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Novell crumbles on &#034disastrous&#034 profit warning

Novell (Nasdaq: NOVL) plunged 32 percent Wednesday after it disappointed Wall Street with a "disastrous" second quarter profit warning. Analysts had expected earnings to improve by 45 percent year-over-year.

Shares in the network software vendor were down 5 3/4 to 11 13/16 after it said second-quarter earnings would fall well short of the 16 cents per share expected by First Call Corp.

"This is just disastrous," said Joel Achramowicz, an analyst with Preferred Capital Markets and a long time Novell bull. "It's just a shame."

As if the second quarter outlook wasn't bad enough, Novell was also downgraded by a host of analysts. Wasserstein Perella lowered its rating from "strong buy," to "buy" and CIBC World Markets from "strong buy" to "hold." Achramowicz cut the stock to "accumulate" from "buy."

After market close Tuesday, Novell said it sees net income of 8 cents per share for the fiscal second quarter, including a $35 million royalty payment from Caldera Systems (Nasdaq: CALD) related to the recent settlement of Caldera's lawsuit against Microsoft (Nasdaq: MSFT). Excluding the one-time benefit, Novell will be break even at best.

"We'd have been very close to break even," CFO Dennis Raney said during a Tuesday afternoon conference call.

The company missed its own sales forecasts by $10 million a week for the last five weeks of the quarter, CFO Dennis Raney said during a Tuesday conference call.

Novell missed Achramowicz's revenue targets by $100 million.

Novell blamed Windows 2000 and Linux in part, but the slow-down was mostly its own fault. Executives blamed "management and organizational issues in sales." Both channel sales and licenses for large accounts saw declines. Novell is expanding into network services, but the shift toward a "solutions" company is taking longer than expected and has yet to pay off.

Tuesday's announcement marks the second financial disappointment in as many quarters for Novell. The company met earnings estimates in the first quarter but generated less revenue than expected.

What's next?

Achramowicz said he won't be surprised by more restructuring at Novell. "These structural and cultural issues should be dealt with summarily," he said. "They have to do it now."