MicroStrategy's share price plunged nearly 62 per cent yesterday after it agreed to abide by new US guidelines on how to register turnover and profit.
The supplier, which makes business intelligence and decision support software, is attempting to reposition itself into the electronic customer relationship management (eCRM) market. As a result, has seen its share price rocket since last October.
Over the last two years, the company has seen sales grow by nearly 100 per cent. In late September last year, its stock price stood at only $80, but over past months it has risen as high as $333.
But following the announcement that MicroStrategy would restate its profits downwards for both 1998 and 1999, its share price plummeted 62 per cent to $86.75 in heavy trading as investors abandoned the stock in droves.
The problem, according to the company, was that when it received a multiyear contract worth $65m for content personalisation software to help website operators build better ties with customers, it booked too much of the anticipated revenue immediately instead of spreading it over the years of the deal.
The nature of such contracts has come under scrutiny lately from the firm's auditors, PricewaterhouseCoopers, who believe that much of the recorded revenue should be deferred in line with recent guidelines from the New York Securities and Exchange Commission.
The new regulations are intended to rein in the practice of recording revenue in a single quarter when it is apparent that services included in the contracts will be delivered over time rather than as a one-off.
There has also been widespread concern that other companies might have to revise their financials, which might have an adverse affect on share prices in the software sector in general.
Within hours of the announcement, however, the first of what is anticipated to be several class action lawsuits was filed against the supplier, alleging that it and certain of its officers and directors made "materially false and misleading financial results".
Michael Saylor, MicroStrategy's 35-year-old, high profile chief executive, spent the day in a failed attempt at damage control, watching his personal worth fall from a high earlier this month of $13.6bn to $3.8bn.
He claimed there was nothing fundamentally wrong with the firm and that it was simply a victim of changing accounting practices.
"We are ready to go full speed ahead," he said. "We were deferring large sums of revenue in these contracts," he continued, noting that the company initially nly recorded $14m of the $65m deal.
"We got caught in a shift in the business model and accounting [guidance]," he dded.
The company also said in a prepared statement: "These revisions relate to the timing of revenue recognition and have no material impact on MicroStrategy's net cash flow or the amount of revenue that the Company ultimately expects to recognise."
Steve Abrahamson, an analyst with Prudential Volpe Technology, agreed that the uture was still positive and pointed out that the problem was an accounting only one.
As a result of the restatement, however, MicroStrategy's 1999 sales will be slashed by between $45.3m and $50.3m, turning a $13.7m profit for the year into losses of as much as $19.8m. Turnover for fiscal 1998 will be reduced by between $5.5m and $10.5m.
But the situation could not have come at a worse time. MicroStrategy was in the throes of raising additional capital by placing 6.5 million shares, 2 million of which would have been sold by existing shareholders.
It was also preparing to spin off wholly owned subsidiary, Strategy.com, which specialises in eCRM software that is used by companies such as online finance house, Ameritrade. The placement has now been shelved.
But Saylor has not been happy for some time about the way MicroStrategy reports its revenue. At last year's user conference, he told vnunet.comthat he was keen to move to a subscription based model because "it would help improve the earnings quality as perceived by Wall Street analysts and remove the quarterly scramble to close big deals."
But it now seems that this will happen faster than anticipated, as large amounts of revenue subject to the audit review will be deferred for up to 42 months.
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