Novell, In Midst Of Turnaround, Draws Wary Wall Street Interest
Dow Jones Online News, Wednesday, March 11, 1998 at 14:53
By Mark Boslet, Staff Reporter
PALO ALTO, Calif. -(Dow Jones)- Novell Inc. still has something to
prove.
Halfway through a turnaround that the company said would take three
to four quarters, the Provo, Utah, company (NOVL) has crept back to
operating profitability.
Now comes the harder part: restoring revenue growth to a franchise
that in its heyday set the pace for software that links computers in a
network.
Standing in the way are formidable competitors, principally Microsoft
Corp. (MSFT) and its Windows NT operating system, but also computer
makers Hewlett-Packard Co. (HWP) and Sun Microsystems Inc. (SUNW), which
sell networking software of their own.
In the eyes of many analysts, a strategy of trying to stay one step
ahead of Microsoft by developing new product features and functions is
difficult for any company. But others are slowly warming up to Novell's
chances, even while acknowledging that a great deal of risk remains.
Working in the company's favor is new management headed by ex-Sun
technology executive Eric Schmidt, who joined Novell a year ago as
chairman and chief executive. Schmidt slashed bloated inventories at
distributors by halting shipments - the cause of the plunge in
third-quarter revenue. Then last month he posted quarterly operating
profits with the help of a cut in expenses.
Along with cleaning up the serious problems in Novell's distribution
channel, Schmidt also got long overdue technology to market, said Mary
A. McCaffrey, an analyst at BT Alex Brown.
The company's product lineup now includes its NDS network user
directory, which runs on Microsoft's Windows NT; BorderManager, network
management software for intranets; GroupWise, groupware that has almost
9 million users; and ZenWorks, management software for remote network
access.
The company also has a new version of its key network operating
system, NetWare 5, coming out this summer. Already 70,000 copies of the
product's second beta test version have been downloaded.
In addition, Novell also has begun talking with Microsoft on several
cooperative fronts. The company is having "deeper architectural
discussions" than it ever has had with Microsoft seeking a common API,
or communications gateway, between the NDS directory and Microsoft's
planned Active Directory, said John F. Slitz Jr., Novell's senior vice
president of marketing.
Microsoft, in a typical Microsoft move, will include Active Directory
in Windows NT 5.0, expected to reach the market next year. That will
create a serious competitive threat for Novell's NDS directory.
Novell and Microsoft also are discussing ways to allow management
software to administer both NetWare and Windows NT environments,
something that would be an advantage to customers using both, another
Novell official said.
But favorable resolutions won't keep Microsoft from trying to make
Windows NT customers out of the 79 million users of NetWare.
"Eric's leadership has been positive and strong," said Robert
Herwick, president of Herwick Capital Management. "He's circling the
wagons, but there's more Indians than wagons. Eric's in a very
challenging position."
However, Joel Achramowicz, an analyst at Preferred Capital Markets,
believes Microsoft may have already lost the battle over directory
services, which are more and more crucial to network administrators.
Novell claimed 33 million directory users at the end of the third
quarter.
"I think the company is beginning to rebuild its momentum," said
Achramowicz, adding that he thinks Novell can successfully co-exist with
Microsoft. He initiated coverage of the company on March 2 with a
"strong buy" rating.
As to growth, analysts project NetWare 5 could bring the company 10%
to 15% revenue growth starting next year. But achieving the more rapid
expansion that Novell says it targets will probably require using its
more than $1 billion in cash and short-term investments for
acquisitions, says BT Alex. Brown's McCaffrey.
The co-existence strategy also has apparently won over Novell
officials. Windows NT is a "general purpose" operating system while
NetWare is "special purpose" software on which applications - some
written in Sun's Java programming language - can be built, said
marketing executive Slitz.
"We feel we have a handle on what we're doing," he said.
-Mark Boslet; 650 496-1366
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