SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Quarter Ended July 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ___________
to ___________
Commission File Number: 0-13351
NOVELL, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0393339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
122 East 1700 South
Provo, Utah 84606
(Address of principal executive offices and zip code)
(801) 861-7000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of August 31, 1997 there were 349,569,231 shares of the
registrant's common stock outstanding.
/TABLE
Part I. Financial Information, Item 1. Financial Statements
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED BALANCE SHEETS
Jul. 31,
Oct. 26,
Dollars in thousands, except per share data 1997
1996
- -----------------------------------------------------------------
- -----------------
ASSETS
Current assets
Cash and short-term investments $ 1,055,867
$1,024,755
Receivables, less allowances
($48,288 - July; $60,940 - October)
177,058
452,327
Inventories 15,668
16,837
Prepaid expenses 61,602
59,009
Deferred & refundable income taxes 142,880
37,831
- -----------------------------------------------------------------
- ------------------
Total current assets 1,453,075
1,590,759
Property, plant and equipment, net 386,144
394,684
Other assets 48,297
64,023
- -----------------------------------------------------------------
- ------------------
Total assets $ 1,887,516
$2,049,466
=================================================================
==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 64,522
$ 96,933
Accrued compensation 50,227
54,731
Accrued marketing liabilities 28,639
48,402
Other accrued liabilities 102,614
118,133
Income taxes payable --
--
Deferred revenue 63,688
46,573
- -----------------------------------------------------------------
- ------------------
Total current liabilities 309,690
364,772
Minority interests 24,311
17,035
Put warrants --
52,150
Shareholders' equity
Common stock, par value $.10 a share
Authorized - 600,000,000 shares
Issued - 349,205,124 shares-July
346,059,050 shares-October 34,921
34,606
Additional paid-in capital 363,951
309,831
Retained earnings 1,181,190
1,266,657
Unearned stock compensation (7,470)
(4,141)
Cumulative translation adjustment (110)
1,183
Unrealized gain (loss) on investments (18,967)
7,373
- -----------------------------------------------------------------
- ------------------
Total shareholders' equity 1,553,515
1,615,509
- -----------------------------------------------------------------
- ------------------
Total liabilities and shareholders' equity $ 1,887,516
$2,049,466
=================================================================
==============
See notes to consolidated unaudited condensed financial statements.
/PAGE
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
Fiscal Quarter Ended Nine
Months Ended
Amounts in thousands, Jul. 31, Jul. 27, Jul. 31,
Jul. 27,
except per share data 1997 1996 1997
1996
- -----------------------------------------------------------------
- ------------------
Net sales $ 90,074 $365,091
$738,028 $991,190
Cost of sales 61,671 75,618
214,817 240,243
- -----------------------------------------------------------------
- ------------------
Gross profit 28,403 289,473
523,211 750,947
Operating expenses
Sales and marketing 97,769 124,853
341,727 375,610
Product development 69,428 60,345
209,625 208,701
General and administrative 33,711 34,299
110,959 107,568
Restructuring charges 55,335 --
55,335 18,442
- -----------------------------------------------------------------
- ------------------
Total operating expenses 256,243 219,497
717,646 710,321
Income (loss) from operations (227,840) 69,976
(194,435) 40,626
Other income (expense)
Investment income 14,619 15,558
41,154 41,715
Gain on sale of assets -- --
- -- 19,815
Other, net (4,736) (822)
(11,079) (5,110)
- -----------------------------------------------------------------
- ------------------
Other income, net 9,883 14,736
30,075 56,420
- -----------------------------------------------------------------
- ------------------
Income (loss) before taxes (217,957) 84,712
(164,360) 97,046
Income taxes (96,312) 25,953
(78,893) 30,085
- -----------------------------------------------------------------
- -----------------
Net income (loss) $ (121,645) $ 58,759 $
(85,467) $ 66,961
=================================================================
==============
Weighted average shares
outstanding 349,381 352,129
348,127 362,052
=================================================================
==============
Net income (loss) per share $ (0.35) $ 0.17 $
(0.25) $ 0.18
=================================================================
==============
See notes to consolidated unaudited condensed financial statements.
/PAGE
NOVELL, INC.
CONSOLIDATED UNAUDITED CONDENSED STATEMENTS OF
CASH FLOWS
Nine
Months Ended
Jul.
31, Jul. 27,
Amounts in thousands 1997
1996
- -----------------------------------------------------------------
- ---------------
Cash flows from operating activities
Net (loss) income $
(85,467) $ 66,961
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Depreciation and amortization 66,582
77,970
Gain on sale of assets --
(19,815)
Stock plans income tax benefits 2,970
9,964
Decrease in receivables 275,269
69,460
Decrease in inventories 1,169
10,316
(Increase) decrease in prepaid expenses
(2,593) 18,827
(Increase) decrease in deferred & refundable income
taxes(105,661) 11,917
(Decrease) in current liabilities, net
(55,082) (127,047)
- -----------------------------------------------------------------
- -----------------
Net cash provided by operating activities 97,187
118,553
- -----------------------------------------------------------------
- -----------------
Cash flows from financing activities
Issuance of common stock, net 9,875
35,145
Repurchases of common stock --
(455,700)
Sale of put warrants 2,300
12,195
Settlement of put warrants
(20,760) --
- -----------------------------------------------------------------
- -----------------
Net cash (used) by financing activities
(8,585) (408,360)
- -----------------------------------------------------------------
- -----------------
Cash flows from investing activities
Expenditures for property, plant and equipment
(53,471) (77,249)
Purchases of short-term investments
(1,911,290) (2,437,316)
Maturities of short-term investments 1,425,255
2,204,944
Sales of short-term investments 465,559
441,489
Proceeds from sale of assets --
10,750
Other 22,321
(1,925)
- -----------------------------------------------------------------
- ------------------
Net cash (used) provided by investing activities
(51,626) 140,693
- -----------------------------------------------------------------
- ------------------
Total increase (decrease) in cash and cash equivalents $36,976
$(149,114)
Cash and cash equivalents - beginning of period 145,521
312,164
- -----------------------------------------------------------------
- -----------------
Cash and cash equivalents - end of period 182,497
163,050
Short-term investments - end of period 873,370
830,662
- -----------------------------------------------------------------
- ----------------
Cash and short-term investments - end of period $1,055,867
$993,712
=================================================================
==============
See notes to consolidated unaudited condensed financial statements.
/PAGE
NOVELL, INC.
NOTES TO CONSOLIDATED UNAUDITED CONDENSED FINANCIAL STATEMENTS
A.Quarterly Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The accompanying consolidated unaudited condensed financial
statements have been prepared in accordance with the
instructions to Form 10-Q but do not include all of the
information and footnotes required by generally accepted
accounting principles and should therefore, be read in
conjunction with the Company's fiscal 1996 Annual Report to
Shareholders. These statements do include all normal
recurring adjustments which the Company believes necessary for
a fair presentation of the statements. The interim operating
results are not necessarily indicative of the results for a
full year.
In the first quarter of fiscal 1997, the Company implemented a
change to its fiscal year and month ending dates. The Company
will now recognize its fiscal year end on the last calendar
day of October, as opposed to prior years on the last Saturday
in October. Likewise, each fiscal month end will now end on
the last calendar day of each month, and each fiscal quarter
will have a unique number of days as opposed to the consistent
13 weeks in prior years. The Company believes that
implementing this change did not have a material impact on its
financial position, results of operations, or cash flows.
B.Significant Events
In December 1995, Novell sold its UnixWare product line to the
Santa Cruz Operation, Inc. (SCO). The Company realized a
small gain and recorded $19 million of UNIX technology royalty
revenue from this transaction in the first quarter of fiscal
1996. Under the agreement, Novell received approximately 6
million shares of SCO common stock, resulting in ownership of
approximately 17% of the outstanding SCO common stock. The
agreement also calls for Novell to receive a revenue stream
from SCO based on revenue performance of the purchased
UnixWare product line. This revenue stream is not to exceed
$84 million net present value, and will end by the year 2002.
In addition, Novell will continue to receive revenue from
existing licenses for older versions of UNIX Systems source code.
In March 1996, the Company completed the sale of its personal
productivity applications product line to Corel Corporation
(Corel). The Company received approximately 10 million shares
of Corel common stock and approximately $11 million in cash.
This resulted in an ownership position of approximately 17% of
the outstanding Corel common stock. The Company reported a
one-time gain of $20 million in the second quarter of fiscal
1996 related to this transaction. Net of tax, the gain was
$13 million, or $0.04 per share. Additionally, Corel licensed
GroupWise client software, Envoy electronic publishing
software, and other technologies from Novell for a minimum
royalty obligation of approximately $50 million over the next
five years.
During the second quarter of fiscal 1996, the Company
implemented a change to its traditional distribution stocking
policy that significantly reduced revenue and earnings in that
quarter. The change in the Company's traditional distribution
stocking policy was to respond to changing market conditions.
Over the previous two years, direct customer and OEM licensing
programs had grown from less than 5% of revenue to more than
40% of revenue. Such licensing revenues do not flow through
the Company's historical indirect distribution channel. This
change, along with the evolution that is taking place in the
method of software distribution to permit eventual electronic
distribution of products, changes the Company's reliance on
boxed product flowing through an indirect distribution
channel. In order to deal with this changing environment, the
Company did not ship to its indirect distribution channel
customers, except to accommodate product exchanges and returns
during the second quarter of fiscal 1996, which had the effect
of reducing inventories within the indirect distribution
channel.
In response to a further decline in sales of boxed products
through the indirect distribution channel customers and lower
licensed revenue of certain older products to original
equipment manufacturers (OEM s), as well as competitive
pressures in the small network market, Novell took corrective
measures during the third quarter of fiscal 1997 to realign
its resources and better manage and control its business.
Specifically, during the third quarter of fiscal 1997, the
Company did not ship products to its indirect distribution
channel customers, except to accommodate product exchanges and
returns. Indirect distribution channel inventory at the
already reduced 1996 levels was no longer appropriate as the
Company's business continued to experience competitive
pressures and a continuing shift from reliance on boxed
software distribution to a changing mix of boxed products and
multi-product licenses. The Company believes this action
brought indirect distribution channel inventories of boxed
software products in line with current market demand. In
addition, the Company reduced its workforce by approximately
18% or 1,000 employees and consolidated a number of
facilities. The decision to withhold shipments to the Company's
indirect distributor channel resulted in an operating loss in
the third fiscal quarter of 1997. In addition, a one-time
restructuring charge of $55 million was incurred, principally
comprised of severance and excess facilities costs. The
restructuring charge contributed ($0.10) per share, net of
tax, to the reported loss in the third quarter of fiscal 1997.
The workforce reduction and associated consolidation of
facilities, is expected to lower operating expenses by $100
million annually.
C.Cash and Short-term Investments
All marketable debt and equity securities are included in cash
and short-term investments and are considered available-for-
sale and carried at fair market value, with the unrealized
gains and losses, net of tax, included in shareholders
equity. All equity securities included as short term
investments are investments the Company has made in technology
companies or equity securities received by the Company through
its dispositions of certain product lines to Corel and Santa
Cruz Operation, Inc. in fiscal 1996. Municipal securities
included in short-term investments have contractual maturities
from 1-5 years. Money market preferreds have contractual
maturities of less than 90 days. No other short-term
investments have contractual maturities. The cost of
securities sold is based on the specific identification
method. Such securities are anticipated to be used for
current operations and are therefore classified as current
assets, even though some maturities may extend beyond one
year.
The following is a summary of cash and short-term investments,
all of which are considered available-for-sale.
Gross
Gross Fair
Cost at Unrealized
Unrealized Market Value at
(Dollars in thousands) Jul. 31, 1997 Gains
Losses Jul. 31, 1997
- -----------------------------------------------------------------
- -------------------------------------
Cash and cash equivalents
Cash $ 94,237 $ -- $
-- $ 94,237
Repurchase agreements 2,859 --
-- 2,859
Taxable money market fund 20,981 --
-- 20,981
Municipal securities 64,420 --
-- 64,420
- -----------------------------------------------------------------
- -------------------------------------------
Cash and cash equivalents $ 182,497 $ -- $
-- $ 182,497
- -----------------------------------------------------------------
- --------------------------------------------
Short-term investments
Municipal securities $ 463,103 $ 5,135 $
(67) $ 468,171
Money market mutual funds 6,790 --
-- 6,790
Money market preferreds 170,917 --
(17) 170,900
Mutual funds 95,089 45
-- 95,134
Equity securities 168,353 25,487
(61,465) 132,375
- -----------------------------------------------------------------
- ----------------------------------------------------------
Short-term investments $ 904,252 $ 30,667 $
(61,549) $ 873,370
- -----------------------------------------------------------------
- ------------------------------------------------
Cash and short-term investments $1,086,749 $ 30,667 $
(61,549) $1,055,867
- -----------------------------------------------------------------
- --------------------------------------------------
Gross
Gross Fair
Cost at Unrealized
Unrealized Market Value at
(Dollars in thousands) Oct. 26, 1996 Gains
Losses Oct. 26, 1996
- -----------------------------------------------------------------
- ----------------------------------------------
Cash and cash equivalents
Cash $ 77,374 $ --
$ -- $ 77,374
Repurchase agreements 4,526 --
-- 4,526
Tax exempt money market fund 36,821 --
-- 36,821
Municipal securities 26,800 --
-- 26,800
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- ----------
Cash and cash equivalents $ 145,521 $ --
$ -- $ 145,521
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Short-term investments
Municipal securities $ 376,510 $1,524
$(12) $ 378,022
Money market mutual funds 78,514 --
-- 78,514
Money market preferreds 224,000 --
-- 224,000
Mutual funds 14,151 14
(10) 14,155
Equity securities 174,054 35,432
(24,943) 184,543
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- ------
Short-term investments $ 867,229 $36,970 $
(24,965) $ 879,234
- -----------------------------------------------------------------
- -----------------------------------------------------------------
- ---------
Cash and short-term investments $1,012,750 $36,970 $
(24,965) $1,024,755
- -----------------------------------------------------------------
- --------------------------------------------------------------
During the first nine months of fiscal 1997 the Company had
realized gains
of $8 million on the sale of securities compared to realized
gains of
$8 million in the first nine months of fiscal 1996.
D. Income Taxes
The Company's estimated effective tax rate for the first nine
months of fiscal 1997 was 48.0% compared to 31.0% in the first
nine months of fiscal 1996. The Company paid cash amounts for
income taxes of $9 million and $15 million, in the first nine
months of fiscal 1997 and 1996, respectively.
E. Commitments and Contingencies
The Company currently has a $10 million unsecured revolving
bank line of credit, with interest at the prime rate. The
line can be used for either letter of credit or working
capital purposes. The line is subject to the terms of a loan
agreement containing financial covenants and restrictions,
none of which are expected to significantly affect the
Company's operations. At July 31, 1997 there were no
borrows, letter of credit acceptances or commitments under
such line.
The Company has an additional $5 million credit facility with
another bank which is not subject to a loan agreement. At July
31, 1997 standby letters of credit of approximately $300,000
were outstanding under this agreement.
In August 1997, the Company entered into an agreement to lease
5 buildings being constructed on land owned by the Company in
San Jose, California. The lessor of the building has
committed to fund up to $157 million for construction of the
buildings, with the portion of the committed amount actually
utilized to be determined by the Company. Rent obligations
for the buildings will commence upon the Company's occupation
of the buildings in fiscal 1999. The Company may, at its
option, purchase the buildings during the term of the lease at
approximately the amount expended by the lessor to construct
and improve the buildings. If the Company does not purchase
the buildings, or arrange for the sale of the buildings, at
the end of the lease, the Company will guarantee the lessor no
more than 85% of the residual value of the buildings as
determined at the inception of the lease. In addition, the
agreement requires the Company to maintain a specific level of
restricted cash to serve as collateral for the leases and
maintain compliance with certain financial covenants.
The Company is a party to a number of legal claims arising in
the ordinary course of business. The Company believes the
ultimate resolution of the claims will not have a material
adverse effect on its financial position, results of
operations, or cash flows.
F. Put Warrants
In the first nine months of fiscal 1997, the Company sold put
warrants on 2 million shares of its common stock for $2
million, callable on specific dates in the third quarter of
fiscal 1997, giving a third party the right to sell shares of
Novell common stock to the Company at contractually specified
prices. The put warrant liability is the amount the Company
would be obligated to pay if all the outstanding put warrants
were exercised at the strike price without a cash settlement.
In the first nine months of fiscal 1997, the Company settled
all of its remaining put warrant obligations on 6 million
shares for cash of $21 million and therefore reversed the put
warrant obligation back to additional paid-in capital. During
the first nine months of fiscal 1996, the Company sold put
warrants on 9 million shares of its common stock for $12
million, callable on specific dates in the third and fourth
quarters of fiscal 1996 and the first and second quarters of
fiscal 1997. During the first nine months of fiscal 1996, put
warrant obligations on 2 million shares expired with no cash
settlement required.
G. International Sales
The Company markets internationally both directly to end users
and through distributors who sell to dealers and end users.
For the nine months ended July 31, 1997 and July 27, 1996,
sales to international customers were approximately $330
million and $498 million, respectively. In the first nine
months of fiscal 1997 and fiscal 1996, 53% and 54%,
respectively, of international sales were to European
countries. Except for Japan, which accounted for 14% of total
sales in the third quarter of fiscal 1997, no one foreign
country accounted for 10% or more of total sales in any
period. No customer accounted for more than 10% of revenue in
any period.
H. Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted
average number of common shares outstanding during the
periods, including common stock equivalents (unless
antidilutive). Common stock equivalents consist of
outstanding stock options.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Introduction
Novell is the world s leading network software provider. The
Company offers a wide range of network solutions for distributed
network, Internet, intranet and small-business markets.
In December 1995, Novell sold its UnixWare product line to the
Santa Cruz Operation, Inc. (SCO). The Company realized a small
gain and recorded $19 million of UNIX technology royalty revenue
from this transaction in the first quarter of fiscal 1996. Under
the agreement, Novell received approximately 6 million shares of
SCO common stock, resulting in ownership of approximately 17% of
the outstanding SCO common stock. The agreement also calls for
Novell to receive a revenue stream from SCO based on revenue
performance of the purchased UnixWare product line. This revenue
stream is not to exceed $84 million net present value, and will end
by the year 2002. In addition, Novell will continue to receive
revenue from existing licenses for older versions of UNIX Systems
source code.
In March 1996, the Company completed the sale of its personal
productivity applications product line to Corel Corporation
(Corel). The Company received approximately 10 million shares of
Corel common stock and approximately $11 million in cash. This
resulted in an ownership position of approximately 17% of the
outstanding Corel common stock. The Company reported a one-time
gain of $20 million in the second quarter of fiscal 1996 related to
this transaction. Net of tax, the gain was $13 million, or $0.04
per share. Additionally, Corel licensed GroupWise client software,
Envoy electronic publishing software, and other technologies from
Novell for a minimum royalty obligation of approximately $50
million over the next five years.
During the second quarter of fiscal 1996, the Company implemented
a
change to its traditional distribution stocking policy that
significantly reduced revenue and earnings in that quarter. The
change in the Company's traditional distribution stocking policy
was to respond to changing market conditions. Over the past two
years, direct customer and OEM licensing programs have grown from
less than 5% of revenue to more than 40% of revenue. Such
licensing revenues do not flow through the Company's historical
indirect distribution channel. This change, along with the
evolution that is taking place in the method of software
distribution to permit eventual electronic distribution of products
changes the Company's reliance on boxed product flowing through an
indirect distribution channel. In order to deal with this changing
environment, the Company did not ship to its indirect distribution
channel customers, except to accommodate product exchanges and
returns during the second quarter of fiscal 1996, which had the
effect of reducing inventories within the indirect distribution
channel.
In response to a further decline in sales of boxed products through
the indirect distribution channel customers and lower licensed
revenue of certain older products to original equipment
manufacturers (OEM s) as well as competitive pressures in the small
network market, Novell took corrective measures during the third
quarter of fiscal 1997 to realign its resources and better manage
and control its business. Specifically, the Company did not ship
products to its indirect distribution channel customers, except to
accommodate product exchanges and returns. Indirect distribution
channel inventory at the already reduced 1996 levels was no longer
appropriate as the Company's business continued to experience
competitive pressures and a continuing shift from reliance on boxed
software distribution to a changing mix of boxed products and
multi-product licenses. The Company believes this action brought
indirect distribution channel inventories of boxed software
products in line with current market demand. In addition, the
Company reduced its workforce by approximately 18% or 1,000
employees and consolidated a number of facilities. The decision to
withhold shipments to the Company's indirect distributor channel
resulted in an operating loss in the third fiscal quarter of 1997.
In addition, a one-time restructuring charge of $55 million was
incurred, principally comprised of severance and excess facilities
costs. The restructuring charge contributed ($0.10) per share, net
of tax, to the reported loss in the third quarter of fiscal 1997.
The workforce reduction and associated consolidation of facilities,
is expected to lower operating expenses by $100 million annually.
Results of Operations
Net Sales
Q3 Q3 YTD YTD
1997 Change 1996 1997 Change 1996
- -----------------------------------------------------------------
- ----------
Net sales (millions) $90 -75% $365 $738 -26% $991
=================================================================
===========
Novell s third quarter of fiscal 1997 revenue was reduced from
recent periods primarily due to the indirect distribution channel
actions described above, which the Company took in response to
changing market conditions. Third quarter revenue was principally
from sales to large network users through the Company's major
account, corporate and volume license programs. Additionally, none
of the $188 million of revenue in the second quarter of fiscal 1996
came from the indirect distribution channel. The decision to not
ship to the indirect distribution channel in both the third quarter
of fiscal 1997 and the second quarter of fiscal 1996 makes quarter
over quarter and year over years comparisons difficult.
Novell s product lines can be categorized into server operating
environments; network services; UNIX royalties; and education,
service and other. While revenue decreased from both the third
quarter of 1996 to the third quarter of 1997 and the first nine
months of fiscal 1996 to the first nine months of 1997, analysis of
the individual product categories characterizes the changes that
have occurred.
Server operating environments revenues decreased by 82% or $177
million in the third quarter of 1997 compared to the third quarter
of 1996. Both the IntranetWare product family and the NetWare
3
product family revenue decreased significantly as the Company
withheld shipments to its indirect distribution channel in the
third quarter of fiscal 1997. In the first nine months of fiscal
1997, server operating environments revenues decreased by 10% or
$50 million over the same period in fiscal 1996. While NetWare
3
product family revenue decreased by $97 million, IntranetWare
product family revenues grew by $47 million or 16% in the first
nine months of fiscal 1997 compared to the first nine months of
fiscal 1996.
Network services revenues decreased by 74% or $68 million in the
third quarter of 1997 compared to the third quarter of 1996. The
decrease encompassed all product lines as the Company withheld
shipments to its indirect distribution channel in the third quarter
of fiscal 1997. In the first nine months of fiscal 1997, network
services revenues decreased by 29% or $68 million over the same
period in fiscal 1996. The decrease encompassed all product lines.
UNIX royalties revenue decreased 59% or $10 million in the third
quarter of 1997 compared to the third quarter of 1996. In the first
nine months of fiscal 1997, UNIX royalties revenues decreased by
61% or $41 million over the same period in fiscal 1996.
Education, service and other revenues decreased by $19 million or
49% in the third quarter of 1997 compared to the third quarter of
1996. The decrease was a result of lower revenues in both service
related and training revenue as the Company withheld shipments to
its indirect distribution channel in the third quarter of fiscal
1997. In the first nine months of fiscal 1997, education, service
and other revenues decreased by 26% or $31 million over the same
period in fiscal 1996.
International sales represented 45% of total sales in the first
nine months of 1997 compared to 50% in the first nine months of
1996. This change is a result of a 17% decrease in domestic
revenues compared to a 34% decrease in international revenues in
the first nine months of fiscal 1997 compared to the first nine
months of fiscal 1996.
Gross Profit
Q3 Q3 YTD
YTD
1997 Change 1996 1997
Change 1996
- -----------------------------------------------------------------
- -----------------
Gross profit (millions) $28 -90% $289 $523 -30%
$751
Percentage of net sales 31% 79% 71%
76%
=================================================================
=====================
The gross margin percentage decreased in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996 and in the
first nine months of fiscal 1997 compared to the first nine months
of fiscal 1996 due to the fixed portion of cost of sales being
a
higher percentage of the lower revenues in the third quarter of
fiscal 1997 as the Company withheld shipments to its indirect
distribution channel in the third quarter of fiscal 1997.
Operating Expenses
Q3 Q3
YTD YTD
1997 Change 1996
1997 Change 1996
- -----------------------------------------------------------------
- --------------------------------
Sales and marketing (millions) $ 98 -22% $125
$342 -9% $376
Percentage of net sales 109% 34%
46% 38%
- -----------------------------------------------------------------
- ---------------------------------
Product development (millions) $ 69 15% $ 60
$210 -- $209
Percentage of net sales 77% 16%
28% 21%
- -----------------------------------------------------------------
- ---------------------------------
General and administrative (millions) $ 34 $ 34
$111 3% $108
Percentage of net sales 38% -- 9%
15% 11%
- -----------------------------------------------------------------
- ---------------------------------
Restructuring charges (millions) $ 55 -- --
$55 205% $18
Percentage of net sales 61% --
7% 2%
- -----------------------------------------------------------------
- ---------------------------------
Total operating expenses (millions) $ 256 17% $219
$718 1% $710
Percentage of net sales 284% 60%
97% 72%
=================================================================
=================================
Sales and marketing expenses increased as a percentage of net sales
in both the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996 as well as in the first nine months of
fiscal 1997 compared to the first nine months of fiscal 1996 as the
Company withheld shipments to its indirect distribution channel in
the third quarter of fiscal 1997. The decrease in absolute dollars
is attributable to lower domestic sales expenses as well as lower
corporate and product marketing expenses. Sales and marketing
expenses fluctuate as a percentage of net sales in any given period
due to product promotions, advertising or other discretionary
expenses.
Product development expenses increased as a percentage of net sales
in the third quarter of fiscal 1997 compared to the third quarter
of fiscal 1996 as well as in the first nine months of fiscal 1997
compared to the first nine months of fiscal 1996 as the Company
withheld shipments to its indirect distribution channel in the
third quarter of fiscal 1997. Product development expenses
increased in absolute dollars in the third quarter of fiscal 1997
compared to the third quarter of fiscal 1996 while remaining flat
in absolute dollars in the first nine months of fiscal 1997
compared to the first nine months of fiscal 1996.
General and administrative expenses increased as a percentage of
net sales in the third quarter of fiscal 1997 compared to the third
quarter of fiscal 1996, while remaining flat in absolute dollars.
General and administrative expenses increased as a percentage of
net sales while increasing slightly in absolute dollars in the
first nine months of fiscal 1997 compared to the first nine months
of fiscal 1996.
During the third quarter of fiscal 1997 the Company incurred $55
million of tax deductible restructuring charges for redundant
facilities and excess personnel as the Company realigned its
resources to better manage and control its business. During the
first quarter of fiscal 1996 the Company incurred $18 million of
tax deductible restructuring charges for redundant facilities and
excess personnel as the Company prepared for the sale of its
personal productivity applications product line.
Overall, operating expenses, excluding nonrecurring charges, have
declined as revenues have decreased in both the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996 as well as
in the first nine months of fiscal 1997 compared to the first nine
months of fiscal 1996.
YTD
YTD
1997 Change
1996
- -----------------------------------------------------------------
- ---------------------------
Employees 4,831 -16%
5,737
Annualized revenue per employee (000's) $184 -7%
$198
=================================================================
=============================
In the third quarter of fiscal 1997, the Company reduced its
employment by approximately 1,000 employees as the Company
realigned its resources to better manage and control its business.
In fiscal 1996, the Company reduced its employment by 1,725
employees as the Company completed the sale of it s UnixWare and
personal productivity applications product lines and terminated or
transitioned former UnixWare and personal productivity group
employees to Corel, SCO, and other third parties.
Other Income (Expense)
Q3 Q3
YTD YTD
1997 Change 1996
1997 Change 1996
- -----------------------------------------------------------------
- -----------------------------------------
Other income (expense), net (millions) $10 -33% $15
$30 -46% $56
Percentage of net sales 11% -- 4%
4% 6%
=================================================================
=====================================
The primary component of other income (expense) is investment
income, which was $15 million in the third quarter of fiscal 1997
compared to $16 million in the third quarter of fiscal 1996 and was
$41 million in the first nine months of fiscal 1997 compared to $42
million in the first nine months of fiscal 1996. The relative
flatness is the result of higher average yields on lower average
cash balances. In order to achieve potentially higher returns,
a
limited portion of the Company's investment portfolio is invested
in mutual funds which incur some market risk. The Company believes
that the market risk has been limited by diversification and by use
of a funds management timing service which switches funds out of
mutual funds and into money market funds when preset signals occur.
Also included in other income (expenses), the Company recorded
a
gain of $20 million on the sale of its personal productivity
applications product line in the second quarter of fiscal 1996.
Income Taxes
Q3 Q3 YTD
YTD
1997 Change 1996 1997
Change 1996
- -----------------------------------------------------------------
- ----------------------------------------
Income taxes (millions) $(96) -469% $26 $ (79)
-363% $30
Percentage of net sales -106% 7% -11%
3%
Effective tax rate 44% 31% 48%
31%
=================================================================
=======================================
The effective tax rate increased from 31% in fiscal 1996 to 48% in
fiscal 1997 due to the loss from operations in fiscal 1997.
Net Income (Loss) and Net Income (Loss) Per Share
Q3 Q3 YTD
YTD
1997 Change 1996 1997
Change 1996
- -----------------------------------------------------------------
- -----------------------------------
Net income (loss) (millions) $(122) -307% $59
$(85) -227% $67
Percentage of net sales -136% 16%
- -12% 7%
Net income (loss) per share $(.35) -306% $ .17
$(.25) -239% $.18
=================================================================
====================================
Liquidity and Capital Resources
Q3
Q4
1997 Change
1996
- -----------------------------------------------------------------
- ---------------------------------------
Cash and short-term investments (millions) $1,056 3%
$1,025
Percentage of total assets 56%
50
=================================================================
=======================================
Cash and short-term investments increased to $1,056 million at July
31, 1997 from $1,025 million at October 26, 1996. The major reason
for this increase was the $97 million provided by operating
activities, offset primarily by the $53 million of cash used for
expenditures on property, plant and equipment, and the $9 million
used by financing activities. The investment portfolio is
diversified among security types, industry groups, and individual
issuers. The Company's principal source of liquidity has been from
operations. At July 31, 1997, the Company's principal unused
sources of liquidity consisted of cash and short-term investments
and available borrowing capacity of approximately $15 million under
its credit facilities. The Company's liquidity needs are
principally for the Company's financing of accounts receivable,
capital assets, strategic investments and flexibility in a dynamic
and competitive operating environment.
During the first nine months of 1997, the Company has continued to
generate cash from operations. The Company anticipates being able
to fund its current operations and capital expenditures planned for
the foreseeable future with existing cash and short-term
investments together with internally generated funds. Borrows
under the Company's credit facilities, or public offerings of
equity or debt securities are available if the need arises.
Investments will continue in product development and in new and
existing areas of technology. Cash may also be used to acquire
technology through purchases and strategic acquisitions. Capital
expenditures in fiscal 1997 are anticipated to be approximately $60
million, down from the original estimate of $80 million, as the
Company experienced less than previously estimated growth, and
could be further reduced if the growth of the Company is less than
presently anticipated.
Future Results
The Company's future results of operations involve a number of
risks and uncertainties. Among the factors that could cause actual
results to differ materially from historical results are the
following: business conditions and the general economy; competitive
factors, such as rival operating systems, acceptance of new
products and price pressures; availability of third-party
compatible products at reasonable prices; risk of nonpayment of
accounts or notes receivable; risks associated with foreign
operations; risk of inventory obsolescence due to shifts in
technologies or market demand; timing of software product
introductions; and litigation.
Novell believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued
business success, but future revenues, costs, margins, product mix,
and profits are all influenced by a number of factors, as discussed
above.
Part II. Other Information
Except as listed below, all information required by items in Part
II is omitted because the items are inapplicable or the answer is
negative.
Item 1. Legal Proceedings.
The information required by this item is incorporated herein by
reference to Footnote E of the Company's financial statements
contained in Part I, Item 1 of this Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
27* Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Registrant during the
quarter ended July 31, 1997.
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Novell, Inc.
(Registrant)
Date: September 11, 1997 /s/ Dr. Eric Schmidt
Dr. Eric Schmidt
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
Date: September 11, 1997 /s/ James R. Tolonen
James R. Tolonen
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)