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Novell misses Q3 revenue and profit targets

VMware deal will not save the day

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The uncertainty over the future of Novell continued to weigh on the company as it reported disappointing financial results for the third quarter of fiscal 2010 ended July 31.

Novell, the maker of the venerable NetWare operating system and GroupWise collaboration software, has bought its way into many adjacent markets, including Linux, but has not been able to grow new businesses faster than old ones are declining.

In the quarter, revenues fell 7.9 per cent to $199m; net income fell a little less, down 5.9 per cent to $15.7m. In a call with Wall Street analysts, Novell's chief financial officer Dana Russell said that the figures were below Novell's expectations, and that it was the first time since the current management team took over five years ago that they had missed their numbers.

While it's convenient to say that the softness in Novell's business is due to a rejected and unsolicited takeover bid from New York hedge fund Elliott Associates back in March, there very well could be something else going on here — such as customers preferring the integrated stacks of software from Microsoft or Red Hat, just to name one possibility.

And merely slapping the WorkloadIQ name on the operating systems, appliance spinners, security, provisioning, and access control programs that Novell has sold separately — as it announced it was doing last week in order to have something positive to say during the Q3 call with Wall Street — cannot change that. Novell needs to be a safe place to invest in the long term to win that kind of deal.

But throwing all possible futures in the air — including selling the company, breaking it up, distributing some of its $1bn cash hoard to investors, or keeping on doing what it has been doing — and not picking one for five months does not make Novell seem safe. That's probably why Novell is wilting a bit in a Linux market that is growing nicely.

Software licenses at Novell declined in the third quarter by 7.6 per cent to just under $25m. Maintenance and subscription revenues were adversely impacted by the waning of support activations by Microsoft customers who were tooling around with SUSE Linux. Maintenance and subscription revenues fell 6.9 per cent to $152.5m. Services revenues — professional and other kinds of custom consulting engagements, not product support — dropped by 15 per cent to $21.6m.

In the call, Russell said that Linux invoicing was down 11 per cent in Q3, but excluding the Microsoft SUSE Linux coupon windfall from a few years back, which has petered out this year, the core SUSE Linux invoicing was up 15 per cent in the quarter and is up 41 per cent for the first nine months of the fiscal year.

Clearly, the uncertainty is weighing down the core Linux biz — but perhaps not as much as you might think. Russell did a little math in real time on the call, and said that if you took Microsoft out of the equation, Linux revenues are up 9 per cent year to date. They were off 7.1 per cent in fiscal Q3, however, to $35.5m.

Ron Hovsepian, Novell's president and CEO, said Novell would not answer questions about the board's review of the company's options nor comment on the two dozen or so companies that have been sniffing around the company since March. Novell is also ceasing to provide revenue guidance for future quarters.

What Hovsepian did talk about was Novell's partnership with server-virtualization juggernaut VMware, which was announced in June.

Under that deal, VMware has agreed to distribute an activate SUSE Linux instance with each vSphere license, and to provide level 1 and 2 technical support for a fee for that Linux license if customers want to put it into production. Novell gets a slice of the support revenue stream under the deal and provides level 2 support, backing up VMware's Linux team. VMware has also joined Novell's SUSE Appliance Program and has decided that virtual appliances based on ESX Server virtual machines will be preferentially deployed on SUSE Linux where Linux is the base operating system and using Novell's SUSE Studio tools.

What Hovsepian did not talk about was how much money the VMware deal might rake in, but the numbers have to be pretty small. The vast majority of VMware vSphere customers are virtualizing Windows, not Linux, workloads. Linux shops that are doing virtualization to consolidate servers and to offer other features tend to want an open source hypervisor. That means not VMware ESX Server.

The Microsoft partnership brought Novell $342m in cash (not all of which has been recognized yet), which helped buy it some time even if, in the long run, it did not buy Novell a lot of customers or a sustainable revenue stream from Microsoft shops. The VMware deal, by contrast, only has money at the back end after customers decide they want SUSE Linux and they want support from VMware.

Microsoft and VMware would probably agree on one thing: if their customers want Linux, they would much prefer that it come from Novell than from Red Hat, which is offering a credible alternative to Windows/Hyper-V and ESX Server.

Drilling down into Novell's numbers a bit more, identity and security management revenues (including licenses and support) rose by 5.9 per cent to $32.1m. Systems and resource management sales (again, including both software and support) came to $38.5m, down 3.8 per cent. NetWare and Open Enterprise Server (a hybrid of SUSE Linux running NetWare services atop it) combined for $40.4m in sales, down 11.9 per cent, while GroupWise accounted for $21m in sales, down 20.4 per cent. ®

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