Novell Sees Disappointing NetWare, Linux Sales In 1Q

Novell saw sluggish sales of NetWare, Linux and services in its 2005 fiscal first quarter, but CEO Jack Messman said he's optimistic that new Linux products and a new sales model will stimulate growth going forward.

The Waltham, Mass.-based software vendor on Tuesday reported revenue of $290 million, a 9 percent year-over-year gain, for the quarter ended Jan. 31. NetWare sales fell 14 percent, while Suse Enterprise Linux Server 9 subscriptions rose by 21,000 during the quarter, a 4 percent sequential increase. During the quarter, the company recognized revenue of $15 million associated with Suse business overall, but only $7 million from new subscriptions.

Novell posted a first-quarter profit of $395.2 million, or 90 cents a share, which includes $448 million from the company's legal settlement with Microsoft. Excluding that settlement, Novell's earnings were $10 million, or 3 cents per share, the same as a year earlier.

Novell executives attributed the slowdown in NetWare sales to the impending release of Open Enterprise Server (OES), which the company launched last week at LinuxWorld, and lackluster Suse Linux business amid Microsoft price cuts and possible customer use of unpaid Linux licenses.

"We didn't have as good a performance of NetWare as I would have liked," Messman said Tuesday during a conference call with financial analysts on Novell's first-quarter results. "There's no single reason why NetWare licenses declined by as much as they did, but [many] Novell customers are waiting to have a look at OES before renewing their maintenance contracts."During the first quarter, the performance of Novell's Linux business didn't reflect the open-source platform's rising momentum, according to Messman. "I'm not pleased with Linux sales this quarter," he said. "Market demand and sales results were lumpy despite an upward trend."

The buying climate remained weak as customers played Microsoft against Novell to force price cuts on Windows and other Microsoft contracts, Messman noted. "It's a buyer's market as customers delay [purchases] as a means of lowering prices," he said.

Linux's increased market presence has Microsoft "fighting back," Messman said. "We are generally given credit for bringing Microsoft to the bargaining table, and Microsoft significantly lowers prices and keeps the business. We've been telling customers we're providing a service to them by bringing Microsoft to the table, and we need to be compensated. I don't see a slowdown in Linux."

Novell's OES, which serves as a major upgrade to NetWare and includes the full Suse Enterprise Linux Server, is slated to begin shipping early next month.

Joseph Tibbetts, senior vice president and CFO of Novell, said the company's worldwide services division--including Novell consulting, customer support services and training--generated first-quarter sales of $80 million, up 14 percent from a year ago. Consulting accounted for $42 million of services sales, and worldwide services overall represented 28 percent of Novell's total first-quarter revenue. Still, Tibbetts said Novell's services group "was not performing to expectations."Messman said Novell has made "good progress" with the realignment of its sales and consulting teams along product lines in the U.S. and European markets. The company also expects to spur growth with its new sales model and substantial changes in its go-to-market strategies, he said.

Yet financial analysts gave Novell some flak for relying too heavily on its consulting division when the company has a strong VAR channel, as well as for not giving some of the $448 million windfall from the Microsoft settlement back to investors as dividends or stock buybacks. Messman said Novell is putting the money in the bank, possibly for strategic acquisitions.

In the meantime, Novell VARs are being trained and geared up for the OES rollout and Linux sales, though it may be several quarters before their impact is felt, Messman said. "We have decided we're going to go that route, and [we'll] take larger named accounts. But all other accounts go through the channel. North America has done that, and in Europe we're starting that," he said. "Part of it is training the channel to handle this and make sure they're engaging with us."