Angry Occam investors call for management’s ouster

Filing restated financial reports for recent years this week, Occam Networks claimed to have put its long restatement process behind it. But investors on the company’s quarterly earnings conference call late Wednesday unleashed a barrage of scathing criticism aimed at upper management and its internal control processes. One after another, investors registered disgust and bewilderment, repeatedly calling for a change in management or a sale of the company.

“Shareholders are clearly fed up,” one investor said. “We either [want to] get someone else new in there to do it better or put the company up for sale.”

Another investor called the company’s governance “nothing short of atrocious,” adding, “You clearly had no clue how to recognize revenue.”

Between 2004 and 2006, Occam prematurely recorded $33 million in revenue, the company reported following an independent audit. Of that amount, $4.9 million was deferred past 2006, and the rest was all ultimately recognizable before this year. As a result, net losses between 2004 and 2006 increased $2.1 million to $23 million.

Restated, the company reported more than $68 million in revenue for 2006 and a net income of $1.2 million rather than $1.5 million, as previously reported. For the first and second quarters of this year, respectively, Occam reported a restated net income of $29,000 and a net loss of $1 million.

The accounting problems stemmed from three main areas, Occam said. First, the vendor in some cases recognized revenue for some products and features that were promised to customers but not yet available, including promises of free products, software, training, and installation services. Second, Occam in some cases sold products to value-added resellers that could not pay for them without being paid by the end user. Third, for certain quarters that ended on weekends, Occam used a shipping vendor that transferred shipments to a second shipping vendor without an appropriate transfer of terms and conditions, such as those pertaining to risk of loss.

“I can’t understand why your legal department did not have acceptance documents part and parcel with sales documents,” said one investor on the conference call. “This just blows my mind.”

The company is still working to correct its internal control problems, following a list of 17 steps identified by auditors as corrective actions. It has also hired a director of technical accounting. “A number [of those 17 steps] are very attainable in the short term,” said Chris Farrell, Occam’s chief financial officer. “Some will take more time than others.”

In addition, Occam predicted third quarter revenue would decline “substantially” from the $19.2 million recorded in the second quarter and its net loss will grow substantially over the second quarter’s $1-million net loss. Those results are due partly to purchase decisions the company said may have been delayed by customers wary of the results of the financial restatement. It also includes the effect of $2.6 million in audit fees.

At the same time, the company continues to win new business, adding 17 new customers in the third quarter alone and 14 new customers in the second quarter.

Occam is also currently offering a “swap-out” of one malfunctioning blade shipped prior to the third quarter that has been known to cause temporary service outages.

The company recently let go between 5% and 10% of its workforce, in part to make room for an unknown number of employees it expects to inherit from its pending acquisition of some passive optical networking assets from Terawave.

Occam executives declined to predict when the company would break even financially. Asked repeatedly about selling the company, CEO Bob Howard-Anderson pointed to future opportunities and the strength of its products—two points even Occam’s harshest critics conceded. “We don’t want to sell the company while we play in a large and growing market,” he said.