| Novell Earnings: good news, bad news |
Jun. 05, 2006
On April 30, Novell Inc. had both good and bad news for its investors as it announced a net profit of $3 million, or $0.01 per diluted common share, for its second fiscal quarter that ended April 30, 2006.
Although Novell reported that fiscal second quarter revenue had declined year-over-year, from $297 million in Q2 of 2005 to $278 in Q2 of 2006, net income for the quarter rose. In Q2 of 2005, the company had reported a net loss to common stockholders of $16 million, or $0.04 loss per diluted common share.
The reported revenue was also a small jump over the prior quarter, which ended Jan. 31, 2006. At that time, Novell reported revenue of $274 million, compared to revenue of $290 million for Q1 of fiscal 2005.
During the most recent quarter, Novell reported total Open Platform Solutions revenue of $57 million, which was up from $20 million in the same quarter of fiscal 2005. Total Open Platform Solutions revenue included $46 million from sales of OES (Open Enterprise Server), Novell's Linux replacement for NetWare, and $10 million from Linux Platform Products, up 20 percent year-over-year.
However, earnings were almost flat compared to the prior quarter. In 2006's first quarter, Novell recognized total Open Platform Solutions revenue of $56 million. This included $43 million from OES sales, and $13 million of revenue from other Linux products.
Combined revenue from OES and NetWare-related products declined 16 percent from the year-ago period.
The second fiscal quarter also saw a drop in Systems, Security, and Identity Management revenue. In the first quarter, the company had reported $63 million, compared to the current quarter's $61 million.
Novell blamed part of its revenue drop on foreign currency exchange rates. These unfavorably impacted total revenue by approximately $6 million year-over-year. Still, the currency exchange rates also favorably impacted net income by $1 million year-over-year.
Jack Messman, Novell's chairman and CEO, did his best to put a good spin on the news. "While Novell delivered on its financial guidance again this quarter, we have not lost sight of our goal to significantly increase our profitability by the end of fiscal year 2008," he said.
"We are engaged in many initiatives to grow revenues, increase efficiencies, and lower costs, to enhance shareholder value," Messman added.
Novell also finally executed on its long-announced stock-buyback plan. In the second quarter, Novell repurchased 35 million common shares at a cost of $267 million. An additional 16 million common shares were repurchased for $133 million after the quarter's end, resulting in an aggregate repurchase amount of $400 million, or 51 million shares. These repurchases complete the share repurchase program.
Even after this expenditure, Novell remains cash rich. Cash, cash equivalents, and short-term investments were $1.3 billion as of April 30, 2006, down $347 million from last quarter primarily due to cash used to repurchase common stock and the acquisition of e-Security.
Novell also finally sold its management consultant branch, Celerant Consulting, during the quarter for $77 million.
Looking ahead, Novell said it expects its net revenue, excluding Celerant, for the third fiscal quarter of 2006 to be between $239 million and $247 million, with no earnings after taking care of from stock-based compensation costs.
This is below market analyst estimates, which had an average prediction of $280 million and a four cent per share profit.
Credit Suisse First Boston analyst Jason Maynard downgraded the stock to "Neutral," in a client note. "We had hoped that management would take more decisive and immediate steps to address the cost structure and deliver higher operating margins, Maynard wrote.
Maynard, along with Novell investor Blum Capital Partners LP, an investment firm, had previously called for sweeping changes in Novell. Some of these changes, such as the selling of non-central business units like Celerant and a stock-buyback, have now been executed.
Still, Maynard thinks the "company is proceeding at too slow of a pace and they aren't going to be able to make enough headway in their Linux business to offset the churn in the installed base."
In early trading, the morning after Novell released its results, the stock price had dropped by 14 percent.
-- Steven J. Vaughan-Nichols
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