Novell reorganizes amid financial worries

By Clare Haney
IDG News Service, 05/23/00

Novell on Tuesday announced a dramatic reorganization of its operations at the same time it released poor financial results for the second quarter of fiscal 2000.

The company blames its poor financial performance on plunging sales of its packaged software in the global reseller channel. Novell had already warned earlier this month that both fiscal 2000 second-quarter revenue and earnings would be much lower than had been previously expected due to channel issues.

"There has been a stark decline in (sales of) our packaged software," said Eric Schmidt, Novell chairman and CEO. "We underinvested and underfocused on an important area - we intend to fix that."

He added that, overall, Novell needs to sharpen its focus and business execution, hence the need for a company reorganization.

Revenue for Novell's packaged software in the channel during the second quarter of fiscal 2000 was half that reported in the company's previous four financial quarters, Schmidt said. He added that he hopes to put the channel issues behind Novell by early 2001.

Novell needs to clarify the role of the channel, according to Stewart Nelson, Novell chief operating officer. "We will carve out specific segments of Novell's market for the indirect channel and eliminate conflict with direct sales, which will be a huge change for us," he said.

The vendor aims to provide its indirect channels with more training, demand generation assistance and field support, he added. Further details of such moves will be announced within 30 to 45 days, Nelson said.

Both net revenue and earnings per share for the three-month period ended April 30, 2000, came close to the company's predictions at $302 million and 9 cents per share, respectively. Novell had said total revenue would be just over $300 million and earnings per share would be around 8 cents. Net income for the second quarter of fiscal 2000 was $31 million, compared with $38.7 million in the year-ago quarter.

Included in the second-quarter results are a one-time royalty payment of $35 million made to Novell by Caldera, the bulk of which relates to a January out-of-court antitrust settlement reached between Caldera and Microsoft. The royalty from Caldera added 7 cents per share to Novell's earnings, Novell executives said on Tuesday's conference call.

Six financial analysts polled by First Call/Thomson Financial on May 18 estimated Novell's earnings per share for the second quarter would be 1 cent.

Excluding the contribution from the Caldera royalty, Novell's net revenue for the second quarter was $267 million, with earnings per share of 2 cents, according to Dennis Raney, Novell's senior vice president and chief financial officer.

Regionally, the drop-off in channel sales hit Novell hardest in Europe, Middle East and Africa (EMEA) where revenue for the second quarter fell 20% to $84 million, Raney said. Without including the Caldera royalty, revenue in the U.S. was down 16% on the year-ago quarter, to $142 million. Revenue also fell in Asia-Pacific by 7% to $24 million. The one bright spot was the Americas region outside of the U.S., where Novell's revenue rose 4% to $17 million.

After Novell's reorganization, the company will consist of four business units. Each unit will have its own strategic focus, distribution channels and investment model in an attempt to make the vendor become much more market-driven, Nelson said. "We recognized that our go-to-market strategy has not been as strong as it should've been," he added. The four divisions will be Net Management, Net Directory, Net Content and Novell Customer Services.

The four business units will report to Schmidt and Nelson.

The Net Management unit, led by Craig Miller, will encompass many of Novell's existing products, such as the company's NetWare operating system and its GroupWise groupware software. "The unit will build on the market presence of NetWare and will be focused on revenue growth," Nelson said.

Headed up by Paul Smart, the Net Directory unit's primary aim is to achieve "ubiquity" for Novell's directory software, according to Nelson.

The Net Content unit will be led by Simon Khalaf, formerly at JustOn, a Web-based file management company which Novell acquired in January. Novell's Chief Scientist Drew Major will be in charge of the unit's strategic direction and the unit will include application delivery services, caching and content exchange, Nelson said. Net Content will be attempting to attract new dot-com companies to use its software, he added.

Novell's Customer Services unit will be headed by Sheri Anderson.

Novell also announced three other management changes effective immediately. Rich Nortz, formerly the company's senior vice president of Novell Customer Services, becomes senior vice president of worldwide sales. "Rich will drive a complete shift in our sales strategy," Schmidt said. "We will get very solution- and customer-focused and will restore the health of channel selling."

Dave Shirk becomes Novell's chief technology officer, while Ken Anderson becomes the company's chief information officer.

Schmidt was pretty upbeat in his assessment of Novell's current and future prospects during Tuesday's conference call. He said that in his opinion and that of the vendor's customers, Novell has already got the right strategy; what's needed is a very strong and continuous focus on that strategy. "I'm confident we'll overcome the transitional issues," Schmidt added.

Looking ahead, Schmidt said the vision of an IT world with "unlimited storage and infinite bandwidth" - an area that the IT industry as a whole is only 5% into - is one in which Novell's products would have plenty of opportunity to play a key role. Issues such as personalization and privacy where the vendor's software is strong will be extremely important, he added.

"We will position NetWare as more than file-and-print; it will become a platform for scalability and data architecture," Schmidt said.

Novell reported its results after the markets closed Tuesday. The company's share price ended the day's trading up 9.1% at $9.75. Over the course of a 52-week period, Novell's stock has reached a high of $44.56 and a low of $8.37.