Novell's Earnings Beat - Analyst Blog

A leading technology software company, Novell, Inc. (NOVL) reported fourth-quarter earnings that beat the Zacks Consensus Estimates. Although revenue declined, earnings were up from the year-ago period.

Excluding the non-cash goodwill and intangible assets impairment charge of $279 million, adjusted EPS (non-GAAP) came in at 11 cents in the quarter and beat the Zacks Consensus Estimate of 6 cents. Non-GAAP EPS increased 83.3% from the 6 cents reported in the year-ago period due to cost-cutting efforts.

As a result of lower operating expenses (sales and marketing fell 24.3% and product and development expenses fell 9.3% year over year) non-GAAP operating margin improved to 17.2% in the quarter from 13.1% in the year-ago quarter. The company plans to reach its long-term goal of generating 20% in operating margin and expects top-line growth to positively impact the bottom line.

However, revenue of $215.6 million in the quarter decreased 11.9% from the year-ago period. Revenue declined due to a sharp drop in software license revenue, which fell 38.9% year over year. Services revenue declined 27.8% year over year, while maintenance and subscription revenue remained flat in the quarter. Foreign currency exchange rates negatively impacted revenue by $2 million and operating loss by $1 million in the quarter.

By product line, Novell’s revenue from Linux Platform Products was up 14.0% year over year, revenue from Identity, Access and Compliance Management was down 14.0% and revenue from Systems and Resource Management was down 10.0%. Workgroup product revenue decreased 15.0% year over year. Revenue from Linux products invoicing fell 8% in the quarter. The Linux business is dependent on large customers such as Microsoft (MSFT), which have been impacted by the weak economy.

Total headcount at the end of the quarter was 3600, down from 3700 in the prior quarter primarily due restructuring initiatives. Restructuring expenses were $9 million in the fourth quarter.

Novell’s balance sheet remains sound with no debt. The company exited the quarter with $983.5 million in cash and equivalents, up from $921.5 million in the previous quarter due to retirement of its outstanding convertible debentures. Cash flow from operations for the quarter was $51.4 million, up from $35 million in the previous quarter. Total deferred revenue was $689 million at the end of the fourth quarter, down from $730 million in the year-ago period.

Guidance

Novell expects first quarter of 2010 revenue to be in the range of $200 - $210 million, down from the fourth-quarter level due to weak invoicing from prior quarters. First quarter expenses are expected to be at or slightly lower than the fourth quarter level. As a result, non-GAAP operating margin is expected to be between 14% and 16%. The company expects invoicing growth to improve in the coming quarter compared to the year-ago period. The company expects Capital expenditure to be $25 million to $30 million in 2010.

Benefit from Partnerships

Novell is expected to benefit from its broad distribution channels. The company has an outsourcing agreement with Affiliated Computer Services, Inc. (ACS), under which the latter has agreed to purchase at least $30 million of Novell products and services over the next three years for resale to its customers and for enhancing its global data center operations.

Moreover, the partnership agreement with Dell Inc. (DELL) will be positive for its growing virtualization efforts. IDC has recognized Novell as a leader for virtual appliances. The company also extended its partnership with SAP AG (SAP) for governance and risk compliance, which will help Novell acquire new customers and expand its footprint in security, identity and systems and resource markets.

While the current outlook and weak demand continue to reflect the adverse and uncertain economic conditions currently affecting Novell’s businesses, we believe this is only a temporary phenomenon, and the long-term growth story remains intact. We remain positive on Novell’s strong operating margins, continued focus on cost reductions and growth in invoicing.

We have a Neutral rating on NOVL shares.
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