Novell Reports Solid Quarter, But Profits Disappoint

The company's revenues climb, but it misses analysts' expectations by a penny per share, which its CFO attributes to continued "weakness in IT spending for infrastructure software."

Novell announced profitable but slightly disappointing third-quarter fiscal results on Thursday.

For the quarter, ended July 31, Novell Inc. reported revenues of $305 million, compared with revenues of $283 million for the same quarter a year ago.

Net income available to common stockholders was $23 million, or 6 cents per diluted common share. The year-ago quarter had a net loss available to common stockholders of $12 million, or 3 cents per common share.

The results werent quite as good as they appear at first glance.

Included was a one-time payment in May of $14 million and interest income of $5 million from The Canopy Group Inc., parent company to The SCO Group Inc. and former owner of Novell.

But this case has nothing to do with the current litigation between Novell and SCO over who owns the copyright to Unix. Instead, it dealt with a breach of contract lawsuit over how the revenues should be split between Canopy and Novell from the money paid by Microsoft in its 2000 settlement for its actions against the DR-DOS operating system.

After excluding this and other one-time events, restructuring charges of $9 million and investment impairments of $1 million, Novell missed analyst expectations by a penny per share.

On a non-GAAP (Generally Accepted Accounting Principles) basis, adjusted net income available to common stockholders for the quarter was $14 million, or 4 cents per diluted common share, which excludes the effect of the one-time events. A year ago, the non-GAAP-adjusted net income available to common stockholders was $7 million, or 2 cents per diluted common share.

In addition, Novell benefited from foreign currency exchange rates, which boosted total revenue by about $5 million year-over-year. Foreign currency did not materially impact net income.

As far as its Linux business is concerned, Novell saw $12 million in revenue in this most recent quarter from its SuSE business. Sales of subscriptions to SLEX (SuSE Linux Enterprise Server) reached 19,000 units in the quarter, with 12,000 of the units sold to one customer.

Despite rumors that this customer was IBM, which made a $50 million investment in Novell in November 2003, Novell chief financial officer Joe Tibbetts characterized this customer as a "venture-backed firm," which would rule out Big Blue.

By comparison, in its last quarter, Red Hat Inc. reported that its sales increased by 53 percent from the same quarter a year ago to $41.6 million, for a net income of $10.7 million, or 5 cents per share. Red Hat sold 98,000 subscriptions to its RHEL (Red Hat Enterprise Linux) software, up 13 percent from the 87,000 reported during the fourth quarter of 2003.

Novells older, NetWare-related business continued to do well. For the first nine months of fiscal year 2004, Novell reported revenue of $865 million and net income of $44 million. For the same period a year earlier, it reported revenue of $819 million and a net loss available to common stockholders of $53 million, or 14 cents per common share.

"While revenue was not as strong as we would have liked, Novell improved earnings performance for the quarter and nine-months period versus the same periods last year," Jack Messman, Novells chairman and CEO, said in a statement.

"Novells transition to growth company status is well under way as we strengthen our products and services in both the Linux and identity-management categories. Our SuSE Linux business performed well in this quarter and is proving instrumental in positioning Novell as a strategic vendor to large enterprises," Messman said.

The reason Novell didnt take in the revenue it expected, according to Novell CFO Tibbetts, was because it was "continuing to see weakness in IT spending for infrastructure software."

/zimages/6/28571.gifNovell said it wont rush a Linux desktop. Click here to read more.

But analysts said they dont agree.

"Spending on infrastructure is still soft at many enterprises, but it is beginning to recover at many enterprises as well," said Michael Dortch, IT infrastructure management practice leader at the Robert Francis Group.

"Novells challenge today is a variant on the same challenge that has bedeviled the company since the glory days of NetWare. As in those days, the companys solutions are popular enough among developers and technologists," Dortch said.

But that isnt enough. "Novell, despite the skills and good intentions of Jack Messman and his team from the former Cambridge Technology Partners, is apparently still struggling to gain greater awareness and credibility among senior IT and non-IT enterprise executives," he said.

"The companys intensified focus on Linux and open source creates an opportunity for it to change this situation, but the jury is still out on whether Novell can take full advantage of this opportunity," Dortch said.

Dan Kusnetzky, vice president of system software research at IDC, said he agrees. "While its clear that Novell is moving rapidly to integrate the engineering teams that make this work, Im concerned that theyve not done enough work on either enhancing awareness of Novells brands or being in front of rapidly moving trends.

"Again and again, Novell is doing wonderful things back in the lab, but it isnt telling anyone about them until something is being released," Kusnetzky said. "That approach was wise in the 1980s but no longer works now. Novell really must move more rapidly on the marketing and marketing-communications fronts to take advantage of its excellent technology.

"If the decision-makers arent aware of Novell and its products," Kusnetzky said, "they certainly wont consider them. If these products are not under consideration, they wont be selected."

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