Novell Earnings Show Linux Growth as NetWare Declines

With reported fiscal fourth quarter 2006 revenue of US$245 million, Novell (Nasdaq: NOVL) missed Wall Street estimates and expectations this week, causing the software and services company stock price to slip more than 9 percent.

Novell, which went through major leadership changes this year, also indicated that it would absorb restructuring charges next year, further impacting investor confidence.

Nevertheless, the company turned a profit of $25 million in the fourth quarter, delivering a 6 cents-per-share dividend to Novell investors who endured a loss of 2 cents per share during the same period last year. The company also claimed its recent interoperability and patent deal with Microsoft (Nasdaq: MSFT) will further fuel Novell's growth in the Linux space.

Linux and Lag

Novell's strategy to center its business on Linux and open source software is growing revenue, but not fast enough to overcome losses from legacy solutions, such as NetWare.

"We are pleased with the progress we made in our key growth categories of Linux and Identity in fiscal year 2006," said Novell President and CEO Ron Hovsepian. "Coupled with the unprecedented Linux partnership with Microsoft just recently announced, we will add significant momentum to our Linux business."

For the fourth quarter of 2006, Novell reported revenue of $13 million from Linux products, an increase of 32 percent compared to last year's fourth quarter. Revenue from Identity and Access Management was also up at $24 million, albeit only 3 percent over last year.

Combined revenue from its Open Enterprise Server and NetWare products was down 25 percent from last year, the company said.

For the fiscal year 2006, Novell said it made $967 million on a net income of $21 million, compared with 2005 revenue of more than $1 billion and net income of $373 million -- which included a nearly $500 million payment from Microsoft for a legal settlement.

Novell's financial results were preliminary, as it is one of several IT and other companies that are reviewing past stock-based compensation practices, according to the company.

Old Problem, Partner Play

For some time, Novell has attempted to compensate for the declining sales of its older products. Even though the company grew its Linux and Identity solutions revenue, the losses are larger, Illuminata Senior Analyst Gordon Haff told LinuxInsider.

"If [the new business] is not growing at the rate that the legacy business is declining, then it's not good," he said.

Although he positioned Novell as a very distant second to top Linux vendor Red Hat (NYSE: RHT), Haff said Novell's stated intention to work more through partners makes sense.

"People are not buying Linux, they're buying a solution and that is delivered through partners," Haff said, referring to IBM (NYSE: IBM) as an example.

Billion Dollar Bump

Novell's somewhat disappointing earnings also push it below the "psychological threshold of being a billion dollar operation," Gartner (NYSE: IT) Vice President George Weiss told LinuxInsider.

"They had been recognized as a billion dollar company and that is no longer the case," he said.

Novell faces the difficulty of not only growing its Linux business but also making up for NetWare and other losses at the same time, Weiss added.

"Every erosion or loss is a really difficult thing to right," he said. "When you have to get back to zero and grow your business, it's double the effort, essentially."