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Diligent to restate revenue of past three years – US sales slow

Diligent Board Member Services, the governance app maker hit by a slew of administrative mis-steps, will restate how it has recognised revenue over the past three financial years, delaying publication of second-quarter trading, which it says will show slowing sales in the US.

The New York-based company will restate financial statements for the 2010, 2011, 2012 financial years and the first quarter of 2013, it says in a statement.

The adjustments will mean customer revenue will be recognised from the date of a contract being signed rather than the start of a month, and revenue from installation fees will be recognised over a longer period of time, it says. The effect of the errors accelerated the time these revenue streams were recognised.

Diligent will also properly capitalise costs associated with software developed for internal use, which have previously been expensed.

The errors will not affect the total revenues earned or the timing of cash received, it says.

The shares dropped 3.3 percent to $5.85 in trading today, and have slumped 28 percent from a peak on June 11.

Diligent posted a tripling in annual profit last year with annual revenue more than doubling to $US43.7 million. Annualised sales were $US58.4 million in the 12 months ended March 31.

The restatement means Diligent will not file its second-quarter earnings with the US Securities and Exchange Commission by the August 9 due date.

Chief executive Alex Sodi says the company maintained its 97 percent client retention rate in the period and new sales outside the US were strong, though new sales within the US were slowing.

"We expect our recurring revenue model to continue to drive revenue growth at a strong pace." 

Diligent added 173 net new client agreements in the three months ended June 30, servicing 2183 companies and 3075 boards.

It increased its cash balance by $US2.5 million in the quarter to $US39 million, after paying $US1.8 million relating to the special committee process and $US1 million in related remediation when it discovered it paid executives too much in its bonus scheme.

(BusinessDesk)

Comments and questions
9

Still a fine company, in my view, at a justifiable share price.

Sales can slow and still support the current vln, in my opinion. And the revenue restatements don't materially impact earnings and cash, according the latest release.

My greatest concern is the reputational impact to a company making its business out of governance best practice systems.

"It increased its cash balance by $US2.5 million in the quarter to $US39 million, after paying $US1.8 million relating to the special committee process and $US1 million in related remediation when it discovered it paid executives too much in its bonus scheme."

Actually, their NZX announcement today says:

"Diligent continued to demonstrate balance sheet strength during the second quarter. Diligent’s cash balance increased by $US 2.5 million in the second quarter of 2013, resulting in total cash balances of $US 39.0 million as of June 30, 2013, after payment of U.S. 2013 estimated quarterly income taxes of $US 1.8 million and final costs relating to the Special Committee process and related remediation activities of over $US 1.0 million."

Revenue recognition is a complex area for SaaS companies, especially when trying to apply two different GAAP (US and NZ).

The change to a new auditor (big 4 this time) will solve all these issues.

Rest of world growth was 'strong', which is promising.

Once they get all these distractions out of the way (stock options, NZX listing rules, accounting treatment, potential US listing) they will no doubt go from strength to strength.

Is this an over-priced PDF reader?

The financial competence and governance on the board has to be seriously questioned.

...but that is why the market is pricing it on a relatively normal multiple of FY14 EBITDA, and not some stupid 100x revenue like other loss-making SaaS. The fact that Diligent keep stuffing up keeps their share price down where it has potential to be trading much higher. As soon as they clean up their corporate governance the market should remove that poor governance discount.

Since 2000 half of US listed software companies have had to restate their revenues.

Can't wait until this company lists in the US. This hiccup will be just a distant memory.

You didn't want so say it was a fairer or chapter price than Xero but it is.

The pedigree speaks volumes.
The market does not lie and determines the true value.
The governance is shocking.