Novell's one-two punch

With $1.7 billion in cash and ranking among the top 25 most profitable companies on the NW200, Novell has more than a fighting chance with its Linux-plus-management strategy.

Open source alone won't save Novell from oblivion.

That's the message Jack Messman, who took over the company reins in 2001, has been hammering home over the past few years. Just as important, he says, are new services that will run on top of the NetWare and Linux operating system kernels.

"Our value is up the stack from the kernel with services such as identity management, security and systems management that we add on," Messman says. "Those are the areas where we will see revenue opportunities in the future."

As much as it is focusing on open source, Novell (No. 59 on the Network World 200) cannot put NetWare behind it, he says. "Our legacy operating system, NetWare, [currently] accounts for virtually all the revenue for new software licenses," he explained last month in an interview at the company's BrainShare annual user conference.

NetWare licensing revenue has been on the decline since 1996 - the first year Windows became the predominant server operating system worldwide. That year, Novell reported operating system licensing revenue of $754 million, down from slightly more than $1 billion in 1995. By the end of 2002, NetWare licenses accounted for about 30% of worldwide revenue, or just $319 million. A 17% drop in 2003 left the company with $265 million in license revenue, while another 10% decline brought the figure to $238 million for 2004.

Today, Messman promises the company is in the midst of a "transformation," propelled by the dual open source and services initiatives launched two years ago.

Novell got serious about open source in 2003, when executives formalized the company's strategy for migrating the NetWare installed base to Linux rather than seeing those users won over by Windows. Before 2003, Novell had dabbled in open source, mostly in making its eDirectory and ZENworks management packages work with Linux.

As part of its new open source strategy, Novell launched the acquisitions of SuSE Linux and Ximian, a Linux desktop vendor, and unveiled plans for Nterprise Linux Services, a NetWare variant that would run on the Linux kernel.

Nterprise Linux Services evolved into plans for the dual-kernel Open Enterprise Server (OES ), which layers Novell's file and print, identity management and security services on top of a NetWare or SuSE Linux kernel. OES, which became available last month, gives Novell's large base of NetWare users a migration path to open source Linux. When users deploy OES, they can decide which services will run on which kernel. For example, they might want to run file and print services on the NetWare kernel and applications such as Oracle or PeopleSoft on the Linux kernel.

"OES is designed as a platform to allow our installed base to easily transition from NetWare to Linux, should they choose to migrate," Messman says in the company's 2004 annual report. "Our intention is that by providing customers with a clear migration path to our Linux products, we mitigate the risk that customers may defect."

Novell also offers the Novell Linux Desktop and a security appliance that runs on Linux. The company announced these, and an open source collaboration project called Hula, at LinuxWorld in February.

Evidence of transformation?

In the first quarter of fiscal 2005, which ended Jan. 31, Novell reported some value accruing from its SuSE Linux acquisition, which closed in January 2004. The company reported $15 million in SuSE Linux license revenue.

Still, at less than half of market leader Red Hat's $39.2 million in subscription revenue for the period ending Nov. 30, 2004, Messman found SuSE's revenue disappointing. "I am not pleased with our Linux sales this quarter," Messman said during an earnings call with financial analysts.

According to research firm Netcraft, Red Hat (No. 134) held almost a 50% market share in 2004, compared with SuSE's 12%. But Red Hat, which reported subscription revenue of $127 million and services revenue of $172 million for the four quarters ending Nov. 30, 2004, doesn't provide software and services "farther up the application stack" as does Novell, Messman says. He's hoping Novell's efforts there will help close the gap - layered on top of the dual NetWare/Linux kernel, those services might save Novell from obscurity and create a sustainable revenue stream, he says.

In the first quarter of 2005, identity management and the ZENworks management package accounted for 34% of Novell license revenue of about $165 million. Novell says it expects to enhance its systems management offerings via IT asset management software from the Tally Systems acquisition, announced last month.

Novell is moving in the right direction with its open source/network services combination, says William Hurley, senior analyst at Enterprise Strategy Group. "Novell needs to fuse its Linux- and identity message into one unified message that highlights the value of the secure platform driven across an organization and across all workloads."

Novell and the NW200

Revenue rank: 59, at $1.2 billion.

Profit rank: 25, at $412 million.

Cash and short-term investments: $1.7 billion.

"Even though Novell's revenue performance in the first quarter was disappointing, with $1.7 billion cash on hand, the company has a lot of room to maneuver in terms of adding to and providing support services [for OES and SuSE Linux]," Hurley adds.

If user attitude at BrainShare is any indication, Messman might indeed pull off a successful transformation. As Dan Tesenair, senior network engineer for Health First, says, "Our director has said that he wants every system in our network to go to Linux." That has the Melbourne, Fla., healthcare provider migrating 40 NetWare servers and a number of Solaris servers to Novell's OES running SuSE Linux.

Copyright © 2005 IDG Communications, Inc.

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