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Novell's Q1 Revenues Slide

There is a popular notion among open source advocates that open source software will do well in a recession as enterprises seek low cost alternatives.

Open source vendor Novell's CEO Ron Hovsepian (NASDAQ: NOVL) might beg to differ.

"Our Q1 Linux performance did not meet our expectations as our pipeline coverage and conversion was overly reliant on direct sales and sales cycles lengthened," Hovsepian said on a conference call with analysts yesterday. "Going forward, we are focused on building our pipeline with and through partners and we will be aggressive on pricing to gain market share."

Hovsepian's comments come as Novell closed out its first quarter financial results for 2009 with with $215 million in revenue, down slightly from $231 million for the first fiscal quarter of 2008.

Net income came in at $11 million, or $0.03 per share, a 35 percent drop from Novell's profit of $17 million, or $0.05 per share, for the first fiscal quarter of 2008.

Hovsepian called the results disappointing, which he attributed in part to an over reliance on the firm's deal with Microsoft on Linux. The covenant from November of 2007 has Microsoft reselling Novell Suse Linux Enterprise Server subscriptions.

Novell's CFO, Dana Russell, also noted that explained that on the Linux side during the first quarter of 2009 Novell did not sign any large deals, many of which have been historically fulfilled by Microsoft certificates. To date Russell noted that Novell has invoiced $199 million or 83 percent the original $240 million agreement. In August of 2008 however, Microsoft took out an option to expand the partnership by an additional $100 million bringing the total to a potential $340 million.

During a conference call to discuss results, analysts asked Russell and Hovsepian why Novell's Linux business wasn't performing at the same level of Linux rival Red Hat, whose most recent financial results showed improvements in revenue and income. Both Novell executives answered that Novell's business is a different one than Red Hat's for a number of reasons.

"I think like any of these markets, we probably entered the market in terms of time, in terms of scale, behind Red Hat by a few years," Hovsepian said.

Then again, according to Hovsepian, Novell's approach to Linux and open source is different than its Linux rival Red Hat.

Novell acquired SUSE Linux in 2003 for $210 million. Hovsepian noted that first Novell had to get big anchor reference clients, which he claims Novell has done. After that he argued that Novell had to build its ecosystem of partners, which now number 3,000 independent service providers according to Hovsepian. Continuing to build out the partner ecosystem is where Hovsepian sees the greatest need in order for Novell to grow its Linux business.

Beyond that Hovsepian sees Linux as a gateway to sell other Novell products and services.

"We will continue to be aggressive with the Linux tool and product in order to drive more of our other management products and other products that sit above that," Hovsepian stated. "So fundamentally we have a different strategy on long-term value of Linux in the marketplace and as part of our portfolio. We see it as an important part but we see the long-term profitability coming from these other categories for our business."