It was not the best of quarters for Linux vendor Novell Inc. When Novell announced its financial results for its first fiscal quarter, which ended Jan. 31, 2006, it reported revenue of $274 million, compared to revenue of $290 million for the first fiscal quarter 2005.
This was a decline from the previous quarter in which Novell had reported $320 million of revenue.
The net income available to common stockholders in the first fiscal quarter 2006 was $2 million or $0.00 per diluted common share.
During the comparable quarter last year, common stockholders saw $392 million, or 90 cents per diluted common share.
Of course, the bulk of that was due to a $448 million net gain related to the settlement with Microsoft in that quarter.
Still, shareholders werent happy as Novells stock rolled down over 17 percent on extremely heavy Friday trading
Not all the news was bad.
During the quarter, Novell recognized total Open Platform Solutions revenue of $56 million, which was up from $14 million in the year ago period.
This included $43 million from sales of OES (Open Enterprise Server), Novells Linux replacement for NetWare, and $13 million of revenue from other Linux products.
The year ago period did not include revenue from OES as it was introduced in the second fiscal quarter of 2005.
In addition, Novell recognized $63 million of systems, security and identity management revenue, up 20 percent year-over-year.
NetWare-related revenue, to no ones surprise, continued its fall. This quarter it had declined 11 percent from the year-ago period.
Jack Messman, Novells CEO and chairman, made the best of the situation.
“We are pleased with the continued improvement in the core business this quarter,” he said in a statement. “Our growth businesses of Linux, Identity and Resource Management are performing well, and we believe we will continue to see growth throughout the fiscal year.”
The problem, however, as Laura DiDio, an analyst with Yankee Group, pointed out, is that while “Novells Linux and OES revenue quadrupled from $14 million during the 2005 first quarter to its present level of $56 million. However, there is no disguising the fact that Novell continues to lose ground to Red Hat and is a niche market player in the overall server operating system business.”
“With each successive quarter, Red Hat widens the gap between itself and Novell in every crucial area: sales, unit shipments, market share and the number of mainstream line of business applications that support the two firms respective Linux platforms. Currently, Red Hat Enterprise sales and unit shipments are outpacing Novells by more than an order of magnitude,” said DiDio.
“Yankee Group survey data,” DiDio continued, “indicates that Red Hat now commands nearly 81 percent of the commercial Linux distribution market compared with Novells 17 percent. And though some companies remain steadfastly loyal to the legacy NetWare server operating system, there are far more defectors than loyalists.
“Yankee Group survey data also indicates that eight out of 10 NetWare businesses are migrating off that platform to Windows and of the remaining 20 percent—more than half are transitioning to Red Hat Enterprise Linux.”
Clearly, then, “If Novell fails to reverse the sales and unit shipment decline during calendar 2006, it will be extremely difficult for the company to mount any type of serious challenge to market leaders Microsoft and Red Hat.
“And unfortunately for Novell, it is unlikely to get another huge revenue boost like the $448 million it received from Microsoft in 2005, so the company must move quickly to reverse its lagging fortunes,” DiDio concluded.
Novell, however, continues to be rich with cash, cash equivalents and short-term investments of $1.7 billion at Jan. 31, 2006.
Despite this, Novell has still not acted on its previously announced common stock repurchase plan, because it has been continuously subject to self-imposed trading blackouts.
Blum Capital Partners LP had asked for the stock buyback in the summer of 2005, along with other changes, because of its displeasure with Novells business practices.
Looking ahead, Novell predicts that in the second fiscal quarter that it will see net income of between $272 million and $282 million.