Novell Expands Margins with Linux

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How confident is Novell’s CEO Ron Hovsepian about the appeal of Linux? He is calling the open source operating system a key driver helping to push the company through the current global economic slowdown.

His confidence comes in part from Novell’s (NASDAQ: NOVL) financial earnings for 2008, which show improvement in net revenue and a reduction in Novell’s losses.

With IT budgets getting tighter, Hovsepian said he expects more IT shops to look into the cost-saving possibilities of Linux.

“If overall IDC is projecting one to two points of general IT spend growth for next year, then what we have to figure out is, as they rebalance that spending, where can we get it?” Hovsepian said on Novell’s 2008 fiscal results call.

“We feel good that Linux should be a winner on that. We are not sure when that will happen. But I actually feel good overall that Linux will be a key player for that as that market unfolds.”

Hovsepian’s comment come as Novell closed out the year with less red than the prior year with its year end financial results for 2008. During a conference call yesterday, Novell said revenues were $957 million for 2008, up by about 3 percent over the $932 million it took in for fiscal 2007.

For the full year, Novell said it narrowed its losses to $9 million, or $0.02 per share, which included a $29 million impairment charge on some auction-rate securities. Although still bleeding red ink, the loss was much smaller than the full year net loss of $44 million, or $0.13 per share, that Novell tallied for fiscal year 2007.

For the fourth quarter, Novell reported net revenue of $245 million, about the same as it pulled in for the same, year-ago quarter. The company said net loss in the fourth fiscal quarter of 2008 was $16 million, or $0.05 per share, which included a $14 million impairment charge related to some of its securities. This compares to a net loss of $18 million, or $0.05 per share, for the fourth fiscal quarter of 2007.

Novell’s CFO, Dana C. Russell, said Novell made progress to improve cost efficiencies, which helped narrow the losses for the year.

Linux sales also came through in a bigger margin. Revenue from Linux hit $120 million, which is an increase of 38 percent over fiscal 2007. Russell cautioned that Novell’s Linux business continues to be dependent on large deals, most notably the one with Microsoft that began in late 2006. As part of that original deal, Microsoft agreed to purchase $240 million worth of Novell SUSE Linux Enterprise Server subscriptions. In August of this year, Microsoft expanded the deal with an option to purchase up to an additional $100 million worth of Novell Linux subscriptions.

“The impact of the Microsoft agreement has been a significant factor for the growth of product revenue, the increase in gross and operating margin for Novell,” Russell said. “We will continue to benefit from this agreement in fiscal 2009. Largely all Microsoft certificate sales have been three-year arrangements, which will begin to be renewable in the first fiscal quarter of 2010.”
During the call, Russell also revealed that Novell has shed some jobs over the last quarter as well.

Russell reported that at the end of Novell’s fiscal fourth quarter and 2008 year end total employee headcount was 4,000 , down from 4,100 at the end of Novell third quarter. Russell noted the employee reduction was primarily due to restructuring activities and he did not provide a year over year comparison with 2007.

This article was first published on InternetNews.com.