WatchGuard Postpones Earnings

A series of financial errors have forced security vendor WatchGuard Technologies Inc. (Nasdaq: WGRD) to postpone its fourth-quarter and fiscal year 2004 earnings call today.

Analysts are expecting quarterly revenues of $20.76 million and annual revenues of $86.42 million for the firewall and VPN appliance vendor.

The Seattle-based firm says that it will now file a Form 12b-25 (notification of late filing) with the Securities and Exchange Commission (SEC) with regard to its annual 10-K report for the year ended December 31, 2004.

So, what caused all this brouhaha? In a statement released this morning, WatchGuard said that the late filing is the result of delays in completing its financial statements and audit for 2004.

Errors were apparently discovered in WatchGuards previously issued financial statements. These include inaccurate income classification of early-pay incentive discounts taken by customers, under-accrual of customer rebate obligations, and timing of revenue recognition associated with specific products and services. The end result was an overstatement of product revenue and an understatement of deferred revenue, the company said.WatchGuard says that it now needs to restate its 2004 quarterly financials. The company is also reclassifying the early pay incentive discounts from interest expense to a reduction in revenue for its financial statements for 2002, 2003, and the first three quarters of 2004. This will reduce revenues and interest expense by approximately $288,000 in 2002; $585,000 in 2003; and $509,000 for the first three quarters of 2004. WatchGuard says previously reported net losses will not be affected (see WatchGuard Narrows Losses).

Another problem concerns the lease on WatchGuard’s Seattle HQ, which began in 2000. The firm failed to "properly gross up" tenant improvement incentives at the lease’s inception. WatchGuard execs are still working out whether the impact of this will require a restatement of previous financials.

WatchGuard is not the only company that has had to postpone its financials over recent months. Others include OSS vendor TTI Telecom International Ltd. (Nasdaq: TTIL) and hardware giant Nortel Networks Corp. (NYSE/Toronto: NT). (See TTI Dips on Results Delay and Nortel Delays Restatement Again.)

It is still too early to tell what impact WatchGuard’s financial reorganization will have on its long-term strategy. The company, which has enjoyed good performance in the Asian market over recent months, is currently looking to boost its presence there (see WatchGuard Signs New Asian Deals).

Since its launch in 1996, WatchGuard has won a number of big-name customers around the world, including BMW Korea and the U.S. Federal Government's 9-11 Commission

(see BMW Turns to WatchGuard).The market did not respond too well to news of the restatement. In trading today, WatchGuard shares fell 9 cents (2.77%) to $3.16.

WatchGuard was unavailable for comment, and the firm is yet to set a date for its rescheduled earnings call.

— James Rogers, Site Editor, Next-Gen Data Center Forum