An embarrassing accounting mistake is shaking faith in
internal controls, prompting a sharp early selloff and an analyst's downgrade.
In recent trading, shares of the Linux software vendor had recovered a bit and were off just 5 cents to $5.26 amid very heavy volume. Earlier, the shares had traded as low as $4.94.
According to a statement filed Friday with the
Securities and Exchange Commission
, Novell incorrectly classified $6 million of Linux maintenance revenue as license revenue in
its first-quarter financial report, released last week.
The restatement doesn't affect the quarter's total revenue of $290.1 million, but it makes an already worrisome decline in license revenue even worse. The company had initially reported an 8% decline from the previous year to $50.4 million; the year-over-year decrease is now 19%.
To be sure, the money simply moves from one bucket to another, but because license revenue is a key indicator of new business, while maintenance revenue reflects ongoing payment from current clients, the shift is disturbing.
Prudential Securities analyst Brent Thill downgraded the stock to underweight from neutral, saying "this causes us to wonder if there are deeper issues that are not apparent on the surface."
Similarly, Mark Murphy of First Albany said "the restatement should cause skepticism around the way Novell conveys its unaudited Linux results in the future," and he is concerned that "the leading indicator of Novell's business -- software license revenue -- is caving in faster than previously thought, suggesting more severe market-share losses with NetWare and other products." (Neither Prudential or First Albany has an investment-banking relationship with Novell.)
The fumble comes at a time when Linux, a onetime guerilla operating system, has not only become mainstream but is continuing to making significant gains at the expense of Unix, the established server operating system. And now there are indications that Linux is even challenging Microsoft's Windows empire.
Market researcher IDC predicts that Linux's share of the server market, on the basis of unit sales, will rise from 24% today to 33% in 2007, while Windows remains at about 59%. Linux is also making gains, albeit much smaller ones, on the desktop, and IDC predicts that sales of Linux devices and software will jump from $11 billion in 2004 to more than $35 billion in 2008.