Last night I submitted some research on NOVL to the Amigos for review. Sergio asked that I go ahead and post it on the thread. I like NOVL a lot; this post covers them, another will cover some work on HYBR (NOT XYBR) in the cable modem biz.
Sergio, I took the liberty to clean up a few typos and add some info on stock price movement and last week's upgrade from ML.
Phil
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NOVELL (NOVL)
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For last several weeks of trading data go here and input NOVL:
tradepbs.com
For a graph:
quicken.excite.com
OVERVIEW (paraphrased from Hoovers)
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Despite all the problems it's experienced over the years Novell is still the #1 corporate
networking software firm. Novell makes the NetWare network operating system,
which weaves desktop PCs into corporate networks and accounts for 60% of the
company's sales. The company also makes NetWare Directory Services, for accessing
network-wide resources, and GroupWise, which links teams of users working on a
project. Novell's majority-owned subsidiary with Netscape Communications,
Novonyx, develops corporate intranet (internal company Web site) products.
The company was unfocused for several years. They were slow to recognize the
potential of internet, made bad acquisitions instead of growing organically, and were
saddled with bad management and bloated bureaucracy.
Its latest chairman and CEO, former Sun Microsystems Chief Technical Officer Eric
Schmidt, has revamped Novell's lines around Internet and intranet standards. The
company has also bundled key technologies into its products, like Sun's pioneering
Web software Java, developed in large part by Schmidt himself. Java's cross-platform
technology is making Novell's software compatible with rival systems from IBM and
Microsoft. To firm Novell's stagnating bottom line, Schmidt pared down staff (including
nearly half of the company's 66 VPs) and eliminated excess inventory built up from a
bloated distributor network.
Basically Schmidt embraced online technology as a way of returning Novell to its
network software roots. As its problems lingered, NOVL laid off 1,000 workers
(18% of the total workforce) in 1997 and became the subject of IBM takeover
rumors. Novell sold its NEST operations to Intelogis, a Utah company it partly owns,
that year. In 1998 a judge granted Novell a preliminary injunction in its case against
former employees accused of taking trade secrets to create a new company,
Timpanogos Research Group, in 1997.
Here's what Schmidt had to say about the challenge he faced in a recent article (May):
"I realized I was way out of my league, and I was going to fail," he recalled. So he sat
"at the feet of CEOs who had done tough things," including IBM Corp.'s Lou Gerstner,
Eric Benhamou of 3Com Corp. and venture capitalist John Doerr. "They said you
don't do anything for the first eight weeks, although I only lasted six weeks, because I
was losing my mind," he said. "Then you start, and you change everything. You change
the management. You change the culture. You push very, very hard."
FINANCIALS
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In fiscal Q1 ending 1/98 NOVL surprised the Street by reporting operating income
and net income for the first time in several quarters. Sales were $252 million and net
income was $14.1 million. This compares with net income of sales of $374.8M and net
income of $50.8 million for the same quarter last year, which were followed by
consecutive losses in the second and third quarters of 1997.
EPS was 4 cents, down from 15 cents for the same period in 1997. The Street
consensus was 2 cents per share. EPS was twice as good as the previous quarter,
though revenue was lower, down from $269 million. Novell attributed lower revenue
currency weaknesses in Asia.
Consensus estimate for 2Q '98 is $0.05 EPS. Next earnings due out May 21.
Since stock price rose about 25% after beating expectations last quarter it's been in a trading range from 9 5/8 to 11 1/8. Merrill Lynch upgraded NOVL last week from a hold to an accumulate, not a major change on the surface, but great news for a company that's underperformed for so long. The stock hit a 52 week high of 11 1/4 after the upgrade and has now settled back to 10 5/8.
Next week should be interesting. The antitrust action against MSFT will almost certainly help NOVL and it's stock price. The hope is that not only will NOVL's products sell on their own merit, it may actually become easier politically inside corporations to go with NOVL...a common complaint has been the IT managers want NOVL but the execs don't want to upset MSFT.
The US contributed 57 percent of Novell's total revenue. Europe, Middle East, and
Africa accounted for 28 percent of revenue, while Asia-Pacific and the Americas
totaled 9 percent and 6 percent, respectively.
Profit was obtained by holding gross profit margin at 78%, similar to a year ago when
they made $50.8M, while decreasing SG&A from $237M to $192M. SG&A shows 9.4% drop vs. last quarter.
VARs were excited about the reported income. "In some ways, 4 cents a share is no
big deal, but in this case, it bodes well for the future," said Dennis Murphy, director of
sales for Network Technology Group, a Novell Platinum reseller in San Jose. "It really
seems like they have turned a corner, and that is good for everyone."
VAR Bill Towey, president of Powerscourt LLC, Tacoma, Wash., said the news did
not surprise
him. "This is a fine validation of the work that has been done to date and that the plan is
correct," he said.
On its analyst call, CEO Schmidt credited the positive results to company restructuring
and tighter internal controls instituted last August. However, Schmidt also warned: "We
are making progress, but we are not through this transition period yet. "This year, I
expect that the progress we're making on the product front will help us convey clear
understandings of the future we intend to build. We're targeting this last big space left in
the IT marketplace, software infrastructure for the Internet and business networks that
take advantage of the Internet," Schmidt said.
Balance Sheet:
Inventories have been reduced 41% since six months ago and 55% since a year ago.
NOVL had a history of stuffing their sales channels and experiencing wide swings in
revenue as they had to let the VAR channels digest the inventories they had purchased.
These days appear to now be over.
Cash is over just over $1 billion, consistent with the previous 4 quarters.
Total liabilities are only $330M, or 1/3 of cash! There is zero long term debt on the
balance sheet. No liquidity problems here... Company could easily fund acquisitions
and Dr. Schmidt has stated he is doing DD on several potential candidates.
Ratios (mostly using 10/97 data when substantially correct)
Gross profit margin is 81%. Industry is 86%.
Revenue per share is $2.52. Industry is 5.14
Book value per share is $4.48. Industry is $3.80.
Assets per share is $5.42. Industry is $6.36
Working capital per share is $3.29. Industry is $2.31
Valuation:
Price/Sales is 4.17. Industry is 9.23.
PE is 63. Industry is 78. (based on 1/98)
Price/Book is 2.34. Industry is 12.48
Operating Ratios:
Days Sales O/S is 91.6. Industry is 79.0
Inventory turnover is 11.5. Industry is 46.7.
ADMINISTRATION
Schmidt has built a new team with a focus on marketing and Internet technology. From
April to September '97, 30% of Novell's VPs and above were either fired, demoted or
left voluntarily. Schmidt's replacements are fewer, and come from companies like IBM
and Sun where they were very experienced with marketing and product packaging and
positioning. Novell products have always been considered to be excellent but were
saddled by poor marketing, channel support, and customer service.
PRODUCTS
NOVL's product set has been rededicated completely toward helping corporations
manage their internet and intranet traffic. The main product, NDS, is the operating
system, and several new added value products, such as the acclaimed BorderManager
and intraNetWare, run on the NDS platform.
NOVL's products have won awards for the last several years and won big at 1998's
Interop conference.
The key difference now is NOVL's dedication toward selling these products and
beating MSFT to the sale. Schmidt commonly attends sales meetings with large
potential clients and makes sure the deals are locked in. A new website called Novell
Passport, is a fully integrated website information and sales training service for resellers
and others who sell NOVL products. Information is readily accessible that used to
take hours or days to obtain.
In the Summer, Netware 5 will be available which includes the following new features:
- The ConsoleOne management framework, which provides a central point of
administration that can be accessed anywhere a Java Virtual Machine is present,
including a NetWare server.
- A free five-user license of Oracle8.
- Support for pure IP (Internet Protocol), to ensure interoperability with open
standards based networks such as the Internet.
- An enhanced version of NDS, with innovative management capabilities such as
catalog services, simplified log-in, role-based management and LDAP v3 support.
- The Upgrade Wizard for automating the move from NetWare 3.x servers to
directory-based NetWare 5 servers.
- A compatibility mode allowing customers to run current IPX (Internetwork Packet
Exchange) applications on a pure IP-based NetWare 5 network.
One more thing - here's a great article that appeared today on the NOVL thread.
Message 4488929 |
