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Novell Revenues, Linux Business Slide

It’s been a tough quarter quarter for Novell (NASDAQ: NOVL) as questions about its future ownership remain on the table. Novell is also facing pricing pressure on its Linux business as renewals come up on Microsoft’s SUSE Linux Enterprise subscriptions. Novell this week reported its second-quarter fiscal 2010 earnings, showing a decline in revenue, whihc […]

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Sean Michael Kerner

May 28, 2010

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It’s been a tough quarter quarter for Novell (NASDAQ: NOVL) as questions about its future ownership remain on the table. Novell is also facing pricing pressure on its Linux business as renewals come up on Microsoft’s SUSE Linux Enterprise subscriptions.

Novell this week reported its second-quarter fiscal 2010 earnings, showing a decline in revenue, whihc came in at $204 million for the quarter, a drop from the $216 million it brought in a year earlier. On the positive side, net income hit $20 million or $0.06 per share, which is an improvement over the $16 million or $0.05 per share Novell reported for the second quarter of 2009.

But the slide in revenue continues for Novell, which provided third-quarter revenue guidance for revenues between $205 million and $210 million.

A closely watched portion of Novell’s income hinges on its Linux business. But CFO Dana Russell reported that the company’s Linux platform product revenue decreased by 4 percent on a year-over-year basis, hitting the $35 million mark.

In 2007, Novell entered into a Linux reselling agreement with Microsoft for Linux support subscriptions. Microsoft initially purchased $240 million of SUSE Linux support certificates that were resold to joint Microsoft/Novell customers. But since then, the situation has changed, with that portion of the business facing several obstacles.

Last quarter, Russell noted that Microsoft renewals were coming in at a substantial discount of up to 85 percent off Novell’s list price. This quarter, Russell noted during the company’s financial earnings call that the discounting continues.

“The original certificates that we sold to Microsoft in 2007 were at a 45 percent discount from Linux,” Russell said. “Today’s pricing, as we know, is closer to [an] 85 percent discount for large enterprise customers. And to put that in perspective, if all the original certificates sold to Microsoft were renewed at today’s price, the total value instead of $240 million would be $65 million.”

Still, he added that once Novell accounts for the difference, the company’s executives are “quite happy with the overall value of renewals we received in the quarter.”

“As expected, the depletion of the original Microsoft certificates last year makes for challenging year-over-year comparisons,” Russell said. “Excluding Microsoft, invoicing growth was quite strong, up 46 percent. We continue to cite sizable deals with large enterprise customers, and we’re pleased with the growth of our core business.”

Novell also noted some of its positive Linux developments during the quarter. Among those is the success of the SUSE Appliance Program.

“Since its launch, over 65,000 users have built over 311,000 appliances using the SUSE Studio Online tool,” Novell President and CEO Ron Hovsepian.

Hovsepian also noted that Novell during the quarter won a critical legal victory over SCO around the issue of UNIX copyrights.

“The Salt Lake City federal jury’s decision confirmed Novell’s ownership of the UNIX copyrights, which still had asserted it owned in connection with its assault on many users of Linux,” Hovsepian said. “Novell has demonstrated its commitment to promote Linux, including defending Linux intellectual property.”

Few hints on potential Novell buyers

One thing that Hovsepian didn’t talk about much was the current ownership situation of his company. In March, Novell rejected an unsolicited $2 billion bid from a hedge fund to take the company private. Novell has been considering its options ever since.

“As you know, on March 20, we issued a press release in which our Board of Directors announced its rejection of the unsolicited conditional proposal,” Hovsepian said. “We stated in that press release we do not intend to disclose developments with respect to any of these alternatives unless and until our board has approved a specific course of action.”

Hovsepian also declined to answer questions about any potential future buyers during his call with analysts.

Sean Michael Kerner is a senior editor at InternetNews.com, the news service of Internet.com, the network for technology professionals.