Novell CFO: Channels, Directories Are Key

LONDON (07/12/2000) - Since announcing its poor financial results for the second quarter in May, U.S. networking software vendor Novell Inc. has been in the midst of a major company reorganization.

During a trip to London, Dennis Raney, Novell's senior vice president and chief operating officer, talked to IDG News Service in a one-to-one interview about Novell's plans for fixing its ailing channel division and the company's renewed focus on directory technology.

Revenue for Novell's packaged software in the channel during the second quarter of fiscal 2000 was half that reported in each of the company's previous four financial quarters. As a result, along with its second quarter financial report, Novell announced it would launch a major company reorganization.

Revenue and net income for the three-month period ended April 30 came in at $302 million and $31 million, respectively. The income figure was down from $38.7 million in the year-earlier quarter, when Novell's revenue totalled $315.7 million. [See "Novell Reorganizes Operations Amid Poor Q2," May 23.] IDGNS: It's been about two months since Novell's second quarter report was issued and a major restructuring plan for the company was announced. How is that progressing?

RANEY: Well, I think it's going fairly well. I think we've got all the key management positions identified. We have obviously more to do in terms of getting all the product marketing and the engineering resources sorted out and focused with these new business activities, but as far as the general reorganization, I think it's going well.

IDGNS: Novell's channels were identified as the main problem area at the time of the restructuring announcement. How has Novell restructured channels?

RANEY: Re-engineered it. Re-engineer how we interact with it. Five years ago, 95 percent of everything that Novell sold went through the distribution channel as packaged software. Now the last couple of years we've been working about 7 percent direct. So we've built up a direct sales force over the last few years and we've been successful doing that.

Eventually, our sales management, in the process of doing that, lost focus of what was going on in the channel. So we didn't spend enough time training them, helping them with their marketing efforts, really focusing on how we selectively make a certain number of those channel re-seller partners successful. And so we lost contact with those people.

What we done subsequent to Q2 (second quarter) is to do an analysis of what's going on in the channel. Because of the Internet and a whole range of other factors, there's a lot of change going on in the traditional reseller channel.

Many of these people want to become ASPs (application service provider), many of them are moving on to become service providers as opposed to software resellers, because that's where everybody can have more customer control, and frankly, make more money.

So what we need to do now is understand the channel has changed and that there are different elements. We need to be more focused on who our partners are going to be and make sure that those people are successful within the Novell relationship and that's what we're embarking on now. We believe it's going to take us at least two quarters to get all of that right. So we aren't looking for any significant uptake in revenues in the third or fourth quarter. And we've told the street (Wall Street), and that's been a fairly consistent message since the second quarter results.

IDGNS: The Novell stock market price has remained pretty much unchanged (at between $9 and $7 per share) since the May restructuring was announced. Does that worry you or do you see that as indicative of something else?

RANEY: I think it is indicative that we have not given the street any upward revenue guidance at this point because we do not believe there will be any upward revenue until we get that channel issue resolved. Now it turns out that our licensing business -- or direct business - has been growing very nicely with our large accounts. We continually have growth there. This continues to be a transition that we have to work through with more and more growth in the large accounts, and in the meantime, re-engineering how we relate with the channel.

I don't think the channel will ever be 35 percent of our business again. It will probably be 20-25 percent would be my guess. Our solutions are much more focused now on large businesses, large network environments.

IDGNS: Would that have to do with the content-delivery and acceleration area and Novell Content Exchange (a service that accelerates content moving between the origin server and content delivery networks) released at the end of June?

[See "Novell Aims at Content-Delivery Market Space," June 30.]RANEY: Yeah, that's actually almost peripheral to our enterprise and government business, if you think about it for a minute, because that's a whole new business. You could almost segregate it, split the company around that. I'm not suggesting that we're going to split the company; the point I'm trying to make is that it is a very separate business from what we have been doing with the enterprises.

Where that has a play is in the large hosting companies that really need to accelerate the delivery of content over the Internet. To make it go faster, to get it there less expensively, to spend less dollars on bandwidth that we're streaming now. That's what the content distribution business is all about.

And so we have to sell out (services) to people like GlobalCenter Inc. where we made the announcement last month. Also Exodus Communications Inc. and other large hosters are going to be the customers, not our traditional enterprise customers or government customers where we've been selling directories and NetWare and directory-enabled solutions for the last few years.

IDGNS: What products or services are going to replace that lost 10 to 15 percent of revenue from the channels?

RANEY: Novell has been selling more and more into these large global networked companies and government organizations. Today, our products are (used) at 81 percent of the Fortune 500 companies in the U.S. and about 80 percent of the Global 1000 companies. So we're very dispersed in terms of our customer base.

We have 50 percent of the download market in the U.S., we've got 40 percent of the education market.

But what we do in these markets is we basically sell NetWare. That's our lead product; that's about 50 percent of our revenue. But over the last five years, we've been developing directory technology, and directory technology is going to be absolutely fundamental to the way that e-business gets built out in these companies.

Just to explain a little bit: we've taken this directory technology -- which is really a service -- and we've ported it so that it will run on all the major platforms. It runs on Unix, it runs on NetWare, our platform, and it runs on NT, Microsoft Corp.'s platform. We've now got it on Linux, we're going to be taking it to AIX, which is IBM Corp., it runs on OS/390 on IBM. So it's going to run on all of the world's largest platforms.

Now what that means is that that directory service is going to allow you to expose your traditional legacy data behind a firewall to customers and partners and suppliers out on the Internet. And be able to allow people to securely come into that data and access what they need to do business with you.

So this is the key technology that we are taking forward in the marketplace, where we have the lead. Nobody else has a product like this that can compete with our directory services. There are some directories out there, but they're not nearly as comprehensive in terms of functionality.

Directories are going to be the key technology by which companies personalize the relationship that they have with their customers and their suppliers. And that's were our key thrust is right now.

IDGNS: In terms of directory technology, who are Novell's biggest competitors?

RANEY: There are probably three people on the marketplace today. Netscape Communications Corp. has a very simple, what is called, L-dot directory. It is not nearly as comprehensive, as fast or as scalable in terms of inner logics as our directory. But they do have a product.

Microsoft has a product called Active Directory. From a marketing point of view, they have mind share of the market but their directory is really an application that goes on Windows 2000 and also supports their Explorer e-mail solution. It doesn't run on (Sun Microsystems Inc.'s operating system) Solaris, it doesn't run on Windows NT. So their directory, though they have a lot of press around it, again doesn't give you the functionality that you need to expose all of your data externally. To organize all your data so that you can expose it externally to people on the Internet.

By the way, almost all of these large companies are very heterogeneous.

Nobody's all Microsoft. If you go to any of the big companies, somebody like British Telecommunications PLC or Hewlett-Packard Co., you will not find a homogeneous server environment.

Whither they have IBM or HP with Linux or Solaris or NT. And Microsoft's Active Directory doesn't integrate that whole environment. We do integrate that whole environment for our customers and that's a major difference.

The other competitor who is coming down the road is likely Oracle Corp. Right now, a lot of the data that you might want to expose on the Internet to your customers is on Oracle databases. The problem with that is that it is very expensive to use Oracle databases to manage relationships (that are primarily online). It's not very fast either. So they're going to see that they need to have a very (profitable) directory and I expect them to come into this space at some point.

Once people realize that directories are the key to how e-business actually is going to take off, directory technology is going to boom. You can look IDC's (International Data Corp., a sister company of IDG New Service) forecasts or at anyone's forecast and they all say the same thing. And actually, it's taking off now. So Oracle will most likely say "gee, we have to figure out how to get into that market at some point."

But today Novell has the lead. We have well over 60 percent -- probably over 70 percent -- of all directory receipts in the world.

Novell, in Provo, Utah, can be reached at GlobalCenter, in Sunnyvale, can be contacted at +1-408-543-4700, or at Exodus Communications, in Santa Clara, California, can be contacted at +1-408-346-2200, or at

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