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Sustainable Investment Authors: Pat Romanski

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Novell's Nightmare Microsoft's Halo Only Stretches So Far

OK, so let's cut right to what everybody wants to know

Now that its long but ultimately uneventful backdating investigation is finally over and it's filed all its missing statements, Novell has returned to making conventional SEC submissions and posting its results. On Wednesday it posted its April quarter.

OK, so let's cut right to what everybody wants to know.

In the two quarters since its hackles-raising deal with Microsoft was signed in November, some 49,000 SUSE certificates have been activated. They are worth $91 million. That's 38% of the five-year $240 million agreement, which has no cap. Microsoft could buy more.

Unless of course the GPLv3 intervenes and the tentative grandfather clause currently protecting the deal gets dropped.

Novell wouldn't answer any questions during its conference call with Wall Street about the worst the GPL can do to its precious and profitable Microsoft arrangement, continuing to hold out until the Free Software Foundation's last draft, still apparently in negotiation, is locked and loaded.

As previously reported, any termination arrangements the two might have were redacted out of the copy of their contract that Novell made public last Friday night and Novell's only public show of fear was in its shiny new 10-K where companies always list any risk factors and let their worst nightmares run riot.

Novell's nightmare is: "If the final version of GPLv3 contains terms that interfere with our agreement with Microsoft or our ability to distribute GPLv3 code, Microsoft may cease to distribute SUSE Linux coupons in order to avoid the extension of its patent covenants to a broader range of GPLv3 software recipients, we may need to modify our relationship with Microsoft under less advantageous terms than our current agreement, or we may be restricted in our ability to include GPLv3 code in our products, any of which could adversely affect our business and our operating results. In such a case, we would likely explore alternatives to remedy the conflict, but there is no assurance that we would be successful in these efforts."

That, one assumes, everybody knew.

Anyway, the bulk of that $91 million, or $73 million, was done in Novell's first quarter when the pair picked off the low-hanging fruit in the US. They subsequently expanded into Europe and are now pushing into Asia, Novell said.

That means they only brought in $18 million in the April quarter. One of the Wall Street boys did some calculations and figured Microsoft's contribution was down 75% sequentially and Novell's was down 39%.

CEO Ron Hovsepian blew if off and called the first quarter as "exceptional."

He prefers the invoicing numbers, offering $29 million in Linux POs - which is $18 million Microsoft and $11 million Novell, a number Wall Street thought was down "significantly" on the Novell side. Well, whoever brought it in $29 million in invoicing is 114% better than last year.

Novell's total deferred revenue at the end of April stood at $700 million, up $354 million, or 102%, year-over-year.

This is last report of certificate numbers we're going to get, Novell Hovsepian said. We're supposed to understand that Novell and Microsoft are working so closely together that it's hard to tell them apart and give credit where credit is due. With Dell in the picture it will only get "muddier," he said.

For all of Microsoft's contributions, Novell still lost money in Q2, $2.19 million to be precise, down from the $3.18 million it earned this time last year and its cash flow was a negative $29 million, worse than last year's negative $24 million. But on a non-GAAP basis, the company cleared $15.9 million, or five cents a share, against $6.7 million, or two cents a share, a year ago.

Revenue was up a tad from $233 million last year, before Microsoft was helping, to $239 million, better than expected.

Broken down, Novell reported $19 million in revenue from Linux Platform Products, up 83% year-over-year. Revenue from identity and access management was $23 million, up 5% year-over-year. Revenue from systems and resource management was $32 million, down 4% year-over-year. And revenue from its legacy workgroup business unit declined 4% year-over-year to $84 million, not as bad as the double-digit declines it's been experiencing.

According to Hovsepian's canned appraisal, "We were pleased with the overall results this quarter. We saw continued strength in our Linux business, improvement in our identity business and better-than-expected results in workgroup. Additionally, we benefited from the impact of cost control measures. While there remains a lot of work ahead of us, our business is moving in the right direction and we believe we are on track to achieve our fiscal 2007 exit rate operating margin target."

That exit rate operating margin would happen to be between 5% and 7%, a number Novell expects to be between 12% and 15% at the end of fiscal '08.

For the current fiscal year Novell is projecting net revenues of between $925 million and $955 million, adjusted for the sale of its Salmon consulting operation in the UK in fiscal Q2, and down from December projections of between $945 million and $975 million. Last year Novell did $967.3 million.

On a non-GAAP basis, income from operations is supposed to be somewhere between breakeven and $10 million, excluding stock-based compensation and restructuring expenses which are supposed to run $35 million-$40 million through the end of the year.

Novell had $1.8 billion in the bank on April 30, a lot of money, and with the accounting review over, well, it's expected to buy back shares and make acquisitions.

Hovsepian dismissed the fact that the Microsoft-Novell indemnification and patent protection may not be as some out there. He mumbled something about "different components of an overall value proposition," or something like that.

He also dismissed the fact that his new buddy Dell is bundling Ubuntu on a few of its PCs. It's for the Linux zealot, he said, an audience he estimated at three million-four million and more a competitor of Novell's OpenSUSE project rather than its SUSE Linux Desktop.

Credit Suisse begs to differ with Hovsepian's sanguine appraisal. Analyst Jason Maynard said the numbers gave him "little reason to change our bearish opinion about the stock. There were no signs of meaningful progress, the upcoming release of GPLv3 creates a near-team risk to Novell's most important business (Linux) and we continue to think that Red Hat is a better investment idea for exposure to Linux and open source software."

Maynard also think the chances of Novell getting picked up by a private equity investors are "relatively low given the lack of sustainable cash flow."

More Stories By .NETDJ News Desk

.NETDJ News Desk monitors Microsoft .NET and its related technologies, including Silverlight, to present IT professionals with news, updates on technology advances, business trends, new products and standards, and insight.

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