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Novell's quarter crumbles, but a new market beckons

Company took a hit in the fourth quarter, but a new product suggests a way forward for the erstwhile software leader.

The next time you feel tempted to laud the power of the open-source business model, take a look at Novell.

Novell has been struggling for over 10 years, yet it still manages to crank out nearly $1 billion in sales each year, most of which derives from the licensing of proprietary software.

Novell reported its fourth-quarter earnings on Thursday, along with results from its full fiscal year. They're not pretty, but they do suggest a path forward for the erstwhile software leader.

Novell saw its sales slump over 12 percent from its year-ago quarter to $216 million. For the full fiscal year, Novell stumbled to a $257 million net loss, versus a $5 million profit in 2008, on net revenue of $862 million and a net loss from operations of $206 million.

Perhaps not for long.

Much of that annual deficit came in the fourth quarter, which included a $279 million noncash impairment charge that sent Novell's quarter into the red by $259 million.

Not pretty.

Unless you look at Novell's Linux numbers. Linux remains Novell's most appealing business and was up 21 percent year over year to $149 million--and up 14 percent at $39 in in its fourth quarter over the year-ago period. While a far cry from Red Hat's booming Linux business, Novell's results suggest that there's life in its Linux business yet.

Life that Microsoft continues to seem content to grant.

Make no mistake, without Microsoft, Novell's Linux business would struggle, at least in the short term. Microsoft, after all, has been funding Novell's Linux business since 2006, when the two companies entered into an interoperability and Suse Linux subsidy pact.

And without its Linux business, all of the rest of Novell's business would be in jeopardy, as Suse Linux makes Novell's other products a palatable choice. Even so Novell's Identity and Security Management, Systems and Resource Management, and Workgroup businesses all dropped significantly (down 10 percent, 6 percent, and 13 percent, respectively).

Novell's needs
Clearly, Novell needs Linux. Equally clearly, it needs Microsoft to grow that Linux business. Microsoft has already plowed $247.5 million into Suse Linux Enterprise Server (SLES) subscription coupons, and Novell CEO Ron Hovsepian has indicated he's now dipping into the additional $100 million in coupons the companies negotiated.

But how can Novell accelerate its Linux business at a pace that will be comfortable for Microsoft, which has made no secret of its animus to Linux and desire to quash it? Microsoft partners with Novell to show a good interoperability face to its customers who use Linux and to prop up the No. 2 vendor against Red Hat, the dominant Linux vendor.

The day that Novell's Suse Linux business threatens Microsoft, and not merely undermines Red Hat, is the day Microsoft will pull its extensive financial support from Novell's Linux business. That same day Novell's Linux business will crumble, perhaps irreparably.


Unless Novell can deliver a coherent strategy centered on Linux rather than merely friendly to Linux. For years Novell has packaged and repackaged a set of mostly stale offerings (e.g., Workgroup), pretending that they were part of a coherent strategy.

They weren't. The company was simply milking maintenance revenues as it sought to find a way forward. (I was in those meetings back in 2002 when the company discussed how to stanch the bleeding from maintenance declines. Those same conversations continue today, I'm sure.)

Then, as now, Novell's various product lines, and particularly Workgroup, offered little synergy, either in sales or engineering (i.e., the buyer of GroupWise is not the same as the buyer of Suse is generally not the same as the buyer of Identity Management).

Ongoing makeover
Novell is now entering a new phase of its repackaging makeover, but this one actually makes some sense. The company is calling it Intelligent Workload Management, arguing that a "new market [exists] for solutions that address the risks and challenges for computing securely across multiple environments."

Not surprisingly, Hovsepian argues that such an Intelligent Workload Management market "plays to the strengths of Novell--identity and security, systems and resource management, and our new Suse Appliance program."

Surprisingly, he may be right.

First of all, its wonderful to see Workgroup dropped from the discussion. Yes, it's Novell's biggest product by revenue, but no, it has almost no relevance for the rest of its business. Sell it off. Move on. The company has already offloaded much of its Workgroup development to India, anyway.

Second, Novell really does have a great deal of expertise in this area, with some assets that could go a long way toward helping it compete with the vendors that compete aggressively in the market: VMware, Microsoft, and increasingly Red Hat.

The key will be for Novell to really put Linux at the heart of its story, rather than simply using it as a conversation starter and loss-leader.

And yet, more is needed. Novell has the burden of a stale brand that it must shed. A few select acquisitions could help it to establish technology and brand leadership in the market. Companies like Reductive Labs (Puppet project for data center infrastructure management), VMOps or Eucalyptus (for building and managing private clouds), and/or Cloudera (for designing and analyzing large-scale data assets) could put Novell in the driver's seat on this market.

For the first time in years, the market seems to have moved in a direction that corresponds with Novell's rich technology assets. If Novell can make Linux the centerpiece of this campaign, bolstered by relevant, innovative technology, it will finally get its Linux business out of Microsoft's shadow and its overall business back on track.

The technology pieces are in place. It's now a question of brand and execution.