Malsi. Here's everything you need to know. Make a decision. Regards,
Joe...
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To: Joe Antol (14179 )
From: Salah Mohamed
Jun 27 1997 12:32AM EST
Reply #14205 of 14307
Hi Joe...By The Numbers
There is a lot of confusion on this thread about what is happening to
Novell. It seems to me that most people are not reading the quarterly
reports and hence don't understand how much trouble this company is
in. I will try to clarify the current situation by reviewing the last
4 quarters results factoring in channel stuffing and then give various
scenarios of what we should expect. Bear with me, it's a long post.
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A. Last 4 Quarters Results
When they pre-announced Q2-97 results and stated that the shortfall is
due to the small business segment, I said then and I say now this
isn't the case. The fact of the matter is that they have problems in
all segments of their business, and these problems didn't appear
suddenly in Q2-97. The situation deteriorated gradually over the last
year or so and it was masked by channel stuffing. This view is
confirmed by the actual Q2-97 results and their comments in the
conference call. The last 4 quarters financial results adjusted for
channel stuffing are given below:
Revenues Channel Stuffing Actual Revenues Expenses
Q3-96 365 0 365 295
Q4-96 384 36 348 315
Q1-97 375 64 311 313
Q2-97 273 0 273 301
Notes and comments:
1. In Q2-96, due to channel stuffing in previous quarters, they
decided to reduce channel inventory by not shipping any products to
the channel (as they are doing in Q3-97). They stated that this
reduction amounts to 225M. I assumed that they didn't stuff the
channel in Q3-96 after they cleared it in Q2-96.
2. In the latest conference call, they said that they are not going to
sell any products to the channel to reduce the channel inventory, and
this will reduce their sales by about 100M.
3. In Q4-96, Marengi wanted to show his ability in growing the
business and accordingly he surprised everyone by showing a 5%
sequential growth for a declining business by stuffing the channel
with about 36M. He was also helped in this quarter by the release of
IntranetWare, GroupWise, and ManageWise at the end of the quarter.
4. In Q1-97, when the sale of the new releases fizzled and to maintain
his assertion that 365M is the base revenue, he stuffed the channel to
the limit, to the tune of an additional 64M. Although, they didn't
achieve sequential growth as promised, but they stayed above the
magical number of 365M.
5. Note that when they cleared the channel in Q2-96, their sales to
the channel were around 225M/quarter. Now this number deteriorated to
a mere 100M/quarter.
6. With 5800 employees, the average quarterly expenses were around
306M. They said that by laying off 1000 employees they will be able to
save about 25M/quarter. Then, their expenses will be around 280M.
7. Review of the above table points to:
a. The Good: Finally, the inert BOD and management realized that
they are running this company into the ground and started to make
some radical changes. Whether these changes are going to make
any difference, we have to wait and see.
b. The Bad: The actual revenue numbers are declining at an alarming
rate and the question becomes: When is this decline going to stop?.
Amazingly, when Schmidt decided to report the actual sales numbers,
all products showed a sequential decline. This is not a disaster, it
is reality.
c. The Ugly: Probably, the most damning and scary thing about what
happened is the fact that they couldn't increase revenues in the
subsequent 2 quarters after releasing major upgrades by the end of
Q3-96 of their main products (NW, GroupWise, and ManageWise). BTW,
these products got favorable reviews in the press and they spent 20M
for the introduction of these products. Unfortunately, this shows the
complete collapse of the most critical aspects of their business
(Management, PR, Marketing, and Sales).
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B. Where Do We Go From Here?
My gut feeling tells me that Schmidt will pull it out, but I'm
getting extremely cynical after hearing their lies for more than 1.5
years. Regardless of what I feel, there are 3 scenarios we can go
through which IMO seem equally viable at the present time:
1. The company is going down the toilet
There are several indications which point to this path, they are:
a. The momentum of declining revenues is so great that it can't be
stopped. Further, revenues keep declining even with major upgrades of
their products.
b. NT has taken over the low end market and is ready to tackle the
enterprise. Further, NT momentum is so powerful that it can't be
stopped.
c. All major OEM are jumping on NT bandwagon.
d. Several ISV's are not developing applications for NW, they are
finding that writing applications for NT is more profitable.
e. Novell doesn't have a viable low end server.
f. There is no change in the BOD.
g. No marketing guru has been appointed yet.
h. A star Sr. executive doesn't agree with Schmidt's
restructuring plan and maybe will be quitting soon.
i. Several gloomy predictions by industry analysts became reality.
For example, last summer, Oltsik of Forrester Research predicted that
Novell revenues will drop from 1.5B to 1.0B by 1998, we are almost
there in early 1997.
j. Several journalists have recently wrote the epitaph for Novell
(InfoWorld Loose Cables Staff, and Wayne Rash of Communication Week).
k. Eric Schmidt stumbled badly out of the blocks:
- He missed Q2-97 pre-announcement by a mile.
- In the conference call, instead of simply saying that he is new and
this was a screw-up which will not be repeated, he had Tolonen (CFO)
give a lame explanation which clearly indicated that they don't know
what they are talking about.
- He promised a business plan by the time of the announcement of Q2
results and didn't deliver.
l. The e-commerce server which was scheduled for release in late 96
and was delayed to late 97 is no place to be found. Is it delayed?.
Cancelled?. Does anyone know?.
m. The alliance with IBM (re NDS) which has been talked about for 6-8
months has never come about.
n. The sales force is a bunch of order takers who never learned how to
compete because they were prominent in this market.
o. Novell is losing market share at a hefty rate such that their
business is declining in a fast growing networking market.
In this scenario, I'm not going to make projections of revenues and
EPS. Simply, take the actual revenues and extrapolate over the next
few quarters and one senses we are heading south very fast.
2. Schmidt will pull it off
There are also several indications that this scenario could take
place. These are:
a. Schmidt is smart, he knows both the technical and business aspects.
His commitment to open standards will give renewed confidence to the
customers. Conflicts in the executive suite will be resolved
(hopefully).
b. The recent manpower reduction should bring the expenses in line
with revenues.
c. Getting rid of more than 30% of management should facilitate
communication between the troops and management and result in a smooth
operation.
d. The fragmented marketing group has recently been reorganized (per
Troop) and a marketing guru will be appointed soon (guessing).
e. Novell has a large installed base (55M-60M). Although, there are
only 20M users of NW 4.x, most of NW 3.x users will stay with
Novell!!!!.
f. Novell products are superior and with the proper PR and marketing
they will be able to stop NT momentum (probably wishful thinking).
g. There are several alliances (with Sun, Oracle, and others) that
could result in increased sales.
h. The Novonyx venture with Netscape should position NW better to
compete with NT.
i. There are several new products scheduled for release this summer
that will add significantly to the revenue stream (Border Manager, NDS
for NT, and HostPublisher). Also, the Replication Service which has
recently been released should also add to the revenue stream by early
1998.
j. Moab will be released late this year or early next year, this
should give NW sales a lift.
k. The remaining employees are upbeat and motivated (per several
recent posts) which should move this company forward.
l. The picture Schmidt painted in the conference call to the analysts
is the bleakest. In fact, the company is doing better than that (per
inside info).
Using the above optimistic views, we can make some reasonable
projections on what we should expect in the coming quarters. Following
Schmidt's theme of 'survive, thrive, and lead', we may assume:
a. Survive: The revenue stream will stabilize over the coming 3
quarters at the current levels (about 280M/quarter). Yes, we might
lose some more market share to NT in the NOS market but the new
products should make up for the short fall. Further, they kept 20M in
reserve from Q2 revenues to make up for any decrease in revenues.
b. Thrive: By Q2-98 Moab will be released and with the proper
marketing and PR, sales should start growing at about 15% yearly.
Further, by this time we should have a hot product for the low end
market.
c. Lead: By the end of FY-98 we should have all our stuff together and
we should start to grow the business at 20% annually, in the least.
Based on the above, here are my projections for the next 4
quarters, and the next 2 fiscal years.
Revenues Channel Stuffing Actual Revenues Expenses EPS
Q3-97 175 -100 275 280 -.30
Q4-97 280 0 280 280 .02
Q1-98 280 0 280 280 .02
Q2-98 291 0 291 282 .04
FY-98 1185 0 1185 1130 .20
FY-99 1425 0 1425 1210 .52
The above projections are reasonable, considering that the
market Novell is in is growing at 20% annually. I read some
annual revenue growth projections in the thread of 300% and
1000%, but I will be happy with my measly 20%.
3. The company will stay stagnant for the foreseeable future
This is a combination of the bleak scenario and the rosy one. It is
feasible that they stabilize the revenues around the current levels
and not be able to grow. With their 1.0B in cash, they could survive
for a long time even with a little lower revenue level than the
current level.
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C. Conclusions
1. If one subscribes to the bleak scenario, he should sell the stock
or short it. If one is in the optimistic camp, he should hold the
stock. If one is in the 'in-between' camp, he should avoid the stock.
IMO, regardless of the stock price level, there is no compelling story
at present to buy this stock.
2. Personally, I don't think that the company will start a share
repurchase program soon. IMO, with the company future in balance, they
will wait to see if they will turn the company around and this will
not be clear before Q2-98. If it became apparent by then that
everything is going according to the rosy scenario and the stock price
is still low, they will commence a share repurchase program.
3. Also, I don't see any firm is interested in buying Novell at the
time being. Almost every potential acquirer is jumping on NT
bandwagon, and nobody wants to compete with MSFT head to head.
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Joe, I know that you know most of the stuff I talked about, but I felt
this overall review would be beneficial for the new people on the
thread. Hopefully, I didn't bore you to sleep.
Regards
Salah |
