Power shift: The Novell lesson

You don't have to look further than Novell, Inc. for an example of how power can dramatically shift in the network industry.

Once omnipotent in the burgeoning LAN market, Novell has seen its revenue nose-dive, its stock price tumble and its dominance erode.

To be sure, Novell is anything but moribund - it still owns more than 55% of the local network operating system market. But other numbers are sobering. Revenues barely crested $1 billion in 1997 (fiscal year ended Oct. 31), down from a high of $2 billion two years earlier. The company closed the books on '97 with a net loss of $78 million.

The slide downward is not quite as dramatic as it would first appear, because the $2 billion 1995 high-water mark included revenue contributions from products that were sold off in 1996, such as Unixware and WordPerfect. Novell ended that year with revenue of $1.4 billion and $126 million in net income.

But the $1 billion in sales Novell mustered in 1997 was for all product lines - including NetWare (then called IntranetWare), Groupwise and BorderManager - while two years earlier the company had generated that much in revenue from NetWare alone.

Worse still, while the company returned to profitability in the final quarter of 1997 (after two quarters of losses), sales for the period were down 43% compared with the same quarter in 1996 - $269 million vs. $383 million - showing waning demand for Novell products.

There are, however, signs that Novell is taking the appropriate corrective steps to right the ship. New CEO Eric Schmidt has focused the company on IP and other Internet-related areas, has put new product development in high gear and has even managed to cut costs.

Perhaps most telling is this: Product development expenses as a percentage of revenue were 27% in the final quarter of 1997 vs. 17% for the same quarter in 1996. The company is pouring money into the fundamentals.

Schmidt wrote in Novell's fourth-quarter release that the $7 million in net income in that quarter "shows that the business changes we've made in Novell's business are taking hold. We have also set a faster pace for product introductions and market initiatives."

Dumping the IntranetWare name and reverting to the NetWare brand it had nurtured for so long is a good sign, as is the momentum the company is building around its Novell Directory Services (NDS) offering.

But the clock is ticking. Windows NT, arguably the single largest source of Novell's problems, still is building momentum. And Microsoft is working with Cisco Systems, Inc. to field its own Active Directory, which could push NDS aside.

1998 will be a swing year for Novell, up or down.

- John Dix