Network Associates Inc held a closed-door meeting for analysts last week to reassure Wall Street that its fourth-quarter earnings will be in line with expectations and that it is business as usual at the Santa Clara-based firm. Shares in the company had declined nearly 30% since the first of the year on concerns about the Securities and Exchange Commission’s investigation of the company and rumors that key executives were ready to jump ship, namely chief financial officer Prabhat Goyal. At the meeting, chief executive William Larson asserted that the top management team is indeed intact and that Goyal was going nowhere. The SEC investigation, which the company admitted to on January 6, was also downplayed, with Larson essentially asking investors to look past the SEC’s wrangling over acquired R&D write-offs. He also revealed that a number of other technology companies were being similarly scrutinized by the SEC including, Yahoo! Inc, Citrix Systems Inc, Motorola Inc, @Home Network Inc, Excite Inc and America Online Inc. Despite what Larson may say about changes in SEC rules which limit the charges companies can take in connection with acquisitions, they will have a tangible effect on operating results at Network Associates, as the company has delayed its fourth-quarter report until its discussions with the SEC are concluded. Analyst Michael Kwatinetz at Credit Suisse First Boston illustrated the effects in research notes. If one assumes that two-thirds of Network Associates’ $220m in write- offs for 1998 can be eliminated by the SEC, with the remainder amortized over seven years, Kwatinetz says CSFB’s 1999 estimate for the company would be reduced from $2.14 to $2.00. But Kwatinetz appears to be of the same mind as Larson, explaining that true operating results should exclude the amortization of intangibles – in which case, his earnings estimate would be $2.27. CSFB reiterates its buy rating on NETA.
