Novell reported on Thursday a 22 percent year-over-year increase in its Linux revenue, topping $40 million. That's the good news. The bad news is that overall, net revenue slumped to $216 million from $245 million for the third fiscal quarter of 2008, with every product besides Linux dropping considerably. From identity and security management (down 16 percent) to systems and resource management (down 15 percent) to workgroup (down 12 percent), Novell is in serious trouble, with at least two potential options:
Turn to the open-source community or Microsoft to fix its failing businesses.
Novell's Open Platform business, of which Linux comprises the majority of revenue, has consistently soared for several straight quarters. Though it has had hiccups, Linux has been a factor in Novell's resilience through the downturn. This is either a factor of Novell's commitment to open source or its partnership with Microsoft, or both.
Whichever it is, Novell needs more of it. Now.
Novell's Workgroup business has been underperforming for years now as the company tries to Band-Aid the declining relevance of its once-leading solutions, like GroupWise. It's time to either amputate (sell off assets) or graft new products onto the product line. Companies like Jive, MindTouch (Disclosure: I am an adviser to MindTouch), Open-Xchange, and others could fill out Novell's Workgroup product offering.
Ever the savvy operator, Novell CEO Ron Hovsepian was able to steer the company to positive growth in operating margin, but now he needs to turn around the company's revenue story. His contention that Novell's "revenue performance was similar to many companies in the software industry" is certainly not true of Novell's chief Linux competitor, Red Hat, which has thrived through the recession, even despite plummeting semiconductor sales, signaling lower overall demand for the servers and personal computers that fuel Novell's business.
That's not to suggest that everything is rosy at Red Hat. As The 451 Group reports, Red Hat's rate of revenue growth has steadily declined over the past few quarters, requiring it to take some action to kickstart growth.
Fortunately for Red Hat, the market has clearly signaled that it welcomes acquisitions, as its highest valuation in the past five years came on the heels of its JBoss acquisition. Apparently, investors would like to see Red Hat grow beyond its core Linux business.
Back to Novell. The company needs a growth strategy, and it has only found two ways to grow over the past few years: open source and Microsoft. One or the other will do. Novell's current strategy of using Linux as a loss-leader of sorts to promote its separate, proprietary products is not working.
Follow me on Twitter @mjasay.
The bad news is that global server revenue is down 25 percent in the last quarter, according to IDC, with Microsoft Windows server revenue down a whopping 29 percent.
The good news? Novell reported Thursday that its Linux Platform revenue climbed 25 percent year over year in the midst of one of the worst recessions in history. Talk about Linux swimming against the economic current.
Well, it's good news for some. Microsoft, of course, won't take any comfort in Novell's numbers, especially as recent Eclipse survey data suggests that Linux is eating into its Windows server and client businesses, with 43 percent of Eclipse developers citing Linux as their preferred deployment platform (versus Microsoft's 41 percent).
It wasn't the best of quarters for Novell, either. Net revenue was down to $216 million from $236 million a year earlier, though cost cutting resulted in $16 million in net income. Novell's problem is that outside its Linux Platform and Identity Management businesses, which both grew, its other lines of business stumbled -- Workgroup was down 14 percent, while Systems and Resource Management dropped 2 percent.
Novell reported $37 million in Linux Platform Products revenue, up 25 percent compared to the same period last year. While not on par with Red Hat's continued growth -- 18 percent last quarter on a higher revenue base, -- Novell's execution on its Linux Platform business, in particular, is impressive.
Workgroup, of course, continues to deliver the biggest chunk of revenue ($79 million in the current quarter), but is also the biggest drag on Novell's brand. Workgroup is a constant reminder of the old Novell: NetWare, GroupWise, etc. I understand the reasons for keeping that revenue, even declining revenue, on the books, but it comes at a high cost to Novell's credibility.
With $1 billion in cash or short-term assets, Novell could conceivably buy relevance in this market, as it has tried in the past with its Sitescape acquisition, but thus far it has failed and throwing more money at this line of business won't likely help. Novell is an enterprise server company. Its desktop-related business is a distraction.
Novell's Linux performance, however, suggests a way forward for the company. It's called open source, and perhaps Novell's own flavor of open source (hybrid source) could be a winning strategy against Red Hat and Microsoft.
Follow me on Twitter @mjasay.
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