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Mr. Softy Won't Save Novell

After an interesting deal with Microsoft (Nasdaq: MSFT  ) last November, Novell's (Nasdaq: NOVL  ) stock surged 16%. Unfortunately, the boost proved short-lived, given investors' ongoing concerns about the open-source software firm.

In its first-quarter earnings report released last week, Novell announced that revenues decreased from $240 million to $230 million. Novell also posted a net loss of $19.9 million, or $0.06 per share, compared with a profit of $1.8 million, or $0.01 per share, in the year-ago period.

Over the past few years, Novell has refocused its business on Linux, a free, popular open-source operating system collectively maintained and expanded by volunteer programmers worldwide.

Linux's growing popularity has begun to threaten Microsoft's Windows franchise, spurring Mr. Softy to tap its cash hoard for a counterattack. In last November's deal, Microsoft agreed to license Novell's software for $240 million. It also pledged an additional $94 million for sales and marketing, while another $108 million payment would protect each party from patent suits.

The deal prompted a groundswell of outrage in the open-source community, raising fears that Novell was selling them out. Many still wonder whether Microsoft will use this deal to threaten litigation against companies that do not use the Microsoft/Novell flavor of Linux.

It's too early to tell, but for now, there's no question that the Microsoft partnership has provided immediate results. Invoicing for Linux increased 659% to $91 million in the fourth quarter. Novell is also snagging big-time customers like Wal-Mart (NYSE: WMT  ) , Credit Suisse (NYSE: CS  ) , and AIG (NYSE: AIG  ) .

That's great news, but it still doesn't offset the weakness from Novell's core NetWare technology. Novell's identity management software sales are also suffering.

Those dropping sales may explain Novell's lackluster revenue guidance for 2007: roughly $945 million to $975 million, according to management. Novell is trying to cut costs to compensate, but these efforts will actually cost $35 million to $45 million in 2007. Any benefits will likely manifest in 2008.

Ramped-up Linux sales may eventually bring some growth back to Novell. Unfortunately for investors, it looks like this won't happen anytime soon.

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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is ranked 1,873 out of 23,837 in Motley Fool CAPS.

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