FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Novell Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: NOVL)") else Response.Write("(NASDAQ: NOVL)") end if %>
1555 North Technology Way
Orem, UT 84057
(801) 222-6000
http://www.novell.com

UNION CITY, Ca., December 1, 1996/FOOLWIRE/ --- Novell reported fourth quarter 1996 results last week. The company reported earnings per share of $0.17 and revenue of $384 million in the fourth quarter. Earnings per share for the year was $0.35 and revenue was $1.375 billion.

NOVELL HAS FOUR PRIORITIES -- first to increase revenue growth, second to become more competitive, third to remain profitable, and fourth to increase shareholder value. They have made choices and are making choices now to rapidly and effectively achieve these priorities. They think it is fair to say that however hard it has been, what they have accomplished in 1996 represents progress. They think they need to build from here and build around the difference that is being made by Joe Marengi and his providing leadership for the organization, by the new Internet orientation of their resources and products, and by recognizing that in the future the company will be more important to the way their customers network Microsoft products than they are today. For the record, Novell Networks, as they have for the last 10 years, account for more than 70% of those Microsoft clients and applications that get networked, whether in California, in Europe, or in Asia.

FINANCIAL PERFORMANCE IN 1996. They kept the underlying financial model of the company sound in 1996, even with the hard action to turn Novell around. In Q4 this year revenue was almost $100 million less than they posted in Q4 last year. Yet the $59 million of net income in this year's Q4 is slightly greater than last year's. With sequential revenue growth going forward, the Novell financial model will generate cash and earnings as a successful software company should. They finished 1996 with $1 billion of cash and no debt even though they spent approximately $450 million during the year to repurchase 33 million shares of stock.

GOALS OF NOVELL'S BOARD. Profitable revenue growth, the clearest indicator of vitality in any business, is the board's number one priority. The board sees four requirements to continue the turnaround and deliver sustainable revenue growth at Novell. First, they need to complete implementing internal changes that move Novell to a culture of urgency as responding to customers and clearly defining value to network solutions. Since they already make existing products to customer needs in the Internet and intranets, it is developing new categories of Internet and intranet-related products and it is investing selectively in services and technologies that can effectively extend the company's business as a provider of network software. Overall the board is confident about Novell's future. They expect to complete this turnaround with Novell stronger and more competitive. Despite speculations to the contrary, the board believes Novell can most rapidly deliver its greatest value to shareholders, customers and partners around the world by going forward as an independent entity.

STILL LOOKING FOR CEO. In early September the board set out to identify candidates to be the new CEO for Novell. It is obviously an important decision that needs to be made carefully. They are reviewing and identifying candidates but it is a process that involves both the board and Joe Marengi as President of the company. They said in September that this choice could take as long as 4-6 months to make and that remains their best estimate.

WHERE THEY WENT WRONG AND WHAT THEY DID ABOUT IT. In 1993 Novell was so focused on Microsoft as a strategy that the company lost its way, diluted its core business and wound up de-focusing the entire company. Today, they feel they are demonstrating that they have learned from the hard knocks they have taken to the market shifts brought on by the commercialization of the Internet and from their own accomplishments in their core business. Since the Fall of 1995, they have understood the choices they had to make and they have been making them.

INTERNET FOCUS. They are using the Internet to help them introduce new categories of products that clearly re-establish Novell's leadership in networks and expand their world in the overall market for network solutions. They will do more and more of what Novell has always done better than anyone else -- delivering network software to customers deployed among a gamut of different computers and service types and across geographical boundaries as reliable, fast, secure, and manageable distributed network solutions. In addition, there will be a profound change in how they deliver value through these network solutions.

PRODUCT STRATEGY. They expect to lead in new categories of the Internet that they define. They are positioning Novell's Network Directory Services as the directory standard for the Internet and business intranets. They are currently taking steps with others in the industry to spur massive adoptions of NDS. The Internet is helping Novell by changing customer's expectations of the networks. Competitive realities obviate the need for isolated public and private networks. The need has moved to the connections required for business intranets and the Internet.

STATUS ON CORPORATE CHANGES. To the outside world, they have worked to clarify Novell's strategy, accelerate the pace of their ongoing business, and deliver revenue growth from an increasing number of network solutions. Third quarter was the financial baseline for how they go forward as a company. Inside Novell, their focus has been on creating a single unified company. The fourth quarter is the baseline for this changed attitude, the changed mindset, and how they go forward as a business. Although viewed as overdue, their current position reflects real accomplishments over the past year. Their success will ultimately be measured by eliminating the doubt about Novell's future. There is no single step that will accomplish that, but a series of actions will, beginning now with their Q4 financial results, their introduction of Internet products in Q4, the market's response to these products, the efforts they are taking to drive broad adoption of NDS, the new categories of products they will add this year, and their performance in 1997.

FLATTENED MANAGEMENT STRUCTURE. First they flattened the management organization to streamline decision making. The Novell Product Group that included 11 product divisions has been reorganized into two groups -- current products and future products. The Internet Products Group is responsible for developing and marketing current revenue products. The Internet Strategies Group is focused on future revenue as well as the overall product business strategy. Success will be judged by the entire organization's performance rather than at the division level, which helps them present one face to the world -- something they haven't been doing very well. Novell has long been recognized as having the best networking software talent in the world. That talent is growing stronger and so are the challenges they face.

MORE PRODUCT UPDATES AND REVISIONS. The second thing they are doing is responding to customers by doing more product revs in a a shorter period of time. They are moving to quarterly product updates called support backs instead of delivering major product releases every 18-24 months. For example, regular revisions to the server operating environment will come every 9-12 months and applications such as GroupWise will be revised much more frequently. In addition, customers will have access to product at earlier stages. Early access release CDs with pre-alpha, alpha, and beta products are now going to customers quarterly as well as being posted on the Internet. The September release included Java support in IntraNetware, ATM LAN emulation, and Novell replication services for automated file and directory replication between servers. In December, the early access release will include major new server caching technology due in mid-97, Java capabilities on IntraNetware, NDS on NT, the new IntraNetware small network products, and the next release of GroupWise due in their second fiscal quarter.

CHANNELS -- PROVIDING SOLUTIONS FOR CHANNELS TO SELL. Their channel will also see a change. The early access release makes Novell a better partner for resellers and systems integrators that resell their products. Most important to the channel are the changed product configurations which better package network technology as network solutions. IntraNetware is an example. One of IntranetWare's chief jobs is to help their channel expand their business by upgrading their NetWare customers. The new product due in January. It will be remote management ready which enables their resellers to remotely monitor and manage the small networks they sell. In early access right now they have IntraNetware as a plug-and-play intranet right now. There is no firewall included in it. People can use third party firewalls to complete the solution. Novell's firewall is in early access right now and is available for people to look at.

MARKETING CHANGES. The third area they are changing is in their marketing efforts. In Q4 they spent approximatley $20 million on their product launches and advertising. For too long they hadn't clearly asserted the value of their products or solutions in an increasingly competitive marketplace. So this is a fair start and will continue with increased visibility in 1997. Regarding their advertising, they told their agency that they want to see a strong emotional connection with their customers in messages targeted to different network market segments.

THE FOURTH QUARTER. As they mentioned, taking Q3 1996 as a financial baseline for their going-forward business, the $384 million in Q4 revenue represents $19 million or 5% sequential revenue growth. Their goal is to place profitable revenue growth throughout fiscal 1997 based on their position in today's markets, the strength of the products they brought to market in Q4, and their plans for product introductions in 1997. They don't anticipate spikes in this revenue flow. They are well positioned to achieve year over year growth in revenue and significant earnings improvement in 1997. A driving factor in the fourth quarter was the new versions of each of their product brands. Their new capabilities that Novell can make their intranets possible today. These products included ManageWise, GroupWise 5, and IntraNetware which included NetWare 4.11.

THE MANAGEWISE PRODUCT. ManageWise, which already integrates with Sun NetManager, IBM NetView, and HP OpenView, now manages Microsoft NT servers as well as their own. They are also in discussions with Computer Associates for integration with CA UniCenter. ManageWise is already the number one PC management software product as a leading product for remote management over the Internet.

GROUPWISE 5 PRODUCT. GroupWise 5 added document management and full Internet Web access. There is a fully enabled NDS application as well. The NDS network directory is the GroupWise directory. This puts Novell in the lead in providing the product breadth and messaging services that intranets require. With GroupWise 5, they become the only vendor providing Internet based mail, workflow, calendaring and scheduling, with document management capabilities. GroupWise 5 has won 3 major awards since becoming available in late October. Just last week at Comdex, GroupWise 5 won PC World's prestigious Most Valuable Product Award in the Email and Collaboration categories. Worldwide, email and messaging capabilities are the most valuable network applications to their customers. As customers have evaluated competitive offerings, they are continuing to see the pace of GroupWise adoption increase. They are currently more than 7 million GroupWise users and they anticipate that will grow to more than 8 million at the end of their first fiscal quarter. The scope of these new adoptions range from the largest healthcare provider in Maryland to one of the most significant providers of advanced technology products for automotive and aerospace, TRW, to one of the largest providers of energy service in the US, the Williams Companies. They have moved ahead and plan to stay ahead of the generational changes in Notes and Exchange. The GroupWise development cycle will have them revving the product every 6 months or sooner.

INTRANETWARE PRODUCT. The third product brand delivered in Q4, IntraNetware, marks the evolution of NetWare from being just a server operating system to a platform for mission-critical intranets. The offering enables Novell's customers to evolve from NetWare LANs to intranets. In IntraNetWare they have taken NetWare 4, the more traditional network operating system product, and enhanced it to meet the requirements of intranets. With the purchase of IntraNetWare, Novell customers gain a Web server, Netscape browser licenses for every client supported by the server, Intranet and Web connectivity with a developer's suite for Java applications. It is very much to Novell's advantage that the universal browser is rapidly becoming the universal network client. Sun's Java technology is also an important change. Java has led customers to anticipate that platform independence, operating system independent applications, and other network resources will populate their networks as they move to intranets. IntraNetWare with NDS adds the ability to host Java applications and the cross-platform services they will bring to market provide the perfect platform for this environment. For Novell customers, IntraNetware will rapidly transition their existing networks to intranets without having to change system architectures or retrain personnel. This is all being extremely well received by both customers and channel as evidenced by how effectively products sell through the channels to their end users. Their October demand was strong and is continuing in November.

MAKING NDS THE DE FACTO STANDARD. Two weeks ago they detailed their strategy to establish NDS as the de facto industry directory standard for the Internet and intranets with Sun, who made the first of many partner announcements to come as they implement their plans. Novell is giving away single server NDS directory capabilities. This works for Novell's business because the real value of the directory is across the network. Beginning in 1997, Novell will sell the value-added software necessary to make the directory valuable between different servers on a network. In NDS they have technology available for the market today that nobody else has. This work they began some two years ago with what was then AT&T Bell Labs, will be incorporated in NDS throughout 1997. It will provide users from business customers to ISPs a scalable solution. They will be able to control access by others to their network directory. With the explosion of content and companies willing to share this information with each other and with their customers and suppliers, a common directory is essential. This explosion of information greatly increases the need for network security and manageability. The secure managed interconnections between business intranets is a core focus for Novell. NDS provides a market foundation for Novell to sell value added cross-platform services that layer on top of it, that take advantage of it as a universal network directory. They see broad adoption of Novell's directory as a key factor in Novell's longer term revenue growth objectives. Beyond the 17 million NDS user base that is already in place, Novell will continue to get to this market sector, they are aggressively working to make NDS the universal standard. Since 1994, they have been establishing NDS within public data networks with partners such as AT&T, NTT, Deutsche Telekom and others.

INTERNET STRATEGY. Novell sells the software that makes the directory valuable. The first of the value-added layer services for NDS will be the scale pack for directory and file replication, synchronization, and distributed management between all leading servers -- UNIX, NT and IntraNetware. It's due during the first half of fiscal 1997. Additional services will be brought to market over time including advanced print, messaging management, and cryptography products among others. They anticipate that typical network service products will vary in list price between $10 and $30 per user. NDS means they can do something that no other vendor can -- establish a fully commercialized dramatically scalable directory of directories for business and public networks. They also believe that IntraNetware will continue to capture about 50% of the growing server market and deliver higher performing network solutions for intranets and the Internet. They think they are well positioned to build off of Novell's lead in directory technology and network products in use around the world. It is one of the ways they take Novell forward in a customer-driven Internet marketplace.

REVENUES BY GEOGRAPHY. Their third quarter revenue was $384 million, up 5% sequentially or 20% on an annualized basis. On a geographic basis, the US revenue totalled approximately $200 million in the fourth quarter which compares to $189 million in the third quarter, up 6% sequentially. Revenue outside the US contributed $184 million in the fourth quarter and include $119 million from Europe, the Middle East and Africa; $36 million from the Asia/Pacific region; and $19 million from Canada and the Americas. That brought international revenue up 5% sequentially. Within the international region, they saw solid growth in Europe, the Middle East and Africa, and in the Americas. However, revenue in their Asia/Pacific region declined by $8 million due to their continued weakness in the single country of Japan.

REVENUES BY PRODUCT CATEGORY. Breaking revenue down by product categories, the total server operating environments grew to $247 million, up $32 million or 15% sequentially from Q3. This included a $50 million, or 38% increase in IntraNetware and NetWare 4 category to $181 million. This was offset by a $17 million decline in their NetWare 3 category to $66 million. Revenue from network services and applications totalled $91 million and compared with $92 million in Q3. Within this category, GroupWise and ManageWise continued strong. GroupWise at $31 million, was up 24% and ManageWise at $20 million was up 18%. Although they did see offsetting declines from NetWare for SAA host connectivity software, LAN workplace and other network infrastructure products. Revenue from all network software, the sum of the above two major categories, totalled $339 million in the quarter, up 10% sequentially from the third quarter. The remaining revenue from education, service, UNIX and other totalled $45 million in the fourth quarter compared with $58 million in Q3. This decline was primarily due, as anticipated, from declines in the UNIX SVRX royalties.

REVENUES BY CHANNEL. On a channel basis, revenue from corporate, OEM and channel licensing programs increased by 7% sequentially to $152 million, now accounting for 40% of total revenue. This contribution reflects particularly strong acceptance of Novell Directory Service in the large network enterprise and the lay segment.

MARGINS, TAX RATE, NET INCOME. Gross margin increased to 82% from 79% in the third quarter primarily based on the strength and product mix and the continued shift to licensed program revenues. Operating expenses were up $29 million or 13% from the third quarter, primarily due to advertising and trade show expenses associated with their significant new product introductions. Their tax rate for the quarter was 29%, bringing their effective tax rate for the year to 30%. This slight change had a minimal impact, less than $1 million on the quarter's results and resulted from the third quarter federal tax extension of the R&D credit. Net income for the fourth quarter at $59 million was 15% of revenue and earnings per share at $0.17 per share.

SHARE REPURCHASE. During FY 1996 they spent approximately $450 million repurchasing 33 million shares in open market transactions.

BALANCE SHEET HIGHLIGHTS. On the balance sheet, cash and short term investments ended the quarter at over $1 billion, which was down $300 million from year end 1995 primarily due to the share repurchase program. However it is worth pointing out that it was up over $30 million compared with the end of Q3 this year. Accounts receivable, although down $18 million from year end 1995, increased $51 million from their third quarter end, principally due to the significant shipments of the introduction of GroupWise 5 and IntraNetware very late in the quarter. They estimate that the channel inventory today has been held constant within the range established after their Q2 channel inventory reduction.

SUMMARY. Overall Novell ended FY 1996 on a strong note. They took a full 2 weeks out of their worldwide year end financial close process indicative of the culture of urgency in place now at Novell. They delivered solid earnings and sequential revenue growth. They introduced new Internet and intranet products on time that are being met with strong market demand. Additionally they took steps to build revenue from value added network services and continue to make those internal changes necessary to strengthen their competitive position. These actions give them reason for optimism about their future. Their outlook for the first fiscal quarter of 1997 is for sequential growth in both revenue and earnings.

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