What happens to Novell, post Microsoft?
Novell reported fiscal second quarter earnings of $110,000 on revenue of $239 million in a so-so quarter that illustrated how the company's non-Linux businesses--Netware and its identity management software--struggle to grow.
The bad news: Novell is becoming too reliant on Microsoft. And given the third version of the General Public License could hamper the partnership that's no idle concern.
First let's look at the numbers regarding just how important Microsoft is to SUSE Linux in the enterprise.
In the quarter Novell reported $19 million of revenue from its Linux platform products, up 83 percent from a year ago. Novell also added $29 million in invoicing for Linux products, up 114 percent from a year ago. A lot of that growth can be attributed to Microsoft reselling SUSE Enterprise Linux certificates.
The rub: The sales pop from Microsoft is waning for Novell. More optimistic analysts call this waning "normalizing."
On the earnings conference call, Novell CEO Ronald Hovsepian said that in the last two quarters the company has received $91 million of a $240 million five year contract with Microsoft. That's roughly 38 percent of the deal complete in just two quarters.
The issue: Most of that pop came a quarter ago. For the second quarter Linux invoicing declined 75 percent from the first quarter. Sure it's up a bunch from a year ago, but that's a way easy comparison. Non-Microsoft related pieces of the Linux business fell 39 percent in the second quarter compared to the first quarter.
Playing with the numbers, SUSE sales without Microsoft had an invoice total of $11 million compared to the $29 million figure reported. The remainder of that sum is Microsoft.
To its credit, Novell has tried to diversify a bit by sealing SUSE Linux deals with SAP and Dell. Novell executives didn't provide details on those two deals. But it's unrealistic to think that either SAP or Dell can deliver the big numbers Microsoft can.
As a result, Microsoft is essentially SUSE Linux's biggest reseller.
That's one helluva blind spot considering the GPLv3 risk that Novell laid out in its annual report. Perhaps, that's why 38 percent of the Microsoft deal's value is completed already. With the GPL final looming Novell could be on the clock. Microsoft may also be on the clock as it rushes to sell SUSE Linux certificates before the new GPL.
Even more worrisome is that Novell's other businesses aren't picking up the slack. Revenue from Novell's identity and access management was up 5 percent compared to a year ago. The company's system and resource management and workgroup businesses were both down 4 percent compared to a year ago.
Credit Suisse analyst Jason Maynard said in a research note that Novell's organic Linux growth is worrisome. Says Maynard:
"Given the lack of organic Linux invoicing growth, we think it is doubtful that Novell’s Linux business will be a source of cash flow unless Microsoft buys more licenses or emerges as a meaningful channel for Linux sales. We however remain skeptical that Microsoft will become a champion of Open Source software."
By front-loading the Microsoft deal, Novell isn't going to receive any further cash until those first SUSE contracts begin to renew two to three years from now. With a new GPL looming renewals aren't a slam dunk.