Novell: Linux finally breaks even (Channel Register)

This really doesn't have a lot to do with Linux other than validating that someone other than RedHat can make money with a Linux Distribution business. What this really says is that Novell is finally getting their house in order after a decade of continuous layoffs and declining revenue. As a Utah resident, for the last decade it's been a yearly (and some years it was bi-annual) occurrence for Novell to layoff staff. It's a really good thing IMO, Novell is doing some of the heavy lifting on some critical projects (ignoring some of their stupider moves things like the ATI driver I consider critical), it would have been a big loss if they hadn't been able to get profitable and put a much bigger burden on RedHat to carry some of those projects.

I didn't really track the financials closely since, but I don't think the balance sheet was very rosy very often in the interim. The distribution business changed quite a bit in that timeframe, and a lot of the obvious sources of cash became less plentiful even as Linux took hold, at least in the datacenter.

I'm certainly glad to hear this news, and wish Novell all the success they can eat.

http://seekingalpha.com/article/190762-novell-inc-f1q10-q...

It helps to actually read the full transcript for Novell's quarterly financial calls for the last year to get a sense of what role MS's cash injection back in 2006 is still playing. First you have to understand that the initial cash injection was accounted for over multiple quarters but is now completely accounted for. The lastest quarter financials has no deferred revenue from the MS deal in it as far as I can tell (compared to say a year ago which included $25 million from MS)

So the real question is what affect are those now 3 year old vouchers having? Both financially and from a customerbase size?

Let's run so quotes from the actual transcript:
---start cherry picked quotes---
Dana Russell in prepared statement:
"Renewal of Linux distribution associated with Microsoft certificates began during the quarter, and as expected we realized much lower invoicing than the original agreement.

Lower invoicing associated with Microsoft certificates was offset by significant growth in our non-Microsoft invoicing."

Q:John DiFucci - JPMorgan

"Thanks. Ron, can you give us a little more detail about the Microsoft renewals? Tell us, perhaps, what the renewal rate was on those original invoicing I mean invoices from Microsoft. I believe it was somewhere around $73 million about three years ago and so about that much would have come up for renewal right around now..."

A: Dana Russell
"...the original certificates we were paid from Microsoft at a 45% of list price, so a 45% discount. And in most of these certificates especially in the early part of this program went out to very large strategic customers at fairly significant discounts."

"And so as we look at the renewals, the expectation is that we could see especially for very large strategic customers the pricing now has changed dramatically and what we are seeing is something more akin to 80% to 90% discount."

Q: Michael Turits - Raymond James

"Okay. So you end up with more like $7 million or so from Microsoft renewals. And then, was there anything from the new tranche that you sold to them or are you getting any invoicing out of that?"

A: Dana Russell

"No, no material amounts with that, very small."

--end quotes---

Okay so there are the actual quotes from the transcript that I think matter. My take? Most customers who were relying on the support vouchers from MS to get no-cost support for Suse are renewing..but at very steeply discounted rates.. 80% to 90% discounted rates compared to the support list price. That's pretty aggressive discounting in order to keep customers (albeit customers who were originally not paying out of pocket at all by using the MS vouchers). Any way your slice it, those renewing voucher customers are actually a revenue drop compared to previous quarters because of the heavy discounting. The break even of the linux business this quarter is not riding high on the backs of those MS vouchers. Those vouchers account for ~$7 million in revenue total if you follow the discussion in the transcript Q/A. Novell is a little cagey about talking about its non-Microsft bookings and renewals but if they are reporting break even even though the MS related revenue is tailing off then their non-MS related linux customers have to be doing some what well.

I'd wager in 6 months after Yahoo transition to Bing for its search engine, Canonical will be getting significantly more revenue from MS on a quarterly basis than Novell will be....but this time without the patent poison pill. Let's face it its not the fact that money has been flowing into Novell from MS for those discounted vouchers that we collectively have a problem with. It's the patent licensing that got bundled in with it as part of a larger deal.

-jef