A leading technology software company, Novell Inc. (NOVL) lowered its third quarter 2010 revenues and operating margin guidance, previously given out during the second quarter earnings call.
Novell shares fell 19 cents, or 3.2% to $5.82 on Tuesday trading based on negative investor sentiment.
Novell’s lowered guidance is mainly due to customer softness, given that they remain cautious regarding the company’s plan to explore strategic alternatives. The uncertainty to sell itself outright to another entity is making customers wary, which is having a negative impact on the company’s sales.
Novell expects to report third quarter 2010 results on August 26, 2010.
Net revenues for the third quarter are expected to be in the range of $197 million to $199 million, down from the previous expectation of $205 million to $210 million. This is 3% to 5% lower from management’s earlier expectation and approximately 4% below the Zacks Consensus Estimate of $207.0 million.
Novell anticipates non-GAAP operating margin for the third quarter of 2010 to be in the 13% to 15% range, compared with the previous guidance of approximately 15%.
In March, 2010, Novell had rejected the unsolicited buyout offer of $2 billion or $5.75 per share in cash from Elliott Associates, L.P., the largest institutional stockholder of Novell.
Elliott is an investment firm with over $16 billion in assets and holds approximately 8.5% of Novell’s common stock. Novell considered the offer to be inadequate and significantly below the company’s value.
Novell had been considering other ways to increase shareholders’ value through share repurchase, dividend payout, joint ventures and alliances with other companies or via recapitalization.
The company did not provide any earnings guidance. The Zacks Consensus Estimate for the third quarter of 2010 is pegged at 6 cents, one cent below the year-ago quarter’s earnings per share of 7 cents.
Over the last 30 days, there has been no change in analysts’ estimates for the third quarter, which reflects that the analysts expect the company to report in line.
Second Quarter Highlights
Novell reported second quarter earnings of 7 cents that beat the Zacks Consensus Estimate by a penny, but fell by 1 cent from the year-ago quarter. Earnings were boosted by lower operating costs, which were more than offset by lower revenues.
Quarterly revenues of $204 million decreased 5.4% from the year-ago quarter. This was due to softness in invoicing and weakness in the company’s legacy products. Moreover, the decline was a result of a drop in software license revenues, services revenues and maintenance and subscription revenues.
Recommendation
Novell is the second largest maker of the open-source Linux operating system. The company struggled considerably to boost its revenues, hurt by intense competition from Microsoft Corp. (MSFT), Oracle Corp. (ORCL), and Red Hat Inc. (RHT). Moreover, the uncertainty surrounding both the sale of the company and the legal suits could impact results, going forward.
Novell’s balance sheet remains sound with no debt. Though Novell witnessed a 5.4% year-over-year decline in revenues, led by a weak performance across its business segments and a 6.1% decline in its Linux platform products, we remain encouraged with product line ups and potential IT spends.
We currently have a long-term Neutral recommendation on the stock. Novell has a Zacks rank of #3, a short-term hold rating on the stock.
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