Veritas Tumbles on Restatement

Updated from 1:54 p.m. EST

Veritas Software ( VRTS) plunged Monday after the company said it will restate three years of financial results.

By the end of the session, shares of the Mountain View, Calif.-based company had recovered a bit from their intraday low of $27.06 but were still off $1.87, or 6%, to $29.14. Trading activity was heavy but, in the end, investors decided that the black eye will probably not have a lasting effect.

Veritas said the restatement would cut net income by $15 million to $20 million for the year ended Dec. 31, and slash revenue for that period by $10 million to $15 million.

Despite the embarrassment of restating financials, Veritas is unlikely to take a long-term hit over the matter, predicted Erik Lang, analyst with PNC Advisors, which is long in the stock. "It will be temporary -- I'm giving management the benefit of the doubt," he said, while adding: "It makes me a little nervous because we're betting on management's word."

Similarly, analyst Kevin Buttigieg of Kaufman Brothers noted that the restatement doesn't affect the company's cash position or cash flow. "This will blow over," he added.

One bit of good news: In a conference call Monday afternoon, Veritas maintained first-quarter 2004 guidance and said it didn't expect any changes to 2004 results.

The company said a forensic audit concluded Friday "identified certain accounting practices not in compliance with generally accepted accounting principles during 2002, 2001 and prior periods under the direction of former financial management." The company cited the "incorrect deferral of professional services revenue and the unsubstantiated accrual of certain expenses, which had a positive impact in some periods and a negative impact in others."

"Upon conclusion of the investigation, we decided that restating our reported financial statements was the appropriate course of action," said CEO Gary Bloom. "The company is committed to accurate financial reporting and our financial leadership has been substantially improved since the arrival of Ed Gillis, our chief financial officer, in November 2002."

The former CFO, Ken Lonchar, resigned earlier that year after admitting that he had faked part of his resume. Since Lonchar left, the company has also hired a new controller and senior vice president of finance.

Without mentioning any of the former executives by name, Bloom pointed the finger at them several times during the conference call. "We have a new team on board, and we are committed to solid ethics and business practices," he said.

The investigation included reviews of documents and emails, as well as interviews with current and former employees.

Veritas also said it would settle federal tax audits related to its 2000 acquisition of Seagate ( STX), a settlement that will boost 2003 net income by some $95 million. Veritas said that other than the Seagate move, the expected adjustments for 2003 were "primarily a consequence of correcting errors from the prior periods." The company said it would seek an extension on its 2003 10-K filing.

Veritas acquired Seagate's software business, but not its large hard drive manufacturing arm. After a period of private ownership, Seagate became a public company again in 2002.

Veritas reiterated first-quarter guidance, calling for earnings of 18 to 21 cents a share on a pro forma basis and 17 to 20 cents a share on a GAAP basis. Revenue should be $455 million to $470 million.

Monday's news comes as the big Mountain View, Calif., storage company licks its wounds from a critical market share report. That brief showed Veritas losing ground in its faceoff with the nation's No. 1 maker of software to manage data storage for large businesses, EMC ( EMC).

Market researcher IDC said Monday that EMC boosted its fourth-quarter market share to 32% from 26% last year, driven by last year's acquisition of Legato. Meanwhile, No. 2 Veritas saw its share inch up to 21.9% from the year-ago 21.3%. Bringing up the rear were Computer Associates ( CA), IBM ( IBM) and Hewlett-Packard ( HPQ).

The companies are battling over a market that grew by 18% year over year in the fourth quarter, to $1.78 billion.

In part, Veritas has fallen victim to the great expectations that come along with its premium earnings multiple. In January, Veritas swung to a profit and posted 17% year-over-year license revenue growth. But Wall Street was expecting more, starting a slide that leaves the stock more than 20% below its recent high. Even so, Veritas has risen some 75% over its year-ago level.

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