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Novell needs to turn Linux into a foundation for growth

Laurent Lachal | Sept. 3, 2009
On the brighter side, Novell did mention some positives for the quarter, but these need to translate into renewed growth fairly quickly if Novell is to turn around its current performance.

Novell recently revealed its third-quarter fiscal 2009 results. Although there were no big surprises, the continuing weakness of its overall licence revenues coupled with poor performances from its identity and security management (ISM) as well as systems and resource management (SRM) businesses does not bode well for the future.

Novell keeps shrinking profitably

Ovum logoThird-quarter fiscal 2009 revenues were $216 million, down 11.9 per cent year on year following 8.5 per cent and 7 per cent drops in the second and first quarter respectively. They were barely up from US$215.6 and $214.9 million in the previous quarters. Year-to-date revenues were down 9 per cent compared to fiscal 2008, although this was broadly within Novells expectations.

Software revenues were particularly hit, down 49 per cent in the third quarter against 31.9 per cent and 29.7 per cent in the second and first quarters respectively. Invoicing continued to fare even worse than licensing revenues, partly impacted by shorter contract durations. When discussing its second-quarter results earlier this year, Novell hinted this could mean flat growth in the second half of the fiscal year instead of being stronger than the first half as usual. At the time Novell did not expect the second half of the year to be down. We did not share its optimism, and based on these latest figures we continue to be sceptical.

On the other hand, net profit keeps growing. In the third quarter it was $16.7 million (up from $15.6 million and $10.7 million earlier this year) due to continuing expense control efforts. Operating expenses shrunk 20 per cent this last quarter, against 12 per cent and 6.2 per cent in the second and first quarter respectively. Total headcount shrunk from 3,900 to 3,700, mostly as a result of an outsourcing agreement with ACS unveiled during its second-quarter results announcement. ACS agreed to purchase at least $30 million in Novell products and services over the next three years, while Novell outsourced some of its IT operations to ACS for $135 million over five years.

Linux is mostly doing fine

Linux platform product revenues in the quarter were $38 million, up 22 per cent year on year. On the other hand, Linux invoicing was down 24 per cent to $39 million, partly as a result of the November 2006 distribution agreement that Novell signed with Microsoft. This agreement is biased towards large deals, and there are not a lot of these deals around owing to the difficult economic situation. Novell has to date invoiced $226 million or 94 per cent of the $240 million agreement. The company talked up its new appliance technology and partner programme. These are welcome enhancements to its Linux portfolio but we do not expect them to significantly speed up Linux growth, although they will sustain it.


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