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Red Hat to restate financials

Red Hat has announced that it will change the way it books support subscription revenue, based on a recommendation from its auditors.

The Linux supplier said the changes will cause the business to correct and restate its audited financial statements for the fiscal years ending 2004, 2003, and 2002, and its unaudited financial statements for the fiscal quarter that ended 31 May 2004.

"The restatement is not expected to reflect any material difference in the meaningful historical trends of our business, nor will it adversely affect our business outlook, which remains strong," said Matthew Szulik, Red Hat's chairman and chief executive.

"We remain committed to meeting high standards in providing timely, accurate and transparent financial reporting, and our planned restatement reflects this commitment. The restatement will also assure that future comparisons to past periods are made on a consistent basis."

The company said the change in accounting was recommended by the company's independent auditor, PricewaterhouseCoopers, "following the normal rotation of audit partners required by the accounting profession's rotation rules".

"As a result of these discussions, the company determined it would be appropriate to stop recognising revenue for subscription agreements on a monthly basis - a method it has consistently applied for the past five years - and start recognising revenue on a daily basis over the particular contract term," the company said.

For the past five years, Red Hat has booked subscription revenue on a monthly basis as if the subscription began on the first day of the month in which the subscription was sold. For example, Red Hat would recognise one-twelfth of the revenue of a twelve-month subscription in the calendar month during which the subscription began, and the remaining subscription revenue over the next 11 months.

After that method was reviewed recently by a new audit team at PricewaterhouseCoopers, the company was told that it should book subscription revenue on a daily basis.

No other related financial adjustments are expected, the company said, although more changes could occur.

The company reported revenue $41.6m (£22.3m) for the first financial quarter of 2005; the adjusted revenue total will be somewhere between $41.2m and $41.7m, according to the company.

Revenue for 2004 was reported at $126.1m but will be adjusted to between $123.8m and $124.8m. 2003 revenue had been reported at $90.9m but will be adjusted to between $89.7m and $90.3m.

Its 2002 revenue, which had been reported at $78.9m, will be adjusted to between $78.3m and $78.9m.

Dan Kusnetzky, an analyst at IDC, said Red Hat's actions today will probably "be seen as a reasonable step" toward meeting stricter financial regulations and improving reporting of its results.

Todd R Weiss writes for Computerworld


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