Novell: Learning to live with Microsoft

With its stock languishing at a two-year low, Novell (Nasdaq:NOVL) was paying the price for several ill-considered acquisitions. Even more troubling, the software maker was steadily losing customers as Microsoft Corp. (Nasdaq:MSFT) stepped up a furious assault in the server market.

By the time the third quarter ended, Novell found itself $121 million in the red. The death watch had begun.

But as the saying goes, what a difference a year makes.

Although it still contends with the challenge posed by an increasingly aggressive Microsoft, Novell has notched its third consecutive profitable quarter and has finally convinced Wall Street that it has a clear strategy.

Cleaning up the Augean stables
The company's shares -- though still depressed from 1995 levels -- have more than doubled from a year ago.

Operationally, it's also a different ballgame as Novell has taken steps to clean up a huge inventory mess. At the same time, the company has brought its expense level in line with revenues by reducing headcount by 1,000 people, or about 18 percent.

On the product front, Novell also has a more coherent story to tell.

Returning to its core strength in networking software, the company has offered up new products built around NetWare and the networking market.

NetWare 5 is Novell's first network operating system to provide native support for TCP/IP, the protocol of the Internet. And with more new products in the pipeline, analysts are guardedly predicting better times ahead.

Already, the number of people developing products for Novell has more than doubled over the last six months to 23,000.

Novell watchers attribute Novell's brightening fortunes to the labors of Eric Schmidt, who took over as chief executive in May 1997.

A kinder, more focused Novell
Schmidt has forced Novell to focus on networking software, winning top marks from Wall Street for revamping the company's marketing, engineering and product design divisions.

At the same time, they credit Schmidt for eliminating the acrimony that surrounded the company's competition with Microsoft dating back to the Ray Noorda era.

In the years prior to Schmidt's arrival, Novell was a company so set on extracting a pound of flesh from Microsoft that it often made wrongheaded decisions based upon its former CEO's personal animus toward the Redmond, Wash., giant.

Schmidt, who prior to joining Novell did a long stint as chief technology officer at Sun Microsystems Inc. confronted that issue head-on.

Under the new regime, Novell's software was going to work with competitors' products -- if that's what customers wanted, that's what they would get. Period.

Better leadership
"Leadership has been the big issue," said Jamie Lewis, president of the Burton Group in Salt Lake City, who said the company had been hampered by the absence of a clear vision.

"Eric has done a really good job of assembling a management team and looking for winnable short-term and long-term issues."

He also gave Schmidt high marks for reorganizing the structure of the company to ensure that Novell spoke with a single voice. Before that, said Lewis, it was hard to tell whether Novell products came from the same company.

"They had different install routines, different help systems, they didn't always work with each other," he said.

With an eye toward making sure that customers received a single message, Schmidt went so far as to hold "install parties," inviting the heads of each product group to install the products they oversaw.

He has since told managers they must ensure that all Novell products must use the same install process by 1999. At the same time, all the company's applications must have the same graphical user interface (GUI) and use the same management console.

More products, faster timetables
That shouldn't retard the company's development cycle. Michael Simpson, director of marketing at Novell, says products are rolling out the pipeline faster than ever before in the company's history. "What we've delivered in the last nine months is more than what's been delivered in any one- or two-year period," he said. Simpson added that Novell will no longer attempt to convince customers that it's "all or nothing."

Instead, he said, Novell will sell customers whatever product they need to make their networks work -- whether it's an all-Novell set-up or a package that includes competitors' products.

"Microsoft will always leave holes in their products and we'll always have an opportunity to fill those holes," he said

That's gone over well with customers -- even those who ultimately ended going with Microsoft for parts of their networks.

The University of Pittsburgh, for example, chose Windows NT because it wanted to take advantage of Microsoft's systems management server, a product used to manage networked PCs. But Richard Hunt, a network and systems analyst, says Novell's not out of the running for the rest of the university's business.

"It just seems like Novell picked up the ball right after they dropped it -- and they're going full-tilt now," Hunt said.

Lingering questions
Microsoft's Windows NT 5.0 is not due out until next summer. That delay could bolster prospects for Novell's new versions of NetWare and NDS, which both run on Windows NT and UNIX.

The revamp of the network operating system includes a new directory service that analysts say will make it easier for network administrators to add or remove users and locate network resources.

Still, Novell is not fully out of the woods just yet -- not by a long shot.

Windows NT is making giant strides against NetWare -- which controls 63 percent of the networking market. What's more, the company still needs to increase its top line growth.

In its most recent quarter, Novell had $90 million in revenue -- a huge fall-off from $273 million in the prior quarter and $365 million in the year-ago quarter.

And then there's the matter of convincing another constituency, the all-important chief information officers -- the executives who control the purse strings -- to buy Novell's products.

"Novell has an impressively loyal following among networking professionals responsible for day-to-day operations, but has not yet recouped mindshare with the bosses of these individuals," said Morgan Stanley analyst Charles Phillips in a research report.

Schmidt -- good or great?
Winning them over will require one heck of a selling job.

Up until now Schmidt has been a good communicator. But still unanswered is whether he can be a great communicator.

In the end, Novell's fate could turn on how effectively he presents his case.