SAN FRANCISCO (Business 2.0 Magazine) - It's official: All mentions of Novell must now, once again, be preceded by the adjective "beleaguered."

The storied software company won a pass from such ominous epithets for the last few years by buying open-source startups Ximian and Suse Linux. It announced bold plans to embrace open source starting in 2004. At the time Novell's strategy was to combine its NetWare operating system with Linux to compete with Microsoft's (Research) dominant Windows operating system.

But the company's second fiscal quarter came up short. While the company announced Wednesday that it had eked out a profit of $3 million on revenues of $278 million, Novell saw sales of its older NetWare products and Open Enterprise Server (OES) - its Linux-based successor to NetWare - sink 16 percent over the same period last year.

In addition to OES, Novell (Research) is also distributing its own Suse-branded version of the Linux operating system. Novell's standalone Linux revenues of $10 million accounted for a scant 4 percent of total revenue in the quarter. By contrast, Red Hat (Research), Novell's chief competitor, saw total sales of $79 million in the most recent quarter, primarily from Linux-related products.

Novell shares sank 19 percent to $6.27 by mid-day Thursday.

With Open Enterprise Server failing to stop the slide in NetWare sales, and standalone Linux sales not yet taking off, Novell is once again in a tight spot.

Wall Street is mixed on Novell's short-term prospects. Jefferies & Company analyst Katherine Egbert upgraded the stock to a Buy in April, writing in a research note that she's bullish on the increasing role of president and COO Ron Hovsepian in the company.

But Citigroup analyst Brent Thill rates the company a Hold, noting in a report that the company hasn't grown Linux revenues as fast as the market.

And Credit Suisse analyst Jason Maynard downgraded the stock from Buy to Hold on Thursday. "I think Novell's window of opportunity has passed," says Maynard. "As long as the current regime is in power, nothing's going to change."

Maynard believes that Novell's other businesses - identity-management software and an IT-consulting operation - are distracting the company from building a business around its Linux software.

In an interview, Novell CTO Jeff Jaffe begged to differ, citing plans for a new version of the company's standalone Linux software.

In July, the company plans to release both Suse Linux Enterprise Server 10 and Suse Linux Enterprise Desktop 10, versions of the Linux operating system designed for corporate computing - an area that has seen little adoption of the open-source operating system to date.

"We're trying to take Linux to places it hasn't been taken before and significantly growing the Linux marketplace," says Jaffe. While Linux has won a growing share of the server market, it's primarily found on cheap, low-end servers that host webpages and perform other simple functions.

Jaffe says that the Code Ten products have much-anticipated features like virtualization - the ability to run multiple copies of an operating system simultaneously on a single machine - and AppArmor, a security feature that keeps programs from interfering with each other. Both features make it easier to use a single server for multiple computing tasks, which means customers won't have to buy as many servers.

On the desktop, Jaffe says Novell is betting that Linux will serve the needs of typical "knowledge workers" who use e-mail, surf the Web, and work on spreadsheets, word-processing documents, and presentations.

If those tasks sound a lot like those handled by software from a certain large software company, it's not by accident.

"Our friends in Redmond have done us a favor," says Jaffe, pointing to announced delays in the availability of Microsoft's new Windows Vista operating system. Vista isn't expected to land until January 2007, while Novell's Code Ten versions of Linux are expected this July, giving Novell a six-month head start.

That's not much time to sell cautious IT managers on switching to Linux. But trade publisher Ziff Davis's DesktopLinux.com gave OpenSuse 10.1 - the open-source version of Linux that forms the base of Novell's Code 10 products - high ratings when tested against a beta version of Windows Vista, noting that the Linux machine ran faster and displayed graphics more smoothly.

And Microsoft continues to suffer from security woes: Windows Vista, long before its official release, has already had to have a security patch issued to fix bugs that hackers could exploit. That's another selling point for Linux.

If there's any reason to be skeptical of Code Ten, it's that Novell has promised gangbuster sales for Open Enterprise Server and earlier versions of Suse Linux, only to disappoint the Street.

To rid itself of the "beleaguered" label once and for all, Novell will have to stop making promises - and start selling more software.

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