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Technology Stocks : LEGATO SYSTEMS LGTO
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To: Skeeter Bug who wrote (589)1/25/2000 2:28:00 PM
From: Chuzzlewit  Read Replies (1) of 1138
 
Skeeter,

I've looked very hard at the numbers, and tried to get a take on the cause of the restatement. I've come to some tentative conclusions:

1. Neither the CEO nor the CFO is a crook. I think that what happened is that the auditors decided to apply a more stringent standard for revenue recognition than existed in the past. There was an excellent on-line article by Lisa Goldbaum in Forbes that discussed this issue.

2. I agree with you that revenues will benefit from the restatement due to the increase in deferred revenues. It would have been nice had the company restated earnings for several years using the new revenue recognition guidelines. Assuming that LGTO was consistent in its revenue recognition policies, we would have seen an increase in revenues this year because of the overstatement of revenues in the prior year.

3. The stock is still very expensive, but given the growth prospects (on a restated basis), I think that the valuations are coming into a more reasonable range. I have not yet done a valuation on this stock, but my gut tells me that something in the range of $20 - $25 may be reasonable (although not cheap).

I believe that the real question is whether there is any reason to believe that shortfall was due to decreased order booking rather than a change in revenue recognition policies.

Finally, this episode underscores the problem with investing in growth at any price. There are any number of stocks whose bubbles may burst on something as trivial as a change in revenue recognition policies. Investors pay entirely too much attention to earnings and ignore the "quality" of earnings (i.e. operating cash flow).

TTFN,
CTC
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