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Qualcomm and Verisign draw more heat
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February 12, 2002: 4:56 p.m. ET
Two long-time targets of short sellers fight off accusations of accounting shenanigans.
By David Futrelle
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NEW YORK (CNN/Money) - In this market, almost nothing is scarier than a sudden whiff of uncertainty. Consider, for example, the recent wild gyrations in shares of one-time tech favorites Qualcomm and Verisign.
Qualcomm (QCOM: down $0.78 to $40.50, Research, Estimates) shares plummeted early on last Friday after the Center for Financial Reporting and Analysis (CFRA), a self-proclaimed watchdog of "financial shenanigans," issued a negative report. The stock quickly rebounded after analysts rushed to the stock's defense. Morgan Stanley denounced the CFRA's "witch hunt." And Gerard Klauer Mattison analyst John Bucher upped his rating on the stock, attributing the plunge to "visions of 'Enron-itis' running through the minds of investors and short sellers."
Security software and domain registrar Verisign (VRSN: up $0.63 to $26.31, Research, Estimates) went on a roller coaster ride of its own last week as worries spread about dark surprises hiding in its books. Analysts rushed to its defense as well. "Nothing is likely to emerge from the dark to haunt the stock," Bear Stearns analyst Chris Kwak assured investors.
Nothing new
Talk of "Enron-itis" aside, both stocks have long been haunted by accounting worries. Qualcomm, a former high flyer that racked up a legendary 2,600 percent return in 1999, has been widely derided for its convoluted financial statements and its liberal use of "pro forma" reporting. It nevertheless has a cult following of fanatical fans convinced that the company's licensing fees from technology for transmitting wireless calls will lead to a windfall.
The worries raised by the CFRA last week, to be sure, weren't exactly earth-shattering -- the most serious one being that Qualcomm had allowed some companies to pay for licenses with equity instead of cash. Qualcomm noted that the amounts involved were small -- a few million bucks out of total revenues of $2.7 billion in 2001 -- and that the transactions had been disclosed in a company 10-K.
Still, Qualcomm stock is fairly richly priced, given the company's less-than-phenomenal growth prospects. And with the company's financial reporting something less than perfectly clear -- the last time I slogged through a Qualcomm earnings report it quite literally gave me a migraine -- it's a safe bet that the company, fairly or unfairly, will be dogged by accounting questions for some time.
Verisign, a provider of Internet security software and leading registrar of domain names, has also been a favorite target for short-sellers. Shorts essentially worry that the company may be resorting to dubious accounting in order to pump up sales as the registration business stagnates.
Indeed, last spring, (in)famous short seller Manuel Asensio launched a campaign to expose what he called Verisign's "questionable earnings, unrealistic forecasts and...extremely excessive stock price."
Last week, Verisign was dogged by accusations that it was driving its sales by investing money in affiliates who would turn around and spend this money on Verisign products -- essentially transferring the money from one pocket to another and calling it revenue.
It's a legitimate worry: bankrupt Belgian speech recognition software company Lernout & Hauspie reportedly used a similar strategy to conjure hundreds of millions of dollars in sales out of thin air. But the companies pumping up Lernout & Hauspie's sales were fraudulent shells. That's not the case with Verisign's affiliates. Still, any time a company bankrolls customers in this way it raises questions -- you may recall how too-liberal "vendor financing" came back to bite telecom firms like Lucent and Cisco.
Both Qualcomm and Verisign have recovered relatively quickly from their recent bouts of Enron-itis. But neither company has even come close to putting investors' concerns fully to rest. Shareholders should brace for a bumpy ride.
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