Legato plunges on 4Q miss, downgrades

Legato Systems (Nasdaq: LGTO) plunged 42 percent Thursday after the company missed estimates because it changed its revenue recognition policy at the request of its auditors. Analysts panned the stock with "hold" ratings.

Shares in the maker of storage management software were down 22 11/16 to 30 15/16.

Legato fell well below estimates when it reported net income of $9.9 million, or 11 cents per share, excluding merger-related costs. First Call's survey of 19 analysts predicted a profit of 19 cents per share for the December quarter. The stock had been doing well after the company beatestimates in its third quarter.

Warburg Dillon Read on Thursday said it cut its rating on Legato to "hold" from "buy," citing the company's lower-than-expected fourth quarter results and decision to change its revenue recognition policy. It also lowered its year 2000 earnings estimate to 57 cents a share from 95 cents a share, and 2001 earnings to 96 cents a share from $1.31 a share.

Goldman Sachs also cuts its 2000 earnings figures on Legato, down to 67 cents a share from 92 cents a share.

Other brokerages were unanimous on the stock. Banc of America cut Legato to "market performer" from "buy," CIBC World Markets from "strong buy" to "hold," Chase Hambrecht & Quist from "buy" to "market perform," Robertson Stephens from "strong buy" to "buy," SG Cowen from "strong buy" to "neutral," and Salomon Smith Barney from "buy" to "neutral."

Executives blamed the shortfall on a decision to take two contracts signed during the quarter and recognize them in 2000 instead, on the recommendation of auditors. The decision wasn't made until the last few days of the quarter, the company said.

Fourth quarter revenue increased 47 percent year-over-year, to $71.2 million from $48.5 million.

Legato also followed auditors' recommendation to restate third quarter results to reflect one contract adjustment that lowered revenue in that quarter to $65.9 million from $71.7 million. The revenue will be recorded in the first and second quarters of 2000 instead, Legato said. Third quarter earnings per share has also been restated to 14 cents per share, rather than the 18 cents previously reported.

Full year revenue rose 55 percent to $251.1 million, from $161.8 million in 1998. Net income, excluding merger-related costs, rose to $43 million, or 48 cents per share, compared to $20.2 million, or 24 cents per share in 1998.

The company expects revenue growth of 50 percent in 2000, with stronger growth in the second half.

Sergio Non contributed to this report.