Novell plans more licensing deals

Open Enterprise Server and NetWare revenues should continue to fall 15 to 20 percent year over year in fiscal 2007

Novell on Tuesday said it plans to seek out more deals similar to its recent marketing and licensing pact with Microsoft as it embraces partnerships and moves away from selling its open-source software directly to small and medium-size companies.

Ron Hovsepian, Novell's CEO for the past five months and president since November 2005, said in a conference call with analysts that the planned changes stopped short of a full restructuring at Novell, which has undergone several leadership and corporate changes in the last several years.

For its fourth quarter, the company reversed its net loss from the prior year. However, its net revenue continued its year-long slide, as Novell continued to struggle with converting corporate customers from its legacy NetWare operating system to SUSE Linux.

And its recent controversial deal with Microsoft probably won't help much in the short term. That deal is expected eventually to contribute about US$300 million to Novell's bottom line overall, but the company only expects to record about US$20 million in revenue from it next year, leaving its net revenue and profits for 2007 basically unchanged from 2006.

For its quarter, which ended Oct. 31, Novell reported revenue of US$245 million, down 15 percent from US$288 million in the same period a year earlier. The company earned US$25 million compared with a net loss of US$6 million a year earlier.

For the full year, Novell reported revenue of US$967 million and net income available to common stockholders from continuing operations of US$21 million. That was down from US$1.039 billion in revenue and US$373 million in net income available to common stockholders from continuing operations of the previous year, when the company's financial figures were boosted by an earlier US$440 million legal settlement with Microsoft.

In the fourth quarter, Novell reported US$13 million in revenue from Linux platform products, which includes SUSE Linux Enterprise Server (SLES). That figure was up 32 percent year over year. But revenue from Open Enterprise Server (OES) and NetWare fell 25 percent from the previous year.

Open Enterprise Server is a server operating system that provides a Netware-like interface for existing NetWare customers while running either a NetWare or SUSE Linux kernel. OES is meant to be a bridge product to help NetWare users transition fully to SLES.

The company said in a conference call that combined OES and NetWare revenues should continue to fall 15 percent to 20 percent year over year in fiscal 2007.

Novell predicts 2007 net revenue of between US$945 million and US$975 million. On a non-GAAP basis, adjusted income from operations is expected to be between break-even and US$10 million.

That includes about US$13 million Novell expects to receive in fiscal 2007 from the five-year, US$68 million patent agreement with Microsoft for Novell's intellectual property, as well as between US$4 million to US$7 million in subscription revenue Novell hopes to earn from Microsoft customers who sign up for SUSE Linux subscriptions.

The marketing side of that deal is worth US$240 million over five years. Novell hopes to book about US$45 million from it in 2008.

Hovsepian said the two companies started jointly marketing this month and noted that there are "several Linux deals that are accelerating due to the new partnership with Microsoft."

Novell hopes to sign at least one or two more partnerships with similar first-tier vendors as it reassigns and lays off direct salespeople, especially those not working on Global 2,000 corporate accounts, Hovsepian said.

Novell plans to invest US$20 million next year in the sales model switch, said Hovsepian, who resisted suggestions from Wall Street analysts during the call to sell or shut down some of Novell's less profitable software units.

Novell internally has "had hard, ugly conversations," Hovsepian said. "We could take the quick earnings hit [from selling off product lines]. But if we want to achieve 12 percent to 15 percent profitability in 2008, making these investments is absolutely the right path."

Citing some recent articles, Hovsepian also insisted that reaction in the open-source community to the Microsoft-Novell deal is "mixed."

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