Back on Sept. 17, Palm released its long-awaited earnings. They were eagerly anticipated because these would be the first full quarter that included the performance of the Palm Pre. Ever since, analysts and investors have been trying to figure out whether the numbers were good news, bad news, or something else entirely.

This head scratching was reflected in the news coverage of the earnings. The Mercury News had a first-day headline that said “Pre Sales Give Palm A Boost.” But within a couple of days, the consensus seemed to turn against Palm, with analysts and others questioning just how good the numbers were, and worrying about the company’s outlook. Four days later, the Motley Fool wrote: “Palm Discovers Its Limits.”

The confusion was largely due to a change in accounting methods. More on that in a second. But once we take a closer look at the numbers, it seems clear to me that Palm seems to be setting itself up to be sold. And that would likely need to happen sometime in the next six to 12 months.

Since the earnings, the stock, has bounced all around. And this weekend, Merc reporter Troy Wolverton came back with a good overview, noting: “Palm Buffeted By Rumors.” Wolverton wrote:

With all the news and rumors about Palm over the past 10 days, it’s hard to know whether investors should be applauding the smart-phone maker or wringing their hands.

Ever since the company released its quarterly update Sept. 17, investors had good reason to do both. Not only was the quarterly report a mixed bag, but so too has been the news since. Two rumors that would be bombshells if they prove true have pulled the company’s stock in different directions.

The problem started with the release of the 10-Q on Sept. 17.

At first glance, the quarter seemed like a disaster. Revenue dropped to $68 million from the same quarter one year ago when Palm posted $366 million. Whoa!

But hold on. It turns out that Palm had changed the way it accounted for revenue. It had moved to the “subscription” model for revenue accounting. In essence, that means that instead of counting the revenue of the entire phone at the point of sale, Palm is spreading out the revenue over 24 months, the estimated life of the Palm Pre.

But why?

Palm had decided that unlike its previous phones, it will provide frequent software updates for the Pre for free. Because of the free updates, Palm said accounting rules require it to switch to this new accounting method.

But this also means that historic comparisons are out the windows. Palm actually provided a 5-page PDF explaining the changes and trying to reconcile them to past quarters. The details of the accounting change were leaked to a Palm-fan blog several months ago and the free updates were cheered for being a good deal for consumers.

Back to Palm’s 10-Q: The company said that 80.5 percent of the revenue decline was related to the accounting change. Which means, of course, that there was still another 20 percent or so that just represented a decline for other reasons:

Revenues for the three months ended August 31, 2009 decreased approximately 81% from the three months ended August 31, 2008…During the three months ended August 31, 2009, net device units shipped were approximately 824,000 units at an average selling price of $427 per unit. During the three months ended August 31, 2008, net device units shipped were approximately 1,334,000 units at an average selling price of $273 per unit.

Of this 81% decrease in revenues, the effect of accounting for shipments of Palm webOS products under subscription accounting resulted in a decrease of 80.5 percentage points. The remaining change in revenues was the result of lower net device unit shipments and accessories sales substantially offset by an increase in average selling prices. The decrease in net device unit shipments is primarily due to lower smartphone unit volumes as a result of reduced demand for our legacy smartphone products, a challenging economic environment and a decline in traditional handheld unit shipments as a result of a market-wide decline in consumer demand for handheld products.

So to establish solid historic comparisons, we’re probably going to have to wait almost two years. But I seriously doubt Palm will make it that much longer.

Since the revenue numbers are confusing, let’s turn instead to cash flow. The company had about $210 million in cash on hand and short term investments at the end of the quarter. In that same quarter, it used $45 million in cash on “operating activities.” So at the current burn rate, the company might be out of cash in about a year. In the 10-Q, Palm says it has sufficient cash on hand to meet its obligations

Not surprising, then, that it announced it was selling additional stock to raise another $359.9 million. A press release says: “Palm expects to use the proceeds for working capital and general corporate purposes.”

Going forward, Palm expects sales to decline this quarter. In the third quarter, it expects revenues to start to tick back up. In part, that’s because it expects to announce distribution deals with other carriers.

Part of the problem here is its carrier partner of choice: Sprint is having its own issues. Sprint has reported at least five straight quarters of revenue declines. One of the troubling aspects of this relationship is how the two companies are marketing the phone. The original price for the Pre was $299 with a $99 mail-in rebate. Why not just subsidize the phone like AT&T and Apple do with the iPhone? It’s likely that neither company can really afford it.

The mail-in rebate is essentially a bet that most folks won’t actually mail in the rebate card. People are lazy, and they often don’t. On the 10-Q, Palm noted that its liabilities related to rebates rose to $51.2 million at the end of the quarter, up from $49.4 million at the end of the previous quarter. Not back breaking, but not a great sign either.

So, to sum up: Palm is still burning through a lot of cash. It has a shaky partner in Sprint. And its outlook is mixed. Which means that while it expects revenue to starting rising next year, that seems like an optimistic view.

What seems more likely is that Palm will be bought. The leading rumor is Nokia, which could make some sense as the global mobile phone leader has struggled to make a splash in the smartphone market.

But there were a couple other intriguing suggestions floated by me the other day: Hewlett-Packard, Dell and Cisco Systems. HP has a line of wireless handhelds. And Dell is trying to get into the smartphone game. Though it might be tougher for Dell to swallow given it just announced it was paying $3.9 billion to buy Ross Perot’s company. And back in March, an analyst speculated that Cisco was at work on its own smartphone.

Given how important mobile computing will be going forward, I think any of the companies would be smart to be beefing up its products in that area. As of close of trading Friday, Palm had a market capitalization of $2.33 billion.

Given the cost of developing a smartphone, and the difficulty of getting them right, acquiring a company that’s already done the R&D makes solid economic sense. And Palm would probably benefit from being bought by someone who can guarantee its longevity. At a certain point, consumers will have to think twice about investing in a phone made by a company that remains on shaky financial ground.

That kind of thinking has a way of becoming self-fulfilling unless Palm can surprise us all by turning in a spectacular quarter that erases all doubts. That seems unlikely.