from existing customers in the United States, reduced expectations for future carrier partnerships and if there is price protection or the ability for customers to return merchandise, potentially a large write off coming. At the very least, we believe that break even in 2H10 is in jeopardy.

    The profitability turn hinges on PALM’s ability to build relationships with additional carriers. We highlighted the need for the company to raise capital after the 4Q earnings call in order to get more units in the hands of consumers before companies like Acer and Huawei gain a presence in the smartphone market. Companies like Verizon are trying to diversify away from their reliance on RIMM devices (which currently account for 85% of VZ’s smartphone sales) and PALM will be a beneficiary, but the level of carrier support is now in question. Despite the rumors to the contrary, Verizon will sell the Pre in January but the handset price subsidy and the marketing spend provided by the carrier are both up for debate. Verizon could offer to launch the phone at a price point of $129 with a $150 subsidy making the platform unprofitable for PALM.

    It is minor for Sprint

    Our best information says Sprint activated a little less than 375,000 Palm Pres as of the end of August. This left about 275,000 or 11 weeks of Palm Pres in “Sprint channels” at the end of August. This is not to say Sprint is carrying 100% of the cost of these phones. Best Buy (BBY), Radio Shack (RSH), Walmart (WMT), Amazon (AMZN) and Letstalk.com are all likely carrying some of this inventory cost. How much we do not know. What these dealers' return rights, price protection, rebates or other incentives are we also do not know. These dealer terms and conditions vary greatly with the phones. However, the core economics around the Palm Pre's market are slipping.

    Sprint reduced the price by 25% to $149 only 93 days after first shipping the Pre. Amazon is selling it for $99. Walmart and Letstalk.com are both offered "specials" on the Pre for is $79. While undoubtedly some expect lower prices will improve demand, we believe the lower prices are more likely to blunt some competitive impact. There are more smartphone competitors today than at time of announcement. HTC’s Hero, Touch Pro2, and Snap, a reworked Blackberry Tour, and Palm’s Pixi are all recent entries to Sprint’s smartphone line up. Moreover, we do not believe Sprint has announced all of its new smartphones for the Christmas season.

    We estimate Sprint on average, is paying Palm about $450 per unit during its September quarter. If Sprint has 100,000 too many units, the cost to it and its channel is about 45 million dollars. While this may be enough to limit Sprint’s short term financial flexibility and restructuring we must view it in the context of a company with more than $1.0B of quarterly operating cash flow.
  2. s219's Avatar
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    #2  
    That is an interesting theory. It could explain the difference between Palm's "majority of 800K" numbers and analyst estimates of 400-500K, and also suggests why there have been so many aggressive price drops lately. The pieces fit the puzzle, but are they right?
  3. #3  
    To OP - Can I ask who are you and why do you always have negative Palm / Pre posts on the forum where people are trying out things for a phone they like????

    Big question - Where are your paychecks coming from??
  4. #4  
    To OP:

    Puns using pre in the title = A-Boooooooooooooooo!
  5.    #5  
    I'm just a noob who has high hopes from WebOS but is a bit disappointed that Pre didnt take off spectacularly.
    I am surprised your generalization about my posts being negative. Even this particular post is not negative - it simply clarifies a confusing issue. In my view, this is a forum for an objective discussion and must include both positive, negative and neutral views for it to be valuable.

    And my views on the forum have nothing to do with my paycheck. Are you implying that everybody who has (in your opinion) positive posts is being paid by Palm :-)
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    #6  
    Quote Originally Posted by montush View Post
    I'm just a noob who has high hopes from WebOS but is a bit disappointed that Pre didnt take off spectacularly.
    I am surprised your generalization about my posts being negative. Even this particular post is not negative - it simply clarifies a confusing issue. In my view, this is a forum for an objective discussion and must include both positive, negative and neutral views for it to be valuable.

    And my views on the forum have nothing to do with my paycheck. Are you implying that everybody who has (in your opinion) positive posts is being paid by Palm :-)
    Hey, when saying some "realistic" things about the Pre a few weeks ago, I was accused of pushing a pro-iPhone agenda so that I could promote my own iPhone apps and profit. Except I have never identified myself, or those apps. Pretty lousy marketing strategy of mine, don't you think?

    The unfortunate thing about these forums is that honest dialog and critique, even when intended to make the platform better, is interpreted as negative trolling and gets you labeled as a basher or Apple fan. There is a whole lot of insecurity, defensiveness, and delusion here.

    What really cracked me up was the Verizon rumor last week. We had people go from touting the Pre on Verizon in the future as the best thing for the platform, to scorning Verizon and saying who needs them. All based on a rumor that was actually false. I guarantee when the Pre is on Verizon in 2010, it will be a Verizon-Palm lovefest here.

    My point -- blind faith and support for Palm and the Pre is what dominates on these forums. It does it in both positive and negative ways. If you attempt to interject any of the following: fact, reason, opinion, conjecture and it happens to have an anti-Palm or pro-(insert company here) slant, then be prepared to be labeled as negative. It's not you -- it's the environment that is hostile to any sort of criticism at all.
  7. #7  
    Quote Originally Posted by s219 View Post
    Hey, when saying some "realistic" things about the Pre a few weeks ago, I was accused of pushing a pro-iPhone agenda so that I could promote my own iPhone apps and profit. Except I have never identified myself, or those apps. Pretty lousy marketing strategy of mine, don't you think?

    The unfortunate thing about these forums is that honest dialog and critique, even when intended to make the platform better, is interpreted as negative trolling and gets you labeled as a basher or Apple fan. There is a whole lot of insecurity, defensiveness, and delusion here.

    What really cracked me up was the Verizon rumor last week. We had people go from touting the Pre on Verizon in the future as the best thing for the platform, to scorning Verizon and saying who needs them. All based on a rumor that was actually false. I guarantee when the Pre is on Verizon in 2010, it will be a Verizon-Palm lovefest here.

    My point -- blind faith and support for Palm and the Pre is what dominates on these forums. It does it in both positive and negative ways. If you attempt to interject any of the following: fact, reason, opinion, conjecture and it happens to have an anti-Palm or pro-(insert company here) slant, then be prepared to be labeled as negative. It's not you -- it's the environment that is hostile to any sort of criticism at all.
    This is all completely natural on a forum dedicated to a single product. But I think you are also overstating the case a bit. Yes, indeed, there are people who fit the mold you describe and are very vocal about defending Palm and the Pre no matter what. But I wouldn't go so far as to say that that is the dominant view. Just because two or three of the thousands of people on the forum jump down your throat, that doesn't mean that the whole forum agrees with them. Most people here, especially the ones I pay attention to, are reasonable adults who give praise and criticism where due.

    Regarding the OP, I thought that was a pretty interesting article, and it seems to add up pretty well. However, I think the price drop to $129 probably has more to do with the recognition that people now believe 8GB costs $99 (iPhone 3G) than with a glut of supply. On the other hand, if they were in short supply, there would not be a price cut. So my guess based on very little data is that they aren't selling like crazy, but probably they have not stagnated either. The total gain in inventory of 13k seems actually pretty small since it included stocking Bell in Canada. I realize that's not as big a market as Sprint, but it's got to be bigger than 13k. Also, if 85% of the revenue is coming from Sprint rather than the second tier distributors, then 85% of the phones are going there too. So I doubt there are as many phones sitting around on shelves as they think. But this is all a guessing game. Perhaps there are some big sellers in unexpected places that are throwing off the channel checks. Something else that isn't mentioned in the article, how does Palm account for Pres that are returned and replaced? The number of returned phones that are floating around the system could be significant.

    Anyway, no one knows but Palm and Sprint how many are really out there. But could their estimate of the number of activated Pres be off by 50% or more?
    Palm III-->Handspring Visor-->Sony Clie PEG-NR70-->no PDA -->Palm Treo 755p-->Palm Pre-->HP Veer
  8. #8  
    Quote Originally Posted by montush View Post
    I'm just a noob who has high hopes from WebOS but is a bit disappointed that Pre didnt take off spectacularly.
    and I'm just an ***** who can not figure out how to read your other 15 posts and see they are all negative and you own an iphone.

    If analysts had even the slightest clue of what goes on the technology world then we would have never had the dot.com boom and the subsequent crash.
    Pilot 1000 -> Pilot 5000 ->Palm Pilot Professional -> HP 620LX -> TRG Pro -> Palm V -> Palm Vx -> Palm M505 -> Palm i705 -> Palm Tungsten|T -> Samsung i500 -> Treo 600->Treo 650 -> Treo 600-> Treo 700p ->Centro ->Treo 800w + Redfly C8n -> Palm Pre -> HP Touchpad
    R.I.P Palm 1996-2011
  9. gbp
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    #9  
    Truth is Pre didn't sell a million, but my guess is sales will take off with the new "Free" plus the 69.99 any mobile free minutes option. For all the college kids , they have 15 % off on the plan. Which sweetens the deal further.'

    But I am disappointed with SPRINT's ability for not selling the Pres



    Is The Palm Pre Tanking? - Palm pre - Gizmodo
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  10. s219's Avatar
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    #10  
    Quote Originally Posted by jbg7474 View Post
    This is all completely natural on a forum dedicated to a single product. But I think you are also overstating the case a bit. Yes, indeed, there are people who fit the mold you describe and are very vocal about defending Palm and the Pre no matter what. But I wouldn't go so far as to say that that is the dominant view. Just because two or three of the thousands of people on the forum jump down your throat, that doesn't mean that the whole forum agrees with them. Most people here, especially the ones I pay attention to, are reasonable adults who give praise and criticism where due.
    Well, I appreciate hearing your view of it, and I have to say, I like reading your posts. Even in cases where I might not agree 100%, the manner and tone of your posting creates credibility and respect. I think that's the way it's supposed to be.

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