Novell's Linux Leanings

Replacing legacy systems with the new hotness can be a profitable way to make a living.

Anders Bylund
Anders Bylund
Aug 31, 2007 at 12:00AM

Novell (NASDAQ:NOVL) came up aces in its third-quarter report yesterday. The operating loss was smaller than last year, despite tepid sales growth of 3%, and $20 million in free cash flow is nothing to sneeze at.

The fact that revenues grew means a couple of good things for the software platform designer. For one, Linux sales hit the ceiling again with a 77% sales increase over the year-ago period. For another, the old NetWare workhorse isn't dying quite as quickly as expected.

Yeah, I know that I keep harping on the impending demise of NetWare, but while Novell still keeps it on board, it might as well bring in some revenue. An 8% annual drop on that segment isn't too painful, with the up-and-coming SUSE Linux platform available to make up the difference.

The cross-licensing, cross-promotion deal with Microsoft (NASDAQ:MSFT) is surely helping drive Linux sales, though it's getting harder to tell what the exact impact of that agreement is. CEO Ron Hovsepian told us in the conference call that Novell has invoiced Microsoft for $105 million under that contract, which is 44% of the ostensibly five-year agreement to sell $240 million of SUSE products. But he also said that "the lines have really become blurred as to how much of it is Microsoft influence. I would say the good news is that we've got a nice halo effect and a good working relationship between the two."

Dell (NASDAQ:DELL) is another valuable ally, with its commitment to sell systems preloaded with SUSE Linux in the Chinese market. And Lenovo (OTC BB: LNVGY.PK) will do the same thing worldwide on the ThinkPad line of notebooks it took off IBM's (NYSE:IBM) hands a couple of years ago.

So things are looking up in Boston, and NetWare isn't dragging the company down too badly. There are new product releases coming up, and this fall should be the litmus test of Novell's Linux ambitions in a seasonally strong quarter. Red Hat (NYSE:RHT) better watch out.

Further Foolishness:

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Fool contributor Anders Bylund holds no position in any of the companies discussed here, and prefers Ubuntu for his own Linux needs. You can check out Anders' holdings if you like, and Foolish disclosure lives on the bleeding edge of tomorrow in a van down by the river.