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Novell's Uphill Comeback Trail: Page 8 of 11

STRONG FINANCIALS, REVOLVING DOOR

Financially, Novell is in good shape for a comeback. Its first quarter 2005 earnings were $290 million, with most of that coming from NetWare maintenance and services, $15 million coming from the SUSE Linux business it acquired, and less than one-fifth coming from new software licenses. Revenue was an increase from the $267 million of the first quarter of 2004. The company's financial foundation is solid, with $2.6 billion in assets, $772 million of it in cash. The sustainability of this level of revenue is doubtful, given that NetWare services revenue is bound to decline as more customers gravitate away from it toward Windows or Linux.

Assuming it can maintain its financial stability, two management questions remain for Novell: First, why are so many of its top executives leaving? And second, is Novell overextending itself with too many projects?

The departure of top executives just when the company is starting to see results is mysterious. Some of those who have left include Vice Chairman Chris Stone and CTO Alan Nugent, who helped forge Novell's Linux strategy. (Both started new jobs in April--Stone became president and CEO of business communications software company StreamServe, and Nugent was made general manager and senior vice president of Computer Associates' Unicenter business unit.) Novell's explanation is that the executives received appealing offers from other companies and insists that no individual is so vital that his or her loss would prevent the company from executing its strategy. But the exodus can't be reassuring for investors or customers. Novell is looking to fill these slots, particularly the CTO position, and the sooner it can accomplish this the better.

The overextension issue has to do with whether Novell is spreading its engineering talent too thin. In addition to porting NetWare services over to the Linux platform, the company is also dividing its engineering efforts among numerous application projects higher up the stack. If revenue from NetWare servicing declines and Novell sticks with the software industry's typical R&D investment of about 17 percent of revenue, the R&D budget will inevitably suffer and developers will get laid off. However, Novell is a large company with about 6,000 employees, and the beauty of open source is that developers from other companies and the open-source community at large also contribute, so Novell doesn't have to devote too many engineers to any one project. For instance, Novell has 20 of its own developers working on the Mono project, but the overall number of contributing developers is 400, affording the company a good ROI in time and labor. So far, 60 applications have been written using Mono.