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By | Timothy Prickett Morgan 27th February 2009 00:00

Novell spills sales after pipe breakage

'Just fell apart. Could happen again'

Novell's plan to shift more of its sales through channel partners has coincided with the economic meltdown, and the combination caused the company's revenues to slip a gear in its fiscal first quarter ended in January.

For the quarter, Novell's sales fell by 7 per cent to $214.9m and were hurt by a dramatic drop off in software license sales, which fell by 29.7 per cent to $28.3m. Services sales at the company fell even more dramatically, down 31.7 per cent to $27.8m, while maintenance and subscription sales helped offset declines a little by growing 5.8 per cent to $158.8m. Net income fell by 36.5 per cent, to $10.7m, and what is immediately clear is that if Microsoft had not extended its SUSE Linux coupon deal with a $100m extension last year and agreed to kick in $25m this quarter, Novell would be at a loss. Quite literally.

And probably making the kind of layoffs that have been rumored but have not occurred. Novell's headcount was 4,000 at the end of the fourth quarter of fiscal 2008 and stood at 3,900 as the first fiscal first quarter of 2009 closed.

That's exactly what Novell has said publicly it would do. But that is a net employee headcount change. The number of employees let go could be higher in one division or department if the company was also hiring in other divisions or departments. Novell has not said this is what has happened, but the persistent rumors of larger layoffs could be the result of such hiring and firing practices.

Ron Hovsepian, Novell's president and chief executive officer, said that software license and services sales were both below expectations, and in a conference call with Wall Street analysts, he said that "the pipe fell apart" in the last two to three weeks of the quarter and warned that it could happen again.

He added that the pipeline for sales in the second fiscal quarter were slightly ahead of where they were at this time last year, and in terms of customer commitments to sign of deals, Novell was also running slightly ahead. But Hovsepian said that his confidence was a little shaken after what happened with Q1 and acknowledged that it could happen again. To that end, Novell is not providing revenue guidance, but the company did say that it expects to be able to hit its target of 10 per cent or higher operating margins for fiscal 2009.

Novell's Open Platforms division posted sales of $37.1m in the quarter, up 19.2 per cent, with $35.2m of that coming from SUSE Linux sales on servers and desktops. (And most of that is for servers, rest assured). Linux subscriptions were up 23.6 per cent, but Hovsepian said that Novell's Linux business has been dependent on closing big deals and that it lost some sales resources in the quarter in Europe at exactly the same time that it was trying to revamp its channel to push more indirect sales.

Of the $240m in coupons for SUSE Linux that Microsoft acquired as part of its partnership with Novell, only $199m of them have been invoiced. That's only $4m more SUSE Linux invoices through this deal this quarter. Hovsepian said it was mostly Novell's job to chase down Windows shops and get them to activate licenses. Why Microsoft pre-paid $25m for a new batch of coupons when it still has $41m coupons already acquired on behalf of Windows shops is clear: both Microsoft and Novell suspected Novell would need the dough in fiscal Q1 to prop up its numbers.

Novell's Workgroup division had a total of $81.4m in sales, down 9.3 per cent, with sales of NetWare and the Open Enterprise Server hybrid (which mixes SUSE Linux and NetWare) down 14.2 per cent to $44.1m. The GroupWise messaging and groupware product declined by 8.9 per cent to $24.9m.

In part because of recent acquisitions, Novell's Systems and Resource Management division saw sales bump up 8.7 per cent to $40.3m, with licenses and support sales both up. The Identity and Security Management division declined by 12.5 per cent in the fiscal first quarter, thanks mainly to declines in software license sales.

Looking ahead, Hovsepian said that Novell was "investigating all opportunities to lower costs," and that might mean more layoffs. (He did not use the L-Word). He also said that Novell was working to build out its application software channel to do a better job chasing business, that Novell would "be aggressive on pricing to gain market share," and that he expected to engage in "hand to hand combat" at customer sites. "At the end of the day, I want the customer," Hovsepian said bluntly.

He added that Novell was looking forward to the launch of SUSE Linux Enterprise 11 this quarter and warned investors and Wall Street that Novell would be sitting on its more than $1bn in cash, which gives it comfort and flexibility in these hard economic times. Don't expect any "broad-based share buybacks," Hovsepian said. It would be a fair guess that any large acquisitions would also be out of the question until the economy improves too. ®

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