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Novell revenues drop as board seeks sale

Customers get antsy

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Whatever drama is going on at Novell in the boardroom — where the company is apparently soliciting takeover offers from up to 20 different prospective buyers — it has spilled over into the company's financial results.

In an IT market that is rebounding, and where its main Linux rival, Red Hat, continues to grow both revenues and profits, Novell's overall business and its SUSE Linux business - which just hit breakeven in the prior quarter after six years of being part of Novell - slumped in the second fiscal quarter ended in April.

Novell said that in fiscal Q2, software license fees were $27.7m, down 8.5 per cent, while maintenance and subscription sales dropped to $153.8m, down 2.8 per cent. Services revenues (mostly training and professional services) fell by 16.8 per cent, to $22.5m. All told, revenues for fiscal Q2 came to $204m, down 5.4 per cent. But Novell kept an iron grip on costs, and it was able to boost net income in the quarter by 27.5 per cent to $19.2m.

Red Hat is moving in the other direction in terms of revenues, but it's not all that much more profitable. As El Reg previously reported, in its fiscal 2010 fourth quarter ended February 28, Red Hat had subscription sales of $169.2m, up 21.4 per cent, with training and services revenues declining a tiny bit to $26.7m. So Red Hat's overall sales were $195.9m, up 18 per cent, and net income was $23.4m, up 46.3 per cent.

Even if Novell's overall business is declining as companies move away from NetWare operating systems and GroupWise messaging and collaboration software, you would think that Novell's SUSE Linux business would be growing at the rate of Red Hat. But you would be wrong if you thought that.

In fiscal Q2, maintenance and subscriptions for SUSE Linux fell by 4.1 per cent, to $35.2m. That was not just down year-on-year against a pretty easy compare, but also down sequentially from the first quarter of fiscal 2010 ended in February, when SUSE Linux accounted for $37.5m in revenues. Novell puts Open Enterprise Server (the amalgam of NetWare services running atop SUSE Linux) and NetWare proper into a different category, and it does not extract a Linux portion of the revenue stream from this, mainly because the purpose of OES was to help mask NetWare's decline as well as move NetWare shops to a Linux base. In any event, OES and NetWare contributed $5.4m in licenses (down 4.6 per cent) and $36.6m in maintenance and subscriptions (down 6.7 per cent).

It is understandable that the NetWare business is crashing, but what is perplexing, in a market where the Linux server business was growing at 20.4 per cent in the first calendar quarter according to the latest numbers from IDC, that SUSE Linux is not doing better than it is. Some of the slowness in sales might have been due to IT shops waiting for SUSE Linux 11 Service Pack 1, which was just announced last week. Novell suggested that a lot of customers who have been kicking the tires on SUSE Linux were waiting for the SP1 update before going into production. We'll see how big that pipeline of prospective clients was as the coming quarters unfold.

Novell's identity and security management strengthened a bit both sequentially and annual, with revenues of $32.2m (up 6.2 per cent year-on-year). The company's systems and resource management products took a bit of a dip, though, with sales off four-tenths of a per cent in fiscal Q2, to $39.9m. If you lump Linux operating systems, identity and security management, and systems and resource management into one category, as Novell does, then this group had $109m in revenues, down only two-tenths of a per cent.

Collaboration solutions, which includes NetWare, OES, GroupWise, and a few other things, posted revenues of $72.5m in Q2, down 8.6 per cent. Notably, GroupWise sales fell by 8.8 per cent, to $22.2m.

Services revenues (not related to support and maintenance for software subscriptions) in the quarter fell by 16.8 per cent, to $22.5m.

In a call with Wall Street analysts, Dana Russell, Novell's chief financial officer, said that fiscal Q2 revenues were in line with expectations and profits came in at the high end of the range. Linux bookings were down 3 per cent and Linux invoicing was down 1 per cent in the quarter, with a tough compare because so many Microsoft shops cashed in their SUSE Linux certificates in the year ago quarter.

Excluding these Microsoft deals, Russell said that the SUSE Linux invoicing in the quarter was up 46 per cent compared to last year. But that seems to indicate how weak SUSE Linux sales were a year ago and how dependent Novell's Linux biz is on what Microsoft customers do. Part of the problem is that Microsoft bought SUSE Linux licenses at 45 per cent of the then-current list price in 2007, and at current prices for SUSE Linux support, these licenses are renewing at something closer to 15 per cent of that original value. This makes the compares for the Linux biz doubly tough. But, Novell is optimistic as always. "We are pleased with the growth in our core business," Russell said.

In the wake of the $1bn unsolicited takeover offer from hedge fund Elliott Associates in March, which was rejected a few weeks later, Novell said that it was undertaking a strategic review of the company's alternatives, including stock repurchase, cash dividend, strategic partnerships and alliances, joint ventures, a recapitalization, or an outright sale of the company. And Ron Hovsepian, Novell's president and chief executive officer, said in the call that Novell would not elaborate on any of the alternatives or deals it is considering and would not comment on them until the Novell board considers and approves a course of action.

But both Hovsepian and Russell said that the strategic review and the offers it is considering have had an adverse impact on deals, particularly those where customers are making an operating system or identity management platform, which tend to be long-term decisions.

Novell ended the quarter with $980m in cash and equivalents, down from $991m in the first quarter of fiscal 2010, and it had 3,500 employees as the quarter ended.

The company expects to have between $205m to $210m in sales in the fiscal third quarter ending in July. ®

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