Novell Posts Another Loss in the Second Quarter

Published: May 30, 2007

by Timothy Prickett Morgan

Novell announced its financial results for its second fiscal 2007 quarter today, and the company was able to show revenue growth of 3 percent to $239 million. In the quarter ended April 30, Novell also booked a $2.2 million loss, but only a loss of $110,000 on continuing operations after divesting some unprofitable businesses. This is considerable progress compared to the first fiscal quarter of 2007, when sales dropped by 5 percent to $229.6 million and Novell had a loss of $19.9 million.

One of the drivers behind Novell's second quarter stabilization was Linux product sales, particularly through Novell's somewhat controversial partnership with Microsoft; lower than anticipated declines in NetWare related product sales also helped out the financial situation.

The first fiscal quarter was when the Microsoft deal kicked in, and activations and invoicing of SUSE Linux Enterprise Server 10 certificates through Microsoft's customer base has slowed somewhat. But Novell said that over 49,000 SLES 10 licenses have been activated through the end of the second quarter (a much larger number have been distributed) and that $91 million, or about 38 percent of the total value of the $240 million worth of SLES 10 certificates that Microsoft acquired under its five-year deal with Novell late last year, had been invoiced so far. Ron Hovsepian, Novell's president and chief executive officer, said that going forward the company would not talk about how many SLES 10 licenses had been distributed or activated, but would rather only talk about what percentage of the total $240 million deal has been invoiced. He also added that the five-year deal does not have a revenue cap, and that Microsoft is able to come back and acquire more SLES certificates to distribute to its customers when the $240 million runs out.

Across the Open Platform group, which includes SUSE Linux and other open source programs and support for them, Novell posted sales of $21 million in the quarter, with Linux product sales in particular rising by 83 percent to $19 million. Linux related invoicing rose by 114 percent to $29 million. While these Linux products represent the growth at Novell, they are not the bulk of its revenues. Open Enterprise Server, the hybrid Linux-NetWare product, accounted for $43.2 million in sales, declining 6 percent. Sales of plain old NetWare fell by 46 percent to $6.3 million, showing that the transition from NetWare to OES is just about done as far as paying customers are concerned. The bright spot in the quarter was a bundle of NetWare, OES, and GroupWise collaboration software, which helped push the Other category in the overall Workgroup division at Novell to $11.1 million in sales. And while GroupWise sales rose by 3 percent to $23.5 million in the quarter, the overall Workgroup category had a 4 percent decline to $84 million. This was, according to Hovsepian, better than expected, and a far cry better than the double-digit declines this business has experienced in the past year.

"It is too early to conclude that this is a new trend," he cautioned Wall Street analysts on a conference call held today.

Novell's Identity and Access Management group posted sales of $23 million, up 5 percent, while its Systems and Resource Management group had sales of $32 million, down 4 percent. Hovsepian said that issues in the Americas region for sales of identity products, which hurt Q1 sales, have been addressed, and added that an expected ZenWorks product launch later this summer was putting the damper on sales in the systems and resource management area.

When you add it all up, Novell had $41.7 million in software license sales in the quarter, up 4 percent, and $197.4 million in maintenance, support, and subscription sales, up 2 percent compared to the second quarter of fiscal 2006.

"We are headed in the right direction, but we still have a lot of work to do," Hovsepian said when describing Novell's financial and business situation. (With this kind of talk, Hovsepian could work for Hewlett-Packard.)

Looking ahead, Novell said that it expects sales for the full fiscal 2007 year to be between $925 million and $955 million, and added that it has adjusted downward its prior revenue guidance to reflect the divestiture of its Salmon business consulting unit, which happened during this quarter. Novell said that it was still on target for an exit rate operating margin of between 5 percent and 7 percent at the end of the fourth quarter of fiscal 2007, and it was targeting an exit rate of between 12 percent and 15 percent by the end of fiscal 2008.

Novell ended the second quarter with $1.8 billion in cash and short-term investments, and gave no indication on the call what--if anything--it will do with this hoard.

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