Corp Foucs

0

Corp focus/22″/mike1st/mark2nd

By SARA FISHER

Staff Reporter

CyberMedia Inc. is yet another high-flying tech company to come crashing down to earth, but the reasons behind its nosedive have been more complicated than those that derailed many of its peers.

The problems surfaced in mid-March, when the Santa Monica-based company acknowledged that it had overstated its fourth-quarter and year-end results, and that its first-quarter earnings would fall far short of expectations. The company’s co-founder and chief executive resigned, on the heels of the resignation of its chief financial officer.

Kanwal Rekhi, CyberMedia’s chairman and acting president, put it this way: “It was a case of an entrepreneur wanting his company to grow a little faster than it was.”

He was referring to CyberMedia co-founder and former CEO Unni Warrier, who could not be reached for comment last week.

But what happened, according to CyberMedia analysts, was that the company essentially had reported shipments as actual sales, without accounting for product returns.

The effect of these announcements was immediate and severe. Share value plummeted by more than 40 percent to hit a 52-week low, bottoming out at $5.50 shortly after the announcements. Analysts downgraded their “buy” recommendations to “hold.” Shareholders quickly filed a slew of class-action suits, alleging the company had issued misleading statements regarding its financial condition.

CyberMedia is still trying to recover. The 7-year-old company, which has grown into a 250-person operation with offices in Oregon, Washington, D.C., Japan and Ireland, develops diagnostic software that pinpoints and fixes problems for Windows-based personal computers.

The company’s own problems surfaced when analysts began questioning CyberMedia executives about various aspects of financial results it had been reporting. The company subsequently conceded that its return reserves had been understated in the fourth quarter by as much as $8 million.

One analyst, who requested anonymity so as to not alienate company executives, described the situation this way: “Quite simply, they booked revenues for products that were not sold. From an accounting perspective, the company got in real trouble on the sell-through.”

Rekhi said the company has worked with major distributors to make sure inventory levels are kept at more reasonable levels, thus minimizing returns.

“We believe that we have fixed (the problem), and we are trying to make sure that we are monitoring inventory closely,” he said.

Even after the downward revisions, CyberMedia’s sales are climbing, hitting $71.2 million in 1997, up 85 percent from 1996 levels. But its bottom line is in bad shape. It suffered a net loss of $11.7 million (97 cents a share) for 1997, compared with a $3.5 million net loss (88 cents a share) a year earlier.

Rehki attributed the most recent loss primarily to the cost of acquiring two new software products, and 68 percent of that annual net loss showed up in the revised fourth-quarter figures.

While the company had not released its first-quarter results as of last week, Wall Street seems to be somewhat reassured. The company’s stock has ticked back up since its March drop, trading last week at about $6.50 a share.

But the management shuffling is still in progress Kristin Gabriel, a CyberMedia spokeswoman, said a new chief executive will be named this week, so analysts are hesitant to forecast the likelihood that the company will regain its footing.

“I can’t gauge the company’s performance until a new CEO is in place,” said Michael Stanek, an analyst for Lehman Brothers. “Their products are good, but the company is only as good as its leaders.”

Stanek went on to say that the numerous class-action suits filed by shareholders are unlikely to further hurt CyberMedia’s stock value.

“We live in a society where heads must roll,” he said. “Lawsuits are a part of everyday life, and I honestly don’t factor them in when evaluating a company. Class-action suits usually don’t affect stock performance.”

Even with the string of woes the company faces, CyberMedia’s diagnostic software has the dominant market share with 57 percent. Its UnInstaller program, which removes useless files in Windows applications, also has a leading 34 percent market share, said Rob Owens, an analyst at Pacific Crest Securities in Portland, Ore.

“Demand for the company’s products continues to grow,” Owens said. “In light of that, it could just be a matter of time for the current issues to work themselves out.”

For its part, CyberMedia has plans to expand beyond the home PC market and into the corporate setting. It has just begun to release diagnostic software designed to work on networks, and according to Rekhi, a concerted marketing push is moving forward.

“It is a good idea for CyberMedia to move into the business world,” Stanek said. “It is a natural extension of their existing product, and can help expand their presence even further in the market. As for being competitive with companies that already have a toehold in corporate diagnostic software, we’ll have to wait and see.”

Rehki is confident CyberMedia will rebound soon.

“We will turn the company around very quickly,” he said. “We hope to re-energize the franchise from here. No one is ahead of us in the marketplace.”

No posts to display