Novell Gets A Chilly Wake-Up Call
By Todd Spangler, Inter@ctive Week
May 15, 2000 3:21 PM ET
The skies over Novell have suddenly blackened. Punched hard in the pocket by weak sales - attributable in part to Microsoft's aggressive push with Windows 2000 - Novell is facing new doubts about its ability to successfully transform itself into an Internet software and services company.
In an unpleasant shock to Wall Street, Novell issued a warning earlier this month that it would report revenue of about $300 million for the second quarter, ended April 30 - roughly half what it was expecting. The company officially reports earnings for the quarter May 23. Subsequently, Novell's stock price dropped from almost $19 per share on May 1 to about $10 last week.
"It's crunch time for Novell," said Laura DiDio, a senior analyst at Giga Information Group. "They have two to three quarters to turn it around. If they don't, we'll see them march slowly off into the distance living off the hump of declining NetWare revenues."
What's the source of the trouble? Analysts pointed to management turmoil and Novell's inability to carry off effective marketing - shortcomings that have hit Novell brutally now that Microsoft has finally shipped Windows 2000, the much-delayed operating system launched in February, which includes directory technology competitive with Novell's.
"From our initial assessments, we've seen impact from the tremendous effort from Microsoft in introducing Windows 2000 to the channel, [which] created uncertainty and delayed sales," said Dennis Raney, Novell chief financial officer, in a conference call with financial analysts.
Some of Novell's woes are simply the result of grossly inaccurate sales forecasting. For the past five weeks of the quarter, Novell's internal estimates were off by $10 million per week, Raney said.
The responsibility for forecasting sales fell to Ronald Heinz, Novell's senior vice president of worldwide sales, who left the company in late April. Heinz could not be reached for comment. Novell simply said Heinz had "left the company."
But Joel Achramowicz, senior research analyst at Preferred Capital Markets, said Heinz was "an old-line NetWare bigot" who may have had difficulty articulating Novell's emphasis on selling directory-enabled applications in favor of trying to compete head-on with Microsoft in server operating systems.
To replace him, the company hired Nicholas Tiliacos, previously president and chief executive of Mosaix, a customer relationship management software company acquired by Lucent Technologies.
Novell CEO Eric Schmidt wins praise, both inside and outside the company, for his technical vision and his ability to listen to people and to ship market-focused products on time. But analysts said the savior of Novell has been too nice - he hasn't fought Microsoft's rip-and-tear marketing tactics aggressively enough, even though Novell has had several years in which it could claim technical superiority to Microsoft.
"While Microsoft was spreading this FUD [fear, uncertainty and doubt], Novell never combated it," DiDio said. "When Novell counterattacked, it was very, very tepid. Eric Schmidt wants to take the high road. But you can't ignore the damage that has been done."
In February, Schmidt said he would step back from day-to-day operations to set strategic direction for Novell. Now, however, Schmidt will have to return to hands-on control of the company, analysts said. "He's got to put his CEO hat on. I think Eric was so wrapped up in the vision, he took his eye off the operating ball," Achramowicz said. "He feels comfortable articulating technology, but he's got to focus on 'How much did I sell today, and what's the return on my investment.' "
Though, analysts are somewhat divided on how Novell should right the ship and move the company off its dependence on NetWare, which still accounts for about two-thirds of its revenue base. Peter Ausnit, an analyst at Prudential Volpe Technology Group, said Novell should aggressively focus on business-to-business (B2B) e-commerce exchanges as a potentially high-growth market.
DiDio, meanwhile, said Novell should continue to build on its NetWare base, while putting into place a focused marketing campaign to push directory-enabled applications and better branding its promising new Internet products, such as Digitalme, the Internet Caching System and iChain, directory-based software that allows secure B2B transactions over the Internet.
Novell is already starting to ramp up its marketing efforts. This week, the company is expected to tout two new customers - Federal Express and Hellmann Worldwide Logistics - for the NDS eDirectory, Novell's Internet-enabled directory software.
Steve Adams, Novell's senior vice president of worldwide marketing, said the company knows what its problems are and has plans to fix them. Novell will drill home a clearer message about the value of NetWare as a network management system, and will more accurately map its Internet products to specific customer needs, he said.
"The onus is on us to deliver revenues related to the non-NetWare products," Adams said.
The bad news for Novell is that it may be running out of time to do that.
zdnet.com
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