Novell Swings to a Modest Profit in Fiscal Q1

Published: March 4, 2008

by Timothy Prickett Morgan

Linux operating system licenses and, more precisely, support contracts for Linux, continues to allow commercial operating systems and systems management software maker Novell to transition away from its proprietary NetWare product line and toward a more open and distributed platform future. But the work, as Novell's financial results from the first quarter of fiscal 2008, remains undone, and while the company swung to a modest profit and grew revenues, the profit is still small and Novell is still fighting to stay a $1 billion company.

In the first quarter of fiscal 2008 ended January 31, Novell posted sales of $230.9 million, up 5.7 percent from the prior year's first quarter. Net income from continuing operations came to $14.7 million, which is a little better than the $12.2 million loss from continuing operations Novell had in the year-ago period. Novell has divested itself of a number of unprofitable businesses in the past year, businesses that pushed its reported losses a year ago to just under $20 million. Ironically, those discontinued operations would have helped Novell's numbers in the quarter, having brought in $1.3 million in profits compared to a $10.7 million loss a year ago.

Software license sales for closed source products rose by 4.9 percent to $40.3 million, while maintenance and software subscription fees--mostly for maintenance on the huge base of NetWare, GroupWise, and ZENworks software but also for subscriptions to SUSE Linux and other open source or mixed source products--rose by 10.8 percent to $149.2 million in the first fiscal quarter. Services, which means more traditional IT services not installation and tech support for software products sold by Novell, accounted for $41.3 million, a decline of 8.5 percent with the year-ago quarter.

The real news for the quarter is that activations of SUSE Linux licenses and invoicing for those licenses has slowed dramatically in the quarter. Dana Russell, Novell's chief financial officer, said in the conference call last Thursday that Linux platform products revenues rose by 65 percent to $27.9 million, and Linux invoicing was down 59 percent to $38 million, which Russell said was in line with the invoicing levels Novell saw from the Microsoft deal in the third and fourth quarter of fiscal 2007. "This was expected, due to the tremendous initial start we enjoyed from our relationship with Microsoft last year, when we invoiced a record $92 million," explained Russell. Ron Hovsepian, Novell's president and chief executive officer, said that Novell has invoiced $141 million, or 59 percent, of the $240 million worth of SUSE Linux licenses that Microsoft paid for in advance on behalf of its customers. In the first quarter of fiscal 2007, Microsoft customers activated enough SLES licenses for Novell to book $73 million in Linux invoices. As Hovsepian pointed out in the call, that is a pretty tough compare.

Novell's Open Platform Products unit, which includes Linux and related open source products, had sales of $36.8 million in the first fiscal quarter, up 55.7 percent; this unit had an $11.8 million income from operations. If you want to know why Novell still pushes NetWare, even if it is in Linux drag, check this out. Novell's Workgroup unit had $103.8 million in sales, driven mostly by the sales of Open Enterprise Server (which includes Linux, NetWare services for Linux, and NetWare 6.5 licenses all rolled into one), GroupWise groupware, and various bundles of software. That was down 1.1 percent for the prior year. Not exactly a growing business, right? But the Workgroup unit brought in $77.5 million in operating profits--more than twice the rate that the Linux products yield. Still, the NetWare and Open Enterprise Server component of this unit had sales of $54 million, down 4 percent in the quarter.

Novell's Identity and Security Management unit posted sales of $47 million in the quarter, down a smidgen, but invoicing was up 17 percent, which would seem to imply that future sales will look better. The company's Systems and Resource Management unit had sales of $43.3 million, up 2.5 percent. Russell said that invoicing in this product area was up 14 percent compared to Q1 2007.

Novell exited the quarter for $1.8 billion in cash and equivalents, and the company will use $205 million of that to acquire systems management software maker PlateSpin, a deal Novell did last week and hopes to complete before the end of the second fiscal quarter, which closes in April. Novell had $723 million in deferred revenues at the end of Q1, down a few million bucks from this time last year. The company also burned $26 million in cash during the quarter because of $31 million in interest and restructuring payments.

Looking ahead, Novell was optimistic enough about its prospects to raise the guidance it gives to Wall Street from time to time, despite the uncertainty of the economy in the United States and the effect this has on the global economy. Specifically, Novell upped its fiscal 2008 revenue target to between $940 million and $970 million, up from the $920 million to $945 million that it was talking about at the end of calendar 2007. While Novell did not say this, these numbers almost certainly are the result of the impending PlateSpin acquisition. PlateSpin had sales in the range of $20 million in 2007, and any model of Novell's sales probably assumes PlateSpin can do better than $40 million in sales in 2008 and that the decline in NetWare sales will be balanced by increases in Linux sales.

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