Can Schmidt fix Novell – again?
The Win2k effect is by no means the whole story of Novell's woes
Novell's second quarter results don't tell the whole story about what is happening in the company, the current issues that resulted in the profits warning of 2 May, and the savage decline in the share price. The outcome was as forecast earlier in the month, with revenue of $302 million and earnings per share of 9 cents beating the 8 cents forecast. In both the previous quarter and the year-earlier quarter, revenue was $316 million, so the downturn is not really so great. Net income was $31 million, down from $34.5 million in the previous quarter.
But we do now have a better understanding as to why Novell is not accelerating in a growing marketplace, and what it is doing about it. It was previously announced that a decline in channel sales, as well as in site licences for large accounts, was the main reason for the downfall. Novell accepted responsibility for its management being insufficiently focussed, and the company now says it is addressing this, with a restructuring of the company's organisation announced yesterday. CEO Eric Schmidt said that the decline was "an unintended consequence of our focus on new products in new markets. Clearly we need to be better in addressing the multiple, and often diverse markets, products and channels that we require for growth". Put more simply, Novell had pushed out a lot of products in the last year, but had not adequately trained its staff or partners. In addition, the company had not worked sufficiently with customers because there were not enough people trained, although this is now apparently being rectified.
Win2k, with an axe, in the conservatory?
Attention has focussed on whether Windows 2000 sales had played a role in Novell's woes. A relationship with Microsoft is never a simplistic issue, because billion dollar companies have a myriad of relationships with Microsoft, with techy collaboration being understandably better than competitive areas. What does seem to have happened is that the channel turned its attention to Windows 2000 because of training and launch activities. What may help Novell is the evident disappointing sales of Windows 2000 (note the lack of any good, hard claims from Microsoft since the launch), and from Novell's perspective, the lack of Active Directory support for Windows NT. With Windows 2000 Datacenter still in beta, Microsoft has a long way to go before enterprises consider staking their future on unproved products.
Novell found that its packaged software business declined to about half that of the previous four quarters, although the site-licence business and Net services applications grew around 10 per cent compared with the previous quarter. Service, education and solutions consulting grew some 25 per cent, and there are certainly possibilities to train up a significant new consultancy force in Utah, with a high probability of retaining many of them.
Schmidt noted that big heterogeneous networks were "a consultancy dream" for Novell and its partners, especially as Novell was some years ahead with its networking technology. Novell also says it has considerable business in the pipeline that should be booked in the next three to six months. Novell admits to being unsure about its channel prospects, so is reluctant to give any firm forecasts. The best guess seems to be that the third quarter will be about the same as the quarter just reported, with the anticipated gain being about the same as the $35 million windfall from the Caldera v Microsoft case.
So far as the fourth quarter is concerned, Novell is very reluctant to be drawn, perhaps because it is jittery about its share price. Novell did not buy back its shares during its quiet period, so it is probably hoping to do so now while the price is profoundly depressed. It has completed a programme of buying back $500 million of its shares, only to see their value decline to under $10 from a high of more than $45 in mid-February. Novell's cash and shares were worth $647 million at the end of April, when the share price was around $20, so the present value could well be around $350 million, which gives a considerable incentive to work on increasing the share price.
My analysts don't understand me
Even the financial analysts who know the difference between a printer and a microprocessor are finding Novell a difficult call, but there again, Novell's management was caught out as well. There's no leeway for a false move now because of the adverse effect that this would have on market confidence, but the five per cent decline - for that is what it was - that caused the Novell and investors to panic certainly seems to have focussed Novell on marketing. Because the company has traditionally sold its stuff mostly to those that pestered the company, rather then marketed it, it is understandable that it doesn't really know what might happen now that it has set in motion some eight marketing campaigns, starting next week.
There's a new marketing team and a new corporate structure that is closer to what it is trying to do. The four business units are net management, net directory, net content and customer services. Dave Shirk has been made CTO; Rich Nortz replaces Nicholas Tiliacos, who resigned, as vp of worldwide sales after just a few days with Novell; and Ken Anderson will be CIO. General counsel David Bradford is leaving to form a venture capital company. It's not going to be easy, because the whole organisation has to learn to coordinate product development, training, marketing and sales - and this will be the key test for the rest of this year.
Novell is a curious company, with a unique culture that has, at its extremes, God in Utah and Mammon in California (and in most other Novell locations, it should be said). The corporate jet, known as the gas guzzler, does a daily trip, with a corridor-talk atmosphere on board that appears to help personal networking. Schmidt is based in California, with COO Stewart Nelson in Utah. Some time ago, internal relationships were rather strained, but the evidence seems to point to an improving situation. Schmidt's continuing challenge is to leverage the best possibilities of each side of Novell's culture, and his success at this could well determine Novell's future. ®
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