Beleaguered Novell Buoyed by VMware Linux Deal

Despite faltering financial results, Novell pushes on with partnerships such as that with VMware for the SUSE Linux Enterprise Server for VMware.

Just when things were beginning to look pretty bleak for Novell, in comes a new partnership with an old friend to help the beleaguered company.

In its latest financial results Novell reported net revenue of $199 million for its third fiscal quarter of 2010, which was down from net revenue of $216 million for the same period in 2009. Moreover, net income for the third quarter of 2010 was about $16 million, whereas it was $17 million for the same period a year ago.

"Our third quarter revenue was below our initial expectations, which we believe is principally related to customer uncertainty associated with the Novell Board of Directors' ongoing review of various alternatives to enhance stockholder value as described in Novell's March 20, 2010 press release," said Ron Hovsepian, president and CEO of Novell in a press release on the company's earnings. "However, I am pleased that we achieved consistent profitability levels. The growth prospects of our target markets remain strong and our focus going forward is on returning to top line growth via execution of our differentiated strategy, WorkloadIQ."

And following the announcement of those results, Jeffries & Company issued the following investment summary:

"We remain concerned over mgmt's silence in relation to the company's strategic review process. The prolonged process is weighing on sales. We think mgmt is focused on selling the company, but as time goes by, the original offer of $5.75 is becoming increasingly attractive. Reiterate Hold."

Jeffries reported that Novell's revenue from Linux - one of the company's strengths -- was down 11 percent. Indeed, citing a March 20 Novell press release, Jeffries identified some of the options facing the Novell board as: (1) a stock repurchase or cash dividend, (2) strategic partnerships and alliances, (3) joint ventures, (4) a recapitalization and (5) a sale of the Company.

Regarding a sale the company or downfall of Novell, Al Hilwa, an analyst with IDC, said:

"It would be a sad milestone if something like this would happen. Normally software firms don't die abruptly as they would have long maintenance streams they can live on for years, sometimes decades. What happens more often is assets and chunks of business get sold off to others and there are many who like to own maintenance streams to fund new R&D in other areas. Looking at Novell's numbers this quarter, they posted some revenue declines but not the type that would signal company failure, and they appear to have kept some control over the bottom line. They still have a sizeable business going and at worst there would be a gradual deterioration. It appears that their board is evaluating ways to get them out the doldrums which I imagine includes perhaps selling off some assets."

With the options the Novell board has at hand, the new deal with VMware is a welcome addition to the Novell fold, particularly as the company's long-running - since 2006 -- partnership with Microsoft is winding down. Novell and Microsoft have had an ongoing partnership around interoperability between Windows and Linux, as well as indemnifying Novell SUSE Linux users from intellectual property liability.

ZDNet's Larry Dignan reports that, "Piper Jaffray analyst Mark Murphy said in a research note that -we continue to believe that the emerging VMware relationship is the most interesting recent development to help offset the decay of the Microsoft partnership'."