There's No Looking Back For Eric Schmidt

He knew Novell was hurting when he left Sun, but...

You've got to admire Eric Schmidt's pluck. When he quit his job as chief technologist of red-hot Sun Microsystems Inc. in March to become chief executive of troubled Novell Inc., reactions ranged from surprise to bafflement. Even his old boss, Sun CEO Scott G. McNealy, remains bemused. "I never understood why he left the best job on the planet," McNealy says.

Especially for what may be one of the hardest jobs in computerdom. Novell once virtually owned the market for the software that runs corporate networks. By the time Schmidt came on board, its share had dwindled to 57%, from 70% in 1993, and archrival Microsoft Corp. was poised to grab the No. 1 spot for new sales with Windows NT. The cause of Novell's woes: a bitter brew of aging technology, ill-advised acquisitions, and management turmoil. Worst of all, the company was a virtual no-show on the biggest network of them all, the Internet.

Schmidt, 42, appears to be just what the doctor ordered. In his 14 years at Sun, he ran product development and operating divisions and earned a reputation as a techno-visionary. In recent years, he was Sun's apostle of Java, the company's pioneering software for creating "applets," or tiny programs, that can be zapped across the Net. His arrival lent Novell some much needed cachet. Wall Street applauded Schmidt's appointment, driving up Novell shares 22% within a few days, to around 10, though the stock has since fallen to 8 1/2.

Now, it's time to deliver. Four months into the job, Schmidt is steering the company, which splits its operations between San Jose, Calif., and Provo, Utah, firmly back to its roots as a supplier of basic network software. At the same time, he's weaning Novell from dependence on its core NetWare operating system and getting the company into the Internet game--fast. On Aug. 25, Novell will ship a new software package called Border Manager that connects NetWare networks to the Net. "This is just the kind of thing they need to be doing," says Jon Oltsik, an analyst at Forrester Research Inc.

But the huzzahs may not drown out more bad news on the financial front. Novell's revenue has been in decline since 1995, and two of the past five quarters were money-losers. On Aug. 21, the company is expected to report a third-quarter loss that could be its biggest ever: around $56 million, vs. profits of $59 million a year ago. Revenue is expected to plunge 47% from a year ago, to $193 million, says analyst Sanjiv G. Hingorani of Furman Selz.

Schmidt has made no secret of the expected shortfall. Indeed, it's part of his plan to put Novell back on track. He has laid off 18% of the workforce, halted NetWare shipments to resellers--whose unsold inventories climbed alarmingly in the second quarter--and is expected to take hefty write-downs. "We're calling it the kitchen-sink quarter," says Schmidt. Still, the extent of Novell's problems surprised him. "I took the job on the presumption that we would not have to do this," Schmidt says. "If I'd known what shape the company was in, I might not have taken it."

PRAGMATIC. Is the worst over? Schmidt thinks so, and Wall Street is cautiously optimistic. Furman Selz projects that revenue will bounce back to $325 million in the fourth quarter. That's still 15% below last year's level but enough to produce a $50 million profit for the quarter--and push Novell into the black for the year. Analysts expect profit of about $48 million for 1997, vs. $126 million in 1996. For 1998, the picture is even brighter: Wasserstein Perella & Co. analyst Stephen C. Dube says revenue could hit $1.5 billion, near Novell's 1995 peak of $1.63 billion (excluding sales from businesses it has sold).

The engine for growth will be new products. In early 1998, Novell will ship a new version of NetWare, code-named Moab, that builds on the Net's basic standards and will work with Sun's Java software. More important, this fall the company will ship the first products that don't depend exclusively on NetWare. Among them is a new version of Novell's NetWare Directory Services, sophisticated software that simplifies the job of managing networks running not just NetWare but also Unix and Microsoft's Windows NT operating systems.

That's a refreshingly pragmatic approach for a company that badly stumbled trying to compete head-on with Microsoft. In 1993, Novell was flying high under founder Raymond Noorda until he became obsessed with beating Microsoft. Noorda spent $350 million to snap up Unix from AT&T in June, 1993. Then in March, 1994, came the $855 million acquisition of Utah neighbor WordPerfect Corp., which made the best-selling word-processing package of the same name. A month after acquiring WordPerfect, Noorda stepped aside, and Novell hired Robert J. Frankenberg, a former Hewlett-Packard Co. exec, as CEO. Frankenberg's 30-month tenure was spent downsizing Novell and divesting the acquired properties--giving rivals a jump on the Net.

Now, Schmidt says he will "focus, focus, focus" on networking. The linchpin of his comeback plan is the directory technology that is built into Novell's NetWare 4 software (recently rechristened IntranetWare). Think of the directory as a master list of all the people authorized to use a network and its attached devices. Employees have to sign in only once to access printers, programs, and data, and network managers need to maintain only one central list. Without a directory, moving someone even from one part of a building to another can require updating dozens of different files.

WELCOME BUFFER. With the spread of the Net, directory technology is more critical than ever--and Novell has a big lead. The directory, says Hingorani, is Novell's "greatest strategic asset." Schmidt plans to make the most of that asset. The NT version, due this fall, is a first step. And Border Manager is just the first of a series of big-ticket software packages that will build on the directory technology. The software, priced from $2,500 for a five-user starter kit to $77,000 for 5,000 users, acts as a buffer between a corporate network and the public Internet--handling security, filtering incoming content from the Web, and other tasks that previously required a hodgepodge of products. "This will keep a lot of customers in the fold," says Doyle N. Friskney, networking director for the University of Kentucky at Lexington.

There's just one snag: Microsoft is hard at work on its own technology, called Active Directory, which will be included in the next release of Windows NT in 1998. And NT is coming on strong. In 1998, NT sales are expected to top NetWare's for the first time, according to Dataquest Inc. If you strip out upgrade business, NT already claims 42% of new server sales vs. 33% for NetWare.

By his one-year anniversary as CEO, Schmidt hopes to transform Novell into "a 100% pure-play Internet and intranet company." Novell may have been late to the Net, but he figures it can provide the software platform for a new generation of network computing applications written in Sun's Java--and leapfrog Microsoft's NT. Analysts are skeptical: So far, there are few business applications written in Java, and such programs won't necessarily run well on NetWare. That could be bad news for the former Java guru. But Schmidt is learning how to make the best of bad news.

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