Novell Warning Stirs Fears About Viability

Analysts doubt Net Services strategy can compensate for flagging sales of NetWare

A warning from Novell Inc. last week that revenue and profits for its latest quarter will fall short of expectations hammered the company's stock and revived concerns about its viability. Analysts voiced doubts that the company's new Net Services business will take off quickly enough to compensate for flagging sales of Novell's core NetWare product.

Novell said it expects to announce later this month revenue of just over $300 million for the second quarter ended April 30, compared with $316 million for the previous quarter and $316 million for the same period a year ago. Earnings will be around 8 cents per share. First Call/Thomson Financial in Boston previously reported a consensus estimate of 16 cents.

"They have not been able to generate new business as fast as the old business is going away," said Peter Ausnit, an analyst at Prudential Securities Inc. in San Francisco.

Novell blamed this quarter's disappointing results on a decline in channel sales and large account site-license sales. Executives said the introduction of Windows 2000 and "growing market interest" in Linux, as well as market moves toward the application service provider model, were creating uncertainty and delaying sales.

Novell expects growth to come out of its Net Services strategy, outlined by President and CEO Eric Schmidt earlier this year, to deliver Internet and intranet services based on its Novell Directory Services.

Novell executives said sales and marketing efforts will be realigned around Net Services, an undertaking that would take at least the remainder of fiscal 2000 to complete.

Analysts are generally upbeat about the Net Services vision. But Joel Achramowicz, an analyst at Preferred Capital Markets Inc. in San Francisco, expressed doubts about whether Schmidt can manage Novell's transition to Net Services.

"I think Eric enjoys talking about the technology, but I wonder whether he can actually make the deals" with major customers in the Internet space, Achramowicz said.

George Weiss, an analyst at Stamford, Conn.-based Gartner Group Inc., said he sees Windows 2000 and Linux subjecting other systems, including NetWare and The Santa Cruz Operation Inc.'s UnixWare, to a "pincer movement."

"They've got another two or three quarters to turn things around," said Laura DiDio, an analyst at Giga Information Group Inc. in Cambridge, Mass. "Otherwise, Novell stands on the brink of becoming the Banyan Vines of the 21st century."

Copyright © 2000 IDG Communications, Inc.

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