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Novell struggles with a tough tech turnaround strategy
(Boston Globe, The (KRT) Via Thomson Dialog NewsEdge) May 16--Novell Inc. shareholders haven't had much to cheer about lately.
In the 1990s, the company was a leader in computer networking products that enabled desktop personal computers to communicate and share information. But in recent years, Novell, which also makes Internet security and identity software, has been trying to move from its own proprietary systems -- marketed under the NetWare brand -- to Linux, an open-source software platform. Linux has become increasingly popular among business, government, and institutional information technology executives who don't like being tied into one company's products.
It's a turnaround that is still a work in progress. Novell closed the year at the top of a Globe 100 list no company wants to be on: It had the biggest profit-to-loss nosedive of any Massachusetts company. It swung to a $16.5 million loss last year from a $414.1 million net profit in 2004. For the first quarter of this year, Novell just broke even on sagging sales, with income from its legacy NetWare products plummeting 73 percent from a year earlier.
Industry analysts say that to the extent IT managers are still aware of Novell, few are putting the company at the top of their prospective vendor lists. And Novell faces a fierce and successful nemesis in Red Hat Inc. of Raleigh, N.C., which has been landing big customers for Linux-based computer systems.
"Novell is losing revenue faster on NetWare than they're gaining it on Linux," said Rob Enderle of the Enderle Group, a San Jose, Calif., technology-research firm. "The transition has been doing a lot of damage to Novell's revenues."
Enderle faults Novell for largely abandoning its existing NetWare customers while trying to push into a Linux future, and failing to listen to its NetWare customers and learn what they really want. "They need to figure out which direction to go in," he said. "It should be where their customers want them to go. Their brand isn't terminally damaged yet, and they have a good service organization that can be leveraged."
Bruce Lowry, a Novell spokesman, rejected trade-press speculation that Novell has lost relevance. He said the issue is now how well Novell can execute its plan.
"The bottom line is we're making progress," said Lowry. "The new products are growing faster than the legacy business is shrinking. People seem to think our revenue is in free fall, and it's just not true."
More importantly, the company had $1.7 billion in cash and liquid investments in January. That puts Novell in a strong position to buy another company to improve its strategic direction.
Novell was based in Provo, Utah, for years. It only became officially a Waltham company after a series of Massachusetts acquisitions left it with a management team based here. The firm has about 5,200 employees worldwide, with about 1,800 in Utah and about 50 in Waltham.
Novell has long been a familiar name for local tech watchers. In 1990 it announced a $1.5 billion merger with Lotus Inc., the Cambridge software company best known for its 1-2-3 spreadsheet product. The combined companies would have been larger than Microsoft Corp. at the time. But the deal collapsed in a squabble over how many board seats each company would get. In 1995, IBM Corp. swooped in and bought Lotus for $3.5 billion.
At the other end of the spectrum from Novell, Marlborough pharmaceuticals manufacturer Sepracor Inc. posted the best swing from red ink to black. After losing $295.7 million in 2004, Sepracor had a 2005 net profit of $5 million.
Notably, a sleeping pill had a lot to do with bringing Sepracor's earnings to life: Lunesta, a new treatment for chronic insomnia. Booming sales of Lunesta and asthma treatments such as Xopenex helped Sepracor more than double its total revenues last year, to $820.9 million, and achieve its first full-year profits since its 1984 founding.
But late last month, Sepracor shares suffered their worst one-day setback in 2 1/2 years when the company disclosed that the prior three months' sales of Lunesta -- while still growing -- fell nearly $7 million short of the $145 million estimated by investment firm Stanford Group of Boca Raton, Fla.
Analysts also worry about stiff competition for Lunesta, which has been heavily advertised in television and print-media ads featuring a cartoon butterfly -- representing insomnia-inducing anxieties -- soaring off as an actress sleeps peacefully. With Pfizer set to add its own sleep sedative to the already crowded market for the drugs, "it is going to take more than the Luna moth flapping across prime-time television to drive patient adoption," A. G. Edwards stock analyst Aaron Reames said in a recent research report.
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