On the conference call for Novell's (NASDAQ:NOVL) fourth quarter, there were two words that stood out: "challenging" and "compelling."

As for challenging, Novell's core business -- based on the networking software of NetWare -- saw a 12% year-over-year decline. This downward trend has been persistent for the company, as customers continue to migrate to Linux or Microsoft (NASDAQ:MSFT) solutions.

In the fourth quarter, Novell generated revenues of $287 million, compared with $300 million for the same period last year. And the company recorded a net loss of $109 million, mainly due to a move toward more conservative tax accounting.

Critical to Novell is stabilizing its core business. It's obvious, though, that stabilization is still a ways off, and getting there could take at least another six months.

But there's also something compelling (there's that other word) in the works at Novell -- that is, building out a full platform in Linux that customers can migrate to. The company's acquisition of Ximian has already led to new product features. Moreover, the recent acquisition of SuSE Linux will also add much more product depth.

To coin a phrase, Novell seems committed to the "Linuxization" of all its businesses. Studies indicate that the biggest concern of Chief Information Officers in using Linux is questionable customer support. Novell's commitment to growing its support staff -- it's built a technical support staff of about 600 employees -- should help soften, if not overcome, those reservations.

And what about the apparent intent of SCO Group (NASDAQ:SCOX) to block the SuSE acquisition because of a contract breach? Novell says the claim has little if any merit, and appears to be a public-relations ploy.

Even though this past quarter showed clear progress at Novell, the environment continues to be challenging, both in terms of the company's lagging core business and the complexities of executing on its ambitious Linux strategy. If things work out, though, Novell's prospects could be compelling for the long haul.

Tom Taulli is the author of six books on investing and finance, such as the Complete M&A Handbook (Random House). You can reach him at tom@taulli.com.

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