Novell Earnings Drop, Blames W2K and Linux

Novell Inc. this week was expected to announce disappointing revenue and earnings for the second quarter, a development the company blames in part on the release of Windows 2000.

Novell ( made a pre-emptive disclosure of the bad news at the beginning of the month. Novell told the financial community to expect revenue of $300 million, with earnings of about 8 cents per share. The numbers include the benefit of a $35 million royalty payment from Caldera Inc. ( relating to an anti-trust settlement between Caldera and Microsoft Corp. ( The legal action stemmed from Caldera’s DR-DOS, formerly owned by Novell.

The second quarter revenue is a drop from the year-ago quarter, when Novell earned 11 cents per share on revenue of $316 million. Novell termed this year's results "significantly lower than anticipated."

The key factor in the drop off, according to Novell, was a significant decline in channel sales. Other major factors included a decline in the company’s large account site-license business, management and organizational issues in sales, and changing strategies to address a new net services market, Novell said.

Specifically in relation to Windows 2000, Novell stated, "The company experienced weak sales across its global channel as the introduction of Windows 2000 and growing market interest in the Linux operating system created uncertainty and delayed sales."

Microsoft has used much of its marketing muscle against Novell’s NetWare network operating system to encourage users to migrate to Windows NT. Now Microsoft is engaged in a different battle with Novell Directory Services (NDS), which Microsoft is taking on for the first time with Active Directory, a new feature of Windows 2000 Server.

Another problem for Novell is that its channel partners are rapidly moving to an application service provider (ASP) role. "In this fast-emerging market, Novell has yet to generate broad awareness and has only begun to make ASP-related investments," the company acknowledged.

Dennis Raney, senior vice president and CFO at Novell, outlined steps the company hopes to use to get itself back on track.

"We have already started to take actions to realign our sales and marketing efforts around our recently introduced net services software strategy," Raney said. "We believe these changes will take the remainder of fiscal 2000 to be deployed."

Novell also brought in a new senior vice president for worldwide sales from Lucent Corp. ( Nicholas Tiliacos succeeds Ron Heinz, who left Novell. Tiliacos was president and CEO of Mosaix, a customer relationship management software company recently acquired by Lucent.

Tiliacos will be responsible for many of the troubled areas of Novell, including managing relationships with Novell’s 27,000 channel and distribution partners.

Novell’s stock dropped sharply on the early May news. It closed down nearly seven points on heavy trading the day after the announcement, and hovered at about $10 a share by mid-month. The stock is down significantly from its Feb. 17 high of above $44.