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Novell continues comeback

The network software provider capped its 1998 fiscal year with earnings of $42 million, or 12 cents a share, on fourth quarter revenue of $298 million.

    What a difference a year makes.

    A year ago recently hired Novell chief executive Eric Schmidt was publicly expressing his dismay at the state of the company he took over, a realization that his task was a larger one than first thought.

    Now, the network software provider capped 1998 by soundly beating Wall Street estimates for the fourth quarter as the company continues to exude a confidence not seen since the heyday of founder and former chief Ray Noorda. Novell earned $42 million, or 12 cents a share--3 cents greater than consensus estimates, according to First Call--on revenue of $298 million. Earnings for the same period the previous year were $7 million, or 2 cents a share.

    Most pundits said Novell would need to start focusing on growing the company after another solid quarter was registered in August.

    For the year, Novell posted earnings of $102 million, or 29 cents per share, on revenues of $1.084 billion. That compares with losses of $78 million, or 22 cents a share, on revenue of $1.007 billion for the company's previous fiscal year. The loss was due in part to costs associated with a major restructuring at the firm.

    Novell also recorded the third consecutive quarter of revenue growth, a key indicator for wary Wall Street investors unsure of how significant the company's turnaround is.

    "Our strategy is clearly working," noted Schmidt in a prepared statement.

    Much of Novell's turnaround can be attributed to the arrival of Schmidt and the executive team he put in place, even as Microsoft increasingly competes for customers, according to observers. "He's using every resource at his disposal to keep this company in the game," said Joel Achramowicz, an analyst with Preferred Capital Markets.

    Novell's stock--currently near a 52-week high--was down about 3 percent in heavy trading today on Wall Street.

    Though Novell executives have adopted a posture of working with software from Microsoft, that company's corporate Windows NT server operating system--to be dubbed Windows 2000 in a forthcoming version 5.0 incarnation--has increasingly competed against Novell's own franchise, NetWare.

    Microsoft's NT took a significant lead in sheer unit volume in 1997, pulling in 36 percent of sales, according to sales numbers compiled by market researcher International Data Corporation. Novell's NetWare server operating system followed at 26.4 percent of total sales, with various versions of Unix trailing in third place with just over 20 percent of sales. Total unit sales for 1997 were 3.5 million, according to the research firm.

    Chinks in NT armor
    But Novell may be experiencing a renaissance due, in part, to two chinks in Microsoft's NT armor: An important upgrade to the operating system is not scheduled to ship until the first half of next year at the earliest and Redmond is currently thought to be behind in a key component of operating system technology--so-called directory services, according to some.

    "Everything I see points to the fact that directory-driven Internet computing is going to be key going forward," according to Achramowicz. "Novell has an expertise that is valuable."

    Directory services provide what is essentially a central database to house a detailed set of information concerning users, desktop and server computer systems, network-attached devices, and applications. Novell is thought to be ahead with its technology, called NDS, while Microsoft continues to hone a revamped directory services approach due out with Windows 2000 called Active Directory.

    Strategy working
    The fourth quarter saw more evidence of Novell taking advantage of Microsoft's delays.

    The company announced shipment of an important upgrade to its flagship NetWare operating system in September, the first version of the software to embrace the standards of the Net. The company also professed a desire to take advantage of NDS as a means to attract third-party developer support.

    That strategy started to come to fruition as the quarter closed. After signing up both Lucent Technologies and Nortel Networks to integrate their networking and management software with NDS, Novell capped it off by nabbing Cisco Systems after the quarter closed, a firm with a high-profile partnership with Microsoft to develop services based on the software giant's forthcoming NT-based directory technology.

    Integration from those firms is not expected until the first half of next year and revenue based on the partnerships will be hard to measure, but for some observers, gaining support for Novell's technology can only help the firm sell software.

    Novell reported a 16 percent increase compared to the same period last year in sales of software that includes the company's NDS technology. Revenue from NDS-enabled software, consisting of versions 4.0 and 5.0 of NetWare-totaled $150 million.

    Waiting in the wings is a version of the company's directory services that runs on top of Microsoft's Windows NT operating system without the need for Novell's own NetWare software. A native version of NDS 2.0 for NT is scheduled to ship by the end of this year.

    Confidence returning
    A year ago, customers were pondering whether they should continue investing in Novell amid a plethora of uncertainty concerning the future of the firm, according to analysts. No so anymore, they now say. "Customers are now saying they like what's coming out of headquarters--Schmidt has a very positive image," said Bob Sakakeeny, group vice president at industry consultants the Aberdeen Group.

    "They're now beyond the stability process," Sakakeeny noted, "What you're looking at now is a strong play for growth."

    As Achramowicz noted: "At this point, the company has a strategy. Now they just have to maintain their focus and continue to execute every day."

    Also of note, Novell reported that revenue from the struggling Asian region was down 39 percent from the previous fiscal year to $21 million. In addition, the company reported that it has spent $245 million to re-purchase and retire 21 million shares of stock, using a portion of the $1 billion in cash it has in its coffers.