Novell stock down after revenue decline

Share price drops 16 percent in morning trading. Analyst notes Novell losing market share to Red Hat.

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Novell's stock dropped 16 percent in morning trading Friday after the server software company reported its revenue declined 5 percent in its most recent quarter.

The Waltham, Mass.-based company on Thursday reported that revenue dropped to $274 million in the quarter ended Jan. 31, down from $290 million the year earlier. Net income was $2 million, or break-even in terms of cents per share, using Generally Accepted Accounting Principles. With non-GAAP accounting, net income was $18 million, or 4 cents per share.

Novell shares dropped $1.49, or 16 percent, to $8.04 in morning trading.

Financial results indicate that Novell is losing market share to top Linux seller Red Hat, said First Albany analyst Mark Murphy. At the same time, Novell's older NetWare business is declining. He downgraded the stock from "neutral" to "underperform."

"Novell's Linux revenue increased 22 percent year over year to $10.4 million. Red Hat's revenue grew 44 percent year over year to $73 million in its most recent quarter. This indicates Red Hat is roughly seven times larger and growing twice as fast," Murphy said in a report Friday. "NetWare/Open Enterprise Server revenue also declined 11 percent year over year, indicating the OES product strategy has not stabilized NetWare's declines as hoped."

Credit Suisse First Boston analyst Jason Maynard was less pessimistic. "We continue to believe that the Linux market opportunity is robust, and that Novell should eventually make some progress in growing its Linux business.

The worst item in the quarter was the "disappointing" performance of Novell's Celerant consulting business, which the company is trying to spin off.

The company predicted revenue for the second quarter of fiscal 2006 to range between $272 million and $282 million and non-GAAP earnings per share of 2 cents to 3 cents. That's a notch below the average analyst estimate of $284 million and 4 cents per share, Maynard said.