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Novell primed for growth, rebound

Having proven with its latest quarterly earnings report that it can cut costs, the networking company now is tackling revenue growth.

Having proven with its latest quarterly earnings report that it can cut costs, Novell is now tackling the other half of the rebound equation--revenue growth.

Investors are cheering that news, pushing the company's stock up as much as 4 percent since Thursday despite a downturn in the Nasdaq during the same time period. Novell is now inching closer to its 52-week high of 13.6250.

Last Thursday Novell beat analysts' estimates with an earnings report that marked the second consecutive quarter during which the company has posted a sequential revenue increase.

But revenue growth remains a key area that analysts are watching closely before declaring a rebound for the networking solutions company. Novell's third-quarter performance resulted in a nearly 4 percent quarter-over-quarter revenue Novell: earnings chart increase to $272 million, and for its second quarter the company posted a similar sequential revenue increase over the previous quarter.

Analysts say the company is poised for year-over-year revenue growth after having suffered mounting losses and declining market share last year.

Joel Achramowicz, an analyst with Preferred Capital Markets, said he expects Novell's revenues to hit $280 million during the fourth quarter See special report: Will Novell find its niche? and $1.07 billion for fiscal 1998. That yearly performance would represent a 6 percent revenue increase in fiscal 1998 over the previous year. For fiscal 1999 he said he expects the company to post revenues of $1.21 billion, a 14 percent jump over the previous year.

Achramowicz, who expects Novell's share price to reach 20 within 12 months, said the company's business has stabilized and now is healthy.

"You have to reset expectations for Novell. This is a new company in many respects," he said. "Novell used to want to take over Microsoft at the client. But that certainly didn't work?now you see a new enterprise that understands its clear leadership in the directory services business and has a lean and mean networking kernel. Rather than focusing on the client, per se, they're now looking at the network."

He added that he views Novell as a start-up company given its efforts to reinvent itself, but one with the available resources of a corporation, such as a large distribution channel and a sizable pile of cash--$1 billion--on hand. He characterizes the company as a world leader in directory services technology, an increasingly important area in the Internet space.

But some analysts aren't quite ready to declare the company a successful comeback story just yet.

"I can't say their rebound is complete, but they're in a terrific position with their new products," said Mary McCaffrey, an independent analyst. "Conservatively, I think their revenues will grow in the low to mid teens for [fiscal] 1999. But if things click with their NetWare 5, it could be higher."

Novell is expected to ship its NetWare 5 in September, marking the first rollout of its product line to offer native support for Java. NetWare 5, which is seen as a potential application development driver for the company, also is expected to shore up Novell's server operating software business--an area that contributes more than two-thirds of its overall revenues.

McCaffrey noted that sales of NetWare 4 were extremely strong during the third quarter, and that, during that same time period, Novell was able to keep a handle on controlling costs and maintaining low inventory in the distribution channel.

"They're not out of the woods yet, but they are poised to be in a good position," she said.

Novell has been able to show an operating profit for several quarters, after having come off a $78.3 million loss. But a drop in its core server operating systems market share last year led the company to cut 17 percent of its staff and consolidate several facilities.

The company also took a hit last year after it virtually halted sales in an effort to clear out existing inventory in its distribution channel.