Novell: Who Needs NetWare?
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Director of Online Research: Dave Sterman (4/4/00)
Three years ago, Dr. Eric Schmidt left a top management position at Sun Microsystems (NASDAQ:SUNW - Quotes, News, Boards) for a chance to lead a turnaround at former high flier Novell Inc. (NASDAQ:NOVL - Quotes, News, Boards). While preserving Novell?s strength in networking software, Schmidt quickly set about to develop new products that extended the company into new arenas.
But all the while, Novell made sure to communicate to customers?and Wall Street?that networking would remain at the core of the company?s product platforms. To that end, Schmidt knew that he had to convince the world that Novell?s NetWare would remain a viable alternative to Microsoft?s (NASDAQ:MSFT - Quotes, News, Boards) Windows operating systems, which handled many similar functions.
But try as he may, Schmidt couldn?t back up his rhetoric with numbers. In 1999, Novell?s NetWare fell to third place behind Windows NT (38% of the market) and Linux (25%). NetWare accounted for just 19% of the market?well down from a 60+% share posted just a few years ago. And the outlook for 2000 calls for continued market share erosion.
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At an annual users conference last week, Schmidt threw in the towel. For the first time in the company?s history, Novell assiduously avoided mentioning NetWare, and instead focused on new Internet-oriented products.
To be sure, Schmidt has spent a great deal of time discussing these new products in recent quarters. But he also spent a lot of energy trying to browbeat potential customers into steering clear of Windows NT. Over the last six months, Schmidt has been taking potshots at Microsoft at every chance. Just two months ago, Novell launched a Web site to dispel the 'blatant untruths' about NetWare that Microsoft published on its Direct Access Web site.
Now that the company has taken NetWare away from center stage, the company?s other software products will receive a lot more attention. The challenge for Novell: convert hype into sales. The company?s broad line-up of new offerings sounds quite appealing. But as we saw in the January quarter, they have yet to have a serious impact on sales. Indeed, analysts greatly lowered their expectations for the current quarter as well. But Preferred Capital?s Joel Achramowitz notes that business was tracking well in the first two months of the quarter.
Building sales won?t be easy. Novell has historically relied on Value Added Resellers (VARs) to peddle its wares to tens of thousands of companies. But Novell?s new roster of software offerings are ideally sold as a bundle. That means the company has to go right after IT executives at Fortune 500 companies. Once Novell can penetrate a few key accounts, sales momentum could quickly build.
Novell?s software offerings hold a great deal of promise. The key products:
Novell?s instant messaging technology for businesses, instantme, will be available immediately. Instantme will allow partners, suppliers and customers to communicate in real-time, and will be capable of connecting with American Online?s (NYSE: AOL - Quotes, News, Boards) Buddy List Network. In the second quarter, Novell will incorporate encryption and digital certificate technology for secure instant messaging.
Novell will combine Internet traffic management software provider Radware?s (NASDAQ: RDWR - Quotes, News, Boards) Cache Server Director (CSD) with Novell's ICS, in a future release, hoping to provide optimized cache redirection and bandwidth management, by redirecting Web traffic to local cache servers like those offered by Novell.
An open beta version of DirXML is available, which will allow companies to manage user profiles stored in software applications, network operating systems, databases and network devices, across divergent platforms and networks, without modifying existing software.
Internet Messaging System and GroupWise will be ported to Sun?s Solaris Unix platform and Linux and offered on a hosted basis to Internet service providers (ISPs) and application service providers (ASPs).
The various pieces of software all revolve around Novell?s Network Directory Software (NDS), which acts as a sort of phone book for Web site administrators. At its BrainShare 2000 confab last week, the company tried to articulate a new software architecture for the Web?which ideally uses Novell?s various products. The company has even coined a catchy umbrella term that covers all of its products?DENIM, which stands for Directory Enabled Net Infrastructure Model.
Novell certainly has a core group of dedicated users. At the BrainShare conference, 8,000 attendees showed up, which may be a record for the annual event.
?The new marketing guys stole the show,? says Preferred?s Achramowitz. The analyst remains convinced that Novell is still grossly undervalued, and sees the shares rising to $60. He figures Novell is the only ?heterogeneous, cross-platform and multi-protocol networking company around. Translation: Novell?s software is ideally suited to tie together disparate computer platforms within a company.
We share the analyst?s enthusiasm. We?ve picked Novell in our Magic 25 portfolio for two years in a row under the assumption the emerging Internet-based suite of products would prove quite appealing. Though we are disappointed at the relatively slow ramp up of the new products, we remained convinced that Novell has a good shot at capturing strong investor sentiment later in the year.
The stock has the potential to appreciate sharply in coming months?if the new products gain traction. Sun Microsystems, for example, trades for 12 times trailing sales. According to Market Guide, developers of integrated computer systems trade, on average, for 64 times trailing sales. Novell trades for just seven times trailing sales.
Bottom Line:
Investors have taken a wait-and-see approach regarding Novell. The stock will likely stay range-bound until the new software products gain traction. But when that happens, the shares could appreciate sharply.
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