Veritas Searches for Truth

Veritas Software Corp. (Nasdaq: VRTS) will restate its financial statements for 2001 and 2002 and delay its 2003 annual report, after an internal investigation turned up accounting irregularities.

In other words, Veritas, which means truth in Latin, is making a belated attempt to live up to its name. Although CEO Gary Bloom reiterated the companys guidance for the current quarter, today’s announcement will certainly have consequences. The company is subject to Nasdaq delisting, and who knows how long it will take for the stock to regain the value it lost after a hold was placed on trading for more than an hour. By late afternoon, the stock’s price lost $1.77 to $29.24 on the day.

In a conference call, Veritas executives said the restatements will likely increase 2001 income by $5 million to $10 million; decrease 2002 income by $5 million to $10 million; and decrease 2003 income by $15 million to $20 million.

“This is an unfortunate announcement,” Bloom said in a conference call.

For Veritas, it is not unprecedented. Last year Veritas restated its 2000 and 2001 earnings by a combined $20 million after an SEC investigation into a transaction with AOL (see Veritas Revises Balance Sheet and SEC Probes Veritas-AOL Deal). As with those restatements, the current adjustments concern business booked when Kenneth Lonchar was CFO. Lonchar resigned in October 2002 after Veritas discovered he lied on his resume about receiving an MBA from Stanford (see Veritas Fires Veteran CFO).Bloom said no accounting irregularities were known when Lonchar departed. “The key question I have been wrestling with is, ‘Why didn’t we find this sooner and will it happen again?’ ” he said. “There are no perfect answers to the questions. I can tell you that, most importantly, we have all new financial leadership in the company today.”

Ed Gillis, who has been Veritas’s CFO since replacing Lonchar in 2002, said the internal investigation focused on accounting practices related to expense accruals. It found incorrect deferral of services revenue, unsubstantiated accrual of expenses, and the overstatement of accounts receivable and deferred revenue by approximately $7 million as of June 30, 2002. He said KPMG is working with Veritas to restate its results.

Bloom said the accounting problems do not change his previous guidance for the current quarter of revenues from $455 million to $470 million and EPS between $0.18 and $0.21 per share (see Veritas Sees No Problem). He also said he believes Veritas is still on track for a $2 billion revenue year. Still, it’s hard to tell how customers will react to the frequent restatement of earnings. Veritas lost ground to EMC Corp. (NYSE: EMC) in the fourth quarter of 2003, according to the latest figures from IDC released today. IDC said EMC and its newly acquired Legato Software increased market share to 32 percent from 26 percent in the fourth quarter of 2002, while Veritas’s share barely budged from 21.3 percent to 21.9 percent. That was before the accounting problems came out.

Bloom didn’t address a possible Nasdaq delisting in the conference call, but a statement released by Veritas said it expects to complete the refiling before Nasdaq delists its securities.

— Dave Raffo, Senior Editor, Byte and Switch0