| Analyst likes the Novell/Microsoft deal |
Jan. 19, 2007
It's no secret that many people in the Linux community dislike Novell's recent Microsoft partnership. To some analysts, though, the deal is a feather in Novell's market cap.
Open-source activist Bruce Perens started an online petition to protest the deal. A group of people launched a Web site with a self-explanatory name, Boycott Novell. And, leading Samba developer Jeremy Allison left Novell because of the patent part of the Novell/Microsoft deal.
At least one independent institutional investment bank, First Albany Corp., likes the deal, however. They like it a lot.
On Jan. 17, First Albany's managing director of equity research, Mark Murphy, wrote a research note to the bank's customers stating that First Albany was "upgrading our rating on the shares of NOVL [Novell] to Buy from Neutral." By the firm's rating system a Buy recommendation means that it expects the stock to have a potential return of 10 to 20 percent.
Specifically, the investment bank believes that Novell Inc. will reach a price of $9 per share. For the last six months, the stock has been hovering around $6.30 per share.
The first reason First Albany gives for expecting Novell's fortunes to rise is, according to Murphy, that "Linux bookings could surge near term. We sense that Novell's Linux bookings and revenue growth could reach a near-term inflection point, due to faster-than-expected uptake of SuSE Linux coupons distributed by Microsoft (MSFT- $31.16-Buy)."
While First Albany also thinks that Microsoft's $350-million payment to the Linux company will help Novell's cash balance, that's not the part of the deal that got the firm's attention. No, what got the bank's attention was that 16,000 of the SLES (SUSE Linux Enterprise Server) certificates, which Novell had sold to Microsoft, have already been activated. Three of the first major customers are Deutsche Bank, Credit Suisse, and American International Group -- all heavy-weight businesses.
Murphy wrote, "The news of the activation of over 16,000 certificates translates into roughly $11M in revenue." That may only be the start, though. He adds: "We believe it is becoming increasingly likely that NOVL could widely exceed the $4M-$7M built into its plan for FY07 for MSFT-driven transactions. Industry contacts also indicate that Novell will likely show additional SLES certificates being activated this quarter, beyond the 16,000 certificates that have already been announced. On that basis, the bogey of 70,000 coupons per year begins to look like a very low bar."
First Albany didn't see this coming. "When the MSFT agreement was announced, we believe the common view was that NOVL would receive a slug of cash and that was the whole extent of it, because very few customers were likely to activate the coupons," continued Murphy. "In that pessimistic scenario, there would be no meaningful impact to NOVL's P&L [profit & loss] during the next 12 months; after which NOVL would begin to recognize meaningless, empty one-time revenue events as the coupons expired without any true customer deployment of the SLES technology. As time passes and the Street learns more about the arrangement, we believe it will become more apparent that customers are implementing the SLES technology as they accept MSFT-sponsored coupons."
While First Albany also recognizes that Novell and Microsoft working on interoperability is helping to get businesses to give SUSE Linux a try, the real key to its positive view on Novell is that those Microsoft SLES certificates are driving "near-term Linux subscription revenue for Novell," and creating "an ongoing revenue stream as customers renew the SLES subscriptions a year later; and 3) it could mean that industry market share estimates, such as those provided by IDC, will begin to show increasing market share for Novell versus smaller, private Linux providers."
In other words, the Novell/Microsoft deal is actually helping Novell get Linux into the enterprise. And, once there, First Albany expects those customers to stick with SUSE Linux.
-- Steven J. Vaughan-Nichols
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