The verdict is still out on whether Novell's reorganization strategy is the right one. Nevertheless, change is the name of the game as slumping software sales and poor performance internationally deflate the company's revenues while it loses valuable market share. Acquisition or a product spin-off could be in the future.
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Novell's fiscal third-quarter (ended July 31) revenue totaled $270 million, down from $326.8 million a year ago. The company posted net income of $8.6 million, or $0.03 per diluted share, a penny ahead of street estimates. That's well off $49.3 million, or $0.14 per share, in the same period a year ago.
A bit of good news did come for investors when the company announced it would repurchase up to $500 million of its own shares in the open market. But investors' patience with the company appears to be ending, as the stock fell in after-hours trading last night. It closed down more than 8% today.
Software sales slump
In a press release yesterday, Novell chairman and CEO Eric Schmidt highlighted reorganization of the sales force in order to improve reseller channels as a cause for the slumping sales and added that the difficult changes should begin to take effect in the near future. He said that the company would make further adjustments to ensure expenses are in line with revenue without affecting investment opportunities -- but topline growth is still expected to disappoint in the near term.
Further attempts to spark sales will include a television advertising campaign. The company noted that its brand recognition has suffered versus smaller competitors who have employed expensive television ads. With cost controls in mind, spending for the new campaign will be offset by cutbacks in traditional advertising, such as promotional and print media.
Ripe for acquisition
But watchers are questioning the future for Novell. Clearly, Novell isn't the company it once was. The company was forced to redefine itself as a specialty software provider as it lost market share and recent earnings reports suggest that the current strategy isn't working and their core products are losing out. Management stands firmly behind its reorganization plan, expecting increased sales starting sometime next year.
Your Turn:
International sales of packaged software, particularly in Europe, were a clear disappointment for Novell. Sales in Europe retreated 30% to $70 million, fell in Asia 8% to $22 million, and slumped in the United States 12% to $22 million.
Novell shares got a nice pop earlier in the week on speculation that it was an acquisition target for IBM (NYSE: IBM). There's been no further evidence to support such a claim, but a debate on the future of the company is on going. Some feel that it is ripe for acquisition, while others feel a product spin-off makes the most sense. One could argue a spin-off of a Novell product division, such as NetWare and Novell Directory Services, might be worth more than a unified Novell, but management has pooh-poohed such talk for the time being.
Does Novel's management have the company heading in the right direction? Do they have the business savvy to see the company succeed? Does a spin-off or acquisition make sense for the company and shareholders? We welcome your thoughts on the Novell discussion board.
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