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December 10, 2006

Novell Linux push fails to cover NetWare losses

Novell Inc's shares sank to a new 52-week low last week after the company announced fourth-quarter revenue down 15% to $244.9m and lowered its targets for 2007, highlighting the fact that the company's move into the Linux distribution business has failed to cover the downturn in its NetWare business.

By CBR Staff Writer

The Waltham, Massachusetts-based software vendor’s fourth quarter revenue was about $6m shy of analysts’ estimates, which was never likely to keep Wall Street happy. Announcing that the company expected revenue to be flat or near flat at $945m to $975m in 2007 was the double-whammy that pushed the company’s share price down to $5.70, its lowest price since March 2005.

One of the significant issues that Novell faces is the fact that its Linux revenue is not accelerating fast enough to cover the decline in its traditional NetWare and collaboration software markets. The fourth quarter might have seen Linux platform product revenue rise 32.4% to $13.0m, but at the same time NetWare revenue shrank 69.9% to $8.4m.

To put this into perspective, Novell’s NetWare revenue fell $19.4m year-on-year in the fourth quarter, while resource management fell $16.2m and collaboration software fell $3.7m. In comparison Linux and Open Enterprise Server revenue grew just $4.3m in total.

The company’s other main area of focus, identity management, brought in revenue of $23.8m in the quarter, up just $793,000, or 3.5%, to be worth 9.7% of overall revenue.

At least the Linux revenue figures are heading in the right direction, although it takes an understanding of Novell’s revenue categorization over the years. For instance, the company reported $13m in Linux Platform Products revenue in the fourth quarter, up 32%, despite reporting $15m revenue from Linux products and services in Q405.

The difference, according to Novell, is that the Q405 figure included SUSE Linux Enterprise Server, SUSE Linux Professional, Novell Linux Desktop, ZENworks Linux Management (Red Carpet), and technical support services related to Linux, while the more recent figure covered just SUSE Linux Enterprise Server and SUSE Linux Enterprise Desktop.

The company has changed the Linux revenue category it highlights during its financial announcements several times since its acquisition of SUSE Linux, but having settled on Linux platform products, it is possible to see that while Novell’s enterprise Linux revenue is heading in the right direction, progress is slow.

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Starting in the first quarter of 2005, Linux platform revenue was $8.5m, $8.6m, $8.9m and $9.3m in the four quarters of 2005, followed by $10.4m, $10.3m, $11.6m, and $13.0m in the four quarters of 2006. In comparison, Red Hat Inc had subscription revenue of $84.9m in its most recent quarter.

On top of that you have the revenue from Open Enterprise Server, which contains either Linux or NetWare with network services. Earlier this year the company said two thirds of OES customers were deploying Linux.

The product was responsible for revenue of $31m, $47m, $43m, $38m, $45m, and $48m since it hit the company’s revenue figures in the third quarter of 2005, but with year-on-year quarterly growth of just 2.4% it is not exactly setting the world alight.

It remains to be seen, of course, what impact the company’s recent interoperability and patent peace deal will have on its Linux revenue figures. Chief executive Ron Hovsepian told investors this week he knew of four big deals he was personally involved in that were lost due to buyer fears of Microsoft.

That fear will now be most felt by non-Novell Linux customers after Microsoft declared them safe from patent infringement claims. There is a significant level of animosity from sections of the open source movement towards Novell regarding its pact with Microsoft, however, and it remains to be seen whether that could have a balancing effect on any gains.

Even Microsoft’s agreement to distribute $240m worth of SUSE Linux Enterprise support vouchers to joint customers over the next five years is only expected to bring in $4m to $7m in the whole of 2007. With that deal failing to deliver immediate gains, Novell needs to increase its Linux revenue fast if it is to balance its losses elsewhere.

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