Novell (NOVL)

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See all Bulls Reasons Bulls: Reasons To Buy NOVL owns 30% of the fastest growing enterprise OS market 0% agree NOVL owns 30% of the fastest growing enterprise OS market The market for Linux is the fastest growing enterprise OS market; at 67% worldwide growth in 2006 and with Novell owning 30% of the market, there is plenty of growth opportunity for Novell. View or Edit Reason 0 votes 0% agree MSFT deal could bring new customers 0% agree MSFT deal could bring new customers If the recent deal with Microsoft stays in place, Novell could potentially gain more customers, as enterprise users who are looking to integrate Windows and Linux choose SUSE over other Linux types because of its being designed in conjunction with Microsoft. View or Edit Reason 0 votes 0% agree Virtualization is flattening the operating system playing field 0% agree Virtualization is flattening the operating system playing field Virtualization is flattening the operating system playing field, lessening the Windows Vista effect and allowing enterprise customers to use both Linux and Windows simultaneously and thus causing the market for Linux to expand. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell "If GPL goes through, Microsoft may rescind its agreement" 0% agree "If GPL goes through, Microsoft may rescind its agreement" If the new draft of the General Public License that governs the use of Linux goes through, Microsoft may rescind its agreement to not enforce its patents, thus making the Novell-Microsoft agreement essentially worthless. View or Edit Reason 0 votes 0% agree If GPL goes through, Microsoft may rescind its agreement 0% agree If GPL goes through, Microsoft may rescind its agreement If the new draft of the General Public License that governs the use of Linux goes through, Microsoft may rescind its agreement to not enforce its patents, thus making the Novell-Microsoft agreement essentially worthless. View or Edit Reason 0 votes 0% agree Indirect sales strategy makes company vulnerable to a few big clients 0% agree Indirect sales strategy makes company vulnerable to a few big clients The shrinking of Novell's customer base caused by the strategy shift to indirect sales could have unpredictable effects on revenues, as the company becomes vulnerable to the spending whims of a few big clients. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Novell is the number two distributor of the open source Linux operating system and a major distributor of enterprise infrastructure software and service, but has seen declining revenues for the past five years. The major reason for this is Microsoft's dominance in the enterprise software arena. The future may hold some bright spots for Novell, however. First, the company has partnered with historical competitor Microsoft to bundle its Linux product with the new Windows Vista. Perhaps most importantly, the fast growth of virtualization software may be a boon to all open source providers, including Novell. Virtualization technology allows enterprise companies to run multiple operating systems simultaneously--including Windows and Linux--on a single piece of hardware.

[edit] Company Overview

Novell is an enterprise infrastructure software company specializing in mixed and open source applications. It designs software that helps facilitate the use of computer applications for productivity, collaboration, and communication in an enterprise setting. The company is known for NetWare, the operating system (OS) that lost the battle for industry control in 1995 to Microsoft's Windows.

Novell has since expanded beyond operating systems: though NetWare revenues dropped 70% throughout 2006, overall company revenues only fell 7%. It now pursues an acquisition, sales, and partnership strategy to increase efficiency and offer a number of software applications in realms as varied as security, collaboration, virtualization and its version of the open source Linux OS.

[edit] Open Source

Open source software is a type of software whose source code can be edited by any user, and most open source software is freely available to anyone. Many basic open source program patents are owned by the Free Software Foundation, the most critical to Novell being Linux. Novell sells a number of programs that are either open source, or have some pieces of code that are open source. Since it would pretty difficult to make money off of standard software that can be obtained for free, however, Novell takes open code, redesigns it to make it more user friendly, and sells it as a licensed piece of software. The code is still open and editable by users, but the particular code configuration belongs to Novell. When a customer uses it, they are essentially licensing the software.

[edit] Business Segments

Novell’s software solutions are grouped into three main solution categories, namely- systems, security and identity management, open platform solutions, and workspace solutions. In addition, we offer worldwide IT consulting, training and technical support services. Following are descriptions of these categories.

Systems, Security and Identity Management. Our systems, security, and identity management products include applications that offer broad capabilities for automating the management of IT resources. This group of Novell solutions creates and assigns digital identities to IT resources, and protects those resources from unauthorized use. They also manage and track the use of IT assets and report on that usage for auditing, billing and compliance reporting purposes.

Open Platform Solutions. Our open platform solutions category includes solutions that offer effective, open and cross-platform approaches to computing, networking and collaboration. Open platform solutions offer operating systems, network services, and workgroup software solutions.

With our open platform solutions, including our Linux-based and other related products, we focus on the substantial growth opportunities presented by enterprise adoption of open source technologies.

The foundation of this category is SUSE Linux Enterprise, our high quality and highly interoperable enterprise computing platform. With its openness, reliability and enterprise-class performance, we refer to SUSE Linux Enterprise as the Platform for the Open Enterprise. It offers businesses a complete open platform that supports mission-critical applications from the desktop to the data center.

Workspace solutions. Like our open platform solutions, our workspace solutions category also includes solutions that offer effective, open and cross-platform approaches to computing, networking and collaboration. Workspace solutions offer operating systems, network services, and workgroup software solutions. Our workspace solutions category is comprised of proprietary software products that provide customers with powerful solutions that are designed to operate within existing heterogeneous computing environments as well as to provide tools and strategies to allow easy migration between platforms to better fit customers’ technology plans. Our primary server products within this category are Open Enterprise Sever (OES) and NetWare. OES consists of several enterprise ready, scalable networking and collaboration services. These include file, print, messaging, scheduling and directory-based management modules that allow customers to manage their global computing environment from a single, central console deployed on either of our major operating systems platforms. Our workspace solutions category also includes our GroupWise» and collaboration technologies, Novell Cluster ServicesTM, and BorderManager.

Global services and support. We provide worldwide IT consulting, training and technical support services to address our customers’ needs. Our worldwide IT consulting practice provides the business knowledge and technical expertise our customers need to implement and achieve maximum benefit from our products and solutions. We also offer open source and identity-driven services designed to assist our customers with fast and effective application integration or migration of their existing platforms to Linux. Through our training services, we offer skills assessments, advanced technical training courses, and customized training directly and through authorized training service partners. We also offer testing and certification programs to systems administrators, engineers, salespeople, and instructors on a wide variety of technologies, including Linux. In support of our strategy to drive increased enterprise adoption of Linux, we offer the Novell Certified Linux EngineerSM and Novell Certified Linux ProfessionalSM programs.

Beginning in the first quarter of fiscal 2007, Novell began operating and reporting their financial results in five new business unit segments based on information solution categories, rather than on geographic area. The new segments are:

• Open Platform Solutions, which will focus on the unique growth opportunities around open source technologies. This business unit includes SUSE Linux Enterprise, SUSE Linux Enterprise Desktop, and other Linux-based solutions.

• Systems and Resource Management, which will focus on meeting the growing infrastructure management needs of our customers for desktops, networks and servers. This business unit includes the ZENworks product family.

• Identity and Security Management, which will continue to provide advanced, identity-driven solutions to the enterprise market. This business unit includes Sentinel, Identity Manager, Access Manager, Secure Login, eDirectory, and Novell Audit.

• Workgroup, which will focus on bringing our new technologies for collaboration to both existing and new customers. This business unit includes Open Enterprise Server, NetWare, GroupWise and BorderManager.

• Business consulting, which conducts general consulting activities and is comprised primarily of our Salmon and Swiss consulting units.

[edit] Revenue Breakdown

Novell's revenue decline from 2005 to 2006 can be attributed mainly to its declining NetWare software licenses. In the future, the company will be depending on Linux sales to make up for the loss. The company's low profitability can also be attributed to the decline of software licenses, which are the higher gross margin products provided by Novell.

[edit] Software Licenses

Novell was known for its NetWare operating system, which competed with Windows in the 90's but is rapidly dying off; now, it is the number two developer of a commercial form of the open source OS, Linux. Novell's version of Linux, called SUSE, is designed to be easy to use for enterprise customers. The idea behind open source operating systems is that a company's IT department can cut costs by configuring platforms and applications to their own needs; as such, SUSE is designed to facilitate the use of open source code on an enterprise scale.

Novell also sells a number of other software solutions:

• Systems, Security, and Identity Management: Novell's business management software works across a number of platforms, and is designed to take basic and complex business needs (like identity security and asset management) and streamline them on a large, enterprise scale.
• Open Platform: These are solutions including SUSE Linux Enterprise products, which are designed from the bottom up to maximize the effectiveness and efficiency of Linux. Novell also produces virtualization software, which is used to run multiple operating systems simultaneously on a single computer. This new field is very important to the company because virtualization will help to increase the demand for Linux, which is Novell's central product. Interestingly, while Novell competes directly with companies like Microsoft and VMware to sell virtualization software, an increase in demand for virtualization--which is considered to be in its nascent stages--will likely lift all boats for Linux players.
• Workspace Solutions: The company's offerings in this area include networking and collaborative software designed to facilitate asset and communications management across networks and platforms.

[edit] Maintenance and Services

Novell's Global Services and Support sector contributed one-third of the company's revenue in 2006. With so much open source and complex networking and security software, this division is heavily involved with services offerings ranging from full technical support to user education programs.

[edit] Returning to Profitability

Novell has seen revenue drop by 1% every year for five years, and has only posted a profit once in the last six. With NetWare revenues decreasing by 70% in 2006, the company is now shifting its focus to Linux, and implementing a new strategy to push more product at lower cost.

Virtualization is the next big hope for Novell; cross-platform compatibility means a place for SUSE even in a primarily Windows-based enterprise. While the company hopes to stay true to its open source roots, it recently partnered with Microsoft and IBM to consolidate its open source software with more established platforms, thus assuaging customer fears of incompatibility.

On the operational front, the company is planning on achieving cost-cutting by outsourcing R&D (possibly to India) and consolidating the financial and administrative support groups.

[edit] Indirect Sales Strategies Decrease Customer Diversity

Novell has shifted from a direct to an indirect sales strategy, whereby it contracts middlemen to distribute its products rather than selling directly to consumers. The company believes that an indirect sales strategy will cut down on sales costs, and by allowing big distributors who have established customer relationships to sell its products, Novell is also hoping to increase revenues.

Novell's shift from a direct sales strategy to an indirect sales strategy can both help and hurt the company. An indirect strategy allows the company to cut sales spending, but places Novell at the mercy of a few big customers.

[edit] Trends and Forces

Novell, as a leading enterprise infrastructure company, is subject to powerful and relatively new industry trends.

[edit] Virtualization is Flattening the Operating System Playing Field

Virtualization is an IT technology that allows multiple operating systems to run on a single machine. Certain applications work best on particular operating systems, so businesses have historically run multiple machines, each with a different OS, in order to be able to use all their required software. Virtualization allows companies to cut the cost of having multiple computers, allowing all necessary applications to run on their respective operating systems simultaneously on a single machine.

[edit] Countering the Windows Vista Effect

Microsoft Windows has been the most prominent consumer and enterprise operating system since it surpassed NetWare in 1995. The most recent version, Windows Vista, comes bundled with a large suite of applications and features (e.g., hard drive security and virtualization tools) but is closed-source software with strict terms of agreement. As part of this Vista effect, users are encouraged to use only Microsoft and Windows-compatible products.

Virtualization, however, has the power to counter this effect to an extent. Users can install multiple operating systems on a computer in order to maximize efficiency while lowering costs. Novell will benefit from this trend, as it will become easier and cheaper for companies to adopt its version of Linux operating system.

[edit] Acceptance of Open Source is Increasing at the Enterprise Level

Increasingly, enterprise customers are finding that closed source software, like the Windows ecosystem, do not have all the capabilities that they need. While open source software may not come with all possible features, IT departments can easily change the source code of an open application to create, change, and remove software functions. This allows companies to cut costs, as they can change a single program to have the functionality of what two or more programs would have had. Virtualization is helping to make open source software more accessible and desirable at the enterprise level, as the ability to run an open OS with a closed OS keeps the cost of hardware and software down, all while increasing information flow. This new method of using unrestricted development and exchange to increase efficiency has been termed Enterprise 2.0, and has great potential to benefit Novell as Linux is the most commonly used open source platform at the enterprise level.

[edit] Novell's Ownership of Unix Could Bring Potential Windfalls

Novell recently won a case that asserted its ownership of all intellectual property rights to Unix System V Revision 4 (SVR4). As the code for which most UNIX applications are based, SVR4 has the potential to bring Novell large amounts of royalty revenue - UNIX code is the basis for a number of operating systems, including Windows and SUSE Linux, and SVR4 is the basis for most iterations of UNIX code. Anyone that designs a program based on UNIX code should theoretically owe Novell royalties; whether this is the case or not will probably be decided in court in the future.

[edit] Novell Partners with Microsoft

In 2006, Novell entered into an agreement with Microsoft that will facilitate the development, marketing, and support for Novell and Microsoft products that work in conjunction with each other. While Microsoft is one of Novell's primary competitors, this partnership could increase overall proliferation of SUSE Linux, especially with the advent of virtualization. The agreement was built upon the premise that enterprise customers who want to use Windows and Linux will find SUSE attractive because it works well with Windows.

Under the agreement, Novell and Microsoft have a combined offering, where SUSE Linux Enterprise Server is bundled with Microsoft Windows Server. The partnership also includes an agreement for both companies to overlook customer patent infringements when customers use either company's software in different ways than originally intended (e.g. editing Microsoft code).

Novell believes the agreement has obvious benefits, including riding on the coattails of the leading industry OS, but risks remain nonetheless. For example, Novell will probably begin to design its software to take advantage of Windows features, and promote Windows in the same breath as it promotes its own software. Unless Microsoft makes moves to promote SUSE and other Novell software, which is highly unlikely, Novell will not see any great gain in SUSE and software sales. Worse yet, the deal with the industry giant could alienate Novell from its open source supporters, leading to a large drop in sales revenue.

[edit] Linux Licensing Shifts Could Affect Business Agreements

The code for Linux is owned by the Free Software Foundation; through the license written by the FSF, called the General Public License, any person has the right to use and edit any piece of Linux code. Novell's SUSE Linux is simply a configuration of the free version of Linux; the company takes the free code and makes adjustments here and there to facilitate its use for those Linux users who do not know how to get around certain of the operating system's complexities. The rewritten code is what is owned and sold by Novell, but can be edited by users.

The company's deal with Microsoft angered many members of the FSF and open source community because bedding with a closed source giant was considered a betrayal of open source philosophy. Furthermore, though Microsoft has conceded the right to assert its patents in the context of SUSE Linux, it has not conceded the right in the context of other open source platforms. Only Novell customers have protection against Microsoft's lawyers, angering the FSF further, to the point where it has proposed an addendum to the current revision of the GPL, GPL Version 3, called "Discussion Draft 3". Discussion Draft 3 was written to attack the Novell-Microsoft deal in two ways:

1. The same protection from Microsoft that is extended in the SUSE-Windows deal must be extended to all users of software covered under GPL three, including all other forms of Linux.
2. In the future, no GPL software can be included in patent agreements like the one made between Novell and Microsoft. While this doesn't affect Novell directly, it prevents any similar deals from being made in the future.

The recently announce final draft of the GPL does not harm the agreement between Microsoft and Novell, allowing SUSE Linux users to skirt around Microsoft's patent protection. The GPL does, however, say that those "discriminatory patent deals" made after March 28th are not allowed to use software covered under GPLv3. This prevents Novell from making any such deals in the future, and is an example of the sort of backlash that the company would receive by "selling out", as many in the open source community would call the deal.

[edit] Server Market Rebound

Servers, the data-and-application holding machines in a network that are queried by all computers linked to them, had been a hot commodity several years ago as enterprise systems have become increasingly digitized. As companies linked departments, offices, and even global business locations, servers were needed to make a common base of information accessible to all users. Market growth slowed in 2004 as the demand was met by output, but began to accelerate again in 2006 with the advent of enterprise 2.0. The market for servers has increased five straight quarters since the second quarter of 2006. Linux-based servers (19% revenue growth) have kept pace with Windows-based servers (18.7% growth). On the other hand, UNIX systems have declined by 4.0%. The overall indication is that new demand for servers has combined with the enterprise 2.0 desire for flexible program use to give the market for open source servers tremendous future growth potential. Novell has the potential to benefit as a dealer in Linux-based servers.

[edit] Competition

Novell faces heavy competition from a large number of companies, including Microsoft, Apple, Red Hat, Sun Microsystems, CA, SCO Group, Cisco, EMC's VMware, IBM, McAfee, Symantec, BEA Systems - pretty much any company that deals in digital systems and network infrastructure at the enterprise level is competing in some way with Novell.

Source: Google Finance, 08/27/07

As an enterprise operating system producer, Novell faces its heaviest competition from Microsoft's Windows and Red Hat's Linux, which has 60% of the Linux market compared with Novell's 30%. Because of the advent of enterprise 2.0 and the increasing popularity of virtualization software, Linux has the fastest growing popularity of any enterprise OS on the market. Linux revenues grew by 67% worldwide revenue in 2006 alone. Given this growth in the Linux market, infrastructure giants like IBM and Oracle could stop supporting vendors like Red Hat and Novell and start producing their own versions of Linux. If this happens, the sheer power of such companies in the IT market could lead to massive losses of market share for Novell.

Novell ranks a distant fourth in the virtualization market. A 2006 global management survey by the Yankee Group suggested that VMware will maintain a 55% market share through 2007; Microsoft clocks in at 29% and Red Hat and Novell both stay in the niche market with 1%. While Novell is not in the best position to make huge money off virtualization software, however, the benefits for Novell from virtualization's entry into the software market have already been made clear.

The recent victory and assertion of Novell's rights to UNIX SVR4 put the company is a strong position in terms of its competition. For starters, SCO is near bankruptcy and has been ordered by courts to pay the 95% of all UNIX-based revenues to Novell. The situation looks like a win-win for Novell, which either receives millions of dollars or sees a major competitor become bankrupt. Furthermore, ownership of the rights to UNIX could mean that all companies who use UNIX code in their programming owe Novell licensing fees. Today, a number of operating systems, from Linux to Apple OS, use UNIX code.

Novell, with its Linux-based strategy, was previously at a huge disadvantage to Microsoft, the producer of the leading enterprise operating system, Windows. As Windows became the dominant OS starting in 1995, Microsoft made deals with hardware producers to sell computers with Windows pre-installed, thus removing the incentive for users to go OS shopping. The rapid proliferation of Windows also led to the rapid proliferation of Windows compatible software, leaving operating systems like NetWare and Linux high and dry and easily overlooked by enterprises looking to keep costs down. The growth of virtualization could offer a foothold back into the market. Though the company has not made any heavily advantageous moves as of yet, it's probable that the flattening and opening of the infrastructure market will have greatly positive benefits for Novell.

[edit] References