Novell Reorganizes Amid Poor Financial Results

SAN MATEO (05/26/2000) - Novell Inc. is in damage control mode after announcing last week poor second quarter results and a company reorganization designed to improve performance. For Novell users, who have weathered their share of ups and downs with the company, it is more like de ja vu all over again.

"It is a little disheartening to see [Novell] reorganizing yet again," said one IT manager, who wished to remain anonymous. "It seems like they just did this a little while ago. I understand that this crazy technology world requires a lot of change ... but there's nothing wrong with projecting an image of stability to reassure your customers."

Novell's warnings earlier this month of lower second quarter earnings and revenue proved to be on target. It reported revenues of $302 million, or 9 cents per share, which included a $35 million royalty payment from Caldera Systems Inc., and net income of $31 million. During the second quarter of 1999, Novell saw revenues of $316 million, or 11 cents per share, with net income at $38.7 million.

According to Novell Chairman and CEO Eric Schmidt, overstocked channels along with packaged software revenues that were "about half" of past quarters accounted for most of the drop. Schmidt said Novell is tackling the shortcomings and hopes to have the situation in hand by early 2001.

"Whenever you have a problem with a channel or anything else, you do two things: You make sure you have short-term tactics [in place] to fix that as rapidly as possible for the quarter you're in, and ... you want an overall strategy to make sure it doesn't happen again," said Stewart Nelson, COO at Novell. "We're doing both now."

Other factors blamed for the second quarter drop included Microsoft Corp.'s Windows 2000 launch, which Novell said took dealers' attention from Novell products (although Novell also claimed not to be losing market share to Windows 2000) and the rise of Linux.

"If Novell was a new company we would call the current situation growing pains instead of revenue carnage," said Herb Hill, a network consultant and professor at Niagara College, in Welland, Ontario. "[It's a] butterfly analogy:

[Novell's] products ... are ready and have broken through the cocoon. The wings to make [Novell] fly, marketing focus and channel focus, are still trying to break out," he said.

Novell's reorganization, which officials said has been in the works for a month, creates four business units, each with its own focus and distribution channels to make Novell more market-driven, Novell's Nelson said.

The Net Management unit will contain products such as NetWare and GroupWise, and the Net Directory unit will focus on spreading the reach of directory services. The Net Content unit will oversee application delivery services, caching, and content exchange as well as targeting dot-com customers, while the new Customer Services group will centralize Novell's customer relationships.

Although analysts generally welcomed the new structure, one warned that Novell may still have tough times ahead.

"If Novell believes its future is Internet services, that business is going to have to grow fast enough to make up for declines in other parts of the business and also be the growth vehicle that will propel the company in the future," said Al Gillen, research manager for server infrastructure software at IDC, in Framingham, Massachusetts.

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