Matt Asay: Novell Still Sucks
My employer, Novell, posted its earnings yesterday, resulting in a nice up-tick in our stock price. Press and commentary has been favorable for the most part, but I feel compelled to respond to Matt Asay’s two posts on our earnings.
Now, I am an employee of Novell, so to some extent my fortunes rise and fall with those of my employer (although there are always other options in a free labor market.) But I am not in PR, and I try to make my comments on this blog objective and fairly independent. I do self-censor along the lines of “if you can’t say something nice about your employer, don’t say anything at all”, but I’d like to believe I’m able to see all sides of Novell’s position relative to competitors, peers and partners.
But I’m afraid to say that Matt Asay, a one-time Novell employee, has lost the ability to view Novell through any lens other than his distaste of the Microsoft deal. Novell had a pretty nice quarter, with our stock up over 8% today as I write, but this is what Matt says regarding our Linux business:
The numbers are still relatively small ($21 million), but any progress is progress. Importantly, the word on the street is that Microsoft is not proving to be a great distribution partner (go figure!). This means that (gasp!) Novell is actually managing to sell its Linux value, not just making silly patent deals.
Sure, the patent deal between Microsoft and Novell was a deal winner at Wal-Mart Stores and undoubtedly a few others. But I would argue that Microsoft has done more harm than good to Novell’s Linux business. Why not cut it adrift?
Matt would argue that the MS deal has done more harm than good, but he doesn’t — he just asserts that this is the case, while linking to a nine-month old article. The actual evidence provides a different picture: as Matt himself quotes from Credit Suisse, $14M in Linux revenues were from the MS deal, while $24M were “organic”. “Word on the street” may be that Microsoft isn’t a good partner, but the quarterly results tell a different story altogether.
Matt excerpts Jason Maynard’s take on the earnings report, which says in part:
Although we acknowledge the improvements to the business, we continue to believe there are better relative investments within the group….we are maintaining our Underperform rating….
So CSFB has been pretty bearish on the stock, and they’re not willing to change their rating after one or two good quarters. Fair enough. Maynard makes various arguments for his view, some of which I think are valid, and some off-base. Of course Maynard is just one analyst, and others have been more bullish, but none of them make suggestions as far out as Matt does:
Now you just need to ditch the ballast that you call Systems and Resource Management and Identity and Security Management, and really grow…
Interesting…so Matt advises getting rid of almost $100M in quarterly revenue and about $35 in quarterly operating income, as well as divesting the customers that own SRM and ISM products but not Linux, because…why?
In most businesses, 2 percent and 4 percent increases are embarrassments.
Matt’s background in hi-tech start-ups is showing. Start-ups can’t survive without rapid growth, but the rest of the business world is hardly embarrassed by a slow growing but profitable business. While start-ups can’t worry about profits at the expense of growth, for the rest of us, profits are a good thing. Novell has a stated goal of growing these business more rapidly, which would be good, but in the meantime they’re not exactly a millstone around our neck.
I’ve heard analysts argue that Novell should shed everything but Linux so that it will have the same business model as Red Hat, a view Matt seems to be alluding to. Sure, Novell could remake itself to look just like Red Hat, but then Novell would throw away most of its revenue and income as well as any chance it has to differentiate itself from Red Hat. The world doesn’t need another Red Hat, and Novell doesn’t need a “me-too” strategy. It needs to find ways to deliver more value in ways that Red Hat can’t. One way to do this is with a broader, integrated product portfolio. I think the chances are better that Red Hat will look more like Novell down the road rather than the reverse.
Matt finishes with the comment “Novell needs a new trick”, by which I assume he means something besides our deal with Microsoft, even though only $14M of our Linux revenue was from Microsoft certificates, leaving $229M in revenue from other “tricks”. We’ve announced a string of partnership deals, an acquisition, and several new product releases in the last quarter, but Matt overlooks all of that due to his over-riding obsession with the MS deal. How many more tricks does he want?
Matt and other open source commentators should feel free to criticize Novell’s MS deal on its merits, or lack thereof. I think they are wrong, though, to view all of Novell through that single lens. They also are wrong to think that Novell, a complex multi-business unit company, must look like Red Hat to succeed.
None of us at Novell know how this wild ride is going to turn out. We may succeed fabulously, or we may crash and burn. Either way, I’d like to see a higher quality of kibbitzing from industry observers than Matt has displayed.