Novell: Quietly developing some momentum

Novell: Quietly developing some momentum

Summary: Novell's fiscal third quarter was notable for reasons beyond Linux sales and its core product line. Novell's most recent quarter was the sixth consecutive one that topped expectations.

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Novell's fiscal third quarter was notable for reasons beyond Linux sales and its core product line. Novell's most recent quarter was the sixth consecutive one that topped expectations.

That consistency may mark the days where Novell becomes something more than an afterthought. Now it's no coincidence that Novell's six quarter string of upside surprises coincides with the meat of its SUSE Linux distribution partnership with Microsoft, which will be two years old in November and has been extended.

But Novell has also been successful in other areas. It has revamped its identity management lineup, restructured the company to increase margins and overall has been a solid performer on the earnings front. For the third quarter ending July 31 (statement), Novell's revenue was $245 million, up from $237 million a year ago. Novell reported a loss of $15.1 million, or 4 cents a share, due to auction rate securities (which theoretically were supposed to be as safe as cash). Excluding charges, Novell reported earnings of $21 million, or 6 cents a share, a penny ahead of Wall Street estimates. Sure Novell got a boost from the weak dollar, but analysts declared the quarter a clean one.

And Novell's revenue outlook for the rest of the year was in line with expectations. The real story here is Linux and how Novell has become the second largest distributor to Red Hat--with Microsoft's help. Novell CFO Dana Russell said on a conference call Thursday:

Within Open Platform Solutions, Linux Platform Products revenue was $31 million, increasing 30% from the year ago quarter. Linux invoicing was $51 million, up 36% year-over-year. We are pleased with our results this quarter which we’re growing substantially above market growth rates. Our Linux business continues to be dependent on large deals which may result in some fluctuations of quarterly invoicing levels. In addition we had strong results in Q7 2007 that may lead to difficult compares in Q4 2008. But our plan for 2008 which exceeds market growth rates remains well on track and we expect to continue to grow above market growth rates next year. Our expanded relationship with Microsoft provides further confidence in our long-term outlook.

He added that Microsoft is buying up to $100 million in SUSE certificates in $25 million chunks.

Other notable items:

  • Novell said its expenses entering fiscal 2009 will continue to decline "due to the restructuring activities planned for the fourth quarter."
  • CEO Ronald Hovsepian said he was confident that Novell is capturing SUSE Enterprise Linux renewals.
  • Identity and security management products had revenue growth of 22 percent in the third quarter with systems and resource management products jumping 25 percent.
  • Novell's Open Enterprise Server and Netware lineup brought in revenue of $53.9 million, down 4 percent from a year ago. But it's still notable how Novell can still milk Netware to fund other growth opportunities.
  • Overall core product sales, which includes Netware, were up 13 percent in the quarter.
  • The only nit in Novell's quarter was a decline in services revenue, but the company explained that's falling because it's shifting its wares to be distributed via partners and independent software vendors.

Perhaps more notable than Novell's performance was the reaction to it. Analysts, who have generally brushed off recent Novell quarters, were actually upbeat. To wit:

  • UBS analyst Abhey Lamda said: "We believe the company’s large cash balance and strong cash flows from its legacy business will continue to provide support to the stock and the continuation of the steady performance delivered over the last six quarters will help move some investors from the sidelines.
  • Jeffries analyst Katherine Egbert said Novell is delivering slow and steady progress on its financials, landing more channel partners and showing positive invoicing trends.
  • Oppenheimer analyst Brian Denyeau gushed that Novell "continues to deliver strong quarterly results that demonstrate its ability to drive consistent margin expansion and solid growth. The decline in services revenue is masking an increasingly attractive growth profile which, coupled with the hundreds of basis points of leverage left to realize, leaves us increasingly confident that owning Novell will pay off for long-term investors."

Admittedly sell-side analysts can get a little bubbly, but it's rare that praise is heaped on Novell. Given customers and partners are also headed Novell's way it may be time to pay a little more attention to the company

Topics: Operating Systems, Banking, Enterprise Software, Linux, Open Source, Software

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8 comments
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  • Novell is on life support

    [i]He added that Microsoft is buying up to $100 million in SUSE certificates in $25 million chunks.[/i]
    Novell will be arround as long as M$ provides the cash.
    The best bet is on companies that stand on their own feet and built everything from scratch and alone, like Red Hat.
    Linux Geek
    • Misinformed

      Novell has a DEEP portfolio of IP that rivals even Microsoft's. Novell has been developing its own technology long before Red Hat ever existed. To say that Red Hat has "developed everything from scratch and alone" and that Novell hasn't is to show a very naive and shortsighted understanding of the history of both companies. Red Hat is built on "productizing" the work of others and supporting FOSS. There is nothing wrong with that. I admire Red Hat and own stock in them. But.... Novell has built and continues to build it's own products long before FOSS was ever dreamed of.
      rjacksix
  • BS!!

    Novell is *not* on life support!! Answer me this: when has Microsoft **ever** done this type of partnership with a company? They have always either bought up tech they wanted...or obliterated a competing one. This deal is a recognition by M$ that Novell has compelling technologies and products that it is worth their while to interoperate with! If you can't see that...I dunno.

    It's also worth pointing out that these "coupons" are finding buyers - whether through M$ or directly from Novell, SuSE is coming into usage! Despite the angry horde that decried the deal and abandoned SuSE for other distros, NOVL has beat expectations the last couple years.

    Life support, my eye!! Better luck next time.
    Techboy_z
    • Have to agree

      Novell are consistently underrated by the IT community,
      partly because their marketing is both crap and low key,
      but also because people ignore the fact that they have
      always been good at connectivity and integration with
      other O/S's, and they've had reasonable amounts of cash
      from Netware.

      Novell have taken open source systems and made them
      acceptable to business, and the gossip I've heard is that
      Microsoft are buying more SUSE licenses because the
      others sold very well.

      Some open source purists hate them because of the deal
      with Microsoft, but looking at Novell's actions they have
      played "straight" and have financed development and
      enhancements of software for Linux which overall is
      helping it spread which can only be good for Linux and
      OSS generally.
      BobF_z
    • You are right, and more to the point...

      MS knew Novel owned Unix copyrights, and simply bought protection from Novel with the covenant. Now, I certainly think that all that money has helped Novel, but they would still be there without it.

      Amazingly, almost 2 years later, Redhat has still refused to sign with MS and still continues to be unaffected by the initial rantings of Balmer's IP threats. So, the second part of the deal, to entice the world to use Suse and drive Redhat out of business seems to be failing as well, both are just getting stronger.

      I need to re-dig up my analysis, MS would do nothing, continues to do nothing, and smarter minds would gag Balmer from spouting about IP, Seems I was right.

      TripleII
      TripleII-21189418044173169409978279405827
  • Some further reading on the second point.

    Like or hate Novel, they are being used as a pawn to shorten the competition that MS has to face. Better to control your enemy than not control them.

    http://www.serverwatch.com/eur/article.php/3768056
    [B]Microsoft hasn't been giving away the coupons for free, but it has been selling many of them for less than their market value, from what I'm hearing at least. And that means Microsoft is effectively subsidizing SLES by making support cheaper for Novell's customers than it would otherwise be and giving SLES a competitive advantage against Red Hat (and others)[/B]

    So the animosity toward Novel is actually healthy for the industry, some of whom choose not to purchase through MS subsidized channels (and let's not forget, RHEL is a great product in it's own right) because of this.

    I think it is a failing scenario, maybe slowing things a bit, but with Ubuntu server being well received, etc, even if MS could drive Redhat out of the picture (it can't), there would easily be any number of companies who will come in cheaper, always.

    TripleII
    TripleII-21189418044173169409978279405827
  • RE: or Microsoft building up their hand?

    The biggest blunder in computer history is the one Microsoft made by failing to do what Linus Torvalds did. They could have done it off in a back room somewhere out of petty cash, AND with full inside information from all the hardware vendors.
    This is easily the equivalent of General Motors' failure, with half the US car sales, to keep up with Japanese development,
    Now maybe they have wised up enough to see that they can't go on forcing crap on their best customers. Again this reminds me of the diesel cars, Cadillac 8-6-4 engine, the Vega and too many other engineering disasters that drove GM buyers elsewhere,
    I think eventyally "Windows" will be linux in disguise.
    reedjjjr
  • RE: Novell: Quietly developing some momentum

    "Again this reminds me of the diesel cars, Cadillac 8-6-4 engine, the Vega and too many other engineering disasters that drove GM buyers elsewhere,
    I think eventyally "Windows" will be linux in disguise."

    First, those cars were engineering disasters -- they are the Windows ME or the M$ Bob of the auto industry.

    Second, how would M$ use the Linux code -- covered by the various FOSS license agreements -- in its product? Now, if you would've said, "UNIX in disguise" then I'd agree with you, and suggest that is the entire basis for the M$ - Novell partnership (along with Novell dropping a huge lawsuit that it was bound to win).

    For the record, half of Novell's market cap is cash reserves. In fact, contrary to the FUD out there, Novell hasn't been in danger of going broke since it dropped its hardware business (Novell NICs anyone?), and even put away another $400 million while it was slashing staff 2 years ago.
    geek49203_z