For three quarters running, business-software provider Novell (NASDAQ:NOVL) has confounded the experts, reporting better-than-expected earnings. Can the company keep the good news coming when it reports its fiscal Q2 2006 numbers tomorrow afternoon? Let's go rummaging among the lines of code to see what clues we find.
What analysts say:
- Buy, sell, or waffle? A dozen analysts follow Novell, with four rating the stock a buy, five a hold, and three a sell.
- Revenues. The analysts predict that Novell will report a 7% drop in sales tomorrow, to $275.7 million.
- Earnings. And a profits-per-share improvement of "infinity" -- up from $0.00 last year to $0.03 tomorrow.
What management says:
Novell's most recent news is that it has sold its interest in management-consulting company Celerant to U.K.-based Caledonia Investments for $77 million. Novell did not clarify whether this sale would cause it to report a one-time gain or loss, based on whether the sale was profitable for the company.
Last month, management announced that it had doubled its share-buyback authorization, allotting as much as $400 million to acquire its own shares through April 2007. Ordinarily, a disclaimer would be called for here, in which I'd caution that an "authorization" is not a commitment to buy back shares. But the day before doubling its buyback program, Novell announced that it had, in fact, "commenced the repurchase of shares," so the company is already putting its money where its 8-K filing is.
In lieu of the above caution, then, let me tell you this. See that analyst estimate of $0.03 in profits above? Don't believe it. In Novell's earnings release last quarter, the company predicted "between $0.02 and $0.03" in profits -- but then clarified that those were pro forma (Latin for "earnings lite!") numbers that excluded a $0.02-per-share charge for expensing stock options. Chances are pretty good that tomorrow's GAAP results will come in closer to $0.01.
What management does:
This shouldn't come as a surprise, though, when you see where Novell's margins have been heading. The firm's rolling gross margin is up slightly over the last 18 months, but operating margins are down, and Novell's continual run of "one-time" (ahem) quarterly charges for restructuring finally knocked a hole in the rolling net margins line of this chart last quarter, allowing red ink to flow in. (Note that quarterly losses were actually recorded twice, in fiscal Q2 and Q4.)
|
Margins % |
10/04 |
1/05 |
4/05 |
7/05 |
10/05 |
1/06 |
|---|---|---|---|---|---|---|
|
Gross |
63.2 |
62.5 |
61.7 |
61 |
63.1 |
63.5 |
|
Op. |
5.8 |
5 |
3.1 |
2.6 |
3.7 |
3.1 |
|
Net |
4.9 |
37.2 |
34.9 |
33.5 |
31.5 |
(1.4) |
One Fool says:
The news isn't all bad. On a cash profits basis, Novell is doing much better than its results under generally accepted accounting principles would suggest. But that's what we call "damning with faint praise." Over the last 12 months, Novell reported a total of $16.6 million in losses under GAAP. Meanwhile, the company quietly generated $41.2 million in free cash flow, most of which ended up on the balance sheet. So far, so good.
Unfortunately, with a market cap of $3 billion, that still gives Novell a very pricey-looking price-to-free cash flow ratio of 74. Weighed against forward profits growth, which analysts peg at just 10% long-term, it's hard to argue that the firm isn't grossly overpriced -- but at least the ratio isn't negative.
Competitors:
- Sun Microsystems (NASDAQ:SUNW)
- Red Hat (NASDAQ:RHAT)
- Oracle (NASDAQ:ORCL)
- Microsoft (NASDAQ:MSFT)
- IBM (NYSE:IBM)
- Computer Sciences (NYSE:CSC)
Microsoft is a Motley Fool Inside Value pick. To meet fellow Foolish value hunters and discover more of the market's best bargains, try Inside Value free for 30 days.
Fool contributor Rich Smith does not own shares of any company named above.
