Novell's fiscal third quarter was notable for reasons beyond Linux sales and its core product line. Novell's most recent quarter was the sixth consecutive one that topped expectations.
That consistency may mark the days where Novell becomes something more than an afterthought. Now it's no coincidence that Novell's six quarter string of upside surprises coincides with the meat of its SUSE Linux distribution partnership with Microsoft, which will be two years old in November and has been extended.
But Novell has also been successful in other areas. It has revamped its identity management lineup, restructured the company to increase margins and overall has been a solid performer on the earnings front. For the third quarter ending July 31 (statement), Novell's revenue was $245 million, up from $237 million a year ago. Novell reported a loss of $15.1 million, or 4 cents a share, due to auction rate securities (which theoretically were supposed to be as safe as cash). Excluding charges, Novell reported earnings of $21 million, or 6 cents a share, a penny ahead of Wall Street estimates. Sure Novell got a boost from the weak dollar, but analysts declared the quarter a clean one.
And Novell's revenue outlook for the rest of the year was in line with expectations. The real story here is Linux and how Novell has become the second largest distributor to Red Hat--with Microsoft's help. Novell CFO Dana Russell said on a conference call Thursday:
Within Open Platform Solutions, Linux Platform Products revenue was $31 million, increasing 30% from the year ago quarter. Linux invoicing was $51 million, up 36% year-over-year. We are pleased with our results this quarter which we’re growing substantially above market growth rates. Our Linux business continues to be dependent on large deals which may result in some fluctuations of quarterly invoicing levels. In addition we had strong results in Q7 2007 that may lead to difficult compares in Q4 2008. But our plan for 2008 which exceeds market growth rates remains well on track and we expect to continue to grow above market growth rates next year. Our expanded relationship with Microsoft provides further confidence in our long-term outlook.
He added that Microsoft is buying up to $100 million in SUSE certificates in $25 million chunks.
Other notable items:
- Novell said its expenses entering fiscal 2009 will continue to decline "due to the restructuring activities planned for the fourth quarter."
- CEO Ronald Hovsepian said he was confident that Novell is capturing SUSE Enterprise Linux renewals.
- Identity and security management products had revenue growth of 22 percent in the third quarter with systems and resource management products jumping 25 percent.
- Novell's Open Enterprise Server and Netware lineup brought in revenue of $53.9 million, down 4 percent from a year ago. But it's still notable how Novell can still milk Netware to fund other growth opportunities.
- Overall core product sales, which includes Netware, were up 13 percent in the quarter.
- The only nit in Novell's quarter was a decline in services revenue, but the company explained that's falling because it's shifting its wares to be distributed via partners and independent software vendors.
Perhaps more notable than Novell's performance was the reaction to it. Analysts, who have generally brushed off recent Novell quarters, were actually upbeat. To wit:
- UBS analyst Abhey Lamda said: "We believe the company’s large cash balance and strong cash flows from its legacy business will continue to provide support to the stock and the continuation of the steady performance delivered over the last six quarters will help move some investors from the sidelines.
- Jeffries analyst Katherine Egbert said Novell is delivering slow and steady progress on its financials, landing more channel partners and showing positive invoicing trends.
- Oppenheimer analyst Brian Denyeau gushed that Novell "continues to deliver strong quarterly results that demonstrate its ability to drive consistent margin expansion and solid growth. The decline in services revenue is masking an increasingly attractive growth profile which, coupled with the hundreds of basis points of leverage left to realize, leaves us increasingly confident that owning Novell will pay off for long-term investors."
Admittedly sell-side analysts can get a little bubbly, but it's rare that praise is heaped on Novell. Given customers and partners are also headed Novell's way it may be time to pay a little more attention to the company