Novell puts Linux on sale as earnings disappoint

Novell's $340 million lifeline from Microsoft appears to be losing its potency.

Although Microsoft originally gifted Novell $240 million to help fight Red Hat, and later added another $100 million to the pile, it doesn't seem to be enough to revive Novell's fortunes, as the company reported disappointing first-quarter earnings and a slide even in its Linux business, which had been growing fairly well.

"The pipe fell apart," declared Novell CEO Ron Hovsepian, as The Register reports. That's an intriguing statement, as other open-source companies with which I work have seen their pipelines grow tremendously, as enterprises look to open source to save money and boost productivity through the downturn.

Novell now plans to cut prices aggressively to increase its market share, according to Hovsepian.

Part of the problem, however, is that Novell isn't really an open-source company, and it doesn't pretend to be one. Most of its revenue comes from proprietary software, and that software didn't deliver in the first quarter.

Novell's Workgroup division--its largest, in terms of revenue--plummeted 9 percent to $81 million for the quarter. Identity, Access and Compliance Management, arguably one of Novell's strongest product lines, also skittered to an 8 percent decline.

Linux invoicing, which had been the standard bearer for Novell, dropped through the floor to land in the basement, with a 42 percent decline, at $23 million. The reason, as ZDNet's Larry Dignan captures, is that Microsoft couldn't deliver big deals for Novell in the quarter, according to Novell CFO Dana Russell:

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 percent, of our original $240 million agreement.

It's true that Open Platform Solutions, of which $35 million was Linux-related, grew 24 percent, compared to the first quarter of 2008, and that's excellent growth, but it wasn't enough to save Novell's quarter or to improve its trajectory, going forward.

Nor will it help that of the roughly 100 jobs Novell recently terminated, Novell reportedly trimmed 20 percent, or 30 people, from its OpenSuse ranks, according to Linux Magazine. Novell's OpenSuse community lead, Joe Brockmeier, has tried to put a positive spin on these layoffs, but with OpenSuse providing an early testbed for some of the technology that feeds into Suse Linux Enterprise Server, this can't be positive for innovation in Novell's Linux business.

But the larger concern is Novell's continued dependence on Microsoft to sell Suse Linux. I have suggested in the past that Novell's reliance on Microsoft appeared to be waning. It appears that I was wrong, as The Register suggests:

Of the $240 million in coupons for Suse Linux that Microsoft acquired as part of its partnership with Novell, only $199 million of them have been invoiced....Hovsepian said it was mostly Novell's job to chase down Windows shops, and get them to activate licenses.

Why Microsoft prepaid $25 million for a new batch of coupons when it still has $41 million in coupons already acquired on behalf of Windows shops is clear: both Microsoft and Novell suspected Novell would need the dough in (the fiscal first quarter) to prop up its numbers.

That should be Novell's concern, not Microsoft's. If Microsoft feels any compunction to assist Novell, it's certainly not to help prop up Linux, but rather to try to hurt Red Hat. This isn't the basis for sound, long-term strategy.

And guess what? It's not working.

On Friday, Piper Jaffray reiterated its Buy rating on Red Hat's stock, noting that "Our survey of 89 domestic Oracle applications customers indicates that Red Hat is gaining IT budget share" and that "we see ongoing evidence that Red Hat's low-TCO (total cost of ownership) message will play well in this challenging macro environment."

That environment hasn't been good for Novell's overall business, but it's helping fuel Red Hat's. Perhaps Novell should be looking to Red Hat, not Microsoft, for clues as to how to rejuvenate its business. The industry could use Novell as a stronger Linux player. Microsoft won't be the source of that strength.

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