Novell Sales Surge, Restructuring Costs Skyrocket

After a one-week delay, Novell (Nasdaq: NOVL) released its fourth quarter earnings Thursday, saying that higher-than-expected costs associated with an ongoing restructuring would weigh on results even as sales of its Linux products surged higher.

The restructuring effort could now cost as much as US$70 million, Novell said, which is significantly higher than the $35 million to $45 million it had previously forecast. Most of the new costs will be tied to severance packages paid to employees being laid off.

Novell's fourth quarter loss $17.9 million, or 5 cents per share -- compared with a $19.9 million profit a year ago -- stemmed in part from costs associated with the sale of its Switzerland-based consultant division and other restructuring moves.

SEC Review

The company's revenue rose 5 percent to $244.9 million, which compares with $233.8 million in the fourth quarter of 2006.

Novell's open platform solutions division led the way on the revenue growth side, with sales up 69 percent, the vast majority of it from sales of Linux platform products.

The company was originally scheduled to release its results on Dec. 5, but postponed the release, citing a review by the Securities and Exchange Commission of past filings. Novell noted earlier this week that it had completed that review and that the SEC would not require any changes to past or current earnings filings.

The regulatory agency had sent Novell a "comment letter" seeking more information on a quarterly report filed in April and the annual 10-K report for fiscal year 2006. Novell delayed the earnings -- in a decision announced just hours before it was slated to report -- out of "an abundance of caution," it said.

The software maker also issued some disappointing guidance, saying 2008 revenues would be between $920 million and $945 million, below the Wall Street estimates of $982 million.

Those two factors helped initially drag down Novell shares, with the stock falling nearly 10 percent in after-hours trading Thursday evening. Things stabilized in morning action Friday, however, with the stock up less than 1 percent to $7.14.

Open and Shut

Novell's Open Platform Solutions division brought in $23 million in the quarter, all but $1 million of it from sales of Linux products. The amount of Linux software invoiced during the quarter more than doubled, the company said.

Identity and Access Management sales were $30 million, up 27 percent year-over-year, while sales from the Systems and Resource Management business line were $36 million, a 5 percent increase. Workgroup products lagged, with revenue of $88 million representing just a 1 percent year-over-year increase.

"We are pleased with our overall results for 2007," said CEO Ron Hovsepian. "While undergoing transformational change, we grew revenue and exceeded our operating targets. We are on the right path to long-term, sustainable profitability."

Novell's restructuring moves may be costly, but they are necessary to ensure the company can execute well as it competes with Red Hat (NYSE: RHT) for direct Linux sales, SunTrust Robinson Humphrey analyst Terry Tillman told LinuxInsider.

Meanwhile, Novell had been benefiting from a partnership with Microsoft (Nasdaq: MSFT), which is eager to make its products more compatible with open source options, but sales from that agreement have been waning.

"The Microsoft deal provided an initial boost to Novell's Linux sales, but what's going to allow it to position itself as a credible alternative to Red Hat is internal execution and a sharper focus," Tillman said.

Court of Public Opinion

The quick resolution of the SEC inquiry -- Novell has emphasized that it was not a formal investigation of its bookkeeping -- means Novell can focus on that execution as well as the variety of legal cases it is currently juggling.

Novell has won some key battles in those legal fights, and after it completes its latest restructuring -- the effort began in 2006 and has already cost the company $47 million -- it should be able to focus squarely on using its Suse Linux purchase to build a more competitive product lineup, Gartner (NYSE: IT) analyst George Weiss told LinuxInsider.

"Red Hat's growth gets a lot of attention and has shown that demand for Linux deployments continues to mount," Weiss said. "Enterprises will also be looking for choice and alternatives, and that should help Novell going forward."

Novell ended the quarter and fiscal year with $1.9 billion in cash on hand, it noted.