Novell Financial Troubles Feed Rumor Mill

Novell posted woeful financial results last week amid fresh speculation abouta possible takeover by IBM and musings from analysts as to how the company might make enough money to keep its technologies intact.

The company's third-quarter net income dropped 83 per cent to $US8.6 million on revenue of $US270 million. That's measured against income of $US49.3 million and revenue of $US327 million for the same quarter last year, making Novell the third-worst performer on Standard & Poor's 500 stock index. Novell attributed its poor performance to midquarter shifts in its sales organisation, weak sales in Europe and a continued decline in packaged software sales.

Early last week, Novell's stock took an upward bounce on rumors that IBM would acquire the company. Break-up and acquisition discussions dominated the conversations on several stock boards and among analysts. Since the earnings release, the stock has held steady at $US10 per share.

Novell's difficulties have some observers wondering whether a breakup of the company might help.

"There are obviously a lot of financial impacts in breaking a company up and having to recreate a corporate infrastructure," says Phil Schaecter of The Burton Group (US). "Though that would be expensive, it would certainly be clearer in terms of market positioning and putting technologies out there that were clearly separated into their own business line."Novell's caching technology, for instance, would be a good candidate for a start-up company, Schaecter says. "Showing a positive revenue stream the first year of operation in a quarter is not all that bad."Novell's caching technology generated $US2 million in royalty revenue from OEMs in the third quarter, says Novell CEO Eric Schmidt.

"Any venture capitalist would be pretty happy with that. It would be valued higher as a technology if it were separate from all the Novell baggage. And eDirectory outside of Novell would be more successful than inside Novell," Schaecter says.

However, splitting up the company would be thorny, says Bob Lam, an equity analyst at Bear Stearns in the US.

"There may be some technical problems because the company is based on NetWare," Lam says. "While Novell has been successful in expanding outside of NetWare into IP and other areas, it is still a NetWare company at heart."More than 50 per cent of Novell's revenue comes from NetWare.

Lam also believes Novell would be a good takeover target and should start looking around. "Novell has some exciting technologies in caching, single sign-on and security products," he says.

Schmidt rejects any talk of dividing the company. "People love to generate rumors," he says. "We don't have any plans that are specific enough at this time to talk about."He acknowledges that Novell's management is stumbling through a learning slump.

"It's been a costly, unintended learning experience, unfortunately,'' Schmidt says.

Time for learning may be running out, some say.

"You have to learn quickly," analyst Schaecter says. "The real question is does Novell know where it is really going here? Is there ever going to be an end to this?"

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