Novell chief: 'Our Linux performance did not meet our expectations'

Novell's fiscal first quarter results were a mixed bag and Linux invoices fell sharply as the company failed to sign big deals.For the first quarter ending Jan.
Written by Larry Dignan, Contributor on

Novell's fiscal first quarter results were a mixed bag and Linux invoices fell sharply as the company failed to sign big deals.

For the first quarter ending Jan. 31, Novell reported non-GAAP earnings of $24 million, or 7 cents a share, on revenue of $215 million. Those results were a penny better than Wall Street estimates. Net income for the first quarter was $11 million, or 3 cents a share.

On the surface, Novell's quarter told a familiar tale. Open platform sales, which are dominated by Linux offerings, were $35 million, up 24 percent from a year ago. Other units had a mixed performance. Novell CEO Ron Hovsepian said that "invoicing was below our expectations in this weak economy."

Hovsepian elaborated on Novell's earnings conference call. Linux, viewed as Novell's growth engine, sputtered in the quarter. Hovsepian said:

Our Q1 Linux performance did not meet our expectations as our pipeline coverage and conversion was overly reliant on direct sales and sales cycles lengthened. Going forward, we are focused on building our pipeline with and through partners and we will be aggressive on pricing to gain market share.

Matt Asay put it best: Novell will be putting its Linux on sale.

Novell CFO Dana Russell noted:

Linux invoicing was $23 million, down 42%. As we have stated before, our Linux business is dependent on large deals which may result in some fluctuations of our quarterly invoicing. This quarter we did not sign any large deals, many of which have been historically fulfilled by Microsoft certificates. Today we have invoiced $199 million or 83% of our original $240 million agreement.

Add it up and it appears that the Microsoft reselling agreement that put Novell's Linux business on the map has played itself out. Meanwhile, an aggressive pricing strategy--for services attached to free software--can't be good for profit margins going forward.

On the bright side, Novell said it is rolling out SUSE Linux Enterprise 11 later in the quarter. That rollout may improve Novell's Linux invoicing fortunes.

Needless to say the Microsoft agreement gravy train was the big topic among analysts covering Novell. A few nuggets gleaned from Novell executives:

  • Russell said that "customers certainly are price sensitive" and Novell expects that the prices for Microsoft-Novell Linux certificates are not going to hold.
  • Demand generation for Novell's Linux business is the company's responsibility--not Microsoft's. The big problem was that Novell was relying on big deals that failed to materialize.
  • Invoicing for Novell's Linux certificates appear to be moving back to historical norms, said Russell. If that's the case then the first quarter hiccup will be an aberration.

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