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Issue Date: March 2007

Microsoft deal shows promise as Novell revenue declines

March 2007
Matthew Aslett

Microsoft distributed double the expected number of Novell SUSE Linux support subscriptions in Novell's first quarter, although it will take some time before the deals begin to make an impact on Novell's financial results.

Waltham, Massachusetts-based Novell reported a first-quarter loss of $20m on revenue down 5% to $230m year-on-year as disappointing results from the company's workgroup and security and systems management businesses offset rapid growth from Linux platform products.
For the first quarter, Novell reported Linux platform revenue of $15m from its SUSE Linux Enterprise Server and Desktop products, up 46% year-on-year, although it is invoicing $91m, up 659%, which points to a brighter future.
"Invoicing this quarter exceeded our total invoicing levels for all of last year by almost 50%," said Novell's chief financial officer, Dana Russell. "We built up a very strong base of deferred revenue in this category that is only starting to contribute to higher secured revenue."
Novell's deal with Microsoft, through which the software giant is buying $240m of SUSE Linux service coupons to distribute to joint customers, certainly helped in that regard as 40 000 coupons were activated by the end of the first quarter, compared to the expected 20 000.
"We experienced strong momentum from our agreement with Microsoft and while these new customer deals did not contribute a material amount to recognised revenue this quarter, they did contribute $73m to Linux invoicing," said Russell.
As previously reported, revenue earned from the deals will be spread over the lifetime of the one- or three-year support agreements, or when unused coupons expire at the end of 12 months. Novell previously stated that it only expects $4m to $7m to come from the deal in the whole of this year.
With twice as many coupons as expected distributed in the first quarter, Novell's chief executive officer, Ron Hovsepian, took the opportunity to talk up the positive aspects of the controversial interoperability, indemnification and resale deal.
"Our results were positively impacted by our relationship with Microsoft, a partnership that is off to a strong start and one where we are executing ahead of plan," he said, noting that the company saw opportunities on the horizon for further growth.
"As we have focused on the enterprise to begin with, primarily in North America, shifting now to EMEA, we have still got EMEA and AP [Asia Pacific] to work from a large enterprise anchor perspective," he said.
The controversial patent covenant aspect of the deal returned to haunt Novell again recently with Microsoft's CEO, Steve Ballmer, telling financial analysts that it "clearly establishes that open source is not free, and open source will have to respect intellectual property rights”.
While he did not respond to that comment directly, Hovsepian maintained that "the whole goal of this agreement was to get customers, that was the whole intention from a customer perspective was to gain customers, and obviously revenue from our shareholders”."
On the customer front, Microsoft and Novell announced this quarter that Wal-Mart had signed up to take the SUSE Linux Enterprise support agreements, joining a list that includes Deutsche Bank, Credit Suisse, and AIG Technologies.
"A lot of these deals that we worked were obviously customers that we had in our pipelines to begin with," said Hovsepian. "The benefits that we have from the relationship was some acceleration of that." He added that while Novell and Microsoft had intended to build a pipeline of 150 potential customers, only 100 had been lined up as a strategic decision had been made to focus on "fewer, larger deals”.
While the Microsoft deal provided a highlight for Novell in the first quarter, the same could not be said for the company's identity and access management business, which Hovsepian admitted "did not perform as aggressively as we had planned”.
Revenue from identity and access management was $24m, down 7%. Additionally, Hovsepian admitted that the move to an indirect sales channel had "not progressed as quickly as I would like”.
Source: Computergram

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