Cash Hoard Calms Novell as It Books Another Loss

by Timothy Prickett Morgan

Commercial Linux distributor Novell reported its financial results last week, and the company posted another loss as it tries to ramp up sales of open source products while its flagship NetWare platform continues to slide. Jack Messman, Novell's chairman and CEO, said the transition that Novell initiated when it bought SUSE and other open source developers is going as planned and that he expected Novell to start gaining market share in the server market over the next few years.

In the second quarter of fiscal 2005, Novell had sales of $297 million, up 1 percent from the $293.5 million it booked in the year ago quarter. Software licenses, which are dominated by sales of NetWare operating systems, GroupWise groupware, and other middleware and tools that are not sold under an open source/paid services model, dropped to $45.8 million, down 24 percent. Maintenance and services sales (with open source products generating services, not licenses, revenues) increased by 8 percent to $251.3 million. Because of increased sales and administrative costs, the company booked a loss from operations of $6.4 million, and after taxes were paid, the company booked a net loss of $15.6 million, compared to a profit of $10.4 million. According to Joe Tibbetts, Novell's chief financial officer, the weak dollar impacted revenues positively by $8 million in the quarter and the loss was cushioned by a factor of $2 million due to currency effects. He and Messman spoke in a conference call with Wall Street analysts about Novell's numbers last week.

On the Linux front, Tibbetts said Novell booked $80 million in Linux and platform services sales, down 11 percent year-on-year thanks mostly to the decline in NetWare sales. Novell is no longer reporting all of its desktop and service license/support sales for Linux and other services as a single unit, so it is hard to reckon how big the company's total Linux take was in the quarter, but the fact that revenue was more or less flat suggests Novell is doing about as well as its lowest expectations as it tries to ramp up SUSE and the Open Enterprise Server kicker to NetWare, which is an amalgam of Linux and NetWare.

Sales of the SUSE Linux Enterprise Server operating system for servers were $8 million, up 159 percent compared to the $3 million level in the same quarter a year ago; SLES shipments were 19,000 units, up from 4,000 a year ago. Compared to the fiscal first quarter, SLES sales were only up 6 percent and shipments were actually down from the 21,000 units Novell shipped then. Tibbetts said 44 percent of the SLES units shipped were sold in North America, that another 44 percent were shipped in EMEA, and the remainder were peppered around the globe. OEM partners, such as IBM, Hewlett-Packard, and Dell, accounted for 23 percent of SLES sales in the fiscal second quarter. He added that if you counted the new OES product as Linux, license sales would have increased to $16 million in the quarter, but the aggregate NetWare plus OES sales were down 16 percent. This suggests NetWare is going south a little faster than Novell would like and the uptake for OES, which was just announced in March, is taking a bit longer.

Messman said competitors were hammering on the NetWare base with lots of deals, causing some customers to hesitate. He said Novell was meeting the challenge head on, and the bulk of the deals that had slipped into the third fiscal quarter because of competitive offers had already been closed. None of the executives on the call would speculate about how soon OES sales would pick up, but Messman reminded everyone that OES was designed to keep the NetWare base from defecting to other platforms and to give them Linux features if they want to use them; he also reminded them that most NetWare customers are not going to think about OES until their current support contracts run out.

Messman said the company was in the midst of a transition to organize its direct and partner sales forces, and was particularly keen on getting Europe in shape. Sales in North America were flat at $125 million and also flat in EMEA at $99 million, but he added that sales in EMEA were propped up by currency and the acquisition of a consultancy, and taking out these factors, sales in EMEA were actually down by 11 percent. This is the best explanation as to why Ron Hovsepian, who was president of Novell's North American unit, was named as executive vice president of the company and given full charge of all the presidents of Novell's operating units, including the EMEA unit formerly headed up by SUSE CEO, Richard Seibt, who left Novell two weeks ago. Messman believes the changes Hovsepian has made in North America can be replicated in EMEA, and he expects the shakeup in sales and marketing will be done in North America by the end of the year and half-way done in EMEA by then, too.

As for some reports of a brain drain at Novell in the wake of Seibt's departure, Messman was having none of that. "There is no brain drain going on at Novell," he said. "We have had very little turnover of our key technologists."

And when pressed about growth in Linux sales, Messman said that Novell was now positioned for it. He explained that 14 months ago, only 37 applications were certified to run on SUSE Linux, and it had grown by a factor of 16 to 806; that the number of pieces of hardware equipment and software packages certified for Linux had grown to 1,409, up from 98; and that the number of Novell's partners had grown to 1,849, up from 320. "We have accomplished in 14 months what Red Hat did in eight years," he explained. "We couldn't start growing until the applications were ready." With SLES shipments more or less flat for the past few quarters and Red Hat being an order of magnitude larger and its shipments growing, Novell wants to get its sales team focused and peddling like crazy and ride the Linux wave as NetWare continues to trough.

Novell has time, of course, because it has $1.6 billion in the bank. The company can afford to be cautious and make considered moves--which is a good thing about suing Microsoft and winning, as Sun Microsystems has also learned.