Novell Warning Stirs Fears of Viability

FRAMINGHAM (05/03/2000) - A warning from Novell Inc. that revenue and profits for its latest quarter will fall short of expectations has revived concerns about the company's future. Late Tuesday, analysts voiced doubts that the company's new Net Services business will take off quickly enough to compensate for flagging sales of Novell's core NetWare product.

Novell issued a statement Tuesday, saying it expects to announce later this month revenue of just over $300 million for the quarter, compared with $316 million for the previous quarter and $316 million for the same period a year ago. Earnings will be around 8 cents per share.

First Call Corp. reported a consensus estimate of 16 cents. The earnings include a $35 million royalty payment from Caldera Systems Inc. related to the antitrust settlement between Caldera and Microsoft Corp., executives said.

"They have not been able to generate new business as fast as the old business is going away," said Peter Ausnit, an analyst at Prudential Securities Inc. in San Francisco. Novell expects future growth to come out of its "Net Services" strategy, outlined by president and CEO Eric Schmidt earlier this year, to deliver Internet and intranet services based on its Novell Directory Services.

Novell blamed this quarter's disappointing results on a decline in channel sales and in large account site-license sales. Executives said the introduction of Windows 2000 and "growing market interest" in Linux, as well as market moves toward the application service provider model, were creating uncertainty and delayed sales.

In a conference call Tuesday, Novell Senior Vice President and Chief Financial Officer Dennis Raney said that sales and marketing efforts would be realigned around Net Services but that it will take at least the remainder of fiscal 2000 to complete that operation. Novell on Tuesday also announced the replacement of Ron Heinz, senior vice president of worldwide sales, with Nicholas A. Tiliacos.

Novell will announce its full financial results in three weeks. The company's shares closed at 17 9/16, down 7.26 percent, on Tuesday before the announcement. They dropped down to about $13 in aftermarket trading.

Analysts generally remain optimistic about Novell's newer product lines, which include products built on Novell Directory Services, such as iChain and DigitalMe. Joel Achramowicz, an analyst at Preferred Capital Markets Inc. in San Francisco, called Novell's position in directory services "unparalleled" and its Net Services strategy "brilliant," but he added that "money needs to be spent and risks need to be taken" to promote the strategy. "The issues with regard to the long-term viability of NetWare need to be addressed," said Achramowicz. "It's become a liability."

George Weiss, an analyst at Stamford, Conn.-based Gartner Group Inc., sees Windows 2000 and Linux subjecting other operating systems, including NetWare and SCO UnixWare, to a "pincer movement."

Achramowicz expressed doubts about whether Novell's Schmidt can complete the company's transition to Net Services. "I think Eric enjoys talking about the technology, but I wonder whether he can actually make the deals" with major customers in the Internet space, he said. Achramowicz is downgrading Novell stock from Buy to Accumulate; Prudential's Ausnit is maintaining a Hold rating.

"They've got another two or three quarters to turn things around," said Laura DiDio, an analyst at market research firm Giga Information Group Inc. in Cambridge, Mass. "Otherwise, Novell stands on the brink of becoming the Banyan of the 21st century."

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