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Goldman Tech Conference: Understanding Novell's Rebirth

The stock has more than doubled in recent months as its directory-services effort expands.

Expect a clash of PC-based old tech and Internet-based new tech when the five-day

Goldman Sachs Technology Investment Symposium

opens Monday in Palm Springs, Calif. And no company will be trying harder to fit in with the new tech crowd than




Hidden among the high-profile presenters from the likes of




Commerce One


is this Provo, Utah-based network software maker, which was written off for dead back in 1997 when it reported a 27% drop in revenue. Back then, it was one of many companies that just didn't get the new world order.

But over the last year, money managers and analysts have been taking long looks at the company led by ex-

Sun Microsystems

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star Eric Schmidt. While investors aren't quite convinced that Novell is an ideal short-range investment -- note its spike to 42 before quickly retreating to 30 over the last month -- the Street is starting to warm up to Novell's long-term vision of installing directory-enabled appliances to simplify company networks.

The B2B Angle

"It's the most underpriced B2B company out there," says Paul Schupf, who runs a New York-based money management firm and is one of Novell's largest shareholders. "When Schmidt came in he was left with a demoralized sales force and $1 billion in cash. Now Schmidt, who understands networking better than anyone, finally has the products to make Novell a first-class company."

"The beauty of the company is that it finally has a significant long-term opportunity with its

Novell Directory Services

product," adds Steve Shapich, an analyst at

Olde Discount

. "The only place they have been lacking is marketing." His firm has an accumulate rating on Novell and has done no company underwriting.

Novell's stock price has risen along with investor interest, doubling since last November. Novell is now trading at 49 times this year's earnings, but that's still below


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P/E of 62.

Novell's NDS, which enables businesses to manage their networks at one central location, has been receiving a lot of support of late.

America Online



Red Hat


, and

British Telecom


have all expressed their support for NDS. "Ninety percent of Novell's revenue is NDS-centric," says Joel Achramowicz, software analyst with

Preferred Capital Markets

. "What used to be a network OS company is now a directory-driven appliance company."

Lethal Injection

What also has investors is the company's improved execution. Novell's earnings growth rate topped out at 79% in its last fiscal year ending in October 1999. This year, analysts expect earnings to rise 47% with year-over-year revenue growth of 22% to $1.5 billion. Analysts expect Novell to report first-quarter earnings of 13 cents a share when it reports, scheduled for Feb. 17. Novell officials are in a quiet period until then and were unavailable for comment, according to a spokeswoman.

One of the reasons for Novell's recent retreat is investor concern over the recent launch of Microsoft's

Windows 2000

, which houses its own directory product,

Active Directory

. Novell fans are concerned, but believe Novell's NDS and its forthcoming


are superior to anything coming out of Redmond.

"Novell realizes the Internet is not platform-specific -- NDS is scalable and runs on Sun's Solaris, Linux and Unix," says Schupf. "Microsoft's product only runs on Windows, and that's the genius of what Sun and Novell are doing."

One Big Number

Novell hasn't yet won over the Street, say analysts, because it has failed to post that one big quarter that makes investors sit up and take notice. It has only managed to meet or barely beat analysts' earnings expectations thus far. "I think its stock is going to stay in the 30s until it has that blowout quarter," says Shepich.

Schupf says he's not concerned. "Novell isn't a quarter-to-quarter story, it's a long-term bet that Schmidt will make Novell a winner," says Schupf, who sees Novell becoming a key player in network storage. So does George Gilder, the influential tech futurist who put Novell on his newsletter's

Telecosm Technologies

list last month. "Sun, Novell and an ever-expanding array of companies that enable direct access to network storage will play an increasing role in the new paradigm," he wrote.

"This is a variant-perception type of stock," sums up Schupf. "That is when you understand something that the Street doesn't." For Novell's growing number of investors, the company's rebirth is becoming more and more understandable every day.

Novell's Schmidt is scheduled to present Thursday at Goldman's conference, which runs from Feb. 7 to 11. Schmidt will also be that evening's keynote speaker. will provide continuing coverage of the conference.