NOVL Novell analyst conference summary for investors August 29, 2006 (Q2, fiscal Q3)

NOVL
Novell, Inc.

Summary

conference date: August 29, 2006
for quarter ending: July 31, 2006 (3rd fiscal quarter)

Overview: Results are preliminary due to internal investigation of stock-based compensation accounting. Revenues continue to decline as company continues to struggle to generate revenues from its Linux products while Netware revenues decline rapidly. Net income consistent with guidance.

Basic data:

Revenues of $241 million down 13% sequentially from $278 million and down 4% from $252 million in July 2005 quarter. GAAP net loss of $3 million or 1 cent per share due to operations, but total net income was $12 million or 3 cents per share.

Reported adjusted (non-GAAP) income of $20 million or $0.05 per diluted share, up from $13 million or $.03 per diluted share year-earlier.

Cash and equivalents ended at $1.3 billion. (Compare to current market capitalization of $2.3 billion). $33 million in positive cash flow.

Guidance:

Revenue between $246 and $256 million for October 2006 quarter. Expects a profit of 1 cent GAAP or 4 cents non-GAAP for the quarter.

Conference Highlights:

Celerant consulting division disposition finalized during quarter.

Linux revenues rose 30% (annually) to $12 million. Traditional NetWare and Open Enterprise revenue declined 19% to $55 million and expects will continue to decline at that rate. Collaboration revenue $25 million up 8%, but 25% was attributable to one large deal. Global Services was $78 million, down 8%, as planned. System security and identity management segment revenues $64 million, up 14%. Within that $34 million was resource management and Identity management revenue was $26 million up 46%.

Japan CTE consulting was disposed of because it was not centered on Novell products.

In Open Platform Solutions (Linux and Open Enterprise), deferred revenues increased to $40 million; growth rate is high and will contribute to future revenue increases. Linux desktop revenues growing well.

Since the quarter ended SUSE Linux Enterprise 10 was released and is being received enthusiastically. Open Suse Professional is now available free to download.

Operating expenses (excluding stock-based compensation and one-time items) $155 million, down 2% from year-earlier.

$391 million in deferred revenue. Recognized revenue is smoothing rather than being focused in fourth quarter.

Realizes need to improve profitability even as investing heavily in Linux. Spending money to grow Linux and Identity businesses; confident on right track for healthy business. Renewals engine will help keep customers up to date and generate revenue.

Major initiatives include strategic selection in marketing and rights-to market. Product management initiative will increase customer focus and cost-effective development.

Q&A:

Maintenance revenue down? Major decline is actually in consulting, rest is Netware OES decline. But growth in other areas.

Key hardware partners are assisting in sales. Working with channel partners to increase sales.

Why is Open Enterprise (OES) not doing well? Actually, OES is doing well, it is the Netware revenue that is falling. Competition is giving major incentives to clients to migrate from Netware and OES.

Unix to Linux migration? Does not seem to be slowing down. Plenty of opportunity in market place. Differentiate between edge-based and enterprise Linux; Novell is focused on enterprise. Hopes being first-to-market on virtualization and database capabilities will give them an edge.

Stripping out single large deal and Celerant is what leads to predicted 4th quarter year-over-year revenue decline.

Operating margins near-term? Will talk about in next earnings call. Believes 12 to 15% long term goal is achievable.

Which products are profitable? Does not share that information.

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