Aliso Viejo-based Quest Software Inc. hasn’t reported full financial results for a year now nor offered even partial quarterly numbers since August. It’s becoming a sticking point for Wall Street.
The company has been unusually quiet during the past six months of a yearlong probe into stock option grants by a board committee and the Securities and Exchange Commission.
In January, Quest did say it expects to take $150 million in charges to past earnings to fix backdated stock options from 1998 to 2002.
But the company has yet to restate prior results or get up to date on numbers for most of 2006 and the first quarter of this year. Quest cancelled its annual meeting last year and has yet to schedule one for this year.
Locally, Quest’s options case stands to be second, albeit a distant one, to that of Irvine-based Broadcom Corp. Earlier this year, Broadcom restated earnings from 1998 to 2005 with $2.2 billion in charges, the most of any company so far.
The chipmaker continued to report partial results during its probe and since has filed updated financials. Other companies here, including Lake Forest-based Western Digital Corp. and Santa Ana’s First American Corp., have wrapped up their own probes.
“Because the investigation is still in progress (though moving along), we are maintaining a no-comment posture until it is complete, which we hope will be soon,” Quest spokesman Joe Horine said in an e-mail.
Analysts and investors are getting antsy.
“The issue is not that they are still working through the process, it’s more that they have chosen not to discuss any financial results,even partial results,” said analyst Todd Weller, of Stifel Nicolaus & Co. in Baltimore. “We don’t know what the business looks like. That kind of uncertainty makes it challenging for investors because they don’t know what’s going on.”
Shares Up
Wall Street seems to be betting on a resolution with little disruption to Quest management. The company’s shares are up some 40% from their low of last summer with a recent market value of $1.6 billion.
“We expect this issue to be resolved soon,” said Norman Young, an analyst at Morningstar Inc. in Chicago.
As with Broadcom and others, analysts seem to be looking past the restatement issue.
“When they finally do this, the most important element will not be the restatements,” Weller said. “It’s going to be ‘What does Quest’s business look like today?'”
In November, former chief financial officer M. Brinkley Morse resigned rather than be interviewed as part of Quest’s look into stock options. Morse had been with Quest since 2001 and handled the company’s investment and acquisition strategy since 2005.
“There’s always somebody that takes the fall at a lot of these companies,” analyst Weller said.
In January, Quest said current and former senior management bore some responsibility for the misdated options but found no fraud or intentional misconduct.
“We see this as a positive development for the company given that the current management structure will be staying intact, most notably (Chief Executive Vinny) Smith, who has been instrumental in the company’s success to date,” Banc of America Securities analyst Kirk Materne wrote at the time.
More than 1.5 million options were repriced to eliminate “actual and potential benefits” to executives, including Smith.
Discounting Charges
Analysts said they aren’t concerned about possible criminal charges.
“The risk of something happening to the CEO is lower now than six months ago,” Weller said. “If there was a fraudulent situation, you would hear about that sooner rather than later.”
The most worrisome thing for analysts is a lack of financial input from the company of late.
“We have a lot of companies involved (in investigations) and the majority is providing investors with visibility as to how they are performing,” Weller said. “The kind of odd thing about Quest is that for whatever reason, they are choosing not to provide any information at all.”
Acquistion?
Quest makes software to help monitor the performance of databases, e-mail programs and other applications. The company’s software is used with programs from Oracle Corp., IBM Corp. and Microsoft Corp.
Being a midsize company among the biggest names of the software business has made Quest a perennial subject of buyout speculation.
The options probe hasn’t changed that, according to Weller.
“We continue to have a positive stance on the stock around the view that Quest is a consolidation candidate,” he said.
A speculative shortlist of suitors includes Hewlett-Packard Co., IBM and CA Inc., formerly Computer Associates International.
