Is Novell on the comeback trail?

By Christine Burns
Network World Fusion, 3/2/98

[Schmidt pic] San Jose, Calif. San Jose - Wall Street analysts last week stopped short of crowning Novell, Inc. CEO Eric Schmidt the Comeback King. But based on Novell's latest financial results, his company may be turning the corner.

Novell posted earnings of $14 million and revenue of $252 million for its fiscal first quarter, marking the company's first operational profit since Schmidt took the reins last April. Earnings per share weighed in at 4 cents, twice what Wall Street analysts were anticipating.

"They're only halfway to what I would call a complete turn-around," said Stephen Dube, an analyst with Wasserstein Perella Securities, of New York, who raised his stock recommendation from "hold" to "moderate buy" based on Novell's results. "But these numbers show they've beaten down the first few obstacles to getting there."

This technically is the company's second consecutive quarter in the black. However, last quarter's $7 million gain was only a result of income earned from the $1 billion Novell has in the bank.

Novell's return to profitability is a crucial step for the company as it seeks to repair its battered image. For the past couple of years, Novell has been whipped by Microsoft Corp. Microsoft has not only won on the Internet front, but its Windows NT Server has dethroned NetWare as the best-selling server operating system.

In a conference call to Wall Street analysts, Schmidt said the company is right where he expected it would be six months into his 18-to-24-month recovery plan. "Novell certainly is relevant again," he said.

Schmidt said he expects the company's ramped-up delivery schedule for new versions of NetWare, BorderManager, ManageWise and GroupWise to fuel continued success.

Novell attributed its first-quarter profit to harsh cost cutting moves that included laying off 25% of its work force and significant channel inventory reductions. These measures held operating expenses for the quarter to $192 million, $45 million lower than expenses in the same quarter last year.

This is how most corporate restructurings start, said Scott Reamer, an analyst with Boston-based Cowen and Co.

"You need to control the infrastructure, i.e., the costs," he said. "Stabilize them there and then move on to focus on products and revenue."

Users who have invested heavily in Novell technology were heartened by the company's financial performance.

"Nobody wants to see the company who supplies 90% of your network software waffle. So this is finally encouraging news," said Bill Kannberg, technology manager for the Hillsboro County, Fla., government, which has a 2,000-seat NetWare 4.X network.

Despite the positive profit picture, financial trackers were alarmed by Novell's 33% drop in revenue from last year's first quarter to this year's. At this rate, Novell will barely be able to maintain its $1 billion annual revenue.

Mary McAffrey, an analyst at Bankers Trust/Alex Brown, in New York, expected better revenue numbers given that Novell shipped a number of new products last quarter. NDS for NT, BorderManager FastCache and the Netscape Servers for NetWare all hit the street in the past three months.

Giga Information Group, a technology consulting firm in Santa Clara, Calif., estimated that these products will only pull down $50 million each this year.

"They are going to have to bank on something much bigger if they are going to get even close to the revenue numbers they've enjoyed in the past," said Todd Chipman, an areas director with Giga Information Group.

Stewart Nelson, vice president of Novell's products group, said the company is banking on NetWare 5 - the firm's top engineering priority this year - to help boost revenue.

NetWare 5 is the next release of Novell's flagship product that Schmidt said will open up the network operating system to Internet standards. This upgrade - which will enter its third beta cycle at the firm's annual Brainshare user conference later this month - swaps out Novell's proprietary IPX protocol in favor of standard TCP/IP. The product also will support server-side Java applications.

The company is on track to deliver NetWare 5 by midyear, Nelson said.