James, Twister, here is a stock that may have a margin of safety. LGTO. Down from 80s to 30 on a forced accounting change (restatement of earnings) but with good fundamentals and earnings prospects. (I am just beginning my research so cut me a break.) It is a tech stock, but...a value! I'd be interested in any thoughts from you expert number crunchers.
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Legato drops after earnings fall short
Company also restates third-quarter numbers
By Debra McGarry, CBS MarketWatch
Last Update: 6:22 PM ET Jan 20, 2000 NewsWatch
PALO ALTO, Calif. (CBS.MW) -- Legato Systems' shares lost almost half their value Thursday after the maker of enterprise storage software's fourth-quarter earnings fell short of analysts' estimates due in part to changes in revenue recognition policies.
Shares (LGTO: news, msgs) dropped 23 7/8 to close at 29 3/4 on volume of 39.7 million shares.
Net income rose to $9.9 million, or 11 cents a share, in the fourth quarter compared to $7.1 million, or 8 cents, made in the year-ago quarter. Analysts, however, projected 20 cents, almost double the reported number.
Revenue jumped 47 percent to $71.2 million from $48.5 million in last year's fourth quarter.
Legato also restated third-quarter earnings and revenue due to a $5.8 million contract, the revenue of which has been shifted to FY00. Earnings changed to 14 cents a share from 18 cents.
Two other deals which negatively affected fourth-quarter revenue included a $10 million contract signed with Storage Networks and a $3 million deal.
The Palo Alto, Calif.-based company's decision to defer $19 million in revenue and its plans to change revenue recognition rules on future contracts was due to auditors suggestions that revenue be deferred into the year 2000.
The change in revenue recognition rules involves deferring revenue vs. recording it up front.
Warburg Dillon Read sliced the stock's rating to "hold" from "buy," and lowered its 12-month price target to $35. Warburg believes Legato's sudden actions may be a result of more serious internal issues yet to be uncovered. The investment firm also reduced 2000 and 2001 earnings estimates.
Dain Rauscher was also negative on the company, cutting the stock's rating to "neutral" from "aggressive-buy." Robertson Stephens joined in and cut its rating to "buy."
Clearly disappointed with quarterly results, Legato officials are more positive about the year ahead. "We believe that annual revenues will grow in the range of 50 percent year-over-year in 2000, and that growth will be stronger in the second half of the year," said Louis C. Cole, Legato's president and chief executive officer
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Legato Smashed (MOTLEY FOOL)
By Brian Graney (TMF Panic)
January 20, 2000
Enterprise storage management software provider Legato Systems (Nasdaq: LGTO) was crushed for a big loss this morning, losing more than 40% of its market value after turning in disappointing Q4 results. Earnings per share came in at $0.11 (excluding merger-related costs), up from $0.08 a year ago but well short of the First Call mean estimate of $0.19. Analysts didn't take the bad news very well and strafed the company with downgrades, reducing earnings estimates from all directions.
The venomous reaction by the sell-siders is understandable considering Legato's CFO went on the record just last week and said earnings would meet the Street's projections. He also reassured investors that revenues would end up in the $85 million to $90 million neighborhood. Instead, the company posted quarterly revenues of only $71.2 million. Under normal circumstances, the credibility destruction from the CFO head-fake alone would be enough to explain today's rapid drop in Legato's share price. However, there is more to the story than merely analysts complaining about shoddy guidance.
As Legato explained during its conference call, the quarterly revenues would have been higher if the company's auditors had not decided late in the quarter that roughly $13 million in revenues from two new contracts should be recognized throughout fiscal 2000 instead. Additionally, the auditors also determined that the company jumped the gun on booking revenues from another contract back in Q3, which is also being pushed into 2000. As a result, the company restated its Q3 revenues down to $65.9 million from the previously reported $71.7 million and lowered its Q3 EPS to $0.14 from $0.18.
By itself, a restatement of past results will almost always cause concern among investors, since it casts doubt that a company has not always been straight-up or accurate in its reporting. But perhaps more important than the revisionist history element, restatements force investors to re-examine their fundamental assumptions about what a company can do in the future. In this case, an added degree of uncertainty is being thrown into the mix as Legato is changing its general revenue recognition policies as well. In short, the days of Legato reporting 60%+ year-over-year increases in revenues quarter after quarter may have come to an end.
Management did its best to play-down the blurry revenue issue, stating that the company remains "financially and technologically strong." Many observers are debating the validity of those two traits, however.
On the financial side of things, warning flags are starting to show up on Legato's balance sheet. Accounts receivable rose 73% in fiscal 1999, faster than the 55% gain in total revenues for the year overall. Meanwhile, accounts payable ticked up only 19% during the year. What this shows is that Legato is extending more generous terms to the clients that owe it money, while at the same time not making great strides in extending the payment terms for the money it owes to others. Ideally, the situation should be the other way around in order for a company to maximize its cash aerodynamics.
Finally, today's revenue brouhaha may be masking market share losses to Legato's larger data storage management software pure-play rival, Veritas Software (Nasdaq: VRTS). If that is indeed the case, then Legato's situation is eerily similar to the problems that fiber channel switch maker Vixel has recently encountered by competing with Brocade Communications in another hotly contested area of the enterprise storage market. These problems suggest that second-tier players might end up being weeded out of the many niches of the rapidly growing enterprise storage market faster than anyone had anticipated. Interested investors may get more clues that an early shakeout is underway next week when Veritas reports its Q4 results. |
