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RSA to face accounting probe

Analysts say the matter shouldn't affect financial results, but it could cause the stock to tumble.

Accounting issues may plague RSA Security, despite the company's solid financial performance and promising security software business.

RSA said on its fourth-quarter conference call Thursday that the Securities and Exchange Commission is investigating its past accounting practices. The news ruffled investors despite analysts' assurance that the matter would have minimal impact on the company's past results.

RSA reported a net loss of $10.1 million, or 18 cents per share. The results compared poorly with net income of $103.9 million, or $1.70 per share, a year earlier--something Wall Street expected, given the current slowdown in IT spending. Excluding one-time items, the company posted fourth-quarter earnings of a penny a share, topping First Call's consensus estimate for a break-even amount. Revenue was $63 million, a sharp drop from the $78.1 million reported last year, and slightly below First Call's estimate for $64 million.

Projections for 2002 were unchanged, with management expecting net earnings of 25 cents to 33 cents per share on revenue of $285 million to $295 million, in line with its earlier forecasts.

Analysts were upbeat about the quarter overall. It "sets the tone for a very positive 2002," said SG Cowen Analyst Peter Kuper in a Friday research note.

But a formal SEC investigation is "the rain on the parade," Kuper added.

Shares in RSA plunged $4.37, or 26 percent, to $12.27 Friday after news that the company is being investigated by the SEC. The collapse of energy giant Enron has made investors hyper-aware of accounting issues, as recent skittishness over PeopleSoft's accounting problems has shown.

The company was informed of the investigation on the eve of its fourth-quarter results and announced the news on a conference call Thursday evening. Management said the SEC plans to investigate the manner in which RSA disclosed its first-quarter change to revenue recognition.

In one of RSA's quarterly filings with the SEC last year, the company disclosed a change to its accounting methods, and admitted it began "recognizing revenue upon shipment to distributors rather than upon sell-through." This practice, which results in revenues being recorded earlier than they are received, and sometimes known as "stuffing the sales channel," led to an increase in revenue of $1,735 for the three months ended March 31, 2001, the company said.

Analysts say the matter shouldn't affect financial results, but it could cause the stock to tumble. "The matter could be minor, addressing perhaps 1 percent of 2001 channel revenue," said Salomon Smith Barney analyst Stephen Mahedy, "but more clarification is needed."

SG Cowen's Kuper also reasoned that 1 percent of total revenue is hardly material and would likely be deemed irrelevant by the SEC. What the SEC has its hackles up about, he said, is likely the fact that RSA buried the disclosure of the accounting change in the "management discussion and analysis" portion of its regulatory filing.

The SEC recently began taking a hard look at "pro forma" results, which exclude various charges and items that would be included under normal accounting rules.

Nevertheless, analysts advised caution. "Given the uncertainty associated with the SEC investigation, RSA is now only appropriate for the most speculative investors willing to bet on the outcome of an investigation we know very little about," said Wedbush Morgan Securities analyst Timothy Leehealey.