Shareholders of electronic-payment terminal manufacturer VeriFone (NYSE: PAY) got a nasty jolt Monday, after the company announced an earnings restatement that slashed shares by nearly 45%. That tumble erased every gain the company had made in the past year, and then some. Worse yet, the trouble seems far from over.
Did we say that?
VeriFone confirmed it will restate financial results for the first nine months of 2007. An "oops" in the accounting methods used to value its in-transit inventory and the allocation of overhead will require big changes to the company's previously stated cost of sales. Since the cost of sales was recorded at an artificially low value, the company's originally reported net income came out inaccurately high.
Adding to the panic, VeriFone management declined to assure investors that this would be the end of the accounting blunders. Neither the company nor its outside accountants can be certain that further errors won't turn up.
Hmm...
Curiously, VeriFone CEO Douglas Bergeron sold 43,300 shares of his company's stock just last week. The transactions -- in which Bergeron pocketed nearly $2 million -- took place under a prearranged trading plan, but given their precarious timing, they will no doubt prompt closer scrutiny from investors and regulators.
With investors' nerves on edge, the question now becomes, "How bad is it going to get?" VeriFone expects the accounting error to reduce 2007 pre-tax net income by roughly $29.7 million. Ouch. That's about one-third of the company's earnings for all of 2006, and 80% of what VeriFone has made so far this year. Even after yesterday's precipitous plunge, a loss this big could undoubtedly spur further contractions in the stock's value.
The accounting errors also call VeriFone's gross margin into question; its strength has been a key determinant of the stock's success in the past year, according to JPMorgan Chase analyst Tien-Tsin Huang. As early as September, analysts across the board were pointing to VeriFone's increased margins for reassurance, amid concerns about increasing competition from rival terminal manufacturers such as Hypercom (NYSE: HYC) and NCR (NYSE: NCR).
After scaring the pants off investors, VeriFone did attempt to soothe nerves. It provided fourth-quarter sales projections that slightly topped analysts' consensus -- but after this squabble, investors may take such forecasts with a grain of salt.
The party's just starting
This Fool cringes at accounting-related earnings restatements for a couple of reasons. First, they make me doubt whether management is attempting to hide further problems with complex accounting gimmicks. Second, even when the problems are cleared up, their lingering shadow can nix investors' confidence in a company's future performance, seriously hindering its stock price.
Play this one safe, Fools. A plethora of warning signs suggest big trouble for VeriFone's valuation going forward.
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