Novell: Quietly Developing Some Momentum
Novell’s (NOVL) fiscal third quarter was notable for reasons beyond Linux sales and its core product line. Novell’s most recent quarter was the sixth consecutive one that topped expectations.
That consistency may mark the days where Novell becomes something more than an afterthought. Now, it’s no coincidence that Novell’s six quarter string of upside surprises coincides with the meat of its SUSE Linux distribution partnership with Microsoft (MSFT), which will be two years old in November and has been extended.
But Novell has also been successful in other areas. It has revamped its identity management lineup, restructured the company to increase margins and overall has been a solid performer on the earnings front. For the third quarter ending July 31 (statement), Novell’s revenue was $245 million, up from $237 million a year ago. Novell reported a loss of $15.1 million, or 4 cents a share, due to auction rate securities (which theoretically were supposed to be as safe as cash). Excluding charges, Novell reported earnings of $21 million, or 6 cents a share, a penny ahead of Wall Street estimates. (See earnings call transcript.) Sure Novell got a boost from the weak dollar, but analysts declared the quarter a clean one.
And Novell’s revenue outlook for the rest of the year was in line with expectations. The real story here is Linux and how Novell has become the second largest distributor to Red Hat – with Microsoft’s help. Novell CFO Dana Russell said on a conference call Thursday:
Within Open Platform Solutions, Linux Platform Products revenue was $31 million, increasing 30% from the year ago quarter. Linux invoicing was $51 million, up 36% year-over-year. We are pleased with our results this quarter which we’re growing substantially above market growth rates. Our Linux business continues to be dependent on large deals which may result in some fluctuations of quarterly invoicing levels. In addition we had strong results in Q7 2007 that may lead to difficult compares in Q4 2008. But our plan for 2008 which exceeds market growth rates remains well on track and we expect to continue to grow above market growth rates next year. Our expanded relationship with Microsoft provides further confidence in our long-term outlook.
He added that Microsoft is buying up to $100 million in SUSE certificates in $25 million chunks.
Other notable items:
- Novell said its expenses entering fiscal 2009 will continue to decline “due to the restructuring activities planned for the fourth quarter.”
- CEO Ronald Hovsepian said he was confident that Novell is capturing SUSE Enterprise Linux renewals.
- Identity and security management products had revenue growth of 22 percent in the third quarter with systems and resource management products jumping 25 percent.
- Novell’s Open Enterprise Server and Netware lineup brought in revenue of $53.9 million, down 4 percent from a year ago. But it’s still notable how Novell can still milk Netware to fund other growth opportunities.
- Overall core product sales, which includes Netware, were up 13 percent in the quarter.
- The only nit in Novell’s quarter was a decline in services revenue, but the company explained that’s falling because it’s shifting its wares to be distributed via partners and independent software vendors.
Perhaps more notable than Novell’s performance was the reaction to it. Analysts, who have generally brushed off recent Novell quarters, were actually upbeat. To wit:
- UBS analyst Abhey Lamda said: “We believe the company’s large cash balance and strong cash flows from its legacy business will continue to provide support to the stock and the continuation of the steady performance delivered over the last six quarters will help move some investors from the sidelines.
- Jeffries analyst Katherine Egbert said Novell is delivering slow and steady progress on its financials, landing more channel partners and showing positive invoicing trends.
- Oppenheimer analyst Brian Denyeau gushed that Novell “continues to deliver strong quarterly results that demonstrate its ability to drive consistent margin expansion and solid growth. The decline in services revenue is masking an increasingly attractive growth profile which, coupled with the hundreds of basis points of leverage left to realize, leaves us increasingly confident that owning Novell will pay off for long-term investors.”
Admittedly sell-side analysts can get a little bubbly, but it’s rare that praise is heaped on Novell. Given that customers and partners are also headed Novell’s way, it may be time to pay a little more attention to the company
Related Articles
|
Hedge Fund Jobs
Job Seekers: Search jobs by category, get job alerts by email or live feed, apply online See full list of jobs »
Employers: See all recruitment options, get applications online or by email Post a job »
Trading Center
- Free E-Newsletters
- About Seeking Alpha
- About Us
- Contact Us
- What's New
- Readers Feedback
- Advertise With Us
- Contributors
- Contribute an Article
- Feature Your Book
- Our Contributors
- Anonymous Contributions
- Dispute an Article?
- Legal
- Terms of Use
- Privacy
- Copyright
This article has 1 comment:
- One who knows
- 1 Comment
Aug 29 03:29 PMYou state that: "The real story here is Linux and how Novell has become the second largest distributor to Red Hat." Suse Linux has been the 2nd Linux largest distrubutor to Red Hat before Novell aquired it and has been since. What is new there? Where is the momentum?
Novell's revenue is up $1 million from the year ago quarter. How is that momentum? Revenue for Q307 was $237 million while revenue for Q308 was $245 million. However, if you look at Novell's statement that they attributed a $7 million revenue growth to currency changes, then revenue is actually only up $1 million.
Since the mid 1990s, analysts have commented, much like UBS did, that Novell's strong cash reserves provide the firm with an opportunity to grow and generate more revenue. However, Novell has gone from a firm that generated $2.6 BILLION in revenue in 1996 and then slipped under $2 Billion, then to $1.7, 1.6, 1.4, 1.2 and then, under the current inept leadership, slipped below $1 Billion in revenue in 2006 for the first time since 1993. It MAY exceed 2007 revenue in FY 2008, but even then, it must thank Microsoft for bailing it out. Take Microsoft certs/vouchers away and Novell is a sub $900 million or less company.
I found it interesting that you noted: "The only nit in Novell’s quarter was a decline in services revenue, but the company explained that’s falling because it’s shifting its wares to be distributed via partners and independent software vendors." Ah, yes, this is the not so brilliant move by Hovesepian to shut down one of the only growing parts within Novell over the past 10 years, their Support division. This is a division that had annual revenues attributed to it of approximately $60 million in 1997 which grew to well over $150 million annual by the end of 2006. Inept management at Novell did a fine job of turning it from a profit center with very good margins to a cost center. The Support division's revenue growth was phenomenal given that the rest of Novell was sinking.
I could go on and would welcome to do so. As my name indicates, I am one who knows. I'm not an employee of Novell. I was a longtime shareholder and I am still a cheerleader for it as it has great products and talented people working there, the leaders in Waltham exempted.
Thanks,
oneknows@ymail.com
More by Larry Dignan