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Profit Slumps at Novell

Revenue also falls from a year earlier.
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Updated from 4:49 p.m. EDT



latest quarter is yet another indication that the software vendor's transition is far from over.

Third-quarter net income, as reported after the closing bell Thursday, plunged by 90% year over year, and revenue declined by 5%, despite a boost from currency fluctuations.

The company earned a profit of $2.14 million, or break-even on a per-share basis after preferred share payouts, vs. $23.4 million, or 6 cents a share last year.

Revenue fell to $290.2 million from $304.6 million in the third quarter of 2004.

Excluding items that included a $9 million restructuring charge and a $1 million gain, the company earned a profit of $14 million, or 3 cents a share, in the latest quarter. Analysts polled by Thomson First Call had forecast a 2-cent profit on sales of $300.9 million.

Currency moves added $4 million to the top line but had no material effect on the bottom line.

Novell, now based in Waltham, Mass., is in the midst of a transition away from its historical role as a provider of a network operating system called Netware, to a seller of Linux-related products and services.

Although most analysts understand that the transition is necessary -- and very difficult -- Thursday's results did not indicate that the shift was proceeding very quickly.

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The stock slipped after hours, shedding 23 cents, or nearly 4%, to $5.94 a share. Since the tech rally began in mid-April, Novell has gained just 5%, while its major rival,

Red Hat


is up 31%.

License revenue, a key growth indicator of new business, decreased 19% to $45.6 million. Part of the decrease was a result of fewer sales of Netware, a product that has been in decline for some time. Also affecting revenue was the company's transition to a model in which deals are longer, and thus recognized ratably, instead of upfront, CEO Jack Messman said on a call with analysts.

Revenue from the company's "platform," which combines its three major lines of business -- was $80 million, a drop of 5%, when revenue from a one-time legal gain is discounted.

Wall Street had hoped for more. Analyst Brent Thill of Prudential Securities said in a note to clients that he was expecting platform revenue of about $84 million.

Revenue from the company's version of Linux, called SuSE, doubled to $8 million, but was flat sequentially; and maintenance and service revenue slipped 4.7% to $290 million. However, Messman said "we were pleased with our initial penetration of the Chinese market, where Linux is an attractive technology for government and commercial users."

Adding to the company's overall sales of Linux is a hybrid product called Open Enterprise Server, which includes elements of Linux and Netware. Sales in the quarter, the first full period in which the product was available, totaled $31 million.

While some analysts had expected the $9 million restructuring charge to be the last for a while, the company expects to take another charge in the fourth quarter. Messman said that the restructuring is part of his ongoing efforts to cut costs and ensure profitability.

Because Novell does not give guidance, some analysts say they find the company difficult to model. One analyst, who spoke informally, commented that "even though they don't give guidance, they always seem to miss everyone's expectations."