The New Novell: Tough Enough to Fend Off Microsoft?
Its rebuilt product line, led by Directory 8.0, is lifting the stock, and even the looming threat from Windows 2000 may be manageable
The past decade has been one of both dispiriting lows
and giddy highs for Novell Inc. (NOVL). By the early
1990s, the Provo (Utah) software company had the
premier operating system for corporate computer
networks -- and a dominant hold on that market. Five
years later, it all came crashing down, a result of
strategic missteps, bug-ridden products, and intense
competition. By April, 1997, the company's stock had
fallen to an unlucky $7.
Novell rebounded after new CEO Eric Schmidt
reorganized the company and rebuilt its product line to
replace the NetWare operating system as the company's
flagship program. In its place, Novell introduced Novell
Directory -- an uber-directory that organizes and
controls all others on a network. The current version of
the product, called Novell Directory Service 8.0, is a
breakthrough success. Novell says that more than 200
of the world's 500 largest companies use NDS. As a
result, Novell's stock is back up above $20.
End of story, right?
Well, not really. To
hear some analysts
tell it, a new menace
has arisen -- from the
direction of Redmond,
Wash. Microsoft's
(MSFT) new operating system for networks, called
Windows 2000, will include a so-called Active Directory
system that will compete with Novell's Directory. For
the first time, network administrators will be able to pick
one Microsoft product that organizes all of the software
giant's other products on a network and makes it
possible to control the entire network from one central
location. Several analysts have raised the specter of
Novell being swept away by the tide of new technology.
"Windows 2000 is going to have a negative effect on
Novell," says Morgan Stanley Dean Witter analyst
Charles Phillips, who nevertheless rates Novell's stock
as outperform.
A close look at the directory market, however, shows
that Windows 2000 might not be as potent a threat as
some think. NDS also controls all the other directories
on a network, such as the ones that oversee the phone
system, control the corporate intranet, and monitor the
Internet routers. Thus, one administrator can make a
change that will register in every directory on the
network. For instance, a new employee will be assigned
a server login, an E-mail account, a phone number, and a
security badge all in one keystroke. If that person is
fired, every part of the network the employee had
access to becomes off-limits just as swiftly. And every
user of the system needs only one password to sign on,
rather than the multiple passwords that are the bane of
many office workers today.
Novell's genius was to make its Directory
platform-independent. Thus it can oversee a network
that includes PCs running the Windows NT operating
system, a NetWare printer network, and an E-mail
system that runs on Unix servers -- all at once. By
contrast, the Active Directory in Windows 2000 will only
interact with other Microsoft products.
WINDOWS CONVERTS. That might make sense for a small
business such as a law office. But for large
corporations, it represents an infrastructure nightmare.
"Windows 2000 won't be a direct competitor," declares
Novell corporate strategist Gary Hein. "If anything,
Microsoft will elevate people's understanding of why
directories are important, and we will benefit from that
publicity. We can say to a customer that we will give
you a directory that doesn't make you change your
E-mail server and your desktop operating system.
Microsoft can't say that."
Of course, Microsoft will still win converts to Windows
2000, which is now in its beta-testing phase and isn't
expected to be released until the end of this year. All
evidence points to the fact that the new operating
system is a vast improvement over Windows NT 4,
Microsoft's current network offering. Windows 2000
may have particularly good luck in displacing Novell's
old NetWare software.
Novell's reaction to
that is: So what? In
the company's most
recent quarter, 91%
of its revenues came
from sales of
Directory or related
products. Even more
promising, sales of software applications that are meant
to run with NDS grew by 24% vs. a year earlier. Novell
"understands that the object is to make its directory the
standard, which it is quickly becoming, and then increase
its margins by selling applications and services that are
related to it," says Vivek Rao, who covers Novell for
Gruntal & Co. and rates it a strong buy. "They have
increased their top line, and now they are growing their
operating margins by pursuing that strategy, and it's just
beginning."
Of these other revenue streams, the most promising is
sales of consulting services. Unlike other software
companies -- such as Oracle (ORCL) -- that have failed
in trying to develop their own consulting businesses,
Novell is teaming up with established consulting firms to
train companies to use NDS and related products. Its
revenues from consulting are running 40% ahead of a
year ago.
If Novell can continue to produce growth like that, it will
easily surpass analysts' expectations of 50 cents in
earnings per share for the fiscal year ending in October.
Says Rao: "Long term, I think there's a tremendous
opportunity for Novell to grow -- with or without
Microsoft."
Sam Jaffe writes about the markets for Business
Week Online
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