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Novell sees 2Q letdown

Wall Street thought Novell (Nasdaq: NOVL) would boost second quarter earnings by 45 percent year-over-year. Instead, the company expects to report no operating profit at all.

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After market close Tuesday, the network software vendor said it sees net income of 8 cents per share for the fiscal second quarter, but that figure includes a $35 million royalty payment from Caldera Systems (Nasdaq: CALD) related to the recent settlement of Caldera's lawsuit against Microsoft (Nasdaq: MSFT). Excluding the one-time benefit, Novell sees no profit for the period.

"We'd have been very close to break even," CFO Dennis Raney said during a Tuesday afternoon conference call.

First Call's survey of 10 analysts predicted Novell earnings of 16 cents per share for the quarter ended last week.

Shares of Novell fell to 12 3/4 in afterhours activity on the Island electronic communications network, immediately following the conference call. The stock closed Tuesday's regular trading at 17 9/16, down 1 3/8 for the session.

The company missed its own sales forecasts by $10 million a week for the last five weeks of the quarter, CFO Dennis Raney said during a Tuesday afternoon conference call with analysts. Executives blamed "management and organizational issues in sales" for hurting revenue. Both channel sales and licenses for large accounts saw declines.

Novell is expanding into network services even as it tries to jumpstart sales in its core business of network management software. However, the shift toward a "solutions" company is taking longer than expected and hasn't paid off so far.

"Slowed large account sales reflected a lack of demand generation by Novell among new customers for new Net services products," the company said.

A slowdown in distributor sales that started in January did not turn around by April, executives said. The company ended the quarter with channel sales remaining "well under" pre-January levels, Raney said.

On Tuesday, Novell announced former Lucent executive Nicholas A. Tiliacos has replaced Ron Heinz as senior vice-president for worldwide sales.

Customers delayed purchases because of "tremendous" pushes for IBM's Linux offerings and Microsoft's Windows 2000 operating system, Raney said. The growth of application service providers has also hampered traditional software license growth, said Novell, which just began investing in that market.

"We need to accelerate our transformation to this strategy by enhancing overall sales execution, increasing our support of existing and emerging channels and more aggressively broadening market awareness,"Raney said. "We anticipate that as customers gain experience with our new Net services solutions, demand for our new offerings will increase."

Novell's reorganization will take the rest of the fiscal year, Raney said. The company already cut channel invetories by more than 40 percent in the second quarter to less than $30 million, largely because of lower demand.

Tuesday's announcement marks the second financial disappointment in as many quarters for Novell. The company met earnings estimates in the first quarter but generated less revenue than expected.>