MORGAN STANLEY - Remains NEUTRAL (November 8, 1996)
.......but provides an excellent overview -
Everybody remain calm. Morgan Stanely provides an excellent overview
and the company (NOVELL) is in much better shape now than in the
recent past.
MORGAN STANLEY & CO. INC., Nov 8, 1996
U.S. Investment Research
November 8, 1996
Technology: Enterprise Software
Novell (NOVL): Company Visit: Don't Count It Out Yet
NEUTRAL
* We recently visited Novell's new management team led by Joe Marengi.
For the first time in years, we detected a sense of urgency and purposeful
execution about the company. The engineering organization sounded more
productive and focused than it's been in years. We anticipate product
releases three to four times a year instead of every two years, as in the past.
* We expect only a modest sequential increase in revenues since
InternetWare didn't ship until the last month of the quarter. However, all
the new products will be available for the full duration of the first quarter,
and the channel rotation of inventory should be completed this month.
* Novell's focus on IntranetWare is part of a larger plan to reorient the
NetWare brand name from a LAN product to an extension of the Internet.
The ability to add Internet access to a LAN could be the catalyst for
NetWare 3 customers to upgrade to IntranetWare.
NEUTRAL
Price 52-Wk Rng Div Yld Shs(MM) EPS 95A
9 19 - 8 - - 352 $0.90
EPS 96E P/E EPS 97E P/E 5-Yr Proj Growth
$0.31 29.0 $0.60 15.0 9%
Fiscal year ends in October.
We recently visited Novell's new management team led by Joe Marengi.
For the first time in years, we detected a sense of urgency and purposeful
execution about the company. The engineering organization sounded more
productive and focused than it's been in years. We anticipate product
releases three to four times a year instead of every two years, as in the
past.
Over the last 45 days, the company has refreshed each of its key products,
and the development organization seems to have found new spunk and
focus after drifting off course for a couple of years. New versions of
NetWare (now called InternetWare), ManageWise, and GroupWise -- the
three power brands -- shipped during the quarter.
We expect only a modest sequential increase in revenues since
InternetWare didn't ship until the last month of the quarter. However, all
the new products will be available for the full duration of the first quarter,
and the channel rotation of inventory should be completed this month. We
view the fourth quarter as a product-transition period and look for $0.16
per share in earnings on $367 million in revenue.
From there, management's guidance will probably be flat to up
sequentially. The fundamentals haven't broken out on the upside yet, but
they aren't as bad as the share price seems to imply.
The inventory reduction caused a couple of distribution holes in certain
regions; the reduction program flushed out gray market suppliers and
increased street prices. Resellers are finding NetWare more profitable than
they have in years and have more technology from Novell to work with
than ever before.
We expect Novell to announce (later this month) that its directory service
(NDS) will be ported to Sun Solaris and the IBM AIX version of UNIX.
Sun and IBM are to participate in the project and support the
announcement. Novell was already working with SCO and Hewlett
Packard. NDS on Windows/NT is already being tested. These
developments fulfill a roadmap Novell talked about two years ago but had
difficulty delivering given the splintering of its development resources
over too many other unproductive projects. If Novell can establish NDS as
a proven cross-platform directory service for all key platforms, in addition
to extending the service to the Internet through its work with AT&T,
high-end customers will probably at least want to hear the story.
Novell's focus on IntranetWare is part of a larger plan to reorient the
NetWare brand name from a LAN product to an extension of the Internet.
The ability to add Internet access to a LAN could be the catalyst for
NetWare 3 customers to upgrade to IntranetWare.
- Flatter, More Focused Management Team
We liked what we heard from the management team on our visit. Mr.
Marengi, formerly the head of sales, recently took on the title of president;
he already knows the organization and key issues and has relationships
with the company's largest customers. Moreover, we believe his sales
background is instrumental in moving the company toward a more
commercial, pragmatic, and competitive culture as opposed to the
engineering, almost academic organization Novell became in its monopoly
days. Mr. Marengi's first act as president was to get on the road and visit
55 different CIOs and meet with 4,000 Novell employees around the
world. The customer feedback was positive; they apparently want to see
Novell succeed since the company is the only credible alternative for
advanced network services for complex networks.
The company's marching orders have been more clearly defined and its
strategy is more succinct. In addition, the struggle between Provo and San
Jose seems to be subsiding, with executive staff now centralized in San
Jose. Provo, Novell's historical headquarters, looks like it will become
more a development lab. The company has been flattening the
management structure, and top management appears closer to sales
activities and customers. Moreover, the decision-making progress seems to
be more streamlined versus the never-ending search for a consensus that
characterized Novell's management team in recent years. Denise Gibson
was brought on board over the summer and is in charge of InternetWare
and related product lines. No one ever seemed to know product details and
ship dates among senior management at Novell. She does. The focus on
execution and new accountability for product delivery is healthy, from our
perspective.
We don't envy the challenge Novell's management faces, but for the first
time in a years, we felt the management team understood the game and is
no longer laboring under a false sense of comfort. Moreover, the company
is delivering more value per dollar as Microsoft is slowly raising prices.
- Product Flow: More Frequent and More Visible
Novell has taken a few pages out of Microsoft's book on how to prep the
market for new technology and instituted an early-access program for
resellers in which they receive alpha releases of products under
development. Novell gets ongoing feedback from a sophisticated audience
before releasing it to the general market, and resellers feel informed and
can evangelize the strategy if they see where Novell is headed.
The engineering team has been more productive in the last six months than
it has in perhaps the last two years. Instead of new releases every two
years, the company is on a schedule of three to four releases a year. The
more frequent releases keep Novell in front of resellers and customers with
new product. In addition, any given release is smaller in scope, which
translates to lower technology risk versus the biannual big-bang releases
stuffed with too many new features to throughly test or market. Novell is
developing more releases in parallel with one another and is more tightly
managing the development process. The company commits to some
features in new releases to rebuild credibility with resellers and customers
while other features are placed in an optional category and show up only if
time permits. The early-release CD currently in circulation (containing
native IP support, replication services, the Novell SDK for Java, ATM
LAN emulation, and distributed print services) seems to be buying Novell
engineering credibility and keeping its developers focused .
- Pricing
The company is still considering simplifying its pricing by adopting a
nodal pricing structure. With nodal pricing, Novell would levy a per-seat
charge on the network regardless of the number of servers. Another
alternative under consideration is some form of subscription service.
Customers want simpler pricing but the company plans to move cautiously
in this area to ensure that the change is revenue-neutral.
- Consulting Opportunity
As customers reengineer their networks to provide Internet access and
build Intranets, Novell has a significant opportunity to provide consulting
service. The company has not historically pushed this business, but large
customers are looking for more strategic input from Novell and other
suppliers of networking products. Given the potential benefits beyond
direct consulting revenue, such as more account influence, Novell plans to
step up its consulting efforts but will be careful not to tread on its resellers'
turf.
Novell's product message has coalesced nicely around IntranetWare.
NetWare 3 should continue to subside in revenue and visibility; we expect
Novell to retire the product sometime in the first half of 1997. Likewise,
NetWare 4 is to be positioned as the services engine under IntranetWare.
It won't be marketed separately next year since customers can get
IntranetWare, which includes Internet connectivity, for the same price as
NetWare 4.
- The Channel
In the direct channel, Novell has been focusing on its top 150 accounts and
believes it has solid relationships with these clients and anticipates more
commitments from large customers. The problem remains on the low end
of the market, where Windows/NT has had a more compelling story from
a price and ease-of-use perspective. Novell has had the same message and
value proposition for a large account like General Motors as for a small
business.
The company is revamping its message and marketing collateral for the
low end but has backed off original plans to develop a separate product for
this market. Instead, Novell will likely package IntranetWare differently
and start to focus by vertical market. Moreover, resellers are more critical
on the low end of the market and recent efforts to rejuvenate that channel
via the early-release program should help. Small customers are more
likely to buy what the reseller presents as the solution as opposed to
specifying the technology that underlies the solution. Since Novell resellers
have seen street prices increase 15-30% since Novell reduced channel
inventories and adjusted discounts, they are more motivated to sell
IntranetWare, especially in light of the increased value Novell is
delivering in recent releases.
The number of NetWare resellers is still growing, with 100-200 being
added in any given week. The platinum resellers are also growing,
although many of them are selling Windows/NT as well. The number of
CNEs (Certified Netware Engineers) has reached 100,000, with another
10,000 in the pipeline undergoing training. We still think Novell has to
lower the cost of becoming a CNE (currently about $7,000) since
Microsoft is subsidizing the training of Windows/NT engineers.
- Power Brand Updates in the Fourth Quarter
IntranetWare -- bundled product for leveraging existing NetWare
infrastructure to build an Intranet. Key features:
* Integrated Web server, browser, and authoring tools;
* IPX/SPX-to-IP gateway for Intranet access within existing IPX
networks; and
* Multiprotocol routing to build wide-area Intranets.
NetWare 4.11 -- new release of core NetWare server. Key new features:
* Symmetric multiprocessing (SMP) for increased scalability;
* NetBasic, a Basic scripting tool for developing applications that exploit
NDS;
* New graphical network administration tools, including NetWare
Administrator for easier configuration changes;
* C2-level security across networks, not just on a single server as provided
by Windows/NT;
* Better network migration and installation utilities; and
* NLS, a licensing service that allows customers to track and monitor the
use of licensed software across networks.
ManageWise 2.1 -- Novell's network management product that monitors,
tracks, and configures network resources. Key new features:
* Management of NetWare and Windows NT servers from a single
console; this is one of the few products on the market that address both
operating systems from a single management platform, which simplifies
the lives of network administrators;
* Simple Network Management Protocol (SNMP) support to exchange
management information with other (primarily UNIX-based) network
management products from HP, IBM, Sun, and others; and
* Web browser access to facilitate remote and outsourced management
(expected in 1H97).
GroupWise 5 -- Groupware product with E-mail, document
management,calendaring, scheduling, and collaboration over Intranets.
Key new features:
* Universal MailBox with access to all communication from multiple
sources. GroupWise continues as one of the slickest groupware products
on the market, but has gotten short shrift because of it ties to NetWare.
Nevertheless, we expect NetWare users to give the product serious
consideration as they run into E-mail scalability limits on legacy products
or move to more standars-based E-mail;
* Client/server architecture for better scalability and standards support;
and
* Better use of NDS for common administration and addressing.
Novell
Morgan Stanley & Co. Incorporated and/or its affiliates make a market in
the securities of Microsoft and Novell. |
