announced that it has restated financial statements for more than five years, removing one cloud that had been hanging over the security software maker.
Shares of Network Associates climbed 58 cents, or 4.2%, to $14.51 in recent trading.
The restatement defers revenue recognized between 1998 and 2000 to the period of 2001 through 2003, and it also results in earnings adjustments. The restatement came from a change in the way the company recognizes revenue, to a more conservative sell-through basis, in which the end customer has bought the product and there's no risk of return. Under previous management, the company had used a more aggressive sell-in basis, in which the product is sold into the channel with some allowances for returns.
The change in revenue recognition did not reduce aggregate revenue, but other adjustments did cut revenue by $112.6 million over a period of three years. Those adjustments were related to investments in customers at or near the time the company sold products to the customer, misclassifications between revenue and expense, and required reclassifications of certain marketing expenses as contra-revenue amounts.
The biggest change hit Network Associates' 1998 results, swinging 1998 net income of $32.4 million into a net loss of $319.1 million.
The restatements, filed after the market closed Friday and which were announced Saturday, cover periods before the arrival of the company's current management. They stem from ongoing investigations by the
Securities and Exchange Commission
and the Department of Justice.
"From a company perspective, it is a positive, as NET management can put this issue behind it and focus its efforts on fixing the problems in its business," Legg Mason analyst Todd Weller said in a note Monday. In addition to the government investigations, the company's weak top-line growth remains an overhang on the stock, Weller added. He has a hold rating on NET, and his firm hasn't done any banking with the company.
Network Associates moved to more conservative revenue recognition in January 2001 after determining that reporting on a sell-in basis was inappropriate because of concessions provided by the company, including noncontractual return rights.
Various shareholder lawsuits have accused Network Associates under past management of "channel stuffing," or recognizing revenue on products sold into the distribution channel that were subject to return.
In addition to sending 1998 results into the red, the recently announced restatements:
Increase second-quarter 2003 net income by $2.5 million, to $3.6 million.
Swing a first-quarter 2003 net loss of $3.7 million to net income of $10.5 million.
Increase 2002 net income by $38.1 million, to $128.3 million.
Swing a 2001 reported net loss of $100.7 million to 2001 net income of $83.3 million.
Reduce 2000 net loss by $15.9 million, to $108 million.
Reduce 1999 net loss by $4.9 million, to $152 million.