Legato Stock Price Plummets on Audit

Restates reports; excludes revenue not yet received

Storage management software maker Legato Systems Inc. (Nasdaq:LGTO) was recently told by auditors to defer revenue from three contracts, resulting in a disastrous market reaction to its latest quarterly report.

On Jan. 19, Palo Alto, Calif.-based Legato restated results downward for the third quarter of 1999 and then said its fourth-quarter earnings would be 11 cents per share, almost half as much as analysts had predicted.

The news sliced Legato's stock price of $53.62 to $29.88 the next day. At its high last year, the stock was trading at $80.

For the fourth quarter, Legato said revenue was $71 million, an increase of 47% over the same period a year earlier. For all of 1999, Legato reported $251 million, up 55% over 1998 but still below analysts' expectations.

The reductions in the third and fourth quarters were the result of auditors' recommendation that revenue from three contracts worth $19 million be recorded in 2000, when Legato customers could expect payment from the deals, several analysts said.

For example, the largest contract, for $10 million with application service provider StorageNetworks Inc. in Waltham, Mass., was considered by Legato to be irrevocable, so Legato counted it as revenue, according to analyst Mark Fernandes at Merrill Lynch Global Securities in San Francisco.

But independent auditors at PricewaterhouseCoopers in New York said the StorageNetworks' sale was dependent on customers signing up, and Legato should be dependent on that revenue as well only when it actually came in, Fernandes added.

The auditing recommendation "could cascade through the industry and be a watershed event" affecting other companies that sell to application service providers, said Joseph Payne, an analyst at Dallas-based Hoak Breedlove Wesneski & Co.

Shortly after Legato announced the restatement, Ontrack Data International Inc. announced the two companies were canceling Legato's planned acquisition of Ontrack. Joan Dyer, an Ontrack spokeswoman, said only that the merger termination was a "mutual" decision based on the interests of the stockholders and the uncertainty of the situation.

Copyright © 2000 IDG Communications, Inc.

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