Accounting ‘disaster’ shakes up Verifone investors

Shares of VeriFone were slashed nearly in half Monday after the company announced that recently discovered accounting mistakes would wipe out some 80 percent of its previously reported pre-tax profits so far this year.

The San Jose-based electronic payments company said that it had miscalculated its costs for inventory, for manufacturing and for distribution in its first three quarterly reports this year, and advised investors to disregard them. Accounting for the errors, the company would have reported a pre-tax profit of about $7.4 million for the first nine months of this year, instead of the $37 million it claimed.

“Obviously, it’s a disaster,” said Todd Fernandez, a senior research analyst at Glass Lewis, a financial research firm.

Although Fernandez saw signs as early as a year ago that VeriFone’s accounting might be suspect, the stock’s reaction indicates that the restatement “was a total blindside.”

VeriFone management apologized for the errors and pledged to fix the mistakes as soon as possible. “I am committed to regaining your confidence in VeriFone,” Chief Executive Douglas Bergeron said in a statement.

Bergeron seemed to have his work cut out for him as investors dumped shares of VeriFone stock after the announcement. The company’s stock closed regular trading off $22.00, or 45.8 percent, to $26.03.

Earlier in the day, the stock was down nearly 51 percent.

Don’t expect the stock to rebound right away. The large size of the accounting problems and their impact on VeriFone’s reported earnings will by themselves weigh on the stock, said Gil Luria, an analyst with Wedbush Morgan Securities. But they also raise questions about whether other accounting issues exist that the company hasn’t discovered yet, he said.

“This appears to be an isolated mistake,” said Luria, whose firm has not done any recent investment banking business with VeriFone. But he added, “Investors’ confidence in the company’s actual performance levels and management’s control over the business . . . will continue to be a concern.”

On a conference call, Bergeron attributed VeriFone’s problems largely to a faulty accounting system for its supply chain. Unable to rely on its computerized system, the company manually accounted for its inventory and, in doing so, double-counted some items. That resulted in lower product costs and in turn, higher profits.

The crash of VeriFone’s stock follows more than a year of steady gains. Through last Friday, VeriFone shares were up 26 percent for the year. The company supplies a wide range of products and services to manage electronic payments between shoppers, retailers and financial institutions.

Amid the run-up, insiders had been selling shares en masse. Bergeron, for instance, has sold some 1.4 million shares this year, raising $54.6 million. Overall, VeriFone insiders have sold $320 million worth of company stock this year.

After the sell-off, “will those insiders take some of their proceeds to buy back the stock?” Fernandez said.

Thanks to the accounting problems, VeriFone said it would postpone releasing its fourth-quarter report, which is due out Thursday. The company did raise its revenue forecast for the quarter to $238 million from a range of $231 million to $233 million, but did not discuss its earnings expectations.

VeriFone expects to release its earnings and restated results next month.