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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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noob

well, I can tell you're new to the IT field, so let me give you a little guidance. If you want a stable, reliable file server, you'll be hard pressed to find one better suited to that task than the old Netware (NOT the new OES2 crap). If you want good login scripting abilities, the login scripting built into the Netware client has always been superior to the half-assed junk in Windows. If you want a high-quality directory infrastructure, sorry, but eDirectory still beats the pants off of your beloved AD.

Now there are some areas where your gross overgeneralization may hold true. Novell made a horribly convoluted mess when they added Apache and Tomcat applets to Netware. That is a nightmare that only a deranged, server-shooting admin would ever try to edit by hand. Novell's DirXML services to sync AD and eDir are likewise incredibly over-engineered (what exactly was wrong with the much simpler NDS4NT???) As well, Novell's gradual slide from compiled EXE admin tools (NWAdmin) to local Java (ConslowOne) to Java on a webserver (iManager, etc) was a downhill slope.

And finally, there's Groupwise. Users generally hate it because it's not Outlook. Admins generally love it because it's not Exchange.

As a long-time Netware/Groupwise admin (not a manager, thankfully), I find Novell's old stacks to be very, very useful and reliable for certain tasks. But as you said, the industry has moved on. Everything is now built for integration with AD, very few things have any integration with eDirectory, and even those that do generally used the more generic LDAP or RADIUS as opposed to the eDirectory API.

So listen, noob, just because you're a hot-blooded young-un who thinks he knows everything, well, you don't. Some of us were doing this back when you were still playing video games and eating ice cream, so we know how the industry got to where it is today. It didn't appear by magic, it slowly evolved. And we helped drive it. Now you come along and say all of the Old Ways (that you don't understand) are shit and only the New Ways (that you understand) are worth their salt. Guess what, noob? In 20 years some other young punk is going to come along and pour piss all over the stuff you're doing today and talk about how old and decrepit it is. And it's gonna make your blood boil. So you'll post him a little note that starts with the sentence "well, I can tell you're new to the IT field, so let me give you a little guidance.". It's that whole "Circle Of Life" thing, just without the Elton John song...

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Multi-fail

You think Netware is bloated? You really don't know what you're talking about. You do know that Netware is an OS right (and one that's gone end of life)? Novell is a company.

Anyway, Netware was great for it's core functions - file and directory services - far, far superior to Active Directory. It just couldn't compete on integration. And then when it started to get squeezed by MS the big panic started. Bad decision after bad decision killed Netware, but the core eDirectory / file server architecture was brilliant.

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Well, yes, actually

I have a BES tied to our Groupwise system. Works a charm, since we use Groupwise. Wouldn't do much good to have the Notes or Exchange version, now would it?

As to staying current, yes, except for Microsoft, I tend to stay current. I had an MCSE for Win2k many years ago but let it lapse. Just got tired of wasting time and money learning stuff that in a few years wouldn't be worth a plug nickel (according to Microsoft). So I play a lot in the Linux/FOSS space, since, from a learning perspective, that's far more stable and memorable than the ever-changing coat of many colors that Microsoft puts out every few years. I'm none too keen on the "upgrade because there's a new version and we have to be cool" mentality - my job is to make things work. Netware and Groupwise still WORK. The users still get their network drives every day because Netware is a NOS built like a refrigerator, humming quietly in the corner, doing its thing.

Now I might give you points for Exchange/Outlook, from a user perspective anyway, but from an Admin perspective, GW is great. The POAs are wonderful at knowing when things go wrong in the message store files and fixing the problems. It's rare that I have to manually "fix" anything in Groupwise - maybe half a dozen times a year. It just works.

Oh, and the other clencher for the deal - for $6.50 per head per year, I can run all of the Netware and Groupwise servers I want. To my knowledge, there is no similar deal from MS at that price point.

You are right about integration. Sadly nobody is integrating things with NW/GW anymore. And there are more and more things coming out that require AD: VMware View is first to mind. But OTOH, it keeps the headaches low since if things can't integrate, they can't break... And it helps by keeping us creative in how we do things, since we have to come up with our own procedures and such to mimic integration. So when our procedures break, we know where they broke and how to fix them, we aren't sitting on the phone waiting for some tech rep with a heavy accent to read his answer off the screen.

We do run some MS stuff. Our main Admin/Accounting system is on MS SQL. I used to like the simplicity of the SQL2000 GUI admin tools, but the GUI tools for 2005 are an abomination, and haven't seen 2008 yet. Then there's IIS, for our users who simply cannot give up their Frontpage/Sharepoint Designer lifestyles. But that's about it. Other than those two instances, we don't really have any need for other Microsoft stacks.

So, no, the Novell software stack is not a liability any more than the Microsoft or Red Hat stacks are a liability. They are getting long in the tooth, and their potential for use is decreasing, but for those areas where they are still useful, they are great for the job. Calling them useless is just foolishness.

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