Critical Path halted as earnings questioned

The Nasdaq halts trading of the Internet messaging services provider, which says it may have misstated fourth-quarter revenue and suspends two top executives.

2 min read
Critical Path is in a critical situation after the Internet messaging services provider said Friday it may have misstated fourth-quarter revenue and announced the suspension of two top executives.

The stock plunged more than 60 percent in premarket trading, but the Nasdaq halted trading of the shares Friday at 6:09 a.m. PST to request additional information.

Shares of the company were frozen Friday at $10.06, a new 52-week low. They had traded as low as $4 in premarket action.

The company said its board of directors formed a special committee to investigate revenue recognition practices after discovering a number of transactions that "put into question the company's financial results."

The company now believes that results it stated Jan. 18--fourth-quarter revenue of $52 million and a net loss, excluding special charges, of $11.5 million--"may be materially misstated." The board of directors has placed on administrative leave David Thatcher, the company's president, and William Rinehart, the vice president of worldwide sales, effective immediately.

For perspective, the fourth-quarter results were already a disappointment. Critical Path missed projections even though the company had reiterated its outlook in December. The December outlook was used to offset news that Critical Path would replace its chief financial officer, who resigned because of a family illness.

In its fourth-quarter report, the company lowered its 2001 projections, citing four reasons; the uncertain environment for Internet infrastructure spending, increases in bad debt reserves, foreign currency effects, and the effect of accounting rule changes on a $7 million software license sale.

The company had intended to give more details about its 2001 outlook in early February, but Wall Street was not expecting these problems.

"The stock will clearly be under pressure following this news," said Goldman Sachs analyst Lilly Bahramipour, who reacted to the news by downgrading the stock to "market performer" from "market outperformer." Bahramipour had kept Critical Path on her "recommended list" until the company's fourth-quarter earnings last month.

SG Cowen analyst Raj Seth downgraded the stock to "neutral" from "buy." "Things look bad here," Seth wrote in a research note.

Seth raised red flags about Critical Path's accounting recently. The company's problems come after a last-minute accounting change to the $7 million deal closed in the fourth quarter. The company had originally booked all the revenue from that deal in the fourth quarter, but after an audit review changed it to a 12-month deferral.

Critical Path becomes the latest company affiliated with CMGI to face a meltdown. Being associated with Internet incubator CMGI was a badge of honor in 1999 and early 2000. Operating companies in CMGI's portfolio such as NaviSite and Engage have also struggled. CMGI's venture capital unit funded Critical Path.