Wednesday night, there will be a third-quarter update from systems software specialist Novell (NASDAQ:NOVL). What's new in the Boston suburbs this time? Let's boot up our systems and go check it out.

What analysts say:

  • Buy, sell, or waffle? Thirteen firms follow Novell nowadays, with five buy ratings and one seller among them. The other seven have settled for a hold. In our own virtual Wall Street, the Motley Fool CAPS community, the stock has been stuck on a one-star rating, based on about 190 user opinions, with a 59% approval rating.
  • Revenue. The average analyst expects about $234.8 million this time, a 2.7% drop from the $241.4 million performance delivered a year ago.
  • Earnings. A penny per share would do. Some analysts even expect a small loss, and none expect Novell to rise to last year's $0.05 per share.

What management says:
Isn't it sweet to enlist the competition to help sell your own products? Novell's Linux segment boosted sales by 114% over last year, according to the latest quarterly report, and it was "largely due to the strength of the Microsoft (NASDAQ:MSFT) agreement," according to Chief Financial Officer Dana Russell.

What management does:
Don't get too excited by the cash flow jump in January -- that was $348 million of up-front payments from Microsoft making its way onto the cash flow statement in a one-time deal. Excluding that windfall, free cash flow has been negative in each of the last two quarters.

The stalled revenue growth is the more interesting fact here, though not quite as cheery. And the operating margins look worrisome on the surface, though I'm OK with an increased investment in research and development and sales functions from time to time. After all, that's a tacit vote of confidence in the business model from the management team and board of directors.

Margins

1/06

4/06

7/06

10/06

1/07

4/07

Gross

68.0%

67.7%

67.9%

67.3%

67.6%

68.6%

Operating

4.3%

5.1%

4.9%

4.0%

2.0%

2.1%

Net

-1.7%

0.2%

-0.6%

1.9%

-0.3%

-0.9%

FCF/Revenue

4.2%

4.1%

6.5%

7.5%

41.6%

40.8%

Y-O-Y Growth

1/06

4/06

7/06

10/06

1/07

4/07

Revenue

-17.1%

7.1%

12.2%

-6.9%

-3.1%

-4.8%
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:
No matter what you think about the Microsoft cross-licensing agreement itself and all its implications for the open-source business model, it's just the shot in the arm Novell's Linux efforts needed. Red Hat (NYSE:RHT) remains the market leader, and Oracle (NASDAQ:ORCL) hopes to make a dent with its Unbreakable Linux distribution, and there's nothing to stop enterprising enterprises from going with community-based alternatives like Ubuntu or Debian, either.

NetWare was great in its day, but that era is long gone. The faster Novell can move its customers off of that platform and stop supporting it, the happier I will be on the company's behalf -- and I have become convinced lately that management feels the same way.

Novell bought its way into the Linux market a few years ago, and it's time to make good on the promise of that exploding market. Someone like Accenture (NYSE:ACN) or Infosys (NASDAQ:INFY), or maybe even IBM (NYSE:IBM), would surely be happy to take the end-of-life support off Novell's hands and let the software designer focus on new software instead.

Accenture and Microsoft are two of the great deals sniffed out by the value hounds of Motley Fool Inside Value. Get a free all-access pass to our deep-discount newsletter service for 30 days and rediscover the cheaper side of the market.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, and his own servers run Ubuntu. You can check out Anders' holdings if you like, and Foolish disclosure is the prognosticator of prognosticators.