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Linux Surge Looms as Threat to Microsoft

In an already tough IT environment, and with Windows 7 garnering buzz, Microsoft (MSFT - Get Report) may have to sleep with one eye open.

One bright spot in an otherwise dampened earnings report showed that Novell's (NOVL) revenue related to its Linux open-source platform -- a chief rival to Windows -- was up 25.5% to $36.6 million from the same quarter a year ago. With Microsoft and Novell currently locked in a deathmatch over the future of netbook software, this news will probably make IT watchers perk up.

Overall, though, there was far less to like about Novell's report. Net income still came to $15.6 million, or 5 cents per share, which is up from 2 cents per share from the year-ago period. Excluding certain items -- like stock-based compensation, amortization on an acquisition, and restructuring costs -- raises the tally to $29.3 million, or EPS of 8 cents.

But an eyebrow-raising 32% drop in software licensing is not a good sign. A steep fall in training and support services sales also helped push overall revenue down from $235.7 million in the year ago period to $215.6 million this quarter. Exchange rates complicated matters, dragging net revenues down by another $6 million.

Despite that, the company was able to get to its bottom line thanks to a cut in operating expenses, which fell to $152.7 million from $173.5 million. That was due in large part to an $18.2 million cut in sales and marketing costs. Revenue from maintenance and subscriptions, which makes up nearly three-quarters of sales, also rose to $158.3 million from $150.9 in a year.

"Our Linux and Identity businesses have the greatest potential to continue to expand operating margins," CEO Ron Hovsepian said in a statement, "and we plan to attain profitability within these businesses no later than 12-18 months from today, barring unforeseen circumstances."

After the earnings announcement, the company also released news of a partnership with Affiliated Computer Services. In a statement, Novell said it will outsource a slice of its IT operations to ACS as part of a five-year contract worth $135 million. ACS will also buy $30 million in Novell products in the first three years.

Novell was changing hands down nearly 5% by afternoon trading. Microsoft was down 6 cents to $20.39.
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