Veritas Revises Balance Sheet

Veritas Software Corp. (Nasdaq: VRTS) said it will restate earnings for 2000 and 2001 by a combined total of $20 million after reviewing transactions with AOL Time Warner Inc. (NYSE: AOL) (see Veritas Restates Results).

In November 2002, Veritas disclosed that the Securities and Exchange Commission (SEC) had launched an investigation into the AOL transactions, which involved Veritas swapping software and services in return for advertising on AOL (see SEC Probes Veritas-AOL Deal).

Analysts note that Veritas's restatement is minor, and that it had been expected. Nevertheless, any financial do-over isn't a positive development, says Sabrina Ricci, an analyst with Deutsche Bank AG.

"It doesn't impact results much, but combined with a few other things recently, it's another layer of worry," she says.

Ricci points to the recent departure of Veritas's head of sales, Paul Sallaberry, as well as the fact that last week Parametric Technology Corp. (PTC), a developer of software for the manufacturing industry, said it will restate its earnings for the past three years, due to problems in booking revenues. Former Parametric CFO Edwin Gillis left that company in November 2002 to become Veritas's CFO (see Veritas EVP of Sales Steps Down and Veritas Appoints CFO).Shares of Veritas dropped about 4 percent today, at $17.51 in midafternoon trading, amid an overall down market for technology issues.

But Thomas Weisel Partners analyst Jason Ader believes the restatement is immaterial. He reiterated his Buy rating on the company.

"Veritas is the best-positioned company in our universe, the result of defensible leadership in backup, a hardware-independent approach in the emerging storage resource management (SRM) software segment, and potential financial upside from the pending Precise Software Solutions [Nasdaq: PRSE] acquisition," he wrote in a note to investors today. (See Veritas Gets Precise.)

The amounts of the restatements are comparatively miniscule. For the year ended December 31, 2000, Veritas will reduce its previously reported revenue of $1.207 billion by $17 million (or 1.4 percent) and will increase its previously reported net loss of $620 million by $7 million (or 1.1 percent). For 2001, Veritas's previously reported operating expenses of $1.812 billion will be reduced by $13 million (or 0.7 percent), and its previously reported net loss of $651 million will be reduced by $8 million (or 1.2 percent).

The deal with AOL involved a $50 million software purchase by AOL and Veritas's purchase of $20 million in advertising services from AOL. Veritas originally recognized $37 million of revenue in the fourth quarter of 2000 and has been recognizing the remaining $13 million in revenue over a "three-year support period."Analysts point out that the revenue-swap agreement between AOL and Veritas was common in the industry. "This is not a Veritas-specific red flag," writes Ader. [Ed. note: But Mr. Ader, if everyone else were going to go jump off a bridge, would you, too? Just throwing it out there.]

Meanwhile, Veritas officials have said the issue with the AOL bookings was entirely unrelated to the departure of CFO Ken Lonchar, who was fired after it was discovered he had lied about receiving an MBA from Stanford University (see Veritas Fires Veteran CFO