Novell Comes Up Short in Second Quarter

SAN MATEO (05/02/2000) - Citing reasons ranging from channel sale declines and internal management troubles to the introduction of Microsoft Corp.'s Windows 2000, Novell Inc. on Tuesday announced that it will report "significantly lower-than-anticipated revenue and earnings" for the second quarter of 2000, which ended April 30.

Novell expects to report total revenue of about $300 million during the second quarter, compared with $316 million during the first quarter of 2000. Earnings for the quarter will be about $.08 per share, a drop of $.05 from the first quarter of 2000 when earnings were reported at $.13 per share. The second-quarter earning figures also reflect a $35 million royalty payment from Caldera Systems, the majority of which came out of an antitrust settlement between Caldera and Microsoft, officials said.

According to Dennis Raney, senior vice president and chief financial officer of Novell, a drop in channel sales was the primary factor for Novell's second quarter financial shortcomings. However, he also cited problems with sales management, transitioning sales teams to solution selling, and inadequate sales forecasting, which "led to a $10 million-a-week decline in forecasts for each of the last five weeks of the quarter."

"All the issues relate to the business changes that are underway in our company; the change is becoming harder and taking more time to get done than we had anticipated," Raney said. "The company is in the midst of adopting new go-to-market strategies that address a new Net services market, and have us entering the Internet and ASP [application service provider] markets while also targeting and expansion of sales from both existing and new customers in our traditional [area] of enterprise network management."

Also, Novell's channel-sale decline from January did not rebound well enough as the second quarter progressed, leaving the company "well-under pre-January levels," Raney said.

Raney also noted a slowing in large-account sales and "a lack of adequate demand generation by Novell among new customers for new Net services products," both of which affected the company's financial situation. However, Novell is expecting interest in its Net services vision to grow as more time passes and customers get used to working with some of the Net services software solutions.

"We're obviously very disappointed with our results, and we've taken management changes we believe are required to address them as quickly as possible," said Eric Schmidt, chairman and CEO of Novell. "We remain absolutely committed to the One Net vision we announced at BrainShare, which has been received very well by all of our customers. We've also been managing our channel inventories very tightly to make sure we don't have any further kinds of problems."

Although Novell did shoulder a good portion of the blame for its less-than-stellar second-quarter performance, it also pointed a finger at some of the other companies competing in the constantly evolving enterprise market.

"From our initial assessments, we've seen impact from the tremendous effort of Microsoft in introducing Windows 2000 to the channel," said Raney. "IBM's new push of Linux in the same channel has also been a factor -- both commandeered channel attention and created uncertainty and delayed sales. In addition, many channel partners are rapidly transitioning to an ASP role."

Raney expected that, given the changes Novell must implement to reverse its second-quarter dip, it will take the remainder of the fiscal year to "accelerate our transformation to Net services businesses by enhancing overall sales execution, increasing our support of existing and emerging channels, and more aggressively broadening market awareness."

Full financial results for the second quarter will be reported after the close of market on May 23, Novell officials said.

Novell today also appointed Nicholas Tiliacos as senior vice president of worldwide sales, filling the position left by Ron Heinz. Tiliacos was previously president and CEO of Mosaix, a Lucent Corporation acquisition dealing with CRM (customer relationship management) software and services.

Novell Inc., in Provo, Utah, is at www.novell.com.

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