Novell sees hope as Microsoft deal starts to pay off

Waltham software vendor Novell Inc. credited its controversial deal with Microsoft Corp. for fueling interest in its Linux operating system software in its fiscal first quarter.

Novell said that Linux sales rose 46 percent to $15 million over the same period last year. In the period ended Jan. 1, the company racked up additional Linux invoices worth $91 million, a 659 percent increase from the previous year. Revenue from these invoices will be recognized in future quarters.

The good news on Linux offset an otherwise gloomy quarter for Novell. Overall revenue declined by 5 percent to $230 million. The company posted a loss of $20 million, or 6 cents a share, compared to $4 million, or a penny a share, in the same period last year. The company also said it would spend $35 million to $45 million this year in a restructuring effort aimed at lowering expenses.

"The results were certainly a bit disappointing," said Brendan Barnicle, an analyst with Pacific Crest Securities, who said Novell's earnings and revenue were below expectations.

Novell chief financial officer Dana Russell said about $73 million of the Linux invoices are due to the company's partnership with Microsoft. As part of the deal, Microsoft paid $240 million for Novell Linux software licenses. Microsoft is to distribute these licenses at no charge to users of Microsoft's Windows operating system who want to use Linux for some computing tasks.

John Dragoon, Novell's chief marketing officer, said that Microsoft customers have been eager to take advantage of the offer. "We activated 40,000 certificates in the quarter, which was double our objective," Dragoon said. "It's evidence that this message of interoperability and cooperation is working."

The two companies also plan to create a joint research facility to ensure that Microsoft's Windows operating system works well with Novell's Linux -- a plan that appeals to companies that use both operating systems, Dragoon said.

Barnicle was pleased by the strength in Linux bookings, but noted that Novell won't gain a continuing revenue stream from them unless customers pay to renew the Linux service licenses when they expire in one to three years.

The deal between Novell and Microsoft infuriated many prominent members of the free software movement, which spawned Linux. Novell paid Microsoft $40 million to cover any Microsoft-patented technology that might be present in Novell's software. Free software advocates reject the idea that Linux contains any Microsoft-patented features. But Microsoft chief executive Steve Ballmer disagrees and has hinted at possible legal action against other Linux vendors. Critics of the Novell-Microsoft deal say that Novell has strengthened Microsoft's case against other Linux companies.

Dragoon said that his company also rejects Microsoft's claim and that the payment was intended to cover a variety of software products made by Novell, not just Linux. And he said it made sense for Novell to offer customers a guarantee that they would never face patent litigation from Microsoft. "The issue of intellectual property was real for some customers," said Dragoon. "Denying it was not going to make it go away."

Hiawatha Bray can be reached at bray@globe.com.