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Pink slips set to fly at beleaguered Novell

By Deni Connor
Network World, 09/04/00

PROVO, UTAH - Novell is expected to pink-slip up to one-quarter of its workforce as early as this week in response to the network giant's worsening financial situation.

The move is likely to exacerbate a yearlong internal debate over a radical recovery plan that would spin off Novell's hotter technologies into a separate company unencumbered by Novell's withering NetWare legacy.

Sources say Novell will lay off up to 1,300 of its 5,500 employees to bring expenses in line with diminishing revenue and take an estimated charge of $20 million in severance and benefits. The layoffs come on the heels of a string of upper-management defections and amid speculation that additional executives are close to leaving.

Novell's last major layoff affected 17% of its workforce in the third quarter of 1997 as the company headed into a $78 million year-end loss. Industry experts see this upcoming cutback as inevitable and risky.

"You could look at the revenue for the last few quarters and say they need to do something," says Dan Kuznetsky, an analyst with IDC in Framingham, Mass. "Layoffs may cause the stock price to rise because [financial] analysts look at expenses lining up with revenue."

However, Kuznetsky believes that any benefit from such massive cutbacks could be short-lived."They may result in lower revenue, which will cause a spiral downward."

Novell officials declined to discuss the impending moves in detail, but a spokesperson offered this comment: "We did commit to lowering our operating expenses as part of budget planning for fiscal 2001. How this is going to be done depends completely on the budgeting process."

Institutional shareholders and ex-employees interviewed for this story say Novell's long-running financial woes have been exacerbated by indecisiveness on the part of CEO Eric Schmidt and the board of directors.

"The company was blind-sided by [its sales troubles]," says Paul Schupf, president of Paul Schupf Associates, an investment firm in Hamilton, N.Y., that is Novell's seventh-largest shareholder. "It all boils down to a sales problem that was not dealt with [early this year]. That problem is surfacing in spades right now."

Novell reorganized at the end of the second quarter into four divisions centered on directory, management, Internet content and customer services.

In an earnings warning issued before disappointing second-quarter results were announced, Schmidt pinned Novell's troubles on a decline in channel sales caused by management and organizational issues. Poor quota management combined with inadequate sales forecasting led to an unexpected $50 million shortfall on projected sales in the last five weeks of the quarter, Chief Financial Officer Dennis Raney said at the time.

"By the time all that came to surface and Schmidt made [organizational] changes, it was too late," Schupf says.

At the time, two vice presidents responsible for the sales to the channel and equipment manufacturers left Novell. Schmidt said the company's recovery would not occur overnight, but rather would take three quarters to accomplish.

Reducing the workforce not only addresses short-term bottom-line needs, but also better positions the firm to spin out new ventures or sell off pieces of the business, observers say.

Novell has been reported to be in talks with Tivoli about that company acquiring Novell's ZENworks management products.

Of greater potential importance are ongoing - some say stalled - plans to spin out Novell's Net Content division into a separate company. Net Content is responsible for some of Novell's more promising products - including content delivery, hosted services, online storage and caching. Today, the products constitute a fraction of Novell's revenue, but they are considered among the company's most promising in terms of future growth.

Plans to spin off the new company have been marked by inertia and indecisiveness within Novell, sources say. Although the company is known to want to make its chief architect, Drew Major, a principal in the new organization, it has retained the executive search firm Heidrick & Struggles to hunt for a general manager/president.

However, sources say in the past month Heidrick & Struggles proposed two qualified candidates for the position, and Novell executives balked and refused the interviews.

Technical issues have also gotten in the way of this possible spinoff, sources say. The kernel of the Internet Caching System (ICS) is based on NetWare, Novell's flagship network operating system, which is notoriously inhospitable to third-party developers.

"The requirement to run ICS on NetWare is difficult because there aren't many tools for writing NetWare Loadable Modules," says Phil Schaecter, an analyst with The Burton Group in Midvale, Utah. NLMs are necessary to efficiently extend the caching environment.

"It's been a historical problem that has kept Novell from successfully establishing NetWare as an application server platform," Schaecter says.

At one point Novell management had asked the software engineering group to present a plan to port the caching kernel and object store of ICS to the more-open Linux platform. That initiative went nowhere.

Funding issues also reportedly hampered plans for the new company. Originally, Novell had hoped to sign up two other companies as equal investors.

Those outside investments fell through because of concerns over the difficulties of developing to the NetWare kernel and concerns that the market opportunity had already been seized by others, sources say.

"There was a magic time and set of ingredients there," says an ex-executive close to the company. "If [the spinoff] had happened six to nine months ago, Novell would have been in a much better leadership position.

"The problem now is that their indecisiveness has led to the market leaving them behind," he adds. "Novell is in a spin and doesn't know what the hell to do to get out of it."