As Novell’s Woes Continue, Red Hat Is the Beneficiary

by Ostatic Staff - Aug. 31, 2010

The war drums are starting to beat around Novell. Now that Oracle has subsumed Sun Microsystems, only Novell and Red Hat remain as large, U.S.-based public companies focused primarily on open source software, and Novell continues to stand on shaky ground. This week, the company underperformed its guidance for the fiscal third quarter of 2010, with earnings and revenues down. As Novell struggles, some foresee a VMware acquisition, and Red Hat may end up the big beneficiary.

Novell’s revenues were $199 million, a decline of 8 percent from the comparable quarter of 2009. The company reported net income of $16 million, or $0.04 per share, down from $17 million in the third quarter of 2009. Most worrisome, the company’s Linux revenues were $36 million, down 7 percent from the third quarter of last year, and Linux invoicing was down 11 percent. Regarding the Linux problems, Novell’s CFO, Dana Russell said “depletion of the original Microsoft certificates this year makes for a challenging year-over-year comparison.” 

Novell fully admitted, for a long time, that it was heavily dependent on Linux-focused deals driven by Microsoft to drive its revenues and earnings.  Now, the company is rumored to be the target of an acquisition by VMware, which has far-reaching partnerships with the company. Previously rumored suitor Oracle is almost entirely likely to have any interest in Novell. Meanwhile, a large hedge fund has an outstanding offer to buy the company,  and is predicted by most observers to simply want to flip it for a higher price.

Novell goes back a long way, and was one of the early players on the rise of local area networking among many other significant technology trends, but its Linux business isn’t carrying it along, and the company is in trouble. If Novell is bought by a software titan, it may be injected with some new momentum, but there are few scenarios that seem very promising, and if Novell does lose its status as an independent public company, that leaves only Red Hat as a U.S. public company focused on open source.

Red Hat, meanwhile, continues to turn in quarter after quarter of astonishing performance surrounding its Linux business—all without a focus on the Linux desktop. Almost certainly, Novell’s woes are already helping Red Hat, and Red Hat will certainly benefit if Novell loses its independence. At this point, the question becomes whether a big partner or buyer can possibly rescue Novell.