WALTHAM, Mass., March 1 /PRNewswire-FirstCall/ -- Novell, Inc. (Nasdaq: NOVL) today announced preliminary financial results for its first fiscal quarter ended Jan. 31, 2007. These financial results are preliminary because Novell, during the third fiscal quarter of 2006, began a self-initiated, voluntary review of the company's historical stock-based compensation practices and related potential accounting impact. The financial results reported today do not take into account any adjustments that may be required in connection with the completion of the stock-based compensation review and should be considered preliminary until Novell files its Form 10-Q report for the third fiscal quarter ended July 31, 2006, its Form 10-K report for the full fiscal year ended Oct. 31, 2006, and its Form 10-Q report for the first fiscal quarter ended Jan. 31, 2007. Financial Results For the first fiscal quarter 2007, Novell reported net revenue of $230 million, compared to net revenue of $242 million for the first fiscal quarter 2006. The loss available to common stockholders from continuing operations in the first fiscal quarter 2007 was $20 million, or $0.06 loss per common share. This compares to income available to common stockholders from continuing operations of $4 million, or $0.01 per diluted common share, for the first fiscal quarter 2006. On a non-GAAP basis, which includes stock-based compensation as described below, adjusted loss available to common stockholders from continuing operations for the first fiscal quarter 2007 was $3 million, or $0.01 loss per common share. This compares to non-GAAP adjusted income available to common stockholders from continuing operations of $4 million, or $0.01 per diluted common share, for the first fiscal quarter 2006. During the first fiscal quarter 2007, Novell reported $15 million of revenue from Linux* Platform Products, up 46 percent year-over-year, and $91 million of invoicing, up 659% year-over-year. Revenue from Identity and Access Management was $24 million, down 7 percent year-over-year. Combined revenue from Open Enterprise Server and products related to NetWare(R) declined 18 percent from the year ago period. "We are very pleased with our first quarter Linux results and momentum," said Ron Hovsepian, President and CEO of Novell. "We have made good progress toward implementing our strategic initiatives and achieving our key fiscal year 2007 milestones. Overall, our quarterly results were mixed and we will need to improve our execution in our identity, security and systems management businesses. We feel confident that we are on the right path to put Novell on target for sustained profitability." Cash, cash equivalents and short-term investments were $1.8 billion at January 31, 2007, up from $1.5 billion last quarter. Days sales outstanding in accounts receivable was 57 days at the end of the first fiscal quarter 2007, down from 59 days in the year ago quarter. Deferred revenue was $728 million at the end of the first fiscal quarter 2007, up $361 million, or 98 percent, from the prior year. Cash flow from operations was $348 million for the first fiscal quarter 2007, up from $25 million from the first fiscal quarter 2006. Both deferred revenue and cash flow from operations were up from the prior year due to the Microsoft agreement completed in the quarter. Full details on Novell's reported results, including a reconciliation of the non-GAAP adjusted results, are included in the financial schedules that are a part of this release. Update on Stock-Based Compensation Review Novell's previously announced, self-initiated review of its historical stock-based compensation practices, which is being conducted by the Audit Committee of its Board of Directors with the assistance of independent outside counsel, is ongoing. Novell expects to file its Form 10-Q report for the third fiscal quarter ended July 31, 2006, its Form 10-K report for the full fiscal year ended October 31, 2006, and its Form 10-Q report for the first fiscal quarter ended Jan. 31, 2007, following the conclusion of the review. Update on Preliminary Full Fiscal Year 2006 Results Because of the stock-based compensation review, the financial results of the third and fourth fiscal quarters 2006 and full fiscal year 2006 remain preliminary. We are required to revise results for those periods as a result of material changes in estimates. Accordingly, an increase of $15 million in other accrued liabilities as a result of a change in estimate identified during the first fiscal quarter 2007 must be recognized as an expense in the third fiscal quarter 2006. Similarly, a decrease of $2 million in accrued compensation as a result of a change in estimate identified during the first fiscal quarter 2007 must be recognized as a reduction of expense in the fourth fiscal quarter 2006. As a result, the following changed in the full fiscal year 2006: -- Cost of revenue and operating expenses decreased a combined $13 million, -- Income available to common stockholders from continuing operations decreased from $21 million, or $0.06 per diluted common share, to $7 million, or $0.02 per diluted common share, and -- Non-GAAP adjusted income available to common stockholders from continuing operations of $29 million increased to $30 million, and adjusted income per diluted common share of $0.08 remained unchanged. Financial Outlook Novell management reiterates the following financial guidance: For the full fiscal year 2007: -- Net revenue is expected to be between $945 million and $975 million. -- On a non-GAAP basis, adjusted income from operations is expected to be between breakeven and $10 million, excluding an estimated $35 million to $45 million in stock-based compensation expense. -- Novell is targeting fourth fiscal quarter 2007 exit rate operating margins, as described below, of between 5 and 7 percent. For the full fiscal year 2008: -- Novell is targeting fourth fiscal quarter 2008 exit rate operating margins of between 12 and 15 percent. Exit rate operating margins are defined as an annualized run rate expense level at the end of the period that, when compared to the full fiscal year's revenue, would result in a pro forma operating margin for the year. Non-GAAP Financial Measures To supplement Novell's preliminary consolidated unaudited condensed financial statements presented in accordance with GAAP and to better reflect comparative quarter-over-quarter and year-over-year operating performance, Novell uses non-GAAP financial measures of adjusted diluted income (loss) available to common stockholders from continuing operations and adjusted diluted income (loss) per common share from continuing operations, which reflect the exclusion of certain expenses and gains, and adjusted diluted weighted average shares outstanding. Novell's financial outlook uses a non-GAAP income from operations measure. These non-GAAP financial measures do not replace the presentation of Novell's GAAP financial results but are provided to improve overall understanding of current financial performance and prospects for the future. Novell considers non-GAAP adjusted diluted income (loss) available to common stockholders from continuing operations to be after-tax income (loss) generated from continuing operations excluding certain non-recurring or non-core items such as, but not limited to, restructuring expenses, asset impairments, actual and estimated litigation judgments and settlements, the write-off of acquired in-process research and development, and gains (losses) on the sale of business operations, long-term investments and property, plant and equipment. In the full fiscal year 2006, Novell excluded stock-based compensation expense from non-GAAP adjusted diluted income (loss) available to common stockholders from continuing operations for transition purposes following the adoption of FAS 123R, "Accounting for Stock-Based Compensation," to provide investors with an easier comparison to the prior year's performance. Beginning in the first fiscal quarter 2007, Novell no longer excludes stock-based compensation expense from its non-GAAP financial measures. Accordingly, the fiscal year 2006 non-GAAP financial measures were revised to include stock-based compensation for comparative purposes to the current year. Novell does not provide financial guidance for GAAP financial measures because items identified as excluded from non-GAAP financial measures are difficult to forecast. A summary of Novell's vision, mission and strategy can be accessed on the Novell(R) Web site at: http://www.novell.com/company/ir/qresults/. Conference call notification and Web access detail A live Webcast of a Novell conference call to discuss the quarter will be broadcast at 5:00 PM ET March 1, 2007, from Novell's Investor Relations Web page: http://www.novell.com/company/ir/qresults/. The domestic conference call dial-in number is 866-335-5255, password "Novell," and the international dial-in number is +1-706-679-2263, password "Novell." The call will be archived on the Web site approximately two hours after its conclusion, and will be available for telephone playback through midnight ET, March 9, 2007. The domestic toll-free replay number is 800-642-1687, and the international replay number is +1-706-645-9291. Replay listeners must enter conference ID number 8070024. A copy of this press release is posted on Novell's Web site at: http://www.novell.com/company/ir/qresults/. Legal notice regarding forward-looking statements This press release includes statements that are not historical in nature and that may be characterized as "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act, including those related to future financial and operating results, benefits and synergies of the company's brands and strategies, future opportunities and the growth of the market for Identity and Access Management and Linux Platform Products. You should be aware that Novell's actual results could differ materially from those contained in the forward-looking statements, which are based on current expectations of Novell management and are subject to a number of risks and uncertainties, including, but not limited to, Novell's ability to realize the benefits anticipated from the Microsoft transaction, Novell's success in executing its Linux Platform Products, Identity and Access Management and Systems and Resource Management strategies, Novell's ability to take a competitive position in the Linux Platform Products, Identity and Access Management and Systems and Resource Management industries, business conditions and the general economy, market opportunities, potential new business strategies, competitive factors, sales and marketing execution, shifts in technologies or market demand, Novell's ability to integrate acquired operations and employees, the final conclusions of the Audit Committee (and the timing of such conclusions) concerning matters relating to the company's review of its historical stock-based compensation practices, and the other factors described in Novell's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on Jan. 10, 2006. Novell disclaims any intention or obligation to update any forward-looking statements as a result of developments occurring after the date of this press release except as required by the securities laws. There can be no assurance that the outcome of the review by the company's Audit Committee of the company's past stock-based compensation practices and the related potential accounting impact will not result in changes in the preliminary financial results for the third and fourth fiscal quarter 2006, the full fiscal year 2006, the first fiscal quarter 2007 or a restatement of financial results provided by the company for any historical period. In addition, the review and possible conclusions may require additional expenses to be recorded, may continue to adversely affect our ability to file required reports with the SEC on a timely basis, may change our conclusions on the effectiveness of our internal control over financial reporting and disclosure controls and procedures and may affect our ability to meet the requirements of the NASDAQ Stock Market for continued listing of our shares; and may result in claims and proceedings relating to such matters, including shareholder litigation and actions by the SEC and/or other governmental agencies and negative tax or other implications for the company resulting from any accounting adjustments or other factors. About Novell Novell, Inc. delivers infrastructure software for the Open Enterprise. We are a leader in enterprise-wide operating systems based on Linux and open source and the security and systems management services required to operate mixed IT environments. We help our customers minimize cost, complexity and risk, allowing them to focus on innovation and growth. For more information, visit http://www.novell.com. NOTE: Novell and NetWare are registered trademarks of Novell, Inc. in the United States and other countries. * Linux is a registered trademark of Linus Torvalds. All other third-party trademarks are the property of their respective owners. Novell, Inc. Consolidated Unaudited Condensed Statements of Operations (Preliminary) (In thousands, except per share data) Fiscal Quarter Ended Jan 31, 2007 Jan 31, 2006 Net revenue: Software licenses $38,351 $42,102 Maintenance and services 191,225 200,192 Total net revenue 229,576 242,294 Cost of revenue: Software licenses 4,227 4,545 Maintenance and services 69,956 76,778 Total cost of revenue 74,183 81,323 Gross profit 155,393 160,971 Operating expenses: Sales and marketing 90,940 88,193 Product development 46,433 43,724 General and administrative 25,985 28,801 Total operating expenses before other 163,358 160,718 Income (loss) from operations before other operating expenses (income) (7,965) 253 Other operating expenses (income) (1) 23,334 (1,000) Income (loss) from operations (31,299) 1,253 Other income, net 18,059 12,978 Income (loss) from continuing operations, before income taxes (13,240) 14,231 Income tax expense 6,672 10,001 Income (loss) from continuing operations (19,912) 4,230 Loss from discontinued operations, before income taxes - (1,043) Income tax expense - 1,322 Loss from discontinued operations - (2,365) Net income (loss) $(19,912) $1,865 Income (loss) available to common stockholders - diluted: Continuing operations $(19,912) $4,167 Net income (loss) $(19,912) $1,811 Income (loss) per share available to common stockholders - diluted: Continuing operations $(0.06) $0.01 Net income (loss) $(0.06) $0.00 Weighted average shares - diluted 345,522 394,534 (1) See Page 10 of 15 for a detail of other operating expenses (income). Certain reclassifications, none of which affected net income (loss), were made to prior period amounts in order to conform to the current period's presentation. Stock-based compensation expense recorded in above amounts: Fiscal Quarter Ended Jan 31, 2007 Jan 31, 2006 Cost of revenue $1,017 $1,062 Sales and marketing 1,928 3,532 Product development 2,117 2,637 General and administrative 1,404 6,271 Total operating expenses 5,449 12,440 Discontinued operations -- 193 Total stock-based compensation expense $6,466 $13,695 Novell, Inc. Consolidated Unaudited Condensed Balance Sheets (Preliminary) (In thousands) Jan 31, 2007 Oct 31, 2006 Assets Current assets: Cash and cash equivalents $1,025,478 $675,787 Short-term investments 790,033 790,500 Receivables, net 146,291 233,986 Prepaid expenses 38,099 32,328 Other current assets 27,254 28,524 Total current assets 2,027,155 1,761,125 Property, plant and equipment, net 182,721 184,084 Long-term investments - 2,263 Goodwill 420,275 424,701 Intangible assets, net 38,980 40,404 Deferred income taxes 4,586 4,770 Other assets 32,391 32,376 Total assets $2,706,108 $2,449,723 Liabilities and Stockholders' Equity Current liabilities: Accounts payable $41,592 $44,419 Accrued compensation 71,031 103,710 Other accrued liabilities 101,941 106,837 Income taxes payable 47,560 49,600 Deferred revenue 469,791 426,971 Total current liabilities 731,915 731,537 Deferred income taxes 4,119 4,186 Deferred revenue - long-term 258,573 -- Senior convertible debentures 600,000 600,000 Total liabilities 1,594,607 1,335,723 Preferred stock - 9,350 Stockholders' equity 1,111,501 1,104,650 Total liabilities and stockholders' equity $2,706,108 $2,449,723 Amounts reported as 'preliminary' for the fourth fiscal quarter ended October 31, 2006 have been updated for a known change in estimate. Also, reclassifications, none of which affected net income (loss), were made to the prior period amounts in order to conform to the current period's presentation. Novell, Inc. Consolidated Unaudited Condensed Statements of Cash Flows (Preliminary) (In thousands) Fiscal Quarter Ended Jan 31, 2007 Jan 31, 2006 Cash flows from operating activities: Net income (loss) $(19,912) $1,865 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Stock-based compensation expense 6,466 13,695 Depreciation and amortization 11,164 11,511 Changes in accounts receivable allowances 773 (2,973) Utilization of previously reserved acquired net operating losses 2,471 544 Net (gain) loss on impaired long-term investments (1,738) 387 Gain on sale of venture capital partnership interests (3,591) - Impairment of goodwill and intangible assets 10,848 - Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions 341,047 94 Net cash provided by operating activities 347,528 25,123 Cash flows from financing activities: Issuance of common stock, net 7,385 9,876 Excess tax benefits from stock-based compensation 1,986 4,039 Payment of cash dividends on Series B Preferred Stock (5) - Net cash provided by financing activities 9,366 13,915 Cash flows from investing activities: Purchases of property, plant and equipment (4,958) (7,603) Short-term investment activity 132 4,474 Long-term investment activity 1,738 (256) Cash paid for equity share of Open Invention Network, LLC - (4,225) Proceeds from sale of venture capital partnership interests 4,964 - Cash paid for acquisition of Redmojo (9,727) - Other 648 2,462 Net cash used in investing activities (7,203) (5,148) Increase in cash and cash equivalents 349,691 33,890 Cash and cash equivalents - beginning of period 675,787 811,238 Cash and cash equivalents - end of period $1,025,478 $845,128 Certain reclassifications, none of which affected net income (loss), were made to prior period amounts in order to conform to the current period's presentation. Novell, Inc. Unaudited Non-GAAP Adjusted Earnings Information (Preliminary) (In thousands, except per share data) Fiscal Quarter Ended Jan 31, 2007 Jan 31, 2006 GAAP diluted income (loss) available to common stockholders from continuing operations $(19,912) $4,167 Pre-tax adjustments: Other operating expenses (income): Restructuring expenses 7,351 (1,000) Litigation-related income (543) - Impairment of goodwill and intangible assets 10,848 - Stock-based compensation review expenses 5,678 - Sub-total 23,334 (1,000) Non-operating expenses (income): Gain on sale of venture capital partnership interests (3,591) - Net (gain) loss on impaired long-term investments (1,738) 387 Sub-total (5,329) 387 Total pre-tax adjustments 18,005 (613) Income tax adjustments (1,567) 756 Diluted income (loss) adjustments: Allocation of earnings to preferred stockholders - (1) Total net adjustments 16,438 142 Non-GAAP diluted income (loss) available to common stockholders from continuing operations $(3,474) $4,309 GAAP diluted income (loss) per common share from continuing operations $(0.06) $0.01 Adjustments detailed above 0.05 0.00 Non-GAAP diluted income (loss) per common share from continuing operations $(0.01) $0.01 GAAP diluted weighted average shares from continuing operations 345,522 394,534 Change in dilution from assumed: Stock option exercises - - Non-GAAP diluted weighted average shares 345,522 394,534 Revisions were made to prior period amounts in order to include stock- based compensation in the non-GAAP adjusted earnings information and conform to the current period's presentation.
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