Channel Inventory, EPS, and Revenues
Hi Scott
>>If we have truly got the channel flushing behind us, which I think we finally do, then we could see a surprise how about .25 cents this Quarter. That should put Novell at 22 bucks.<<
The channel inventory reduction was completed during Q2-96. However, Q3 results were not that good. The EPS of $.17 was O.K. and in line with analysts expectation of $.17 (Zacks) or $.18 (First Call). The main reason the stock headed south after Q3 announcement in the midst of a tech stocks rally is that the revenues were about 10% lower than expectation (actual: 365M vs expectation: ~400M).
The company explained the low Q3 revenues as follows:
1. Seasonal slowdown in Europe
2. 20M less revenues in Japan than projected
3. Sales of TCP/IP were slow
I don't buy 1 and 3 above. Sales in Japan is a real problem that they have to solve. In my opinion, Q3 revenues were low because:
1. GroupWise 5.0 which was scheduled for release in 12/95 was late. In the meantime Lotus released Notes 4.0 and Micorsoft released Exchange in Q2 or Q3. This had an adverse effect on GroupWise sales.
2, In early July, Microsoft announced that NT 4.0 will be released earlier than scheduled which slowed down NetWare sales.
3. There was a turmoil in the executive ranks at Novell during Q3 due to the unexpected low sales which resulted in BF famous memo and the dismissal of Waxman and Hughes, and finally Fankenberg himself.
Clearly, some people knew about Q3 revenues before the announcement because the stock has started to go down persistently since late May. The low sales were confirmed later by VarBusiness and CRN after it was too late (the stock dropped to 10-11 range), and before Q3 announcement.
Now, let's see what we know about Q4:
1. A post by Roger Mariner (from an article in PC Week, I think) indicated that some analysts "think" Novell started to stuff the channel. If this is true, it would be bad news. However, the company said that in Q3 the channel inventory stayed the same. Further, they said that they could have sold an additional 5M in Q3 but delayed it to maintain the same level of channel inventory. Who do you believe?. Take your pick.
2. A survey by CRN in August (Post by Joe Antol) indicated that NetWare beat NT by 50% to 42% (reversing July survey of 50% NT to 37% NetWare). Clearly, this bodes well for NetWare sales in Q4.
3. Release of ManageWise in August, GroupWise in September, and IntranetWare in October, along with: generally favorable reviews of the 3 products, incentives for early purchases, and aggressive marketing, bodes well for Q4 sales.
Starting from a base revenue of 365M in Q3 and increasing it sequentially by about 5% over the coming quarters should convince the skeptics that Novell is healthy and kicking. Don't forget that Forrester Research issued a report saying that Novell revenues will drop from ~1500M in 96 to ~1000M in 98. There is clearly a concern in Wall Street that they are going down the tubes, and the only answer is to show that their products are selling well in the market place. It is my opinion that at this particular time, revenues are more critical than EPS because it says more about the health of the business. Just as an example, ORCL has EPS of $.17 in their latest quarter (same as Novell), but ORCL stock is in the 42 - 44 range while Novell is in 10 - 12 range. What is the difference?. ORCL sales are growing 35% - 40% yearly, while Novell sales are stagnant.
Overall, I am optimistic, but I want to see Q4 results first.
Regards
Salah |
