Novell Swings to a Tiny Profit on a Tiny Revenue Bump in Q2

Published: June 3, 2008

by Timothy Prickett Morgan

Commercial Linux distributor Novell may be very happy about the growth that it is seeing from its SUSE Linux products and has certainly dodged a bullet by embracing Linux as plain vanilla NetWare sales go into what is probably a permanent, if very elongated, decline. But Linux is still, by the numbers, a very small piece of the business at Novell, even if it does give Novell mindshare in today's IT space as the major--some might say only--alternative to Red Hat.

Nothing points this fact out more than a look at Novell's quarterly sales figures. Novell reported the financial results for its second quarter of fiscal 2008, ended April 30, last week, and the company reported sales of $235.7 million, up 1.4 percent, and swung to a $5.9 million net profit, compared to a net loss of $2.9 million in the year ago quarter. The company's Open Platform Solutions unit, which includes the server and desktop variants of SUSE Linux, accounted for $30.5 million in recognized revenue in the quarter, and the vast majority of that was for maintenance and support subscriptions or Linux implementation services. That means open source products accounted for 12.9 percent of the company's overall reported revenues in the quarter. And if you want to be very precise, Linux subscription sales came to $28.6 million, up 30.9 percent, and accounted for 12.1 percent of sales.

Of course, Novell's Workgroup division, which sells the Open Enterprise Server amalgam of NetWare and Linux, should probably be counted as much as Linux as not at this point, and this is still the largest part of Novell. In the second fiscal quarter, OES sales fell by 1.5 percent to $48.2 million, and NetWare sales fell by 7.1 percent to just under $6 million, with NetWare licenses down and support costs up. Novell's GroupWise and related collaboration software brought in $28.2 million in sales, up 7.7 percent, within the Workgroup division, and with all the other software in this unit tossed into the mix, the Workgroup division brought in $92.4 million, down 9/10ths of a percent. Identity management, a big deal for Novell for the past decade, accounted for $30.7 million in sales, up 6.4 percent, and systems and resource management, another area where Novell has tried to put a heterogeneous stake in the ground, brought in just under $41 million, up 15.4 percent.

On the Linux front, Ron Hovsepian, Novell's chief executive officer, talked up the SMB bundles that it has created in conjunction with ERP software giant SAP, and said that to date, Novell has invoiced a total of $157 million in SUSE Linux licenses that Microsoft acquired in a landmark five-year partnership deal that was announced in November 2006; that is 65 percent of the total $240 million in licenses acquired by Microsoft. If you do the math, Microsoft customers only activated $16 million in SUSE Linux licenses in the second fiscal quarter, and it looks like this might be the rate going forward. For a while there, it looked like Microsoft's Windows customers might burn through $240 million in licenses in under two years.

The combined NetWare and Open Enterprise Server businesses grew sales 5 percent in the quarter, doing better than even Novell expected, according to Hovsepian. With Novell just getting Service Pack 2 out for SUSE Linux 10, the OES base is now awaiting their SP2 update, which will bring much of the same functionality to Linux supporting NetWare services. Hovsepian confirmed that OES 2 SP2 was on tract to be delivered in the summer, but of course, the summer is a long time on the IT calendar, often stretching from early May to late September.

Novell exited the quarter with $1.4 billion in cash and equivalents, and spent $205 million of its $1.8 billion cash hoard to do it; the remaining cash was used in the quarter to retire debts. Novell was sitting on $702 million of deferred revenue as the second fiscal quarter ended, up a few million bucks from a year ago. The company added around 200 employees in the quarter (mostly from the PlateSpin acquisition), boosting its total headcount to 4,200. PlateSpin kicked in around $3 million in sales during fiscal Q2, according to Dana Russell, Novell's chief financial officer, who was also on the call with Wall Street analysts last week.

Hovsepian reiterated Novell's goal of hitting between $940 million and $970 million in sales for all of fiscal 2008, and said that based on sales of $467 million in the first six months of the year, "this goal remains well within target."

As every top exec from an IT supplier is asked by Wall Street analysts these days, Hovsepian was asked about the economy and what Novell is seeing. "From an overall economic perspective, we do remain cautious as we look at the rest of 2008," Hovsepian explained. "We have some real positive overall invoicing numbers and growth in all of our market segments that we are trying to grow and have stabilized our base business. So overall we feel good. The one thing that is making us just step back is the overall economic environment. None of us can predict that, and therefore we are being reserved in our approach."

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