When Novell (Nasdaq: NOVL) delayed its fourth-quarter filing, my initial knee-jerk reaction was nasty and immediate: There must be something sinister going on. It didn't help any that the company simply said that its results were under SEC review, with no further explanation.
As it turns out, it wasn't so bad; the regulators were reviewing a few periods where Novell made some complex moves, such as the Microsoft (Nasdaq: MSFT) indemnification agreement. It was a routine matter, the SEC found nothing wrong, and Novell just wanted to make sure it wouldn't have to immediately retract any fresh releases. Just in case. Still, it would have been nice to know what was going on.
In other and more material news, the company doesn't see eye to eye with Mr. Market on the caliber of fiscal 2007. "We believe our financial results for the quarter and the full year are very positive and show great progress," CFO Dana Russell said on the earnings call. Both non-GAAP earnings and sales came in above management guidance and Wall Street estimates.
But that wasn't good enough for the market makers, and Novell's share price remains flat since the announcement. The likely culprit is a less-than-rosy outlook on 2008, with sales about flat over this year as the company strives for a different revenue mix.
In particular, Novell wants to drive more business towards installation partners like IBM (NYSE: IBM), BEA Systems (Nasdaq: BEAS), Oracle (Nasdaq: ORCL), and good ol' Mr. Softy, which means less service revenue for Novell itself. Lower sales? The horror!
But I think it's a really good idea. You see, the service segment delivered a 29% margin this quarter. Not bad, but software licenses and maintenance contracts brought in a staggering 90% gross margin on its sales. Sure, you'd have to adjust those figures with sales and marketing expenses, but that applies to services as well. So you can see how Novell wants to run a more profitable business mix, even if it means lower revenue. Focus on Linux platforms and identity management solutions, and let less profitable items eventually drop off the edge of the world. It's a sensible strategy that I wish Sun Microsystems (Nasdaq: JAVA) would emulate.
Maybe it's time to take a position while the market panics over shallow short-term issues. I think the company is on the right track. Way to go, Novell!
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