Novice Investing - Earning Per Share Calculation for Novell Inc.

Date: Thursday 07th 2008f August 2008 01:42:42 PM

EPS Estimation for NOVL

This is the heart of our analysis. All we try to do is to predict the company's profit for the coming fiscal year. We spent most of the analysis predicting revenue because without it, there will be no profit! Therefore, predicting revenue is essential for other components of the income statement.

Revenue Estimation

For fiscal year ending on October 2005 and October 2006, Novell reported revenue of $ 1.2 Billion and $ 1.038 Million respectively. Meanwhile, for fiscal year 2007, Novell predicted revenue of $ 960 Million, down 7.5% compared to this year's revenue. We feel that revenue will experience a flat to slight decrease for several reasons. First, while Novell experienced a decline in its NetWare segment, its open source SuSe Linux should experience modest to robust growth. This is feasible with the recent collaboration deal with Microsoft. We expect at least $ 20- 30 Million additional revenue per quarter or $ 120 Million annually from the deal. Based on this, we project Novell's revenue to be at $ 1.03 Billion, roughly flat from revenue in fiscal year 2006. For 2008 and 2009, as revenue from Microsoft collaboration is kicking through, we predict Novell to increase revenue by 10% from previous year while other cost remains constant.

Gross Profit Estimation

For fiscal year 2003, 2004 and 2005, Novell spots a gross profit of 60%, 64% and 63% respectively. In fiscal year 2006, Novell spots a gross profit of ~ 62%. Assuming historical is of any guide, we predict gross profit margin to be 62% for fiscal year 2007, 2008 and 2009.

SG&A Estimation

Selling General & Administrative Expense is a big problem for Novell. It has a bloated payroll and it spent $ 510.8 Million during fiscal year 2005. For fiscal year 2006, the run rate suggests that Selling General & Administrative expense will be at $ 490 Million.While the company has tried to reduce its payroll and be more efficient, it has more rooms left to cut. It had cut 15% of its workforce and it can do so again, especially when result are lackluster. We expect SG& A to be the biggest driver of Novell's profit for fiscal year 2007. For 2007, 2008 and 2009, SG&A is predicted to be $ 400 Million. Over the past several years, Research & Development stays steady at around $ 180 Million for Novell. We will use this number for our fiscal year 2007, 2008 and 2009 estimation.

Interest & Income tax expense

Novell has more cash equivalents & long term investment than it has long term debt. Therefore, we predict interest expense to be $ 0. Meanwhile, tax rate for fiscal year 2004 and 2005 was 23.7% and 19.2 % respectively. For fiscal year 2007 and beyond, we will use 21 % tax rate for Novell.

Shares Outstanding Estimation

Shares outstanding for Novell Inc. 340 Million recently. We will assume flat shares count (due to shares buy back and option issuance canceling each other).

Pro Forma Income Statement for NOVL	Fiscal year 2007	Fiscal year 2008	Fiscal year 2009
Revenue	$ 1,030 M	$ 1,133 M	$ 1,246 M
Cost of Goods Sold	$ 391 M	$ 430 M	$ 473 M
Gross Profit	$ 639 M	$ 703 M	$ 773 M
SG & A	$ 400 M	$ 400 M	$ 400 M
R& D expense	$ 180 M	$ 180 M	$ 180 M
Interest Expense	$ 0 M	$ 0 M	$ 0 M
Profit Before Tax	$ 59 M	$ 123 M	$ 193 M
Income Tax Expense	$ 12 M	$ 26 M	$ 41 M
Net Income	$ 47 M	$ 97 M	$ 152 M
Shares Outstanding	340 M Shares	340 M Shares	340 M Shares
EPS Estimate	$ 0.14	$ 0.29	$ 0.45

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