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Highlights From Novell's (NOVL) Q1 Conference Call; Results Mixed, Taking Conservative Views


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February 27, 2009 12:05 PM EST
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Last night, Novell (Nasdaq: NOVL) reported Q1 earnings of $0.07, 1 cent better than estimates. Revenues were $215 million vs. the consensus of $229.95 million. Novell management reiterated its target of no less than 10% non-GAAP operating margin in the full fiscal year 2009. Shares are down almost 2% this morning.

Highlights from the Q1 conference call:

  • Our results this quarter were mixed. Product renewals held steady, but new product and service revenue was below our expectations, largely due to the slowing economy. Revenue was also modestly impacted by FX headwinds.
  • Within Open Platform Solutions, Linux platform products revenue in Q1 was $35 million, increasing 24% from the year-ago quarter. Linux invoicing was 23 million, down 42%.
  • This quarter we did not sign any large deals, many of which have been historically fulfilled by Microsoft certificates. To date we have invoiced $199 million or 83% of our original $240 million agreement.
  • Softness in Q4 continued into Q1 and was magnified by the economic situation. Customers are downsizing, which translated into lower licensing this quarter.
  • Services revenue declined 32% to 28 million during Q1. While we expected a slight decline from Q4 levels, companies have lowered their discretionary spending on services, which caused services revenue to decline more than anticipated. We expect services to be at or slightly lower than this run rate for the rest of the year.
  • Total head count at the end of the quarter was approximately 3,900, down from approximately 4,000 in the prior quarter.
  • We continue to take a conservative view with respect to our cash strategy in light of the volatile financial markets and economic downturn. Our sizable cash balance is an important asset as it provides flexibility to pursue acquisitions, which is our first priority, as well as to continue to repurchase our debentures, which will be due in July of 2009.
  • Our Q1 Linux performance did not meet our expectations as our pipeline coverage and conversion was overly reliant on direct sales and sales cycles lengthened.
  • The Identity and Security market remains very attractive, and our pipeline is solid. Our ISM focus is on lead and opportunity conversion. Our confidence in this market remains high. Finally, the Systems and Resource Management market remains very attractive.
  • CEO says I readily acknowledge there are some different views regarding our capital structure. At this time, however, we continue to believe the best avenue for long-term profitable growth is not through a broad-based share buyback program.
  • CEO says When I look at the overall pipeline for the exact same period of time compared to last year, in this quarter, we're slightly ahead of our actual pipeline in a comparative basis. So I actually feel good about the amount in the pipeline and the amount that we have in there we're running a little earlier on the committed; we're in a better position this year, this time in terms of committed.
  • Most of our invoicing or a good portion of our invoicing occurs in the second half of the year. It's weighted toward the second half of the year. And that will drive royalty costs for some of the things that we - purchased technology, some of our technology purchases.
  • We do believe, though, that there'll also be a tough environment at the end of Q2.
  • We will maintain double-digit operating margins throughout the year. Now that really does depend on our ability to invoice and our licensing revenue, and so as we look today at looking into the future, which is hard to do in this economic environment, we really believe that we can maintain double-digit operating margins each quarter going forward here.

Novell, Inc., through its infrastructure software and ecosystem of business partnerships, integrate mixed information technology (IT) environments, allowing people and technology to work as one.

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