Novice Investing - What a Novell Idea

Date: Thursday 07th 2008f August 2008 01:43:38 PM

What a Novell Idea - 11/08/2006

By: Novice Investing Staff

Things just get better for Novell Inc. (NOVL). I has been portrayed as the underachiever in the booming open source industry, playing second fiddle to Red Hat Inc. (RHAT). One week ago, Microsoft came to the rescue for Novell. Both companies announced alliance to combine their product; Suse Linux open source software and Microsoft window.

Late Tuesday, Novell announced that Microsoft is to pay Novell $ 348 Million for the Linux collaboration. The breakdowns are: $ 240 Million for upfront payment in Linux subscription fees and $ 108 Million upfront for the use of patent. In exchange, Novell would have to pay Microsoft at least $ 40 Million or share the percentage of revenue derived from the open-source products. In addition, as was previously announced, Microsoft will help Novell in marketing aspect of the combined products. Microsoft will spend a total of $ 44 Million over six years to market and sales force allocation for this specific alliance. The agreement runs until 2012 and Microsoft's commitment for this deal is a 'mere' $ 65 Million per year. A pocket change for a company that brings in $ 1000 Million of cash flow each month

The advantage is plenty for Microsoft. Rather than acquiring Novell for $ 2.35 Billion, it can spend what it earns in two days to get its hand on the growing Linux popularity. If it fails, not a problem. In fact, the only alternative to Linux operating system platform might be Apple's macintosh and Microsoft's Window itself. Thus, it is a win win situation for Microsoft.

For Novell, this support by Microsoft is symbolic. It will no more play second fiddle to Red Hat, unless of course if it stumbles very badly in the coming years. Meanwhile, additional revenue of $ 65 Million while small even for Novell, would turn out to be a bigger pie if these collaboration works.

In the meantime, while getting revenue boost from the Microsoft deal is essential for Novell, the most important thing it has to do first is to cut cost! If you look at Novell's income statement, its selling general & administrative expense for fiscal year 2005 stand at $ 510.8 Million. Google, which is 50 times larger than Novell, has a selling general & administrative expense of 'only ' $ 854 Million ! Obviously, Novell can cut a lot of fat here. Assuming a mere $ 50 Million of cost reduction here, Novell would double its profit for the year! If Microsoft deals turns out to be good, imagine how much additional revenue and profit the company can register. That is why we had said before. $ 0.30 and $ 0.50 of earning per share next year (2007) and the year after (2008) is possible. Novell hold a lot of potential but unfortunately so far, it cannot realize this potential. We can only hope. Regardless, at this price, Novell represents a good investment candidate for our portfolio pick.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Novell Inc. (NOVL) or any other securities.

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