Tough times hit Novell

Firm's future questioned after Q2 warning.

By Deni Connor
Network World, 05/08/00

Novell had analysts questioning the company's prospects last week when it warned that earnings this quarter would be half what Wall Street expected.

The firm acknowledged it will fall short of second-quarter revenue predictions, attributing the problem to forecasting mistakes, a slump in sales and intensifying competitive pressure from Linux vendors and Microsoft's Windows 2000. Novell's stock price plummeted about 40% to 10 5/8 on Wednesday, off from a 52-week high of 44 and change. Volume was enormous as 98 million shares changed hands, making Novell the day's most actively traded issue. Novell typically trades six million shares per day. By Friday afternoon the stock had failed to rebound.

Poor quota management combined with inadequate sales forecasting led to a $50 million shortfall on projected sales in the past five weeks of the quarter, Chief Financial Officer Dennis Raney says. Currently sales of the company's flagship operating system, NetWare, account for more than two-thirds of the company's revenue. Its caching product, directory and hosted services have yet to generate significant revenue.

The only thing that might save Novell from finishing in the red for the quarter is a $35 million royalty payment resulting from an antitrust settlement between Caldera Systems and Microsoft. Raney estimated it would take at least two quarters for Novell to recover.

In light of the disappointing quarters, the company might not have that long, according to analysts. "I'm just disgusted," says Joel Achramowicz, a financial analyst with Preferred Capital Markets in San Francisco. "[Novell CEO Eric] Schmidt told me they could have milked NetWare for all it's worth. That's what they should have done and then focused on the future of the company."

Achramowicz says Novell "needs to be rejiggered, but it may be too late now. You have to ask yourself what the hell is going on." It may be time to split the company in two: developing caching, directory services and hosted services; and handling NetWare and Novell's messaging system, GroupWise, Achramowicz says.

Other experts agree that the company must do something and fast.

"Novell should seed the directory by [giving it away] or cede the directory space to other directory vendors," says Laura DiDio, an analyst with Giga Information Group in Cambridge, Mass. According to DiDio, Novell has nine months until Win 2000 reaches a critical mass of momentum.

"Even if they were to make decisive moves supporting the new directory-enabled initiatives, it is doubtful that in the short term the revenue from directory-related applications could sustain a company of Novell's size," DiDio says. "If they succeed, they will bear little resemblance to the Novell we know today."

One Novell response to the challenge has been hiring Nicholas Tiliacos, former CEO of Mosaix, to replace Ron Heinz, Novell's former chief of sales. Tiliacos will be charged with restoring integrity to Novell's sales reporting processes, increasing sales and consolidating a fractured sales force around the new products.

A month ago at its annual BrainShare customer conference, Novell announced a new marketing vision centered on directory-enabled, cross-platform products and technologies.

"Unfortunately great technology [and] nonexistent marketing has summed up the situation at Novell for many years," DiDio says.

Schmidt insists the company's marketing messages are on target, and Novell will not be split up. Asked about Novell's plans to spend some of its $1 billion cash reserves to acquire technology or launch a branding campaign for its Internet Caching System (ICS), Chief Operating Officer Stewart Nelson declined to answer. He says those issues will be addressed May 23 when Novell releases its earnings and the company's quiet period expires.

Novell customers are clearly discouraged by the company's struggles.

"I took instructor kits home for the new Novell courses that are coming out," says Peter Strifas, a Certified Novell Engineer and instructor at a Novell authorized training center in New York. "I'm thinking to myself, 'Should I even begin prepping these classes at this point?' I'm wondering if I should become certified on Windows 2000."