Late Accounting Move Rocks Tech Firm, Stock Falls
By CHRISTOPHER KEOUGH
Staff Reporter
SeeBeyond Technology Corp. became mindful of the groundswell for increased scrutiny of corporate accounting three weeks too late.
The Monrovia-based company, which had become the No. 2 player in the market for software that allows different applications to talk to each other, reported last month it would fall $2 million shy of its previously projected revenues of $44 million for the first quarter ended March 31.
After the announcement, Chief Executive Jim Demetriades said that auditors from Ernst & Young advised the company not to record another $2 million in revenues that were booked, but not collected, in the first quarter.
“Post-Enron, what we’re learning is that auditors go through things very carefully,” Demetriades said. “If they don’t want us to record it until we get paid, we won’t.”
As a result, SeeBeyond reported quarterly revenue of $40.4 million, and Wall Street reaction was severe. The stock fell more than 50 percent, from $6.58 to $3.15, on April 21. The stock closed May 1 at $3.14.
This, despite the fact that SeeBeyond reported net income for the quarter of $2.9 million (3 cents per diluted share), improving on a loss of $4.4 million (6 cents a share) for the like period a year earlier and the company’s second consecutive positive quarter. Revenues were $40.4 million versus $49.4 million in the first quarter of 2001.
“The pre-announcement was not that dramatic, but when the reported numbers were even lower, in some ways it’s a bit dicey,” said Erick Brethenoux, vice president of equity research at Lazard Freres & Co. LLC.
Not to Demetriades, who said he learned a lesson by making an announcement based on unaudited books. “There’s just no question visibility remains clouded, but we’re optimistic recovery will eventually come about,” he said.
(Demetriades, one of the founders, has decreased his stake in the company from 40 percent to 30 percent between September 2001 and February, selling 7.3 million shares at prices ranging from $1.40 to $9.01 per share. He said the sales were made in response to a margin call and in an effort to diversify his portfolio.)
Setback after rise
The lower revenues come after a streak of positive news.
After raising $15 million in a private placement with institutional investors in December, and another $70 million in a secondary offering in February, company executives felt confident enough to commit to a 12-year, $25 million lease for 120,000 square feet of office space.
But analysts, wary of the shortfall in announced revenues and mindful of what they consider a shaky market in the company’s niche product, known as “middleware,” are now less than optimistic.
Jaime Roca, an analyst at Precursor Group in Washington, D.C., said middleware and an emerging integration field known as Web services are converging. The Web services market will likely be the domain of BEA Systems, IBM Corp., Microsoft Corp., Oracle Corp. and Sun Microsystems Inc.
Middleware acts as a conduit or translator between disparate programs used in unison by a business. A small-scale analogy is the interface between a personal digital assistant and PC. The larger the business, the more complicated the task of communicating among these programs.
“Middleware players, especially the small players in the market, might feel some pressure because it’s the Big 5 that are leading the race,” Roca said.
There will be a battle, and the question is whether SeeBeyond can regain investor confidence and continue to grow. Brethenoux said prospects are not good if the company defers revenues to bolster future quarters.
Demetriades denied that the E & Y; advice was aimed at fortifying the numbers going forward. “We don’t know that we’ll be able to account for that revenue in the next quarter,” he said. “We get to account for it as the customer deploys it.”
Thomas Berquist, an analyst at Goldman Sachs, said profitability might be difficult to maintain because tough times are ahead for the industry. Software stocks, as a class, are down 30 percent to 40 percent in 2002 after a strong end to 2001.
“The question that people have is about the health of the integration space overall,” he said. “Many of the vendors have been struggling as the economy has been struggling, and SeeBeyond had the weakest balance sheet in the field” prior to raising the $85 million.
Building a war chest
Demetriades said the recent cash infusions have established a $100 million-plus balance in the bank, which should allay any fears on the part of customers about the company’s long-term viability.
Berquist wasn’t so sure. “With the weakness reported in the March quarter, people are worried that they’ve lost their momentum,” he said.
Brethenoux, of Lazard Freres, said the cash would help SeeBeyond, so long as it remains in the bank and doesn’t end up being spent to shore up for lagging sales.
“They have to keep a decent treasure chest to be able to say that ‘Even in tough times, we go into the cash we have and we’ll be around,'” he said.
The company will fill the increased office space, Demetriades said. Despite the bleak outlook for sales, SeeBeyond will increase staff by as much as 15 percent worldwide, 20 percent in Monrovia.
Brethenoux conceded that SeeBeyond has better than a fighting chance in the middleware market if the economy rights itself. But he warned that Demetriades should be casting about for smaller companies with high-end technologies that SeeBeyond can acquire to keep it competitive with WebMethods Inc. and TIBCO Software Inc.
WebMethods posted a $15.7 million loss in its first quarter ended March 31, an improvement over the like period a year earlier, when it lost $46.8 million. TIBCO reported net income of $3.4 million on revenues of $74 million in its first quarter ended Feb. 28.
John Ederer, an analyst at Pacific Growth Equities Inc., remains upbeat about SeeBeyond’s chances of competing once the company’s performance helps people forget the first quarter’s results. “They ended up doing a lot of damage by pre-announcing one number and reporting another,” Ederer said.
