Novell announced disappointing financial results Thursday for its third fiscal quarter ended July 31, 2005.
For the quarter, Novell reported revenues of $290 million, compared to revenues of $305 million for the third fiscal quarter 2004.
Net income available to common stockholders in the third fiscal quarter 2005 was $2 million.
For practical purposes, this came to no earnings or loss per diluted common share.
In the third quarter of 2004, Novell realized net income available to stockholders of $24 million, or 6 cents per diluted common share.
On a non-GAAP (Generally Accepted Accounting Principles) basis, however, the adjusted net income available to common stockholders for the quarter was $14 million, or cents per diluted common share.
This compares to non-GAAP adjusted net income for last years third quarter of $14 million, or 3 cents per diluted common share.
Those results had excluded a payment from The Canopy Group Inc. of $19 million as a result of a legal judgment in favor of Novell, restructuring charges of $9 million and long-term investment impairments of $1 million.
The payment from Canopy Group Inc., former parent company of The SCO Group Inc., has nothing to do with the current litigation between Novell and SCO.
Instead, it was for 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.
Next Page: Declining software fees.
Declining Software Fees
Analysts had expected a profit of 2 cents per share on revenue of $300.9 million.
During this quarter, Linux-related product revenue contributed $44 million, including $31 million from sales of Novell OES (Open Enterprise Server).
OES bundles both NetWare and SLES (SuSE Linux Enterprise Server) into one package; sales of 28,000 standalone copies of SLES generated $8 million of subscription income.
Novell CFO Joe Tibbetts said that these numbers dont reflect the full impact of Linux on Novells bottom line or its customer base.
“NetWare use continued to decline,” said Jack Messman, Novell CEO in a teleconference.
“But,” Messman added, “its decline rate has been less than it has been historically. In a July survey of OES buyers, 65 percent of customers are using OES to move from NetWare to Linux.”
Declining software license fees were largely responsible for Novells weak bottom line, falling to $45.6 million in the quarter from $57 million a year ago.
Tibbetts pointed out, though, that in part this was because Novells new contracts are more long-term and multi-element than previous contracts.
This means that revenue, which might have been recognized immediately as sales revenue, will now be recognized over time as support revenue.
For the first nine months of fiscal 2005, Novell reported revenue of $877 million and net income available to common stockholders of $382 million, or 88 cents per diluted common share.
This includes a $448 million net legal payment from Microsoft for unfair practices.
Looking ahead, Messman said, “Customers continue to embrace Novells Linux and identity solutions. We were particularly pleased with our initial penetration of the Chinese market where Linux is an attractive technology for government and commercial users.”
Novell is making a strong move into the second-world market. Besides deals in China, Novell has recently realized several large deals in Brazil.
Next Page: “A stronger Novell.”
A Stronger Novell
On Thursday, Novell also became the sole owner of Onward Novell, a major Novell reseller in India.
“Our increasingly customer-focused, go-to-market approach is leading to a stronger Novell as evidenced by our positive operating cash flow and growth in deferred revenue in the quarter. While we were profitable this quarter, we still have improvements to make in our business which will lead to cost reductions,” said Messman.
Messman said that these cost reductions will take the form of restructuring—employee layoffs. A final decision on cuts will be made in the fourth quarter.
Novell executives wouldnt go into detail on where these cuts would come.
That said, Novells management also made it clear that they value Novells Linux and open-source research and development.
Mono, an open-source version of .Net, and the Linux desktop were specifically mentioned as areas that Novell sees as being potentially very rewarding for the company in the future.
In addition, Tibbetts said that Novell would be spending more money on marketing.
Still, there will be cuts. Since Novell is in the middle of growing and transforming itself into a Linux-based company, making them will not be easy.
Its like “trying to change the tire while the car is moving,” said Messman.
Messman believes that Novell will be successful with both its restructuring and its emergence as a leading Linux power.
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