Update: Novell to Reduce Workforce by 16%

Updated from 11:41 a.m. EDT

Novell(NOVL Quote) said Wednesday that it would cut 900 jobs, or about 16% of its workforce, and take a fourth-quarter restructuring charge of up to $50 million.

The layoffs, which will trim the total workforce to about 4,600, had been expected since the Provo, Utah-based network service provider disclosed in mid-August that its third-quarter earnings were down nearly 83% on weaker overall sales. The company had vowed to make internal changes to increase its profits.

Investors showed little reaction to Wednesday's announcement. Novell finished Wednesday regular trading down 38 cents, or 3.4%, at $10.69. The stock has lost about 75% of its value since it hit a 52-week high of $44.56 in February.

Novell said it expected to save $45 million in the current quarter, which ends Oct. 31, through its cost-cutting measures. Nearly half the anticipated savings will be used towards increased spending on sales, marketing and development of its Internet services.

The company hopes to cut overall quarterly costs by $25 million beginning in its fiscal year 2001, which starts Nov. 1.

"Immediate benefit will come with the prospect of better earnings performance after lowering expenses," Eric Schmidt, Novell's chairman and chief executive, said in a statement.

Charles Phillips, an analyst at Morgan Stanley Dean Witter, called the company's efforts to streamline its operations a pragmatic move, but not a long-term solution.

"The company has been shrinking for awhile, stemming from ongoing problems of not being able to expand from its original product," said Phillips, who has maintained a neutral rating on the stock since last November. "They were innovators in the past. But they have been flailing around for a strategy ever since."

Novell's Schmidt said he plans to focus the company's efforts on developing and marketing new Internet services. Last quarter, Novell formed four business groups to focus specifically on developing new Internet service products.

Though its cut costs in other areas, Novell will continue spending a higher percentage of its revenue on product development, and sales and marketing, than other software companies, said Schmidt. It will match the industry average for general and administrative spending.

But Phillips remains unconvinced that increasing spending on research and development will be enough to raise revenues. "You can double the budget, but if you don't have a good idea, it doesn't matter. You'll just be bringing bad ideas to the market faster," he said. "I'm not convinced they have the winning idea yet in their head."

Morgan Stanley Dean Witter does not have a long-term target price for Novell shares. It has done underwriting for the company, said Phillips.