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Novell 3Q In Line, Revenue Slips

August 27, 2010 | Comments : 0 Recommended this article: (0)

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Enterprise software developer, Novell Inc. (NOVL) reported third quarter 2010 earnings of 5 cents, in line with both the Zacks Consensus Estimate and the year-ago quarter. Earnings include stock based compensation but exclude one time item. The better-than-expected result was primarily driven by stringent cost management.

Revenue

Revenues decreased 8.0% year over year to $199.0 million from $216.1 million in the year-ago quarter. Foreign currency exchange rates favorably impacted revenues by $1.0 million.

According to management, the year-over-year decline was primarily due to customer uncertainty related to the ongoing review of various alternatives that are aimed at enhancing stockholder value, going forward.

In March, Novell rejected a buyout offer from Elliott Associates L.P., citing that the proposal of $5.75 per share in cash is inadequate and it undervalues the company's franchise and growth prospects. Novell had also authorized a thorough review of various alternatives such as stock repurchase, payment of dividend, strategic partnerships and alliances, joint ventures, a recapitalization and a sale of the company to enhance stockholder value.

Revenues from Software Licenses fell 7.6% year – over - year to $25.0 million. Maintenance and subscription revenues decreased 6.9% year – over - year to $152.5 million. Services plunged 15.0% year over year to $21.6 million.

According to business units, Security Management and operating platforms' product revenues plunged 2.0% year – over - year to $108.0 million in the quarter. Invoice decreased 8.0% year – over - year. Linux platform products fell 7.0% year – over - year and Linux invoicing decreased 11.0% year – over - year.

Identity, access and compliance management product revenues were $30.0 million, up 8.0% year - over - year, despite an 8.0% decrease in invoicing. Systems and resource management product revenues were $38 million, down 4% year - over - year, while invoicing declined 8%.

Revenues from Collaboration solutions business unit decreased 14.0% year - over - year to $69.0 million and invoicing was down 17.0%. The combined OES and Netware related product revenues declined 11.0%.

Margin

Gross margin fell slightly to 78.1% from 78.2% in the year-ago quarter. Total operating expenses decreased 9.0% year over year to $134.4 million, due to improved cost management and favorable foreign exchange. Operating margin increased 70 basis points in the quarter.

Total headcount at the end of the quarter was approximately 3,450, down from approximately 3,500 in the prior quarter.

Balance Sheet

At the end of July 31, 2010, cash, cash equivalents and short-term investments were $1.0 billion, up from $980.0 million in the prior quarter. Cash flow from operations was $26.0 million as compared with a cash outflow of $7.4 million in the prior quarter.

New Product

Recently, Novell launched WorkloadIQ to benefit from the rapidly growing intelligent workload management (IWM) market. WorkloadIQ helps in integrating identity and security into information technology (IT) workloads, thereby enabling customers to deliver IT services to end users across physical, virtual and cloud environments.

We believe Novell continues to execute well over its strategy of competing in the IWM market. Following its December 2009 announcement to compete in the IWM market, Novell has shipped seven WorkloadIQ products, till date, and plans to ship five additional products before the end of December 2010.

Novell currently has more than 30 new customers for its WorkloadIQ products. Moreover the company has an impressive list of old customers such as ACS, Xerox Corp. (XRX), Ericsson, General Electric Co. (GE), Monsanto Co. (MON) and Sony Corp. (SNE), who have already purchased the product.

During the reported quarter, Novell signed significant cloud partnerships with companies such as Amazon.Com Inc. (AMZN), HS Origin, Basis One, Elesa Corporation, Fujitsu and Vodacom business. This adds to an already existing list of ECS Technology, Genii, International Business Machines Corp. (IBM), 10 Cent and Trustmark Corp. (TRMK). These partnerships will boost top-line growth over the long term, in our opinion.

Recommendation

In our view, Novell is well positioned to gain market share in the IWM market and will become a significant part of top-line growth over the long term. With an increasing demand for virtualization and cloud computing technology, we expect Novell to achieve strong growth, going forward.

However, Novell remains undervalued, primarily due to lack of visibility over management’s long-term strategy, and hence, remains a potential acquisition candidate.

We maintain a Neutral rating on a long-term basis (6-12 months). Novell has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).

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