VeriFone Holdings Inc.'s stock dropped nearly 50% Monday after the terminal company said it would restate earnings for first three quarters of the fiscal year that ended Oct. 31, because of accounting errors that overstated its inventory and understated its costs of goods.
Observers said the accounting problems could have been related to November 2006 acquisition of the Israeli terminal manufacturer Lipman Electronic Engineering Ltd., which made VeriFone the world's biggest terminal maker.
"I am very disappointed to have to bring you this news and am committed to ensuring that we promptly and thoroughly remedy this situation," Douglas G. Bergeron, the San Jose company's chairman and chief executive, said in a press release.
VeriFone said executives were unavailable for an interview Monday, but the company was scheduled to discuss the restatement during a conference call after the market closed Monday.
VeriFone said it anticipates that the restatement will result in about $54.4 million of reductions to inventories for the three quarters, as well as about $29.7 million of reductions to pretax income.
VeriFone said it is evaluating the effect of the restatement on after-tax income for those periods.
The company also said it would delay its fiscal fourth-quarter earnings report, which was scheduled to be released Thursday, though it expects to report revenue of about $238 million for the quarter and about $904 million for the full fiscal year.
At midday, VeriFone's stock was trading at $25.78, down 46.33% from Friday's closing price.
Analysts said revenue does not appear to have been affected by the accounting problems.
VeriFone also said that some of the estimates include corrections of unrelated accounting errors it has detected, and that even though it is not aware of any other errors that might require adjustments to previous financial statements, "there can be no assurances that VeriFone or its independent registered public accounting firm will not find additional accounting errors requiring further adjustments."
According to a company filing, VeriFone uses Ernst & Young as its independent auditor. Ernst & Young awarded Mr. Bergeron its 2007 "Entrepreneur of the Year" award in July.
Gil B. Luria, an analyst with Wedbush Morgan Securities, said in an interview Monday that the restatement was "certainly very bad news" for VeriFone. "It appears that their profits were overstated by 20% to 25% in their most recent quarter, so that's very substantial."
The accounting problems "seem to correspond with the acquisition of Lipman," Mr. Luria said.
The three quarters are the first for which VeriFone reported results that included Lipman. Before the acquisition VeriFone outsourced all its terminal manufacturing, but Lipman made some of its products, and VeriFone continues to make those products, Mr. Luria said.
"They introduced a new set of accounting when they bought Lipman, and for whatever reason that accounting must not have been proper," he said.
VeriFone's earnings have been consistently strong this year, and it has been taking market share from its competitors, but Mr. Luria said it may have overstated its profitability. "What is exaggerated is they usually talk about how profitable they are. They're still more profitable than their competitors, but not by as much as they said they were."
Tien-Tsin Huang, analyst with JPMorgan Securities Inc., wrote in a research note published Monday that the restatement "calls into question" VeriFone's gross margins, "which up until now have been positive fuel for the stock."
The restatement returns VeriFone's stock "to show-me mode, though we believe that secular trends remain favorable," Mr. Huang wrote.
