October 21, 2005

Novell layoffs coming?

Author: Lauren Rudd

Novell may lay off 10 to 15 percent of its staff as early as Monday, according to sources close to the company. It appears that one or more of the larger shareholders in the company are becoming worried about Novell's future.

The shareholders have suggested that Novell divest itself of its consulting group and GroupWise division, while at the same time instituting personnel cuts across the board to bring expenses more in line with revenues. Although NetWare engineers would likely be at risk if that scenario were to play out, Novell has a substantial investment in those people and would probably retrain them to work with its Linux products rather than lose them.

A call to Bruce Lowery, Novell's director of public relations, brought the standard "We do not comment on rumors or speculation" reply. However, Lowery did point out that management's position that a corporate restructuring was necessary is no secret. In fact, Lowery said that management made that point quite clear during its discussion of third quarter results.

Clearly the company has to do something if it is to survive long-term. On August 4, in "Are the wheels coming off Novell's wagon?" I wrote that although Novell received some temporary relief as a result of cash settlements from legal suits, its operating performance was declining.

If you dig into Novell's 2004 10K filing with the Securities and Exchange Commission (SEC), the problem is no secret to management. According to filing, the company said that its NetWare revenue stream continues to deteriorate, declining by $36 million in fiscal 2004, excluding the impact of favorable foreign exchange rates.

To try and stem the decline, Novell indicated that its next generation of NetWare will give customers the opportunity to migrate to Linux and open source solutions while maintaining the enterprise-class functionality to which they have become accustomed.

By providing this migration strategy, Novell hopes to not only retain existing NetWare customers, but to also gain new customers who are looking for the additional benefits that open source has to offer. However, if the strategy is unsuccessful, the NetWare revenue stream will continue to deteriorate faster than it can be replaced by revenues from other products.

Late in August, Novell released its third quarter earnings, which indicate that Novell is flush with cash, about $1.6 billion, mostly from lawsuits. For the quarter, Novell reported revenues of $290 million, versus $305 million a year ago. Earnings available to shareholders in the third quarter were $2 million, which amounted to $0.00 earnings per diluted common share, versus 6 cents per share a year ago.

On a non-GAAP basis, which means "Watch my sleight of hand with the numbers," adjusted net income was 3 cents per share, when you exclude restructuring charges of $9 million and a net gain of $1 million on the sale of previously impaired long-term investments. That was the same as a year ago, which back then excluded the effect of the payment from Canopy of $19 million as a result of a legal judgment, restructuring charges of $9 million, and long-term investment impairments of $1 million.

On the third quarter balance sheet, cash and short-term investments were $1.6 billion as of July 31, 2005, consistent with $1.6 billion on April 30, 2005. Days sales outstanding (DSO) in accounts receivable was 77 days at the end of the third fiscal quarter 2005, the same as a year ago. This means that it is taking Novell 2.5 months to collect money owed. Cash flow from operations was a positive $15 million for the third fiscal quarter 2005, down from $65 million in the third fiscal quarter 2004, which included the $19 million payment from Canopy.

Here is the bottom line. Novell has sufficient cash that it could go for at least another year. Technically, the company's cash belongs to the shareholders, and the largest among them do not want to see it dissipated while management pursues what some might consider to be either dead-end paths or paths that diverge from Novell's current strength, which is to capitalize on its Linux offerings.


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