Novell Reorganizes After Poor Q2 Showing

BOSTON (05/24/2000) - Networking software vendor Novell Inc. yesterday announced a dramatic reorganization of its operations at the same time it released weak financial results for its second fiscal quarter.

The Provo, Utah-based company blamed its problems on plunging sales of its packaged software by resellers. Novell had warned earlier this month that second-quarter revenue and earnings would be much lower than expected due to the indirect sales.

"There has been a stark decline in (sales of) our packaged software," Eric Schmidt, Novell's chairman and CEO, said during a conference call yesterday.

"We underinvested and underfocused on an important area. We intend to fix that."

Revenue from indirect sales of Novell's packaged software in the second quarter was down by about 50 percent from the levels of earlier quarters, Schmidt said.

He added that he hopes to put the reseller-channel issues behind Novell by early next year.

"There needed to be a shake-up, especially in the marketing and sales (department) there," said Steve Shepich, a financial analyst at Olde Discount Corp. in Detroit. Novell has good products to sell, "but these guys are not the best marketers," he said. "The problem they have is (in) execution."

Until that's solved, little change in Novell's financial performance is likely, Shepich said. And that could take time, he added. "It's a difficult challenge because of the size of the company," he said. "It's a big process, especially if you've been doing things wrong for a long while."

Norman Fuchs, an analyst at M. H. Myerson & Co. in Jersey City, New Jersey, said Novell missed a golden opportunity to capitalize on delays in the release of Microsoft Corp.'s Windows 2000 operating system, which finally shipped earlier this year.

"I think (Novell's) management basically blew it," Fuchs said. "They gave out the wrong marketing and sales messages." The problems could be seen as early as six months ago, when many of the company's top sales managers departed en masse, he added.

Stewart Nelson, Novell's chief operating officer, acknowledged that the company needs to better clarify the role of resellers. He said company executives plan to "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."

Novell also intends to provide its resellers with more training, demand-generation assistance and field support, Nelson added. More details of such moves are due to be announced within 30 to 45 days, he said.

Both revenue and net income for the three-month period ended April 30 came close to the predictions issued by Novell earlier in the month, at $302 million and $31 million, respectively. The income figure was down from $38.7 million in the year-ago quarter, when Novell's revenue totalled $315.7 million.

Included in the second-quarter results was a one-time royalty payment of $35 million made to Novell by Caldera Inc., the bulk of which relates to a January out-of-court antitrust settlement reached between Caldera and Microsoft Corp.

Regionally, the drop-off in channel sales hit Novell hardest in Europe, the Middle East and Africa, where revenue for the second quarter fell to US$84 million, down 20 percent from the same quarter last year. Without including the Caldera royalty, revenue in the U.S. was down 16 percent to $142 million.

Plans for Novell's reorganization call for the company to be split into four business units. Each unit will have its own business strategy and distribution channels in an attempt to make the vendor more market-driven, according to Nelson. "We recognized that our go-to-market strategy has not been as strong as it should've been," he said.

The four divisions will be Net Management, Net Directory, Net Content and Novell Customer Services, and all will report jointly to Schmidt and Nelson.

The Net Management unit will encompass many of Novell's existing products, such as the company's NetWare operating system and its GroupWise groupware technology. The Net Directory unit will be responsible for Novell's directory software, while Net Content will focus on application delivery services, caching and content exchange for dot-com companies. Novell Customer Services will be in charge of customer services.

Novell also announced several management changes, including a new senior vice president of worldwide sales. Rich Nortz, who is taking that job, previously headed customer service for the company. Schmidt said Nortz "will drive a complete shift in our sales strategy."

Despite the problems, Schmidt remained upbeat about Novell's prospects during yesterday's conference call. He insisted that Novell has the right strategy and just needs a stronger focus on executing that strategy. "I'm confident we'll overcome the transitional issues," Schmidt said.

Clare Haney is a correspondent for the IDG News Service.

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