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Novell Inc. (NASDAQ: NOVL)

Novell Inc. (NOVL) engages in the development and integration of mixed information technology environments worldwide. The Company operates in four segments: Open Platform Solutions, Identity and Security Management, Systems and Resource Management, and Workgroup. The Open Platform Solutions segment delivers Linux solutions for the enterprises. Its products include SUSE Linux Enterprise Server, an open source server operating system for professional deployment in heterogeneous IT environments; SUSE Linux Enterprise Desktop, a business desktop product that brings together the Linux operating environment with various business applications; openSUSE, a home computing product; and SUSE Engineering, a product development work for its customers. The Identity and Security Management segment integrates, secures, and manages IT assets. Its product line comprises Identity Manager, a data-sharing and synchronization solution; Access Manager that simplifies and safeguards online asset-sharing; SecureLogin, a directory-integrated authentication solution; Sentinel that automates the monitoring of IT effectiveness; Novell eDirectory; and Compliance Management Platform. The Systems and Resource Management segment offers various products under ZENworks brand that protects the integrity of networks by centralizing, automating, and simplifying network management. The Workgroup segment provides workgroup solutions that offer infrastructure, services and tools, which customers require to collaborate across various devices.

NOVL also provides various professional, technical support and training services. It has strategic alliances with Microsoft Corp.; Accenture Ltd.; Advanced Micro Devices Inc.; Dell Inc.; Hewlett-Packard Co.; International Business Machines Corp.; Intel Corp.; Lenovo Group Ltd.; and SAP AG.

The Company was founded in 1983 and is headquartered in Waltham, Massachusetts.

Source: Reuters.com, SEC Filings. , FY ending October 31

Financial Summary

For third fiscal quarter of 2009, NOVL reported net revenue of $216 million. This compares to net revenue of $245 million for the third fiscal quarter of 2008. The Company posted a slightly worse-than-expected decline in revenue for its fiscal third quarter, as product sales of identity and security management, and systems and resource management software each fell sharply.

Net income in the third fiscal quarter of 2009 was $17 million, or $0.05 per share. This compares to net loss of $15 million, or $0.04 loss per share, for the third fiscal quarter of 2008. Excluding special items, the Company said earnings for third fiscal quarter of 2009 were 7 cents a share.

The Company has a solid balance sheet, with cash, cash equivalents and short-term investments ranging at $921 million as of July 31, 2009, down from $1 billion last quarter due primarily to the retirement of outstanding convertible debentures. For third fiscal quarter of 2009, cash flow from operations was $35 million. This compares to cash flow from operations of $29 million in the third fiscal quarter of 2008.

Analyst Consensus

Consensus estimates, $

Source: http://www.reuters.com/finance/stocks/estimates?symbol=NOVL.O

Nine analysts covering rate the Company with “Outperform” rating.

Consensus rating

Source: http://markets.ft.com/tearsheets/analysis.asp?s=novl

Investment Highlights

The Company is a provider of enterprise-quality software that is positioned in the operating systems and infrastructure software layers of the information technology industry. Particularly, NOVL develops and delivers Linux operating system software for the full range of computers from desktops to servers. In addition, it provides a portfolio of integrated IT management software for systems, identity and security management for both Linux and mixed-platform environments.

NOVL is organized into four business unit segments, which are Open Platform Solutions, Identity and Security Management, Systems and Resource Management, and Workgroup. In the third quarter and first nine months of fiscal 2009, total revenue decreased 12% and 9%, compared to the respective prior year periods, similar to many companies in the software industry. The lower total revenue for the third quarter and first nine months of fiscal 2009 reflected lower services revenue of 30% and 32%, respectively, and lower product revenue of 9% and 5%, respectively, compared to the prior year periods.

Operating margin continued to expand year-over-year due to good expense management. The Company remains focused on delivering strong operating margins even as it continues to invest to generate long-term revenue growth. NOVL management remains committed to long-term sustainable profitability and expects to maintain double-digit non-GAAP operating margins in the full fiscal year 2009. According to Reuters Estimates, analysts were expecting the Company to report net profit of $101.02 million for fiscal 2009; $113.76 million for fiscal 2010; $127.70 million for fiscal 2011; $142.80 million for fiscal 2012.

NOVL’s Novell(R) SecureLogin received a Strong Positive rating in Gartner’s report titled, “MarketScope for Enterprise Single Sign-On. The Company released Novell SecureLogin 7 in September 2009. The latest version of its enterprise single sign-on solution drastically reduces the time required to SSO-enable applications in an organization from weeks to days–allowing customers immediate advantages from improved productivity and operational efficiency. The Strong Positive rating is the highest available in the MarketScope.

The Burton Corp. moved its mission-critical applications from UNIX to SUSE Linux Enterprise Server from NOVL to improve system uptime and reduce overall server-related costs by 80%.

The City of New York has turned to NOVL for improved integration of the city’s identity and security information technology infrastructure. Using the Novell Compliance Management Platform, New York City is enhancing the interaction with its customers by providing a single digital identity that can be used to access services across various agencies. As a result, New Yorkers will eventually require only one username and password to access a variety of Web-based city services. New York City has selected the Company as its enterprise identity solution, leveraging NOVL’s sophisticated identity and security technologies to make government more accessible, transparent and accountable.

NOVL announced the availability of MonoTouch 1.0, the industry’s first solution for developing applications for the iPhone* and iPod* Touch using the Microsoft* .NET framework, including C# and other .NET programming languages. Until now, developers primarily built iPhone applications using C and Objective-C, putting iPhone development beyond the reach of most .NET developers. With MonoTouch, the creativity of millions of .NET developers worldwide can be unleashed to build a vast array of iPhone applications. The growing popularity of the iPhone and iPod Touch has created a huge market for iPhone applications, which NOVL intends to address.

According to a study of research firm IDC, the Linux market, dominated by Red Hat and NOVL, grew at 23.4% in 2008 and is expected to top $1 billion in 2012. IDC estimates that worldwide revenue from Linux operating system software will continue to rise at an annual rate of 16.9% until 2013. Still, Red Hat and NOVL, which accounted for 94.5% of worldwide Linux operating systems revenue in 2008, are likely to face competition from free systems that IDC expects will grow faster than paid alternatives such as those sold by Red Hat and NOVL.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

NOVL closed above its 13-day moving average. This is generally considered to an indication of a bullish trend.

NOVL has been relatively stable recently. This is evidenced by the width of its Bollinger Bands, which are tighter than normal. Additionally, NOVL is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

The MACD for NOVL currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Comparative Analysis

NOVL is traded with huge discount to its direct competitor RHT. While the Company reported weaker revenue during fiscal year 2009, its focus on better management of expenses is paying off, and the strong pipeline of software solutions is promising a revenue recovery already in 2010.

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

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