The network software maker posted quarterly earnings last week that beat lowered expectations, but the shortfall renewed concerns that the company is struggling to shift its strategy to focus on providing Internet infrastructure software.
Analysts say Novell is a case study of how a veteran technology company must walk a fine line in the Net era to retain customers while at the same time transform to pursue new market opportunities. The company has increasingly pushed its eDirectory software technology as a sort of central "phone book" to catalog the information carried by private networks and the Net, yet it still has a substantial NetWare operating system business, its classic strength, analysts say.
Those competing interests led, in part, to a more than 50 percent drop in sales of NetWare through the company's third-party sales channel from the same period a year ago. "The whole attitude within Novell has to change," said Joel Achramowicz, equities analyst with Preferred Capital Markets.
Novell's stock is flirting with its 52-week low of $7.88, far from the heights it reached during its rebound of $44.56.
There may be renewed pressure for Novell to either spin off its Net-based business or succumb to an acquisition. "If they don't show they have the problems under control, they have to sell the company," Achramowicz said.
Novell chief executive Eric Schmidt has been pushing the idea that his company can take advantage of an emerging market opportunity to provide software to tackle a variety of back-end tasks for corporations. Internet service providers (ISPs) and application service providers (ASPs) are among the targets. Yet marketing that vision has proven difficult for the firm, according to analysts.
In addition, that path has the potholes of Novell's legacy as a NetWare-centric company, even though the company is losing ground to Microsoft's corporate Windows NT and 2000 operating systems and the growth of Linux. "There's a stigma to NetWare," Achramowicz said.
But Novell executives insist the company's epitaph should not be written yet. They say the latest woes are only a bump in the road and not akin to previous implosions at the company. It is only a matter, they add, of realigning the company so it can concentrate on its strengths: eDirectory software, NetWare and related technology, and the company's Web content caching business.
"It's a matter of focus," said Stewart Nelson, the company's chief operating officer. "I think you have to split them a little bit to get a better focus.
"We certainly had the hiccup," he added. "We're moving ahead at this point."
Nelson said the company is a world away from the Novell that, starting in 1996, experienced a series of fiscal woes and executive upheaval, resulting in a company with few products in the pipeline and no strategy to tackle the emergence of the Internet.
That has changed, executives say, with the arrival of Schmidt and a continually honed strategy focused on Net-based software services. "I think we're in a much different situation," Nelson said.
Yet the fiscal future for the company remains "cloudy," according to analysts, with Novell providing little guidance for the remaining quarters in its fiscal year. Nelson refused to disclose expectations for the company's upcoming third and fourth quarters.
Achramowicz said in a report last week that the next quarter for Novell "could very well be the most important and critical quarter in the company's 18-year history."