Legato Announces Record Third Quarter 1998 Results; Revenues Grow 71%, Net Income Grows 86%, and Earnings Per Share Increases 82% — Excluding One-time Charges

Business Wire, Oct 14, 1998

PALO ALTO, Calif.--(BUSINESS WIRE)--Oct. 14, 1998--Legato Systems, Inc. (Nasdaq:LGTO), a leader in the enterprise storage management software market, today announced revenue of $37.5 million for the third quarter ended September 30, 1998, representing growth of 71% over third quarter 1997 revenues. Excluding $0.6 million of non-recurring charges associated with the Software Moguls acquisition announced on July 30, 1998, net income grew 86% to $7.9 million, compared with $4.3 million in the third quarter of last year. On the same basis, diluted earnings per share increased 82% to $0.20, up from $0.11 in the year-earlier quarter. Including non-recurring charges from the merger, net income grew 76% to $7.5 million with diluted earnings per share of $0.19 growing 73% over the same quarter of last year.

"Our third quarter results were very strong, reflecting continued success in the enterprise storage management software market," commented Louis C. Cole, President and Chief Executive Officer. "We're very pleased with our increasing market momentum and continued customer demand for Legato's storage management solutions," said Mr. Cole. Also during the quarter the company successfully completed the merger and integration of Software Moguls, Inc., a Minnesota-based developer and supplier of storage management software.

For the first nine months of fiscal 1998, the company reported revenues of $98.6 million, an increase of 71% over the $57.8 million reported in the same period of last year. Net income, excluding non-recurring expenses, grew 82% to $18.5 million, compared with $10.2 million in the corresponding period of last year. Comparable diluted earnings per share for the first nine months increased 74% to $0.47, versus the year-earlier period. Including non-recurring charges, net income for the first nine months was $18.1 million and fully diluted earnings were $0.46 per share.

"We are pleased with our third quarter financial performance in all respects," observed Stephen C. Wise, Chief Financial Officer. "Product revenues grew $11.4 million over last year's third quarter to $28.8 million, achieving record levels both domestically and internationally. Our efforts to expand our consulting services and support offerings are driving higher growth in service revenues, which grew 90.7% to $8.7 million in the current quarter. Excluding non-recurring charges, operating income expanded to 30.6% of revenue helping to fuel year-over-year earnings per share growth of 82%," Wise concluded.

This announcement may contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results described in such statements. Factors that might cause such a difference include, but are not limited to, those discussed in the "Risk Factors" section of the Company's Report on Form 10-K filed with the Securities and Exchange Commission in March, 1998, and in the "Risk Factors" section of the Company's Report on Form 10-Q filed with the Securities and Exchange Commission in August, 1998, copies of which are available on request from the Company.

About Legato Systems

Legato Systems, Inc. develops, markets and supports an integrated set of enterprise storage management software products for heterogeneous, client/server computing environments. The company's solutions are selected by large customers around the world because of their reliability, platform-independence and ability to seamlessly integrate with existing computing environments. The company's storage management software has become the recognized de-facto standard with the largest installed base representing over 37,000 customers, protecting more than 4,000,000 systems. Twenty-four of the world's largest system and applications vendors have chosen Legato's software as their preferred storage management solution for their customers, including Banyan, BMC Software, Compaq/Digital, Compaq/Tandem, Data General, Fujitsu/Amdahl, Fujitsu/ICL, Groupe Bull, Hewlett-Packard, Hitachi, Informix, NEC, Netscape, Network Appliance, Nihon-Unisys, Oracle, Siemens Nixdorf, Silicon Graphics, Sony and Sun Microsystems. The company's NetWorker, BusinesSuite, SmartMedia, and GEMS products are also licensed, resold, or endorsed by other major vendors, including Computer Associates, IBM/Tivoli, Microsoft Corporation, MTI, Novell, and SAP.

Note to Editors: Legato NetWorker is a registered trademark, and NetWorker Archive, NetWorker HSM, ClientPak, SmartClient, SmartMedia, StorSuite, BusinesSuite, Power Edition, Legato GEMS, and OpenTape are trademarks of Legato Systems, Inc. in the U.S. and/or other countries. All other product, trademark, company, or service names mentioned herein are the property of their respective owners.

The following condensed consolidated financial statements have been restated to reflect the Company's acquisition of Software Moguls, Inc., announced on July 30, 1998, and accounted for as a pooling-of-interests. -0-

                         LEGATO SYSTEMS, INC.
              CONDENSED CONSOLIDATED STATEMENTS OF INCOME
               (in thousands, except per share amounts)
                              (unaudited)


                                Three Months Ended   Nine Months Ended
                                  September 30,        September 30,
                                ------------------  ------------------
                                   1998      1997      1998      1997
                                 -------   -------   -------   -------
REVENUES:
    Product                      $28,770   $17,415   $76,874   $45,573
    Service & support              8,722     4,573    21,764    12,228
                                 -------   -------   -------   -------
       Total Revenues             37,492    21,988    98,638    57,801

COST OF REVENUES:
    Product                        1,155       773     2,917     1,938
    Service & support              3,481     1,830     9,169     4,682
                                 -------   -------   -------   -------
       Total cost of revenues      4,636     2,603    12,086     6,620
                                 -------   -------   -------   -------

GROSS PROFIT                      32,856    19,385    86,552    51,181

OPERATING EXPENSES:
    Research and development       6,018     3,719    15,567    10,482
    Sales and marketing           12,614     7,438    36,052    20,116
    General and administrative     2,483     1,824     7,434     4,785
    Amortization of intangibles      279       279       838       838
    Merger related expenses          645         0       645         0
                                 -------   -------   -------   -------
       Total operating expenses   22,039    13,260    60,536    36,221
                                 -------   -------   -------   -------

INCOME FROM OPERATIONS            10,817     6,125    26,016    14,960

Interest income, net               1,130       543     2,994     1,492
                                 -------   -------   -------   -------

INCOME BEFORE PROVISION FOR
 INCOME TAXES                     11,947     6,668    29,010    16,452

Provision for income taxes         4,420     2,395    10,883     6,254
                                 -------   -------   -------   -------

NET INCOME                       $ 7,527   $ 4,273   $18,127   $10,198
                                 =======   =======   =======   =======

Basic earnings per share         $  0.20   $  0.12   $  0.49   $  0.29
                                 =======   =======   =======   =======

Diluted earnings per share (1)   $  0.19   $  0.11   $  0.46   $  0.27
                                 =======   =======   =======   =======

Shares used in the calculation
 of basic earnings per share      37,143    35,247    36,693    34,873
                                 =======   =======   =======   =======

Shares used in the calculation
 of diluted earnings per share    40,348    37,961    39,813    37,710
                                 =======   =======   =======   =======

(1)  Excluding non-recurring charges from the Software Moguls, Inc.
     merger, diluted earnings per share was $0.20 and $0.47 for the
     three-months and nine-months ended September 30, 1998,
     respectively


                         LEGATO SYSTEMS, INC.
                 CONDENSED CONSOLIDATED BALANCE SHEETS
                            (in thousands)


                                                Sept. 30,   Dec. 31,
                                                   1998       1997
                                                ---------   --------
                                               (unaudited)
ASSETS

Current assets:
       Cash, cash equivalents and investments    $103,331   $ 71,991
       Accounts receivables, net                   30,597     21,426
       Other current assets                         4,571      4,365
       Deferred tax asset                           4,099      2,702
                                                 --------   --------
                    Total current assets          142,598    100,484

       Property and equipment, net                 15,164     10,515
       Deposits and other assets                      515        362
       Intangible assets, net                       2,540      3,431
                                                 --------   --------
                    Total assets                 $160,817   $114,792
                                                 ========   ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
       Accounts payable and accrued liabilities  $ 16,373   $  8,224
       Deferred revenues                           16,885     12,491
                                                 --------   --------
                    Total current liabilities      33,258     20,715

       Deferred tax liability                         531        768

Stockholders' equity:
       Common stock                                81,919     66,326
       Retained earnings                           45,109     26,983
                                                 --------   --------
                    Total stockholders' equity    127,028     93,309
                                                 --------   --------

                    Total liabilities and
                     stockholders' equity        $160,817   $114,792
                                                 ========   ========