Hi Don...About Revenues and EPS ...etc
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About Channel Inventory:
>>Novell had a channel reduction move in Q2 96 at that time the company estimated that channel inventory was reduced by $255 million
as a result.<<
In Q2-96, the company estimated that channel inventory was reduced by
200M-225M. Further, they estimated that the channel inventory at the
end of Q2-96 is 60-90 days supply. This means that there were about
180M (225Mx75/90) inventory in the channel assuming 75 days supply.
When they announced the channel inventory reduction for Q3-97, they
implied that the channel was stuffed. In fact, this appears now to be
not true at all. Let's look at what they said in the latest conference call:
1. Sell Through Channel = 103M
2. Channel Inventory = 45 Days = 52M (103M/2)
Note: they proudly said that the channel inventory is at the lowest
level for the last 10 years. I didn't find that this is something to
be proud of, on the contrary they should be ashamed of this low
inventory of 52M because it simply means that their products are not
selling. I would have been very pleased if they said that the current
channel inventory is the highest in 10 years because their products
are selling like hot cakes.
3. Returns = 26M
4. Inventory at the end of Q2-97 = 103+52+26 = 181M
Clearly, the channel inventory at the end of Q2-96 (180M) remained
the same up to the end of Q2-97 (181M). This simply means that the
reported revenue numbers for Q3-96 through Q1-97 are the actual sales
numbers and shouldn't be modified to reflect channel stuffing.
Amazingly, Marengi didn't pad the numbers as we previously thought
and the current management wants us to believe. The fact of the
matter is sell-through the channel has been declining over that
period such that the inventory became bloated.
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About various data:
>>Q2 97 states that $144 million was shipped to the channel during
that quarter.<<
Not true, Q2-97 announcement states that 100M was shipped to the
channel, in the conference call of Q2-97 they stated 109M instead of
100M.
>>Q3 97 states that the company allowed an extra $28 million to be
returned.<<
In Q3-97 conference call they said the returns were 26M, except if I
heard it wrong.
>> Border Manager began shipping this quarter.<<
Shipping date for BorderManager is 8/28/97.
>>Schmidt stated that current expenses are going to be $250 million
per quarter.<<
In Q3-97 conference call they said the expenses are 261M, they added
that although the expenses don't fully reflect the savings from the
layoffs, the increased expenses due to ads will offset these savings,
and the expenses will stay the same. IMO, this is not going to happen, when they start shipping products to the channel, the expenses will increase to around 280M. This is consistent with the average of the previous 4 quarters expenses (305M) minus the savings from manpower reductions (25M).
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About Q3-97 Results and estimate of Q4-97
>>So I'm guessing $90 million + $144 million + $28 million = $262
million + BorderManager $70 million? = $332 million - $250 million =
$82 million or .23 EPS for Q4.<<
There is no guessing here, Q3-97 normalized revenues can be easily
calculated as follows:
Reported Revenues = 90M
Sell-through Channel = 103M
Returns = 26M
Normalized Revenues = 90+103+26 = 219M
In fact, in the conference call, they mentioned the decline in sales
from the previous quarters for various segments as follows:
OEM = 25M
Licensing = 9M
Services and Education = 20M
Total Decline from Q2-97 = 25+9+20 = 54M
Q2-97 Revenues = 271M
Normalized Revenues for Q3-97 = 271-54 = 217M
Whether the number is 217M or 219M, it is a crummy number anyway you
want to look at it.
To get a feeling about what is happening here, you need to look at
previous quarters revenues. For Q3-96 thru Q3-97, reported revenues
are: 365M, 384M, 375M, 271M , and 219M, respectively. As Jim McCormack said in one of his posts, the revenues are dropping like a stone. Even if one gives them the benefit of the doubt and assumes that Q4-96 and Q1-97 revenues were padded by channel stuffing of about 25M (although I believe it didn't happen as I explained above), and add the deferred
revenues for Q2-97 (20M) and Q3-97 (12M), one ends up with normalized
revenues of 365M, 359M, 350M, 291M, and 231M for Q3-96 thru Q3-97,
respectively. Anyway you slice it their position is deteriorating
fast. The disappointing thing is that they are not saying why the
sales are declining at that catastrophic rate, and the analysts are
not questioning them. Of course everyone in the thread knows the
answer to this one, they are getting slaughtered by MSFT and can not
do anything about it, it is sad.
According to this dismal picture, here is my rosy estimate for Q4-97:
Revenues excluding new products = 190M
New Products Revenues = 30M (BorderManager & HostPublisher)
Note: New products don't work with NW 3.x, this limits the installed
base that can use these products to only 22M from a total of about
55M.
Total Revenues = 220M
Expenses = 280M
Other Income = 15M (interest on cash)
Net Income before Taxes = 220-280+15 = -45M
The same situation will remain intact in Q1-98 (maybe 230M revenues,
and -35M earnings before taxes). When will Moab be shipped?. They
changed their tune to early 98 instead of late 97 or early 98, expect
it to be shipped sometime in 2/98 or 3/98, not sufficient time to
save Q2-98. Now, you know why Schmidt changed his promise of good
things to happen from 4/1/98 to the summer of 98, and in next quarter
conference call he probably will say wait till the fall of 98.
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About the stock price
>>A trading range of $10 to $13 should be reasonable.<<
If they are going to make $.23 EPS in Q4-97, the stock should trade
around $25 and anyone who believes this $.23 number should buy with
both hands.
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My .02 Worth
My main problem with the executives of this company is that they lie
consistently including Eric Schmidt. The most glaring lie is the one
about revenues, in the conference call and on CNBC, he stated that
the revenues have been flat around 250M over the last 4 quarters. No
Eric, the revenues have been declining fast especially during your
tenure. You previously stated that misleading statements are in the
past and you can not change the past, but you are doing the same
thing, I guess you became a true Novellite. Lying indicates that they
are deep troubles, no other explanation. IMO, the only way out of
this mess is a merger with a strong partener. Is this going to
happen?. I don't know, but I hope it does for the long suffering
longs.
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PS: I don't own the stock and don't intend to in the foreseeable future.
Regards
Salah |
