The truth about Novell's third quarter
By Om Malik
NEW YORK. 12:30 PM EDT—Novell (nasdaq: NOVL) has been written off many times before. And every time, like a cat with nine lives, the Provo, Utah company has staged a comeback and astounded its critics. Now the company has done it once again, as shown by the strong performance in the fiscal third quarter ending July 31.
Novell reported its third quarter earnings after the closing bell on Thursday, Aug. 19. The company, which started off selling Netware operating system for networks, says that its third quarter income was up 86% for the quarter from the year-ago period.
Net income for the quarter was $49.3 million, or 14 cents a share on a fully diluted basis, compared with $26.6 million, or 7 cents a diluted share, in the year-earlier period. Revenue increased 20% to $326.8 million. The mean estimate of nine analysts surveyed by First Call/Thomson Financial was for net income of around 13 cents per share.
But these numbers do not reflect the strength of recent gains by the company. For example, the company told analysts in a conference call that it had changed its inventory method and that resulted in a more conservative revenue statement. This inventory related change reduced the reported revenues by about $10 million, or about 3 cents a share on an earnings per share basis.
In addition, the company sold its stake in Santa Cruz Operations (nasdaq: SCOC) at a loss, which is another penny off the net income statement. If you take into account these two numbers, the company's actual earnings are 18 cents a share, or up 157% from 7 cents a share in the fiscal third quarter 1998.
A better metric for assessing the third quarter is perhaps the "operating income," which jumped from $30.1 million in third quarter 1998 to $62.4 million this quarter, an increase of 107%.
Novell also gave a nice guidance for the fourth quarter ending November 30, 1999. The company says that by end of the fourth quarter it will sell its stake in Corel Corp. (nasdaq: CORL) as well, which could add another penny to the earnings, estimated at 9 cents a share.
In the fourth quarter, the company is likely to start getting royalties for its network caching software products currently being installed in most of the servers being shipped by companies like Compaq (nyse: CPQ) and Dell Computer (nasdaq: DELL). The royalty payments from these two vendors could add a few pennies to the bottom line.
Given the company's strong performance in the Novell Directory Services (NDS) business, it seems Novell is on the fast track to posting strong earnings growth in the coming quarters.
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