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Novell: Linux finally breaks even

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Well, that only took six years and change.

As part of its discussion of its financial results for the first quarter of fiscal 2010 ended in January, Dana Russell, chief financial officer at operating system and systems software maker Novell, said that the SUSE Linux business was at break-even, what he called "a significant milestone."

For the quarter, Novell continued its trend of ever-shrinking overall sales as its legacy NetWare operating system and GroupWise collaboration software business declines faster than SUSE Linux support revenues can fill in the gap. Total revenues for the quarter came to $202.4m, down 5.8 per cent, with software license sales plummeting 25 per cent to $21.2m (largely because of NetWare declines).

Maintenance and subscription revenues were up a smidgen to $158.9m in the quarter, and services sales fell by 20 per cent to $22.2m. And all of this was against an easy compare, mind you, since this time last year the economic meltdown was hurting all IT suppliers. By cutting sales, marketing and development costs and by selling off auction rate securities that had already been written off during the meltdown to the tune of a $3.8m profit, Novell was able to nearly double net earnings to $20.2m.

Novell ended the quarter with $991.3m in cash and short-term investments as the first fiscal quarter came to a close, and it dropped 100 employees from the payroll, which stood at 3,500 workers at the end of January.

Maintenance and subscription revenues for SUSE Linux products accounted for $37.5m in revenues, up 6.4 per cent compared to a very weak Q1 fiscal 2009 but down 3.9 per cent from the quarter ended in October 2009. Russell said that Linux invoicing was up 75 per cent in fiscal Q1, but again this was against an easy compare a year ago. The company did not provide an amount for how much in invoices Novell sent to Linux shops in the quarter and did not talk about how much of the Microsoft certificates for SUSE Linux had been distributed, or more importantly, what the renewal rate was on the certificates that Microsoft's customers activated three years ago and which came up for renewal.

The Wall Street analysts on the call with Russell and Ron Hovsepian, Novell's president and chief executive officer, figured that $73m of Microsoft certificates were up for renewal in the quarter, and they pressed the two to give some sense of how renewals were going.

Russell said that Microsoft got those certificates at a 45 per cent discount off then-current list price three years ago for SUSE Linux subscriptions, but that pricing had changed so much in the market in the interim that Novell was renewing them at something more like 10 to 20 per cent of the list price back then. As to how much in Microsoft-related SUSE Linux renewals were actually booked or invoiced in the quarter, the two would not elaborate.

NetWare and Open Enterprise Server, which is a product that runs NetWare services atop SUSE Linux and which also allows real NetWare 6.5 instances to run atop Xen virtual machines managed by SUSE Linux, had a mere $4.1m in software licenses, up a tiny bit, and maintenance and subscriptions for NetWare and OES together fell by 6.5 per cent to $37.6m. Collaboration software, which is largely GroupWise running on NetWare and Linux, accounted for $1.7m in new license sales (down 45.7 per cent), with support for collaboration products down 9 per cent to $19.8m.

If you are wondering why Novell wants to talk about intelligent workload management and cloud computing, as it did in early December, and it rejiggered its executives and reporting units to reflect this change a week later, this is why. Only by selling a stack that creates, manages, and secures systems and application stacks can Novell grow its Linux business enough to make money. It needs a full-court press, and that means cutting loose from the past represented by NetWare.

And Hovsepian is unapologetic about this. NetWare 6.5 - the final release of the venerable file serving operating system that used to have a 70 per cent market share and now has nil even by Hovsepian's reckoning - goes off standard support on March 7, and Novell is not extended it.

If you want to keep using NetWare 6.5, you have to buy an extended support contract that will no doubt be pricey and that will add another two years to technical support - or you have to migrate to OES and use NetWare services in that OS atop Linux. As for those customers, Hovsepian said that "we obviously don't want them to leave," but he added that with millions of lines of NetWare code and a future based on Linux, "we're definitely in a vice on that one, but we have given customers choices."

Users of other proprietary platforms, such as OpenVMS and OS/400 have faired a bit better, and those use MPE and a slew of others have done far, far worse. Hovsepian makes a good point.

Looking at Novell's quarter by its two new product groups, the Security Management and Operating Platforms Group (which purposefully does not include NetWare or OES in a bit of obfuscation but does include SUSE Linux), revenues came to $124.7m, with gross profits of $29.8m and an operating loss of $3.9m. The Collaboration Solutions Group had sales of $77.7m, with a gross profit of $65.5m and $36.7m in income from operations. ®

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