Novell Sells Celerant Unit as Sales Continue to Slide

Published: June 6, 2006

by Timothy Prickett Morgan

Beleaguered commercial Linux distributor Novell, which is still really a vendor of proprietary NetWare software and related services although it has been the second largest Linux player for nearly three years, has bowed to Wall Street demands and sold off its Celerant consulting unit and bought up $400 million in its own shares as it reported its financial results for its fiscal second quarter ended April 30.

For the quarter that just ended, Novell had total sales of $278.3 million, down 6 percent from the year ago quarter. Novell's software license sales dropped by 12 percent to $40.1 million, while its maintenance and services sales fell by 5 percent to $238.3 million. Because Novell has kept a tight rein on costs, it only reported a net loss from operations of $2.5 million, but after booking $13.4 million in income from investments and paying $7.5 million in taxes, the company had a net income of $3.2 million, which worked out to a penny a share. That was a lot better than the $15.8 million loss Novell had a year ago, which worked out to 4 cents a share. Novell said that its open platform solutions (which include SUSE Linux, Open Enterprise Server and related products) accounted for $57 million sales, up from $20 million a year ago. Open Enterprise Server accounted for $46 million in sales, up 21 percent, and SUSE Linux sales were $10 million, up 20 percent. Novell had sales of $61 million in systems, security, and identity product sales in the quarter, which was an increase of 16 percent. Combined sales of Open Enterprise Server and NetWare products declined by 16 percent, which implies that the decline in NetWare sales was quite severe (but probably not unexpected).

Given this, you might be wondering why Novell is not spending a lot more dough peddling its SUSE Linux products and bowed to Wall Street demands to spend money buying back its own stock. Last September, Novell capitulated to demands to buy back some stock, saying it would put up $200 million of its cash hoard to buy its stock and therefore boost earnings per share. In April, Novell said it would double that to $400 million, probably because it knew Wall Street would be bumming about the sales decline in the second fiscal quarter.

To help pay for these buybacks and to make Wall Street happy by divesting a non-core business, Novell has also sold off its Celerant consulting business, which came to Novell as part of its acquisition of consultancy Cambridge Technology Partners--where a lot of Novell's top brass comes from. Novell sold the consulting company to an investment trust called Caledonia Investments and a group of Celerant managers for $77 million. There is no relationship between Novell and Celerant going forward.

After the Celerant sale and the stock buybacks, Novell ended the quarter with $542.1 million in cash and $797 million in short-term investments. That's plenty of money to be more aggressive about pushing Linux and open source stacks, which is what Novell should have done instead of listening to Wall Street. That same money could have bought middleware maker JBoss, which yesterday formally became a part of rival Red Hat.