Novell's Earnings Down--Linux Business Disappoints
by Sam Dean - Feb. 27, 2009Comments (6)- Related Blog Posts
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Novell has reported its financial performance for the November-to-January quarter, and the results aren't pretty. Earnings dropped 36 percent to $11 million, compared to $17 million in the year-earlier quarter. Sales fell short of analysts' expectations, although the earnings were very slightly above expectations. Novell's CEO Ron Hovsepian didn't just pin the results on the economy. He said "invoicing was below our expectations in this weak economy,” and he noted that "our Linux performance did not meet our expectations." What lies ahead for Novell's Linux business?
Matt Asay has a good analysis on how the multi-million lifeline that Novell gets from Microsoft could be losing its potency. He writes:
"Although Microsoft originally gifted Novell $240 million to help fight Red Hat, and later added another $100 million to the pile, it doesn't seem to be enough to revive Novell's fortunes...Linux invoicing, which had been the standard bearer for Novell, dropped through the floor to land in the basement, with a 42 percent decline, at $23 million."
Matt also notes this from ZDNet's Larry Dignan, where Novell's CFO Dana Russell weighs in:
"As we have stated before, our Linux business is dependent on large deals, which may result in some fluctuations of our quarterly invoicing. This quarter, we did not sign any large deals, many of which have been historically fulfilled by Microsoft certificates. Today, we have invoiced $199 million, or 83 percent, of our original $240 million agreement."
Novell's relationship with Microsoft is unusual in the sense that the company is reliant on Microsoft to assist with Linux-related deals, but is not unique in terms of Microsoft's standard business practices. Huge companies like Dell and Intel--and many more--have been reliant on Microsoft for years in helping to get big deals, co-marketing, and much more. It's very much the Microsoft way to join forces with strategic technology partners, including infusing cash into marketing efforts from other tech companies. However, Dell and Intel have huge, diversifed lines of proprietary technologies delivering consistent cash flows.
I agree with Larry Dignan and Matt Asay that Novell can't afford to be so reliant on Microsoft going forward. Novell reported Linux invoicing down 42 percent at $23 million. Part of Microsoft's interest in its partnership with Novell is staving off Red Hat, which has continued to deliver consistent financial performance even during the downturn. Red Hat does not have the same fluctuation as Novell does, from quarter to quarter, in terms of big deals. It relies heavily on renewals for support and service contracts from its top 25 customers, and tends to dependably get them--a model of consistency.
Novell's best course of action is to become less reliant on Microsoft with its Linux business, and to steady its dependency on erratic striking of new deals. This isn't a good economy for new deals. It is a good time to be very focused on consistency, though.
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