Anyone care to comment on the market share/growth issues in the following story????????????? We've already got plenty of comment on the accounting issues. Anyone want to discuss market share/growth?
Legato stock all shook up
By Sarah Lai Stirland
Redherring.com
January 21, 2000
Sometimes, efforts to keep up good appearances can
backfire. That's what just happened to enterprise
storage software maker Legato Systems (Nasdaq:
LGTO).
The company informed Wall
Street Wednesday evening that its
auditors had instructed it to defer
reporting a key portion of its
revenues until sometime in the first
half of 2000. The result: even
though Legato is profitable and
growing rapidly in a market that's
showing a healthy demand for
enterprise storage software
solutions, its stock plummeted Thursday, ending at
$29.75, down 44.52 percent for the day.
On Wednesday evening, Legato announced that
following an audit, it is revising its third quarter earnings
down from $71.7 million to $65.9 million, reducing
earnings per share for that quarter from 18 cents a
share to 14 cents a share. The company's dramatic
fourth quarter revenue shortfall of $71.2 million, which
was well below the expected $85 million to $90 million
range, also shook analysts' confidence in the
company's management and strategic direction. Legato
also lowered its growth-rate projection for 2000 down
to 50 percent; analysts had projected that sales would
grow about 65 percent this year.
TICKER SHOCK
What happened? Although
Legato officials weren't available
by press time, the company told
analysts that its auditors had
instructed it to defer reporting
revenues resulting from three new
contracts signed in the third and
fourth quarters until the first half of
this year. Given the new reporting
practice, Legato's management
also had to revise its projections for 2000, hence the
lowered growth forecasts.
Despite these changes, Legato's management remained
confident about its future. Wall Street analysts,
however, wondered whether the revised numbers are
a symptom of Legato's slipping competitive position as
a leader in the enterprise storage and backup market.
"It's not a question about price or accounting -- it's a
question about fundamental competitive positioning
and ability to execute," says Andrew Brosseau, an
analyst at SG Cowen. Mr. Brosseau on Thursday
downgraded Legato from Strong Buy to Neutral.
Seven other brokerage firms also downgraded the
stock from Buy to Hold.
Mr. Brosseau notes that the fact that Legato tried to
recognize the revenues from its new contracts
immediately instead of spreading them out over several
quarters suggests that Legato felt that it needed the
revenue and that business is not going as well as the
company's management had hoped.
In a research note giving reasons for his downgrade,
Mr. Brosseau wrote, "Whether distracted by its spate
of recent acquisitions or stretching too far to maintain
growth, the company is having execution problems that
seem to go beyond changes in accounting policy."
As a result of the changes, Mr. Brosseau has revised
his 2000 revenue estimates for Legato to $360 million.
That's $90 million less than his previous estimate.
More than two-thirds of that will come from licensing
fees, while the rest will come from service fees, he
predicts.
Like all the other analysts that downgraded Legato this
week, Mr. Brosseau was following in the footsteps of
Goldman Sachs (NYSE: GS) analyst Anne Meisner,
who downgraded the company last week to Market
Perform, which is Goldman Sachs's polite way of
saying Sell. The rating is the company's
second-to-lowest, next to Market Underperformer,
which is almost never used.
CREDIBILITY GAP?
When Ms. Meisner downgraded the stock, she had
reported that Legato's management had hinted that
fourth quarter earnings would be just slightly lower
than her expectations. She says that the $71.2 million
figure was a bit of a shock.
"This was much more disappointing than even I would
have imagined," she says.
Could Legato's accounting shift belie a broader
strategic problem at the company? Ms. Meisner thinks
so. In particular, she singles out Veritas Software
(Nasdaq: VRTS), which she thinks is aiming straight at
Legato's core market. Ms. Meisner predicts that
Legato's Networker product, which targets the
midmarket Unix workgroup and high-end NT users,
will face stiff competition from Veritas's new
Netbackup BusinessServer package, which the
company recently started marketing. And since Veritas
already has the high-end Unix data center backup
market covered with its Netbackup product, she
predicts that the company will be able to offer clients
packages that will be more appealing than Legato's.
Though Legato's growth may have lost some of its
previous momentum, the company is still profitable,
and it's still growing. Even though revenues were less
than expected for the fourth quarter, net income was
$9.9 million for the period, up 39 percent from the
same period last year. Excluding merger-related costs,
net income for fiscal 1999 was $43 million, up 112
percent from $20.2 million in 1998.
As CIBC World Markets' analyst Melissa Eisenstat
puts it, most of the time in cases like Legato's, negative
buzzwords such as "accounting issues" send people
running into the hills, even when companies are
performing relatively well in a promising sector. She
calls Legato a "good company in a great space."
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