Hi Paul....About Novell Prospects
Excellent review.
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>IntranetWare 5.0 (Moab) is going to be a much stronger product than 4.11.<
Moab is basically a product for the enterprise, let's wear our rosy shades and assume that they will be able to grow their NOS sales by 15% yearly, this amounts to about 100M additional sales yearly (currently, NOS sales including IFSB is 600M-700M yearly), if one optimistically assumes these additional sales will add about 70M to the bottom line, this will increase the EPS by $.14/year if you factor in taxes. Nothing to be excited about. Their problems goes beyond marketing and mindshare, their business model also stinks. Current revenues 260M-270M/quarter, expenses are 270M-280M/quarter, additional income is 10M-20M/quarter, net income is around ZERO. For Novell to accomplish $.20 EPS/quarter (which they were comfortable with in FY97 <smile>) with the current business model, they need to increase their total sales by 40%-50%. My best guess is this will happen 2-3 years from now if they do everything right. I agree with Joe that they need to knock out another 1000 employees to improve their financial outlook. I thought that reducing expenses would be accomplished in short order to set up the company for subsequent profitable growth. Unfortunately, they only went 1/2 the distance, IMO.
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>I think you (Joe) and I know how fudged the numbers were for the last
quarter.<
Beyond their waffling on the 45 days channel inventory, and Jim McCormmick's concern about high educational sales of 37M (not concern of mine compared with 30M-32M sales in Q2-97 and Q3-97), I don't know where the numbers were fudged. Would you, or Joe, enlighten me?.
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>The low end is still a vacuum on two levels at Novell. I see them still pushing IFSB.<
Yes, Schmidt stated in several occasions that MSFT is dominant in this
area and they will do something about it, but nothing is happening. In
their Q4-97 announcement, they referred to enterprise only, not a single word about SB:
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From the 4th para of Q4-97 announcement:
Novell's core business -- supplying software for very large networks -- was its strongest ever.
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From this statement, I gathered they gave up on SB, I thought their core business is -- supplying networking software and related services for businesses -- large and small. The growth rate for the enterprise probably is in the 10%-15% range, and for SB is in the 40%-60% range. If they are going to prosper, they need to do something about the low end QUICKLY.
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>Conclusion: I will start buying some stock above 7 rather than waiting until the low is reached after the Q1 announcement.<
Regardless of the stock price, I will not buy this stock before I see significant buying by insiders, especially Bradford, this guy has been
selling all along and he was right, when he buys with other insiders, this might be a good buy signal. Otherwise, if the big guys aren't willing to put their money where their mouth is, I'm not in the mood to get burned again.
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Off Topic -- About Oracle
I saw a lot of enthusiasm for ORCL in the thread when the stock dropped more than 9 points. Figuring it might be a buying opportunity, I reviewed their announcement, the WSJ article regarding the results, and several posts in ORCL thread. My conclusion is that this is not a short term problem, it is probably the beginning of a long term slide ala Novell, is it possible that after the experience we had with Novell that some of us are becoming suicidal?. Here is a summary of ORCL Q2 results:
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From the WSJ 10/9/97 - ppg B5
1. Net income for the 2nd fiscal period rose to $187M from $179M for the year earlier period. Revenue increased 23% to $1.61B from $1.31B.
2. ORCL conceded that its problems went beyond currency and acknowledged that weakness could extend into the 3rd quarter and beyond. World-wide sales of the company's flagship database programs grew just 3% over the-year-earlier period, while application programs grew just 7%.
3. Rick Sherlund, an analyst at Goldman Sachs, said most analysts had expected ORCL to post data-base sales growth on the order of 17% to 20%, compared with ORCL's actual results of just 3%. "Clearly, something is happening in the database business, and its too early to attribute that to MSFT", Mr. Sherlund said.
4. Analysts had expected application sales to grow 40% to 50% in the 2nd period, compared with its reported growth of just 7%, Mr. Sherlund said.
5. The brightest spot for the company was consulting and educational services, which grew 40% to $968.3M.
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Evaluation:
a. Total sales growth of 23% is impressive. However, most of the growth came from consulting, of total increase in sales of 302M, 281 came from consulting, and only 21M came from software sales.
b. Clearly, the consulting business is a very low margin biz, they increased sales by 302M and their net income increased by 8M from 179M
to 187M. This shows that they are making very small profit, if any, on
the consulting biz. For all practical purposes, since their consulting
biz is not helping the bottom line (EPS) it should be ignored. The only thing it does, it bolster the top line growth (sales) but it doesn't impact the EPS.
c. On the other hand, software sales (database and applications) are stagnant, they reported sales of 645M compared with 624M of the year-earlier quarter. This is about 3% growth.
d. Analysts don't think that the stagnation in software sales is attributed to MSFT. Everyone can imagine what will happen when MSFT starts gaining market share in the low end. It sounds very familiar. Further, the company indicated that weakness could extend to Q3 and beyond, how far?, don't know.
e. The headlines indicating that ORCL's problem is Asia are FALSE. It might have had 2%-3% negative impact on software sales, but the shortfall of 14%-17% in software sales indicates to me that they have lost their focus on their core biz. Aren't they spending a lot of money and effort on promoting the NC?. Isn't this similar to Novell involvement in Unix and WP?.
Conclusion
Based on their software sales (say 2.7B/year), consulting biz doesn't enhance the bottom line, software sales are stagnant and subjected to an assault by MSFT at the low end, and the company seems to have lost focus on its core biz, it seems to me that this is a repeat of Novell's fiasco. Further, the stock is not cheap, it sells for about 25 PE (consensus estimate is $.90), and 8X-9X software sales, which is rich indeed considering that the core business is stagnant and most likely will be declining. If someone has some good reasons to buy ORCL other than the stock dropped 9-10 points in one day, I like to hear them.
Regards
Salah
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