Updated from March 2

Novell's ( NOVL) first-quarter sales dropped by 5.5%, but the Linux software provider was still able to eke out small upside surprises on the top and bottom lines.

But second-quarter guidance was shy of expectations, and on Friday shares fell $1.36, or 14%, to $8.17.

Net income available to common-stock holders in the January quarter was $2 million, or break-even on a per-share basis. That compares with $392 million, or 90 cents a share, a year ago, when the bottom line was swelled by a one-time $448 million gain related to a legal settlement with Microsoft ( MSFT).

Revenue was $274 million, slipping from $290 million in the first quarter of fiscal 2005.

Excluding items, adjusted net income available to common-stock holders was $18 million, or 4 cents a share. On the same basis, analysts polled by Thomson First Call were looking for a 3-cent profit on revenue of $269.3 million.

Stock-based compensation, now expensed by the company, totaled $13.7 million.

The first-quarter results were a bit better than the company's own guidance. Novell had set the bar at a profit of 2 cents or 3 cents a share on sales ranging from $260 million to $270 million.

Guidance for the second quarter, however, was on the light side. Novell said it expects a profit of 2 cents or 3 cents on sales ranging from $272 million to $282 million. Wall Street was expecting a 4-cent profit and $282.2 million in revenue.

New businesses for Novell, including its version of Linux and its Open Enterprise Server, grew strongly in the first quarter, up from $14 million a year ago to $56 million.

Even so, Novell continues to lag far behind Red Hat ( RHAT), its major rival in the Linux business.

Pacific Securities analyst Brendan Barnicle, who rates the stock market perform, said Novell is showing signs of progress as it continues to shift from its legacy network operating system business called Netware, to Linux and related technologies.

"Progress has been painfully slow, but it is progress," he said in an interview. "I wouldn't be selling the stock on the news we heard tonight." (Pacific Crest does not have a banking relationship with Novell, and the analyst does not hold any shares.)

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