Foolish Forecast: Novell Showing Brotherly Love

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After the closing bell Wednesday night, software platform producer Novell (Nasdaq: NOVL) reports second-quarter earnings. Let's open up this novella and glean what we can from the prose on the past.

What analysts say:

• Buy, sell, or waffle? A lucky 13 analysts follow Novell today. Five of them carry buy ratings on the stock, two are selling, and the other six prefer to hold. Nearly 150 Motley Fool CAPS users have weighed in, rather bearishly, resulting in an overall one-star rating.
• Revenue. The Wall Street consensus estimate would be satisfied with $235 million, though that would be a 15% decline from last year's $278 million.
• Earnings. The average forecast calls for $0.01 of net profit per share, down from $0.03 last year.

What management says:
Novell just completed a lengthy options-granting review, combing through 10 years of grants to find incorrect issues. There were a few procedural mistakes, but no egregious backdating, so apart from a $19 million reduction of the retained earnings balance, there will be no financial restatements and quarterly reports should flow in on time forthwith.

What management does:
As Novell works its way toward a future based on Linux software, phasing out the aging NetWare platform, the effect is showing up as improving margins. The company appears to spend the extra dough on reinvestments in the business rather than hanging onto it as net income, which is fine by me.

Margin	10/2005	1/2006	4/2006	7/2006	10/2006	1/2007
Gross	63.1%	63.6%	64.2%	64.1%	67.3%	67.6%
Operating	3.7%	4.3%	4.6%	4.9%	4.0%	2.5%
Net	31.5%	(1.4%)	0.2%	1.0%	3.3%	1.1%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
The cross-licensing, cross-marketing deal Novell signed with Microsoft (Nasdaq: MSFT) last fall is in the books as $348 million of deferred revenue, which will be converted into realized revenue over the next few quarters. With that in mind, I'd be surprised to see sales taking as hard a fall as Wall Street experts expect them to.

Despite the hubbub kicked up by that contract, including special anti-patent sections added to the working drafts of the open-source General Public License 3 (specifically the third and fourth paragraphs of section 11), Novell has shown some real commitment to the ideals of the open-source community lately.

For one, the 10-K statement filed last week contains nearly the full text of the Microsoft agreement. For another, the company just teamed up with the Electronic Frontier Foundation to lobby governments the world over to break down software patent protections. "As a long-time innovator in the industry and a holder of many significant patents, we understand the rationale behind the patent system in general," said Chief Technology Officer Jeff Jaffe in a statement. "But we believe that software patent system reform is necessary to promote software innovation going forward."

Novell seems serious about the Linux business, and willing to make sacrifices to protect that way of life and gain street cred. Standing shoulder to shoulder with Red Hat (NYSE: RHT), despite the direct competition between the two, is the very essence of Ubuntu -- another Linux distribution whose name is Swahili for "I am what I am because of what we all are." Right on, brother.

Microsoft is a Motley Fool Inside Value selection.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure will help you find the road ahead.