Novell Still Has a Mountain to Climb

Implications: Novell’s last quarterly results show an impressive turnaround in their business, but the bulk of their revenues are still from legacy products.  While SuSE is doing much better, largely due to the Microsoft deal, there’s still a long way to go for the new products to provide Novell’s overall growth.

Analysis: Novell is to be complimented on the turnaround they have shown recently.  They have demonstrated both increased revenues and decreased expenses, thus converting a quarterly loss a year ago into a solid profit today.  Novell has arrested the revenue slide from legacy business while increasing revenues on new products (largely SuSE Linux), and at the same time reduced costs across the board.  This is a solid first step on the road to long-term profitability and growth.

Nonetheless, Novell still has a long way to go to demonstrate long-term profitability and growth.  Revenue from the legacy product lines will inevitably decline over time.  That decline may be rapid or slow, depending in part on how successful Novell is in demonstrating continuing value to legacy customers.  The best Novell can achieve here is a slow decline, and even that will be an uphill battle. 

While Novell’s open source revenue (SuSE Linx primarily) has been growing nicely, its overall percentage of revenue is still quite low.  Growing open source revenue by 40-50% annually is quite impressive, but it may not be fast enough for Novell, since their open source revenue is so much smaller than their legacy revenue.   Novell will either need to accelerate the growth of their open source revenue dramatically, or ensure the legacy revenue falls very slowly.  They achieved the latter goal in this last quarter, so perhaps they can do likewise in the future.

SuSE’s market penetration is still significantly lower than Red Hat.  ISV’s and IHV’s support Red Hat much more than SuSE, so Red Hat has become the de facto standard for enterprise Linux.  Novell’s partnership with Microsoft has removed a number of barriers for SuSE, but it has not led to general acceptance.  SuSE’s overall market share is low enough that Novell can achieve nice growth by targeting a relatively small number of large accounts.  That strategy, however, will not be sufficient to allow Novell to achieve overall market acceptance for Novell.  Novell has many barriers to overcome to gain widespread acceptance for SuSE. 

Novell is moving aggressively, with their recent acquisitions of PlateSpin and others, to diversify their product line and move beyond Netware.  PlateSpin, despite receiving considerable media attention, still has a long way to go to achieve significant amounts of revenue.  Further, they are likely to face increasing competition from other vendors as the virtualization space opens up over the next couple of years.  Their products, especially as part of Novell’s suite, have a lot of potential, but reaching that potential won’t be easy.

Overall, Novell seems to be doing all the right things to turn around the company.  It’s not an easy or quick task, however, and their ultimate success is most definitely not assured.  The products they have been acquiring recently all have potential, but will need to grow hugely to be significant to Novell’s future.