To All: Conference Call Items discussed with Analysts on 5/29....
Joe...
=====================================================================
(FOOL CONFERENCE CALL SYNOPSIS)*
By Debora Tidwell (MF Debit)
Novell Inc. (NASDAQ: NOVL)
1555 North Technology Way
Orem, UT 84057
(800) 317-3195
UNION CITY, Ca, May 29, 1996/FOOLWIRE/--- Novell Inc. reported Q2 1996 earnings
today. They reported a net loss of $0.15 per share, versus a profit of $0.26 per share last
year in Q2, well below analyst estimates of -$0.10 per share.
During Q2, Novell took the final steps to focus on their core strength -- network software.
They reset worldwide channel inventories and they successfully completed the business
applications sales.
Net sales into their worldwide distribution channel for the quarter were zero. Approximately
$225 million sold out of the channel, representing a 62% reduction in worldwide inventories
from the first quarter. This action lowered revenue by a corresponding amount resulting in
$188 million in revenue and a loss of $0.15 per share.
Although rebalancing inventory levels was a hard choice, they are pleased that they took the
step and that it is now behind them. They feel that their action aligns them with their customers'
buying preferences and their channel integration preferences. Their channel partner feedback
has been extremely positive because it dramatically lowers their costs, significantly improves
inventory turns, and improves their margins.
For Novell, the new distribution model changes channel promotion costs, reduces new
product introduction expense, and reduces the time to market, as well as positively impacting
product rotation and restocking charges. They expect to not only see lower expenses, but also
lower cost of goods.
Novell's Q2 revenue of $188 million was derived primarly from customer and channel
licensing, OEM programs, sales by their Japan joint venture, and education services. These
parts of their business were not affected by their change in distribution policy. Revenue for
corporate and channel license programs grew 125% from the year earlier period and 27%
sequentially. They expect licensing programs to contribute as much as 35% to 1996 revenue,
and their Q2 growth rates support this prediction.
Key Sales and Industry Trends
Growth during the quarter was fueled by strong acceptance of NetWare 4.1, by enterprises
that are making competitive choices about how best to build distributed networks.
Representative Q2 accounts with large network employments included Allied Signal, Mobil
Oil, the Department of Justice, McKinsey and Company, and Citicorp. Growth has also been
driven by the adoption of NetWare 4.1 by accounts that are reappraising the position and
value of Windows NT, LANServer, Banyan, and other non-NetWare software.
They are finding a growing base of Novell customers among companies that discovered
challenges while trying to implement NT-only networks. These challenges include: lack of a
directory, very limited management tools, and narrow choices for connecting to other systems.
The automotive industry is indicative of this trend. Just last week, Novell announced that
Saturn, which had been touted as an NT-only shop, standardized on NetWare 4. Other
divisions of GM as well as Chrysler and Ford have standardized on NetWare 4. Beyond the
automotive industry, some 130 referenceable accounts have migrated from other products to
NetWare 4 for their networking. These include: Aetna, Chase Manhattan, Hallmark, Heinz,
Hewlett-Packard, Sprint, and Phillips Petroleum, amongst many others.
In addition, they continue to extend their business through distributed network products and
services -- products built on top of the network or platform. In Q2, GroupWise license
revenue increased more than 50% sequentially. This is driven by accounts like Scott Air Force
Base, the Department of Justice, TRW, American Airlines, Blue Cross/Blue Shield, and
Telecom S.A. The rapid growth of GroupWise reflects its increase in value as an end-user and
workgroup interface to the network. Thusfar, in Q3, a newly announced GroupWise
promotion that targeted Microsoft Mail users has already converted 50,000 Microsoft Mail
users at 850 companies to GroupWise. They expect this growth to continue because
GroupWise provides the scalability, low cost of ownership, and fucntionality that both Notes
and Exchange lack.
Other Plans Completed in Q2
Beyond the channel inventory change, the second important action in the quarter was the
completion of the sale of their personal productivity applications to Corel Corporation for
$10.75 million in cash and 17% of Corel common stock. In addition, they expect to receive
minimum royalties of $70 million over the next five years for the inclusion of GroupWise client
software, onboard electronic publishing software, and other Novell technologies that were
licensed by Corel. The sale became final on March 1st, resulting in a Q2 net gain of $20
million.
The third measure they took in Q2 was to further reduce staff and consolidate their facilities.
This was to match their business model's lower operating expense levels. During fiscal year to
date they have reduced their workforce by 1900 people, bringing the total staffing to below
5900. They have also rescaled their facilities to meet their current needs and gave one of their
Orem, Utah buildings to Corel.
They are focused on being a networking software company. They will concentrate on the
network software platforms and services that customers need to benefit from a global
network. These include services that extend from the workgroup LAN to the enterprise
WAN, the Internet and the Intranet. In Q2 they introduced new products that extend their
customers networks to intranets and the Internet. They made progress toward porting their
distributed network services to other platforms and connecting the industry's broadest range of
client and server systems. They organized their product group to compete more effectively in
the small office network systems market.
The Internet
They see tremendous opportunities here to apply Internet technology to create intranets within
business networks. Of course, many other people do as well, so there is a lot of bandwagon
hopping going on. They believe that they have a unique position among Internet players;
specifically, millions of installed NetWare servers to augment upgrades, a user base of 55
million users, 25,000 resellers and 75,000 CNEs (companies that people train to deploy,
design, and manage these networks). They believe that this strong market presence combined
with great products positions them to capitalize on the rapidly expanding intranet and Internet
opportunities.
Shortly, they will deliver two new Internet products. The first is a new NetWare Web Server
that plugs into any network or networks and transforms a NetWare Server into a
communications hub for Internet access and for high-performance hosting of a Web site. The
product does this while maintaining all of NetWare's current capabilities.
The second new product is an InterWeb Publisher that combines their new Web Server with
browser products from Netscape, state-of-the-art publishing tools, and all of the network
software that is needed to transform any NetWare network into an intranet.
Improved Time to Market
Both of these products will ship in June. A noteworthy process change here is Novell's time to
market for new products. They shipped their first Web Server in January and will deliver the
next release in June. They announced the InterWeb Publisher in April and will deliver it in
June. They are picking up the pace of product introductions and it is a pace that they intend to
maintain, if not accelerate.
According to Shiloh Consulting and Haines & Co., the performance levels of this Web server
are unsurpassed on Intel servers. Their tests confirmed that Novell's Web servers, with the
NetWare 4 engine, performs up to 4 times faster than Netscape running on NT. That
translates into a customer's ability to handle 4 times more Internet or intranet hits per day. The
NetWare Web server places a small load on current systems and lowers the cost of Internet
and intranet installations so customers don't have to add a new server or, worse yet, start from
scratch.
Strategic Partnerships
Novell formed two significant partnerships during the quarter. They licensed some Java
technology to make it available on NetWare servers so they could host and distribute Java
applications across intranets or the Internet. They see NetWare becoming the fastest and most
cost-effective platform for running Java applications. At least as important, they see using Java
to more easily create new and portable NetWare services for a wide range of other platforms.
Their second partnership, they will integrate Open Market's hot new software with their Web
server to create secure electronic commerce solutions and enable people to establish virtual
storefronts and malls on the Internet running on NetWare servers.
NDS and Network Services
Another network software strategy priority is to enhance and extend distributed network
services of NetWare 4 to connect the broadest range of customer systems and make these
services available on non-NetWare platforms. They plan to make NDS (the Novell Directory
Service) the directory for intranets and the Internet. In Q2 they announced their decision to
make LDAP (Lightweight Directory Access Protocol) a subset of the Novell Directory
Service definition. What this means is that LDAP Internet applications will be able to use NDS
directories without change, positioning NDS as the most robust intranet and Internet directory.
These applications that run on the Internet and make use of NDS will enable users to
discover, access, and manage Internet information and services through the directory service
-- substantially simplifying management.
In Q3, Novell will announce NDS enhancements that will allow NDS to interoperate with
directories already in place from Hewlett-Packard, from IBM, and from others. This means
that customers will be able to easily combine existing directories, reduce administration costs,
and extend the reach of the directory services without disrupting their installed systems.
Novell has also opened NDS and their other network services to developers. They can now
access and use Novell's directory services and other network services with the development
tools that they already know and use. Their end goal is to establish NDS and the other Novell
network services as the open platform independent standard for connecting all people and all
systems.
Small Business
Another ongoing priority is to sharpen their focus on small businesses that network,
specifically, single sites and don't have a dedicated IS staff. Their challenge is to deliver the
advantages of leadership networking technology packaged as solutions which are easy to
install and use, reliable, and low cost. The first of their NetWare 4-based small business
solutions was introduced by IBM in Q2. It received strong acceptance from channel partners
and from users who value pre-configured server solutions. The comprehensive, multiple
language, solution was built by 4 partners and includes IBM's PC server hardware, Novell's
NetWare 4 and GroupWise messaging capabilities, Corel's suite of business applications, and
Cheyenne's fax server. In April, Hewlett-Packard began shipping a similar solution in Europe.
Novell sees these agreements and these solutions as prototypes for additional small business
solutions with other system vendors.
Looking Ahead -- The 2nd Half of 1996
They intend to achieve sequential growth during the second half of 1996 that builds from their
current $380-$390 million range per quarter reflected in continuing operations in Q1 and Q2.
Assuming that level of topline growth, their business models for 1996 end with a financially
strong $1.6 billion network software company with a plan to grow revenues faster than
expenses. They expect to run 20-22% cost of goods sold. This should give them a 78-80%
gross margin. They expect to continue to spend 19-17% on R&D. Sales and marketing target
at 27-30% over the next few quarters. SG&A is budgeted at 7-8%.
* A Fool conference call synopsis represents an effort to highlight the salient points of a
conference call and should not be taken as an authoritative accounting or transcription
of the entire event.
Copyright©1996, The Motley Fool
All Rights Reserved |
