Updated from 8:49 a.m. EDT Red Hat ( RHAT) shares tanked Tuesday after the Linux vendor said it will restate results for three fiscal years and the first quarter it reported June 17. The decision came after new accountants decided the company would be better off with a more precise method of recognizing software subscription revenue. Raleigh, N.C.-based Red Hat also disclosed it is in the process of responding to comments and questions from the Securities and Exchange Commission regarding its 10-K annual report. Asked about the SEC inquiry on a conference call, Red Hat CEO Matthew Szulik said he could not describe the nature of those questions. Despite company assurances that its overall revenue totals should stay the same, one analyst downgraded the stock and investors, loath to hear about accounting issues of any kind, sold the stock. Red Hat shares were recently down $4.24, or 21%, to $16.02, although they remain well above the 52-week low of $5.95. The accounting changes top a string of disappointing announcements from Red Hat, beginning last month when the company announced the
sudden resignation of its CFO. After that, Red Hat preannounced quarterly results as a form of damage control and subsequently released lower-than-expected first-quarter revenue. "You have some credibility issues there," said Steve Roth, an analyst with the ( NTTFX) John Hancock Technology fund. "Given the valuation of Red Hat, it's a justified reaction," Roth said of the selloff. (His fund doesn't hold Red Hat shares.) Even with Tuesday's drop, Red Hat is still trading at a heady 67 times estimated 2005 earnings and 38 times estimated 2006 results. The accounting practice in question is Red Hat's policy of recognizing revenue from software subscriptions as if they began on the first day of the month in which they started -- regardless of the date the subscription actually began. That method called for a system of pro-ration that made up for the small calendar imprecision in later months. In changing the policy, Red Hat will adopt its accountants' suggestion that revenue recognition start on the day the subscription actually begins. That will shift revenue previously recognized in the early part of the month under the old method to the end of the subscription under the new one.