Foolish Forecast: Novell Swings for the Fences

Enterprise software veteran Novell (Nasdaq: NOVL) is stepping up to the plate for a second-quarter earnings report. Novell has hit home runs in each of its last four reports by blowing analyst estimates out of the water. Are we expecting another home run or a swing and a miss? Let's find out.

What Fools say:
Here's how Novell stacks up against some of its peers and competitors in CAPS:

	Market Cap (in billions)	Trailing P/E Ratio	CAPS Rating
Microsoft (Nasdaq: MSFT)	$261.5	16.3	***
IBM (NYSE: IBM)	$177.2	16.7	***
Oracle (Nasdaq: ORCL)	$117.4	23.4	****
Red Hat (NYSE: RHT)	$4.6	66.5	**
Novell	$2.3	N/A	**

Data from Motley Fool CAPS as of May 28.

CAPS player rockynoggin gives Novell a thumbs-up, in part because of the recent $205 million acquisition of data center management specialist PlateSpin.

[The] best move I've seen them make in a long time. This puts them in position to ride VMware's (NYSE: VMW) coat tails out of the gutter, plus gives them the ability to support data center migrations, disaster recovery.

But it's a short-term boost, and the same player ends that comment with this diatribe:

However, I think in the long run [Novell] will eventually fail. I've seen no innovation from them in years (no, adopting Linux as a platform is not innovation) and they have a niche following. Frankly, I'm surprised they're still around.

What management does:
Don't be fooled by the massive cash flow margins in 2007. It's a mirage, generated by a cross-licensing and cross-promotion agreement with Microsoft that landed Novell a one-time $348 million payment. Without it, the trailing free cash flow margins would have stayed positive but in the lower single digits.

Margins	10/2006	1/2007	4/2007	7/2007	10/2007	1/2008
Gross	69.4%	70.2%	71.2%	71.9%	72.1%	73.1%
Operating	(2.5%)	(4.0%)	(4.1%)	(1.2%)	(1.1%)	1.7%
Net	2.0%	(0.3%)	(1.0%)	(0.6%)	(4.8%)	(0.8%)
FCF/Revenue	7.9%	44.1%	43.2%	41.8%	42.4%	2.2%

Growth (YOY)	10/2006	1/2007	4/2007	7/2007	10/2007	1/2008
Revenue	(6.8%)	(8.6%)	(10.2%)	(8.0%)	1.4%	4.9%

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:
Many companies are trying to ride VMware's generously apportioned coattails, and it remains to be seen whether Novell can do it better than the rest. In the meantime, the company generates plenty of cash, and the stock has dropped 13% in the past year while getting back to dependable sales growth performances and above-expected earnings.

The faster the company unloads the burdensome NetWare legacy (Hey, IBM! Are you shopping around for support contracts to handle? Are you still hungry, HP (NYSE: HPQ)? Anybody? ... Bueller?) to focus its efforts and assets on the growth opportunities in Linux platforms and data security, the better.

That's not happening today, though, and with IT departments holding their purse strings tight in an uncertain economy, I don't think that this will be the quarter Novell turns heads and improves its stock price with a superb report.

Swing and a miss. But the bases are loaded, so if you play the next fat pitch right ...

Further Foolish reading:

• Consumers Confound Linux Leaders
• Are We in a Recession? Who Cares?
• 5 More Unloved Growth Stocks