In the wake of continued losses, Novell has made it clear that its attempt to shape a new guise as an Internet supplier will be as dependent on an overhaul of its channels strategy as its more high profile redundancy programme.
Last week the troubled networking software supplier reported losses of $14.6 million on revenues of $273.1 million for its second quarter ended 30 April 1997. That was an improvement on comparable figures for the same period last year of $55.3 million losses on $188.2 million, but sequentally revenues were down from $375 million reported in the first quarter.
Disappointing returns from two of the company?s most established distribution channels - which between them account for 54 epr cent of total revenues - were cited as one of the primary reasons for this shortfall. So while public attention has been most focused on the bloodletting that is about to take place on the Novell payroll, many eyes internally are on the proposed changes to the channel strategy.
It was the middle of April when Novell first started detecting signs of lower than expected sell-through from the channel, but those reports only arrived officially within the company in May. This led to an immediate reappraisal of the shipment mix in terms of packaged products versus licensing, the latter of which is booming, up 50 per cent on last year.
The expectation now is that direct licensing will continue to be a major growth area and that it is important to get "ahead of the curve", so that this ceases to be an issue in future quarters. The two main areas of weakness have been identified as sales of boxed software products to distributors and lower licence revenue from some of the older products sold though OEMs.
Shipments of boxed software products into the channel declined by approximately $82 million to $109 million compared to the previous quarter. According to the company, this is indicative of two factors - reductions in the box product sell-through by distributors, and lower sell-in by Novell, in order to bring channel box inventory down to reflect the decline in sell-through OEM returns. These declined by $18 million sequentially, to $40 million, in the second quarter.
According to new Novell boss Eric Schmidt, action is being taken to address these problems, but it will mean further short term pain for the company. "We intend to reduce product inventories in our distribution channels in the third quarter," he said, in a statement following the release of the results. "Current levels of product inventories are no longer appropriate as Novell's business continues to experience competitive pressures and to shift from a high reliance on boxed software distribution to a changing mix of boxed products and multi-product licences."
What this means in practice is that no additional products will be shipped to distributors in the third quarter, which will reduce revenue and almost certainly contribute to a third quarter loss, but should clear the channel of any blockage. Novell says it will not abandon the channels? needs however and will "assist resellers to meet customer needs by appropriately matching existing inventory in the channel to specific product demand around the globe".
When questioned during a post-results conference call, it became clear that Novell had been taken by surprise by the degree to which the company has had to struggle with the inventory sell-through issues. Whatever exclusivity Novell once enjoyed in certain channels is now accepted to be gone, as most distributors now offer competitive products alongside.
Schmidt said he remains aware that marketing has to be improved in order to make it easier to compete against the likes of Microsoft, but added that he now feels the company is going as fast as it can in this area. The goal for the moment is to "touch every customer" by focusing on the established user base with the new Internet-centric positioning.
Novell bosses last week tried to play up the positive aspects of the results, arguing that the company is in the middle of a transition period similar to that which it went through in the mid-1980s. On that occasion it went from being hardware-centric to operating systems-centric. This time the traditional business model is giving way to one based on the still relatively unknown values of the Internet.
The company still aims to be seen primarily as an Internet supplier within a short timescale and cites research by IDC as proof that it is well on its way. The IDC study asked corporate customers which are the most important Internet companies. Novell did pretty well, tying for third with its Novonyx spin-off partner Netscape - but still behind that troublesome Microsoft marketing machine.
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