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Novell dives on earnings warning, downgrades

The network software maker's shares plummet after it says it will fall significantly short of expectations for its upcoming quarter.

Novell's stock dropped by more than a third today after the network software maker warned that revenues for its upcoming quarter will fall significantly short of expectations.

Shares slid $6.94, or 39.5 percent, to $10.63 at the the close of regular trading today.

Novell said yesterday that it expects to report revenues of just above $300 million and earnings per share of about 8 cents for its fiscal second quarter, which ended April 30. That is half of what analysts expected for the quarter, according to consensus estimates compiled by First Call/Thomson Financial.

Today, several Wall Street analysts downgraded Novell's stock. Wasserstein Perella cut Novell to "buy" from "strong buy". CIBC World Markets downgraded the stock to "hold" from "strong buy". Other firms, including PaineWebber and Banc of America Securities, lowered their full-year earnings estimates for the software maker.

Novell is attempting to evolve from a maker of operating system software for networks to a provider of back-end infrastructure software for the Internet. Historically, the company has relied on sales of its NetWare operating system for corporate networks, but it has recently altered course, choosing to focus on a new set of Internet-based software services tied to its Novell Directory Services, or NDS, technology.

"We're trying to move these new products out into the market," Stewart Nelson, Novell's chief operating officer, said in an interview. "We had hoped they would have a quicker ramp."

The company blamed a "significant decline" in software sales. Also fingered was a decline in its large account software licensing business.

It attributed the lagging sales to "management and organizational issues." The company said its primary sales executive, Ron Heinz, has left the company and will be replaced by Nicholas Tiliacos, a 20-year industry veteran who was previously chief executive at Lucent Technologies' Mosaix subsidiary. "We felt it was time for a change," Nelson said.

Novell chief executive Eric Schmidt made a brief statement in a conference call yesterday with financial analysts and the press, characterizing the shortfall as "disappointing."

Dennis Raney, Novell?s chief financial officer, said management and organizational issues included inaccurate sales forecasting as well as overall "poor quarter management."

The company also said the introduction of Microsoft's competing Windows 2000 operating system and the growing popularity of Linux led to "uncertainty and delayed sales." It added that many channel participants are morphing to become application service providers, or ASPs, an emerging market where Novell "has yet to generate broad awareness."

Raney also said implementation of new sales initiatives to buttress the company?s evolving market strategy had been harder to implement than anticipated.

Novell noticed a decline of sales through its channels in January of this year, Raney said, a situation that did not improve by the end of the quarter in April.

Raney said Novell would need the remainder of its 2000 fiscal year to correct the issues.

"What we expect is by the end of the fiscal year to be running on all cylinders," Nelson said. "We're going to be very aggressive here."

The company relies on a largely indirect sales model to sell its software, counting on distributors and resellers to deliver on revenue targets.

In its filings with the Securities and Exchange Commission, Novell has said its earnings results can fall victim to its widely used sales model.

"As is typical in the software industry, a high percentage of the Company's revenues are expected to be earned in the third month of each fiscal quarter and will tend to be concentrated in the latter half of that month," the company's annual SEC filing said. "Accordingly, quarterly financial results will be difficult to predict and quarterly financial results may fall short of anticipated levels."

The revised estimates include a royalty payment of $35 million from Caldera Systems related to an antitrust settlement between that company and Microsoft.

The company posted revenues of $316 million and earnings per share of 13 cents for its fiscal 2000 first quarter.

Novell will report earnings at the close of the markets May 23.