Accounting & Tax

Red Hat Restates after CFO Resigns

The provider of Linux support services also announced that it is responding to an SEC inquiry regarding its annual report.
Stephen TaubJuly 15, 2004

Red Hat Inc., which provides support services for Linux software, announced that it will restate its financials for the prior three fiscal years and the first fiscal quarter of 2004 to correct the way it recognizes revenues for certain subscription agreements. The restatement is expected to result in “significant percentage differences” in quarterly operating profit and net income, Red Hat warned.

The announcement — which came about a month after chief financial officer Kevin Thompson’s June 16 resignation “to pursue other interests” — sent the company’s share price plummeting 23 percent on Tuesday, reported Investor’s Business Daily. Red Hat stock has fallen by more than 40 percent since June 1, the newspaper added.

The Raleigh, North Carolina-based company said that two days after Thompson’s resignation, its independent auditors, PricewaterhouseCoopers, recommended that the company change the way it recognizes revenue. According to Red Hat, however, the decision to restate resulted from discussions between the company and PricewaterhouseCoopers following the normal rotation of audit partners required by the accounting profession.

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“As a result of these discussions, the company determined it would be appropriate to stop recognizing revenue for subscription agreements on a monthly basis — a method it has consistently applied for the last five years — and start recognizing revenue on a daily basis over the particular contract term,” Red Hat stated in a press release.

Red Hat also announced that it is responding to comments and questions from the Securities and Exchange Commission regarding its annual report. “Although the company does not anticipate that the review [by the SEC staff] will result in any material changes to previously reported financial results, the company cannot provide assurances that such changes will not be required,” it added in a press release.

Red Hat chairman and chief executive officer Matthew Szulik told Reuters that the commission’s inquiry was related to results for one year, but he wouldn’t say which one. “The SEC was not involved in our decision to restate,” Szulik told the wire service. “The SEC comments could come from a range of issues.”

“When you look at the timeline, the timing is so bizarre, there are some concerns about management credibility,” Trip Chowdhry, an analyst with FTN Midwest research, told the wire service.