Novell's revamped marketing efforts and focus on new markets have been at work for more than a couple of quarters now, and investors are anxious to see top-line results. With Novell guiding down guidance for the full year yesterday, though, a significant turnaround seems further off.

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By Mike Trigg (TMF Tonto)
February 16, 2001

Internet software vendor Novell (Nasdaq: NOVL) reported first-quarter results that beat expectations yesterday, but lowered guidance for the year. Novell shares have been stuck in the single digits and are trading well off their 52-week high of $45, lending some to call it a value play. Though the company's cost-cutting efforts and new business initiatives bode well for future growth, yesterday's news suggests a comeback could be further off than originally anticipated.

Novell reported fiscal Q1 (ended Jan. 31) earnings, excluding an accounting change, of $3.27 million, or $0.01 per share, compared to $44.8 million, or $0.13 per share, in the year-ago period. That beat the Street's estimate by a penny. Sales dropped 22% over the year-ago period, to $245 million, but the company pointed out that Q1 of last year was especially strong because of year 2000-related purchases.

Novell also announced an accounting change that entails that the company will now only recognize revenue upon shipment of products by channel partners to customers (also known as "sell through"). Including the adjustment, it reported a loss of $7.8 million, or $0.02 per share. Stuffing distribution channels can get a company into trouble: Internet security firm Network Associates (Nasdaq: NETA), for example, recently overloaded its distribution channel. When some software was returned, its earnings fell well short of expectations.

In a conference call last night, Novell said it expects full-year revenue of about $1 billion and earnings of between $0.17 and $0.18 per share. Last year, it had $1.16 billion in sales. Novell also stated it expects revenue in the current quarter to be in line with Q1's results. With a new release of its NetWare server operating system scheduled for later this year, Novell is optimistic that business will pick back up in the year's second half.

NetWare contributed $114 million in sales this quarter and currently holds the number-three spot in the market, behind Microsoft (Nasdaq: MSFT) and Linux-based offerings. But the company has seen its market share in the server operating system dwindle over the past year because of problems with distribution channels and new releases from competitors. While NetWare remains critical to the company's top line, long-term success depends on its Net Services products.

These products range from security and caching to directory services and client management. Earlier this month, Novell said it was forming a new content networking company called Volera with Nortel Networks (NYSE: NT) and consultant firm Accenture (formerly Andersen Consulting). The new company will sell caching products that speed the delivery of Web content. Volera's birth came after Novell's own efforts in the content and caching market failed.

Novell has also launched a $60 million-plus marketing campaign with a 30-second television advertisement. The commercial hails the ability of Novell services software to solve the complexities of e-business. The company's revamped marketing efforts and focus on new markets have been at work for more than a couple of quarters now, and investors are anxious for top-line results. With Novell guiding down guidance for the full year yesterday, a significant turnaround seems further off. Still, the company's strategy seems solid.

Mike Trigg's personal holdings can be viewed in his profile. The Motley Fool is investors writing for investors.

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