Microsoft's Linux foray props up Novell

Microsoft's deal with Novell to resell SUSE Linux may be controversial, but it's looking like a boon for Novell. In fact, it's just about the only bright spot the Novell has right now.

Novell reported its fiscal first quarter figures last night. The company reported a loss from continuing operations of $20 million, or 6 cents a share, on revenue of $230 million. The results, which missed Wall Street estimates and reversed a profit a year ago, are preliminary because Novell is examining its stock based compensation practices.

Overall revenue declined 5 percent, but Novell's Linux business surged. In fact, most of the questions on Novell's earnings conference call revolved around the company's deal with Microsoft.

"We're very encouraged by our Linux platform business which saw revenue growth of 46 percent and invoicing increase over 650 percent from the quarter a year ago," said Novell CFO Dana Russell.

CEO Ron Hovsepian also talked up Microsoft.

"Our results were positively impacted by our relationship with Microsoft, a partnership that is off to a strong start, where we are executing ahead of plan. Customer reaction to our collaboration agreement is robust as evidenced by our record Q1 results. On a year-over-year basis, we recognized Linux revenue growth of 46%, Linux invoicing grew by over 650%, and Linux activated deferred revenue was up almost 300%."

Specifically, Hovsepian outlined the following milestones:

• Microsoft and Novell published a technical roadmap;
• Activated 40,000 subscriptions at the end of the first quarter;
• Established a pipeline of 150 enterprise customers. The quarter closed with 100 enterprise customers and Novell is focusing on large deals.

Hovsepian said the future pipeline is also looking strong. He said: "Moving forward to Q2, we anticipate our positive Linux format to continue. Our Linux strategy to providing enterprise-wide solutions has been validated in the market. For example, we recently announced an important customer win. PSA Peugot Citron, a new customer for Novell, signed a multi-year contract to deploy up to 20,000 Linux desktops and up to 20,000 Linux servers."

Other key points that emerged on the Novell conference call:

The Microsoft deal for Novell was about grabbing customers. "The whole goal of this relationship was to get customers. That was the whole intention, from a Novell perspective, was to gain customers, and obviously revenue in return for our shareholders. But we needed to make sure we're getting customers out of this relationship to measure success, and I do believe we're getting that," says Hovsepian.

Microsoft's deal for Novell generated $348 million in cash flow. Russell acknowledged that sum is roughly equivalent to Novell's total cash flow for the quarter.

Novell's deal with Wal-Mart was accelerated largely because of Microsoft's partnership.

There's a halo effect for SUSE because of the Microsoft deal. Hovsepian said:

"I personally have been on a number of calls around the globe and literally some of the phone calls that our team has gotten been along that line of 'hey, could you add more here on the technical collaboration agreement,' 'hey, could you add more here?’ People were very enthusiastic that Microsoft was trying to reduce some of the workload for the customer in the inoperability between SUSE Linux and Windows in the marketplace. So we think that’s all goodness."

Bottom line: Critics of the Novell-Microsoft deal are going to have to get used to it. The partnership is working out too well for Novell to end it anytime soon. A few quarters of this and you could argue that Microsoft is saving Novell.