I'll give credit to Novell (NASDAQ:NOVL) right off the bat for this much: Those who have run the company over the years have never given up on their long fight. That said, it's still not certain whether this company can carve out a defensible niche amidst Microsoft (NASDAQ:MSFT), Red Hat (NASDAQ:RHAT), Computer Associates (NYSE:CA), and a host of other competitors.
So far, it doesn't look good.
I wasn't greatly encouraged by recently announced second-quarter results. Apparently, Wall Street analysts weren't exactly overjoyed either: The median estimates for the next two fiscal years were revised lower in the wake of the report.
Sales for the quarter were basically flat, with a rise in maintenance and service revenue offset by a decline in license revenue. There wasn't a lot to celebrate operationally either; margins declined and the company posted a loss, according to generally accepted accounting practices (GAAP).
While I love a good turnaround story, this quarter brings home some of the larger issues I have with Novell. I see this company as more of a collection of cobbled-together bits and pieces than a cohesive single entity. What's more, costs are still out of line, and numerous strategic changes over the years still haven't put the company on a clear track to growth.
The question now, though, is whether Linux can save the day. Novell has clearly made a commitment to Linux as one of its platforms for future growth, but no benefits have materialized so far. What's more, Linux is a very competitive market in its own right, and pricing has become tough lately.
The best news going for Novell believers is the balance sheet. Netting out $600 million of convertible debt, Novell exited the quarter with about $1 billion in cash on the balance sheet. That not only gives the company the resources to focus more on its marketing efforts (which I believe it needs to do), but it also lends flexibility to the business model.
Of course, too much flexibility can also be a bad thing. Despite its more than 20 years in business, Novell still hasn't really shaped its own identity and, in my view, more piecemeal acquisitions aren't the answer.
Given Novell's present valuation, not many people seem to expect a sustained recovery. For investors who have faith that Novell management can tighten up cost containment and put the company on a path to meaningful and sustained growth, these shares could be a bargain. For me, though, I'd rather stay clear of a seemingly unfocused company that has to compete with the likes of Microsoft or IBM (NYSE:IBM).
For more on the software space:
- Microsoft's Creepy Crawlies
- IBM Stands for ASP
- Software Firms Struggle With Upload
- Microsoft on Sale
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
