Shares of Sybase (SYBS) plummeted 26.4 percent in morning trading after the company announced yesterday that it would take a larger-than-anticipated fourth-quarter loss and would restate previous quarters.
Sybase shares fell as low as 7-1/8, down from its close of 9-11/16 yesterday.
The database maker announced after the markets closed yesterday that it had learned that its Japanese subsidiary has been using improper accounting procedures. As a result, the database company will restate profits and revenues for the first three quarters of its fiscal year and will be forced to take a substantially larger fourth-quarter loss than it had expected.
Sybase said the effect of the improper accounting procedures on its revenues is currently estimated to range from $60 million to $65 million and will require the reversal of revenues in the fourth quarter as well as the restatement of revenues for the first three quarters of 1997.
The company recently learned of the improper revenue-recognition procedures during its annual audit by an outside firm. Its investigation of the matter is still ongoing.
"What we uncovered in Japan were clear violations of the revenue-recognition policy at Sybase," Mitchell Kertzman, chairman and chief executive, said in a conference call. "It is really maddening, personally speaking, to have five misguided individuals cast aspersions on 5,000 other people around the world who are getting up every morning and doing the right thing."
Kertzman added that the five individuals responsible for the errors either have resigned or have been terminated from Sybase Japan KK. The company employs 200 people at Sybase Japan.
Under Sybase's policy for booking revenues, sales are not counted until they reach the end user. But the investigation found that several Sybase employees in Japan were providing sideletters--agreements outside the scope of customer licenses--that allowed them to return software.
Kertzman said the five executives involved in this practice lied about the existence of the sideletters.
Sybase is not the only company to experience this problem.
Graphics chip maker S3 (SIII) in November said it would have to restate its revenues for the prior quarter downward by $40 million to $70 million, and would have to restate its net profits as well. Like Sybase, S3 found that employees did not follow the company's revenue-recognition policy of booking revenues once they reached the end user.
Last August, database competitor Informix (IFMX) was hit with a similar and much larger accounting snafu. Informix had to restate its financial results from January 1994 to June 1997, adjusting its revenues downward by $278 million and net income downward by $236 million. Informix previously used an aggressive accounting procedure that counted revenues once sales were recorded in the channel, rather than when they were received by the end user. That policy, however, was largely changed last year.
Database heavyweight Oracle (ORCL) also announced back in the 1990 and 1991 that it would restate previous quarterly results. The company attributed the downward restatement to such errors as customer returns that were not logged in and accidental double billings.
Sybase's disclosure comes on the heels of an earlier announcement this month that its quarterly profits would fall short of analysts' expectations of 12 cents a share. The company said it anticipated that earnings would fall within a range of a loss of 7 cents per share to a profit of 2 cents per share. The database maker now says it expects fourth-quarter performance to fall "substantially" below its preliminary figures.
"We were preparing to announce that we would come in at the high range of preannounced estimates," Kertzman said.
Sybase, which had planned to issue its fourth-quarter results yesterday, announced that it will postpone the release of its figures until January 28.
"In the rest of the business...Europe is solid and North America revenues are on the high end of what we expected," Kertzman said. He added that Japan also was experiencing "real demand" and said that the now-terminated company executives did not have to resort to ignoring Sybase's accounting policy.
(Mitchell Kertzman is a member of CNET: The Computer Network's board of directors.)