Does Novell still have mind share?

Does a reinvented Novell matter anymore? As the company prepares to trumpet its focus on serving the open enterprise at its annual BrainShare conference this week, industry observers remain mixed on whether the former networking powerhouse has a relevant place in today’s corporate software market.

Does a reinvented Novell matter anymore?

As the company prepares to trumpet its focus on serving the open enterprise at its annual BrainShare conference this week (full coverage), industry observers remain mixed on whether the former networking powerhouse has a relevant place in today’s corporate software market.

“Novell never comes to mind, and it has been a long time since I last thought about Novell,” says David Bratt, manager of network systems for the H. Lee Moffitt Cancer Center in Tampa, Fla.

It’s a mind-set that Novell is trying to change as it transitions away from its NetWare roots into a company focused on Linux and open platforms. Industry experts say there is little question that Novell still has quality products in directory services, systems management and collaboration.

“Novell is a leader in the provisioning of identity management [eDirectory] and open source products,” says John Halamka, CIO of Harvard Medical School and CareGroup Healthcare in Boston. Halamka says he recently looked at Novell for directory services and Linux. He decided to build his own metadirectory and use Red Hat Linux for his kiosks because he was more familiar with it.

More than two years after acquiring Linux distributor SuSE and setting out to right itself – with a business transformation based on Linux and management applications based on open, non-proprietary systems -Novell continues to struggle.

The company’s revenue was roughly flat last year vs. the year before.

In the first quarter of this year, it reported revenue of $274 million, down about 5% from the $290 million it reported during the same period a year ago. It scratched out about a $2 million quarterly profit.

Industry observers say Novell’s struggles don’t come as a surprise because the task of migrating from a proprietary platform – NetWare – to an open one – SuSE Linux – is no easy task. At the same time, analysts and customers say Novell could be doing a better job delivering its message.

“Novell has made it very clear that Linux is the future of the company, but once again Novell is poor at communicating it to everyone but the Novell faithful,” says Karl Reischl, network administrator and longtime NetWare user at Moraine Dam Technical College in Beaver Dam, Wisc. “I can almost guarantee you that one of the speeches at BrainShare will be, ‘We’ll improve our marketing,’ which they do for a few months and then drop off the planet.”

Novell was the name in network operating systems in the early 1990s, but today most IT managers aren’t looking at the company for new software purchases. A recent Goldman Sachs survey of IT executives showed expected increases in software spending in 2006 but found that Novell was one of just two software vendors listed as losing share. CA was the other.

“Today the question is, ‘Novell who?'” says Josh Greenbaum, principal analyst at Enterprise Applications Consulting. “They’re completely irrelevant in the enterprise software market now, and it’s ironic because they were such a major force for so long. . . . We almost forget how dynamic the company was, once upon a time.”

Novell has yet to replicate that former energy to drive big growth with its Linux business. Although the market continues to soar – Linux notched its 14th consecutive quarter of double-digit growth, boosting revenue 20% in the fourth quarter of last year, while Windows grew just less than 5%, according to IDC – Novell is having trouble gaining market share from leader Red Hat.

In the most recent quarter, Novell’s Linux revenue grew 22% to $10.4 million, while Red Hat’s revenue jumped 44% in its most recent quarter to $73 million.

“This indicates that Red Hat is roughly seven times larger and growing twice as fast,” wrote Mark Murphy, a managing director at First Albany Capital, in a note issued March 3 after Novell’s earning release.

According to a note issued last fall by Credit Suisse First Boston analyst Jason Maynard, Red Hat nearly doubled its hold on the Linux market between 2002 and 2004, growing from a 40% share to nearly 64%. SuSE, which was acquired by Novell at the end of 2003, fell from holding 25% of the market to just less than 20%.

In an open letter to Novell’s board of directors, Maynard says big changes are needed, including a stronger shift in strategic direction to take advantage of the “giant market opportunity” Linux offers.

“Although SuSE is the No. 2 player in the market, unless things change, we believe that it will continue to lose market share to leader Red Hat,” Maynard says.

Novell executives say they are on course, shifting focus from NetWare, which experienced a 73% decline in revenue in the first quarter of 2006 compared with the same period a year ago. Novell’s NetWare/Linux-based Open Enterprise Server, which shipped in March 2005, has seen an increase of $43.1 million in revenue in the first quarter of this year, balancing the combined decline to 11%. “A big portion of what we lost [in NetWare revenue], we gained with sales of Open Enterprise Server,” says Joe Tibbetts, Novell’s CFO.

Not that Novell’s days are numbered. The company has $1.7 billion in the bank and reported a respectable 22% jump in Linux-related revenue for the first quarter, compared with the same period a year ago. Chairman and CEO Jack Messman also has played a part in Novell’s transition – when he joined the company at the end of 2001, it was suffering a loss of $272.8 million. At the end of fiscal year 2005, Novell reported net income of $376.7 million, up from fiscal year 2004 net income of $57.1 million.

A Novell spokesman says he expects about 1,000 first-time attendees at this week’s BrainShare conference, which typically draws about 6,000 people. The weeklong event will be the first to focus solely on Novell’s open source, with sessions focused on Linux and the migration of NetWare users to the Linux platform. Novell is expected to talk about its next release of Open Enterprise Server, code-named Cypress, in which NetWare can only be run as a client operating system on an open source Linux/Xen virtualized server (NetWare viX).

But analysts say Novell has a tough road ahead as it fights to drive interest from customers outside its legacy NetWare base.

“They actually have a good offering [in SuSE Linux], but they seem unfocused,” says Rob Enderle of the Enderle Group. “Because of NetWare they are simply perceived broadly as a company in decline, and folks don’t want to bet on such a company.”

“They need to take their lumps and move crisply off of NetWare; downsize if they need to, but get back to a position of growth so that companies can believe they will be around post-sale,” he says.

Financial analysts call for a change in management and point to a number of executive appointments made earlier this month as a good sign.

The appointments “may represent the beginning steps being made by [Novell’s] president and chief operating officer, Ron Hovsepian, in overhauling the management team to improve the aggressiveness of the corporate culture,” Murphy wrote in a note March 10, in which he upgraded Novell from underperforming to neutral.

That kind of corporate rejuvenation may be just what Novell needs to start attracting more enterprise buyer attention.

“Novell disappeared from the radar screen for a while,” says Ulrich Seif, CIO at National Semiconductor. He says he looked at Novell when choosing a Linux distributor but brought in Red Hat at the recommendation of his application vendor. With the Linux kernel becoming commoditized, the playing field is open and he’ll be looking more closely at what kinds of services and support the two distributors can provide.

“It’s imperative to stay close to the road maps of both vendors, since we need to keep an open mind when it comes to system tools like monitoring or features around grids and virtualization,” he says.