Exit Rate Operating Margins

Posted: May 31st, 2007 | Author: saldarji | Filed under: business, stuff | No Comments »

Novell announced the Q2 results yesterday and I noticed some new terminology in our reports. Because I am an employee of Novell, I will refrain from putting any personal or subjective commentary. However, I feel like I should blog about it from a finance perspective. There are a ton of news stories on our results, so I will just post a link to them.

I noticed for the first time that we are now using the term “Exit Rate Operating Margin”.

Exit rate operating margins are defined as an annualized run rate expense level at the end of the period that, when compared to the full fiscal year’s revenue, would result in a pro forma operating margin for the year. – Novell 10Q

Operating margins is an industry standard term. However, I could not find anyone else using the Exit Rate Operating Margin term…I even Googled it!

The numerator of Operating Margin, Operating Income, consists of Gross Income minus Operating Expenses minus Depreciation. The denominator of Operating Margin is Net Sales. So, it follows that if the operating expenses are now “annualized run rate” (redundant, IMHO), that management is focusing on the long-term rather than quarterly results.

It should be noted that management is targeting significantly higher Exit Rate Operating Margins next year. Are they predicting higher sales or planning a lower expense structure?

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