Hello! Think about it: If you were Steve Wise and smart enough to walk and chew gum at the same time, would you have made such a statement unless you thought you were on firm ground?
The issue is a relatively new one, particularly for this company, and has to do with revenue recognition when doing business with Internet companies; it's a shift to progress payment accounting rather than accrual accounting, as Shane rightly points out--it's a sort of modified cash accounting.
The positive is that the deferred revenue line on the balance sheet provides much higher visibility of earnings. The negative is that if the company doesn't expect that the auditor is going to insist on the switch until the last minute, the CFO is out there looking like a fool, relying on signed contracts for his guidance that suddenly move out of current and into deferred revenue status.
I've seen a lot of "cooking the books" and this doesn't look like it. The majority of the shortfall was a $10 million deal with Storage Networks, a privately held company that already has its network in place and is well capitalized and that has been signing on customers for network storage and management. Price Waterhouse, Legato's auditor, decided that the revenue recognition should be based on deployment of the solution rather than when LGTO gets paid, a notion that Larry Ellison has been pushing for some time now when he claims that everyone is providing services rather than software.
The $3 million contract that "slipped" was an unusual contract with a VAR to provide a solution to one end user. Once again, this sort of sale has been customarily treated as an immediate sale to the VAR, but if a company moves over to progress payment accounting, the revenue is recognized as the solution is deployed--during the first and second quarters of this year.
Dear aliveinsf, you may not be aware of this, but auditors do not live at the companies they audit unless the companies are very large and complex and lucrative. Normally, they make a pit stop once a quarter. From what happened here, it seems obvious that PW made a pit stop and insisted on an unexpected change in revenue recognition without warning. You refer to sales by insiders: The stock was wildly overpriced not that long ago and any sane person would have been selling purely on the basis of valuation. |
