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Novell's Linux Business Gains Steam

Novell reports an overall loss in the fourth quarter, but the company's Linux business increased 30 percent to $61 million for the quarter, including a tripling of SUSE Enterprise Linux server subscriptions to 65,000.
In spite of a quarterly loss, Novell's Linux business is gaining steam.

During its fourth quarter and fiscal year 2005 earnings call Thursday, the Waltham, Mass software company reported $61 million in revenues generated from its Linux product and service business, up 30 percent from $47 million during the same quarter a year ago, and more than 400 percent from $12 million reported two years ago.

That figure includes $46 million in Open Enterprise Server license sales and $15 million from all other Linux platform and services sales including SUSE server, OES sales, Linux desktop, Zenworks, SUSE Professional Services and technical support. Total platform revenue for the quarter, including OES and NetWare, totalled $87 million, up three percent from last year.

The number of SUSE Linux Enterprise Server subscriptions sold tripled to 65,000 during the quarter, up from 21,000 during the same quarter last year and 28,000 sold during the prior fiscal quarter of the year.

For the quarter overall, Novell suffered a $5 million loss but reported a seven percent increase in revenues to $320 million.

For the full fiscal year, Novell reported $148 million in Linux platform revenue, up almost 300 percent for the 2004 fiscal year, executives said.

During the call, Novell CEO Jack Messman and newly appointed president Ron Hovsepian detailed encouraging signs for its Linux and resource management businesses.

These include a $40 million customer win with the National Health Service of the United Kingdom -- Novell's largest deal ever -- and scores of other deals with Novell Linux customers Marriott, AMD, Fannie Mae, Deutsche Bank, and the Czech Postal Service. The NHS win spans all product categories, including Open Enterprise Server and Zenworks' resources management.

Novell's president said the company is seeing a 75 percent win rate in competitive bids against Red Hat and others in corporate environments running mission critical applications.

Solution providers are seeing some tangible results in the field.

"Red Hat might be feeling pressure from Novell because many of my financial clients are still pretty big Novell shops," said John Dodge, solutions architect for Foedus, a VMware and Microsoft partner that specializes in virtualization software. "Novell is very much loved in the financial sector and SUSE Linux is being looked at by all of them."

To boost new growth areas in 2006, Novell unveiled a new global field sales model for 2006 that emphasizes specialization in five distinct buckets – including Linux.

The company unveiled the new model to 1300 employees and 200 partners at its field operations kickoff two weeks ago. Novell's 2005 fiscal year ended on Oct. 31.

Executives said 55 percent of its direct sales team will be assigned to these dedicated teams, which will push Novell's Linux business, security and identity business, resource management, workgroup and desktop.

The company also enhanced its compensation and incentives to align with these specializations and encourage growth in new software categories.

"We are investing in new specializations in the field to align sales with indirect and direct channels," Hovespian told analysts during the call.

Hovsepian, who was named Novell's president during the quarter, was bullish for Novell's Linux prospects in 2006, which will be buoyed by the release of the next generation Suse Linux Enterprise Linux 10 platform including server and desktop operating systems, management tools and updated subscriber services.

The company also reported that declines in its overall platform business are slowing. Its Netware and Open Enterprise Server business, for instance, grew three percent last quarter. For the year, Novell's platform business declined nine percent for the fiscal year, an improvement over the double-digit losses in platform revenues in recent years.

Still, Novell has a long way to go. For the fiscal year, the company reported revenues of $1.2 billion – including a $448 million settlement with Microsoft – compared to revenues of $1.16 billion for the 2004 fiscal year.