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Novell's Solution Gain Traction

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Enterprise software developer Novell Inc. announced that its collaboration solutions are gaining traction amongst customers. Users are increasingly purchasing Novell's host of collaboration solutions for email, social networking, conferencing and file management.

Novell cited that more than 9,500 customers have purchased or renewed its lean and cost effective collaboration solutions in 2010, thereby generating increased return on investment. Last year, Novell launched Novell GroupWise, its flagship e-mail and calendar product as well as shipped new technologies for enterprise social networking, conferencing, mobility and file management.

For 2011, Novell plans to release Novell Vibe Cloud, its next-generation social collaboration product, which had more than 10,000 users in less than two months of beta availability. This will help the company increase its customers in both domestic and international markets.

We believe Novell’s collaboration solutions such as intelligent workload management solution, personal and team productivity solutions and collaboration data management solutions as well as cloud computing initiatives will drive growth going forward.

Per research firm IDC, the collaboration market was $7.8 billion in 2010 and is expected to reach $11.2 billion by 2014. The growth is primarily attributable to the growing cloud market and the need to manage increasing data.

Novell’s fourth quarter (most recent quarter) 2010 non-GAAP earnings of 7 cents, excluding one-time charges, were in line with Thomson Reuters Consensus. Earnings per share plunged 36.4% from 11 cents in the year-ago quarter.

Revenues decreased 4.2% year over year to $206.5 million from $215.6 million in the year-ago quarter. Revenues were slightly above the Thomson Reuters Consensus estimate of $204.1 million. Foreign currency exchange rates favorably impacted revenues by $1.0 million.

At the end of October 31, 2010, cash, cash equivalents and short-term investments were $1.1 billion, up from $1.0 billion in the prior quarter. Cash flow from operations was $51.6 million as compared with a cash generation of $26.0 million in the prior quarter. In full fiscal 2010, cash flow from operations was $76 million, compared with $69 million in 2009.

Novell remains the #2 maker of the open source Linux operating system behind Red Hat (RHT - Free Report) . Despite having a diversified portfolio and strong customer base, Novell remained undervalued particularly due to weak top-line growth in recent times.

Novell is considering the acquisition offer made by Attachmate Corporation, a software company supported by private equity firms such as Golden Gate Capital, Francisco Partners and Thoma Bravo. Novell expects the deal to close in the first quarter of 2011. Attachmate Corporation will acquire Novell for $6.10 per share in cash in a transaction valued at approximately $2.2 billion.

Novell believes that the deal would add value to customers and complement its existing product portfolio. In our opinion, the potential acquisition will boost Attachmate’s customer base and enhance its cloud computing abilities, thereby driving top-line growth over the long term.

Over the long term (6–12 months), we maintain our Neutral rating on the stock.

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