Novell buoyed by Vmware, Linux deal

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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 management'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%. Indeed, citing a 20 March 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 recapitalisation 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 reported 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'.”

On 1 September at the VMworld 2010 conference in San Francisco, VMware and Novell announced the general availability of SUSE Linux Enterprise Server for VMware, the first step in the companies' expanded partnership announced in June. The solution is designed to reduce IT complexity and accelerate the customer evolution to a fully virtualised data centre. With SUSE Linux Enterprise Server for VMware, customers who purchase a VMware vSphere license and subscription also receive a subscription for patches and updates to SUSE Linux Enterprise Server for VMware at no additional cost. Additionally, VMware will offer the option to purchase technical support services for SUSE Linux Enterprise Server for VMware for a seamless support experience available directly and through its network of solution provider partners. This unique solution benefits customers by reducing the cost and complexity of deploying and maintaining an enterprise operating system running on VMware vSphere.

"This unique partnership gives VMware and Novell customers a simplified and lower-cost way to virtualise and manage their IT environments, from the data centre to fully virtualised data centers," said Joe Wagner, senior vice president and general manager, Global Alliances, Novell, in a statement. "SUSE Linux Enterprise Server for VMware is the logical choice for VMware customers deploying and managing Linux within their enterprise. This agreement is also a strong validation of Novell's strategy to lead in the intelligent workload management market."

"VMware vSphere delivers unique capabilities, performance and reliability that enable our customers to virtualise even the most demanding and mission-critical applications," said Raghu Raghuram, senior vice president and general manager, Virtualization and Cloud Platforms, VMware, in a statement. "With SUSE Linux Enterprise Server for VMware, we provide customers a proven enterprise Linux operating platform with subscription to patches and updates at no additional cost, improving their ability to complete the transformation of their data centre into a private cloud while further increasing their return on investment."

With SUSE Linux Enterprise Server for VMware, early adopter companies such as Online Computer Library Center (OCLC) are already starting to take advantage of the VMware and Novell offering.

"OCLC is running 2,000 SUSE Linux Enterprise Server (SLES) virtual machines on VMware vSphere using 120 physical hosts, saving OCLC time and money," said Gene Oliver, executive director for systems management at OCLC. Furthermore, by taking advantage of SUSE Linux Enterprise Server for VMware, OCLC has adhered to its public purpose of furthering access to information and reducing costs for libraries."

As Dignan put it:

“Add it up and VMware may be Novell's saviour in many respects. Novell's quarter was light on revenue as customers held back purchases. Novell is exploring strategic alternatives and IT buyers don't want to deal with the uncertainty. Novell reported third quarter non-GAAP earnings of 6c a share on revenue of $199 million, which fell short of Wall Street estimates. Novell also declined to give an outlook for the fourth quarter.

“Simply put, Novell needs a few powerful friends to gain traction among IT buyers. And with the Microsoft partnership waning, it's clear Novell's new best friend is VMware. Another possibility: VMware is a leading candidate to buy Novell.”

Meanwhile, Novell also is looking to cash in on the push into the cloud. The company recently announced the general availability of Novell Cloud Security Service. Part of Novell's WorkloadIQ vision, Novell Cloud Security Service gives cloud providers the ability to deliver secure access and compliance in the cloud for their customers. Novell Cloud Security Service is part of Novell's broader identity and security portfolio, which enables enterprises to have a consistent framework for managing identities across physical, virtual and cloud deployments.

With Novell Cloud Security Service, enterprises can quickly and easily extend their identity infrastructure to any public cloud. Any changes that are made to their users or permissions are immediately replicated in the cloud environment, thus ensuring one consistent identity and security framework for the enterprise, regardless of where the computing is actually taking place, Novell officials said.

"Security is the biggest hindrance to cloud adoption that service providers offering cloud services need to overcome," said Antonio Piraino, vice president of research at Tier 1 Research, in a statement. "The ability to provide interoperable security solutions for and between an enterprise's internal infrastructure and the cloud provider's platform will alleviate the biggest assurance, vulnerability and SLA concerns enterprises have today."

As cloud computing vendors that offer software-, platform- or infrastructure-as-a-service seek to differentiate themselves in the marketplace, value-added services such as customised security become increasingly important. Novell Cloud Security Service helps cloud service providers deliver trusted security assurance and compliance to their enterprise customers, the company said.

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