SAN FRANCISCO -- Novell (NOVL) has found that luck favors those who deliver on time.
Over the past year, the Provo, Utah, software company has found a way to live in a
world without getting squashed. In the early 1990s, Novell went head to head with the Redmond, Wash., software giant in the battle to control network operating systems and software programs for personal computers. Novell was nearly buried in the
onslaught and was on the brink of becoming a has-been.
Today, under the tutelage of CEO Eric Schmidt, the former chief technology officer at
, the company has a new and, apparently, winning strategy that has received accolades from Wall Street. Schmidt, who joined the company in 1997, applied several measures to pull the company together: He closed down unprofitable product lines, cut back staff and focused the company on the business of network directories -- especially on Novell Directory Service, or NDS.
Last September, Novell delivered -- on time -- its
product, which allows corporations to run corporate intranets. By contrast, Microsoft's
, formerly known as Windows NT 5.0, has been delayed by two years and has yet to ship. Windows 2000 includes an active directory that will compete with Novell's primary directory product.
Microsoft's stumbles have allowed Novell a rare chance to shine. And Schmidt has taken full advantage of the opportunity. In late February, Novell reported its sixth consecutive quarter of solid results. The company's profits doubled, with sales jumping 13% year over year and the directory-related business now making up to 80% of revenue. Novell's stock has also steadily risen more than 150% since October to hit its highest level since February 1994. On Friday, the stock closed at 26 3/16, 1/8 higher for the day and significantly up from 18 3/16 when the year began.
Because Novell's directory products work across platforms, companies like to use them when they are considering directory services for the Internet, on which there is currently no standard platform, says a Boston-based buy-side analyst. More customers need services that can operate across different platforms, a demand that Microsoft has, until lately, ignored. While Microsoft pushes its own Windows systems, Novell's strategy is to partner and work with other vendors to make its products work everywhere -- on any box or router manufactured by any company. That way, customers don't have to revamp their entire IT infrastructure to get connected.
By eschewing a single standard, Novell has the opportunity to make significant inroads in the directory services market, says the buy-side analyst. "The opportunity to get in on a company like that doesn't come along very often."
In the past two weeks, two Wall Street investment banks have upgraded Novell. On March 12,
Morgan Stanley Dean Witter
analyst Chuck Phillips raised his rating to outperform from neutral, and on March 17,
analyst Joe Bellace upgraded his long-term rating to buy from accumulate. Bellace left his near-term rating at accumulate. Neither firm has underwritten for Novell.
In his report to investors, Phillips pointed out that "Novell held a partners' summit last month, and it was standing room only. The company had to turn away potential attendees to this invitation-only event, which drew nearly 300 partners from across the country. Novell tried the same summit a year ago and couldn't get enough attendees to put on the event."
Steve Adelman, Novell's vice president of corporate development, stresses that partnerships are a key to the company's growth strategy. Unlike Microsoft, which promotes only its own products, Novell customers "say they want everything to work together," Adelman says. "We're not going to start building hardware and database, but we'll make sure our software works with their systems."
Interest in Novell is expected to continue to build at the company's annual
user conference, which began on Sunday and runs through Friday. A company spokesman says about 6,000 people have signed up to attend the conference, up sharply from about 4,500 last year.
Phillips also notes Novell's switch to a license model based on the number of users rather than servers has made Novell's NetWare software more easily and broadly deployed. Phillips says enterprise license agreements grew 54% last year, and more than 80% of that business was for deals over $100,000.
Merrill Lynch's Bellace expects Novell to announce next week an alliance with
and one other company for a fast-caching product that would improve network storage and bandwidth. Specialist companies like
currently have proprietary caching products, but these are more expensive.
As long as Microsoft remains a competitor, however, risk lurks for Novell investors. Microsoft's first crack at a product may not be great, but subsequent versions could easily pose a threat. Just ask
Despite that threat, the Boston-based buy-side analyst, who does not own Novell stock, says he is keeping an eye on the company. "I might wait a little while, just to make sure it's going to take the market, but once it looks headed that way, as an individual investor, I would take the gamble. The rewards could be huge."