| Novell's Linux income increases, looks to channel for growth in '08 |
Dec. 14, 2007
After an unexpected delay of eight days, Novell finally announced its financial results for its fourth fiscal quarter and 2007 fiscal year, which ended Oct. 31, 2007. Novell reported net revenue for the overall year of $932 million, a loss of $26 million or 8 cents per share, although the company also reported 69% growth in its core Linux products.
The delay in Novell's results was caused by an SEC (Security and Exchange Commission) investigation into the company's financial statements. After completing the investigation, the SEC did not require Novell to make any changes to those statements, allowing the company to release its delayed financial results.
While Novell's net income went up from 2006's $919 million to $932 million in 2007, the Linux distributor showed a net loss of $26 million. The key reason appears to be that Novell is still restructuring from being a direct sales software and services company to being one that focuses on software and channel sales.
In addition, Novell is getting rid of all of its consulting business units. In this last quarter, Novell has agreed to sell its consulting unit in Switzerland. Once this deal is done, Novell will be entirely out of the this business.
Novell CEO Ron Hovsepian explained, during the Novell earning teleconference, that Novell was making this move because "We're shifting our revenue mix." Hovsepian went on, "One year ago we were a generalist, now we're focusing on becoming a software company."
Moving forward, Hovsepian said that Novell would be "Very, very focused on improving operating margins in Linux and identification management." While "we want the company top line to grow, what we really want is to change the structure of Novell so we can operate in a much more efficient manner," he said, and "the only way to do that is to work with the channel."
The company has already made clear its plans to shift from direct sales and service to a channel-based business model. Novell has started new channel programs and named a new head for its channel programs.
That is not enough, Hovsepian contends. During the press conference, he said, "We need to keep shifting from geographical model to one where channel partners are more closely aligned with our business units." At the same time, Novell wants to bring more partners on board. "We want to bring on new partners," said Hovsepian. "We haven't done a good job on that recently."
As for Linux in particular, Novell reported 69% year-over-year growth. Linux invoicing for the fourth quarter was $46 million. This is up 108 percent from last year. Although Hovsepian would not give specific details on how well Novell is holding on to its Linux customers, he did say that Novell had seen "significant improvements with its large customers," but that when it came to smaller customers, "we still need to see improvement," he said.
Looking at Novell's operating system competition, Hovsepian dismissed Sun's OpenSolaris. "We don't see much of an uptick at all with OpenSolaris. They have good marketing, but nothing else really," he said.
As for Red Hat, Hovsepian said that he felt that Novell is ahead of Linux's top company in technical innovation, and has a much stronger support model. From where Novell sits, its real advantage over Red Hat or any other Linux company is that Novell, thanks to its Microsoft partnership, has by far the best interoperability with Microsoft Windows. "We're better than anyone else when it comes to interoperability with Windows," said Hovsepian.
That last fact has not won Novell friends with large numbers of the open-source community. The Boycott Novell site remains alive and well.
Still, even though Novell CFO Dana C. Russell said it's "difficult to decipher Microsoft's halo effect" on Novell's business, the company clearly believes its Microsoft relationship has helped more than hindered its business sales.
Novell continues to be cash-rich, with $1.9 billion in the piggybank on Oct. 31. That's up $400 million from last year's $1.5 billion. When asked if Novell was considering a stock buyback or had any particular plans for this abundance of cash, Hovsepian declined to comment.
Looking ahead for 2008, Russell said, the company's net revenue is expected to be between $920 million and $945 million. Novell expects the real improvement, as the company shifts from consulting and direct sales to the channel, will be that profits go up as it becomes more efficient.
Novell may be sure of this path, but the market doesn't seem to share this view. In after-market-close trading, company stock plunged 80 cents per share.
--Steven J. Vaughan-Nichols
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