Novell's Linux revenue soars 22 percent, while everything else tanks

Novell's Linux business seems healthy, but is unable to carry the burden of its languishing proprietary products. Something has got to give.

Novell reported on Thursday a 22 percent year-over-year increase in its Linux revenue, topping $40 million. That's the good news. The bad news is that overall, net revenue slumped to $216 million from $245 million for the third fiscal quarter of 2008, with every product besides Linux dropping considerably. From identity and security management (down 16 percent) to systems and resource management (down 15 percent) to workgroup (down 12 percent), Novell is in serious trouble, with at least two potential options:

Turn to the open-source community or Microsoft to fix its failing businesses.

Novell's Open Platform business, of which Linux comprises the majority of revenue, has consistently soared for several straight quarters. Though it has had hiccups, Linux has been a factor in Novell's resilience through the downturn. This is either a factor of Novell's commitment to open source or its partnership with Microsoft, or both.

Whichever it is, Novell needs more of it. Now.

Novell's Workgroup business has been underperforming for years now as the company tries to Band-Aid the declining relevance of its once-leading solutions, like GroupWise. It's time to either amputate (sell off assets) or graft new products onto the product line. Companies like Jive, MindTouch (Disclosure: I am an adviser to MindTouch), Open-Xchange, and others could fill out Novell's Workgroup product offering.

Ever the savvy operator, Novell CEO Ron Hovsepian was able to steer the company to positive growth in operating margin, but now he needs to turn around the company's revenue story. His contention that Novell's "revenue performance was similar to many companies in the software industry" is certainly not true of Novell's chief Linux competitor, Red Hat, which has thrived through the recession, even despite plummeting semiconductor sales, signaling lower overall demand for the servers and personal computers that fuel Novell's business.

That's not to suggest that everything is rosy at Red Hat. As The 451 Group reports, Red Hat's rate of revenue growth has steadily declined over the past few quarters, requiring it to take some action to kickstart growth.

Fortunately for Red Hat, the market has clearly signaled that it welcomes acquisitions, as its highest valuation in the past five years came on the heels of its JBoss acquisition. Apparently, investors would like to see Red Hat grow beyond its core Linux business.

Back to Novell. The company needs a growth strategy, and it has only found two ways to grow over the past few years: open source and Microsoft. One or the other will do. Novell's current strategy of using Linux as a loss-leader of sorts to promote its separate, proprietary products is not working.


Follow me on Twitter @mjasay.

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