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 (February 28, 1997)/FOOLWIRE/ --- Novell Corporation reported first quarter 1997 results after the market close on Wednesday. The company reported earnings per share of $0.15 ($0.03 per share below analyst estimates of $0.18) on revenue of $375 million, which was slightly below Novell's expectation for sequential growth, but above the foundation that they have been building since the third quarter of 1996.

REVENUE BY GEOGRAPHY. Breaking revenue out on a geographic basis, US revenue totalled $203 million compared with $200 million in the fourth quarter of 1996 and the reported $220 million a year ago (remember, however, that in the year-ago quarter, US revenue included $51 million of the $61 million of revenue from one-time items and businesses they have subsequently sold). Revenue outside the US contributed $172 million this quarter and included $107 million from their EMEA (Europe, Middle East, and Africa) region, $42 million from their Asia/Pacific region which includes Japan, and $23 million from Canada and the Americas. On a comparative basis with fourth quarter 1996 they saw a 2% growth in the US and 24% growth in the Americas, offset by the weaknesses in Europe and Japan. From the prior quarter, their Europe region declined $12 million and Japan declined $5 million, approximately half of which was from exchange rate declines. They have strengthened their management team in Japan and expect to see a different picture there a year from now.

REVENUE BY PRODUCT CATEGORY. Breaking the revenue out by product categories, they had total server operating environments contributing $251 million, which was up 10% from the first quarter of 1996 and up 2% from the fourth quarter. Of this total, their directory-enabled platforms totalled $185 million, which was up 41% year-over-year and 3% sequentially (virtually all of that was from IntraNetware as they transitioned the Netware brand and incorporated the NetWare 4 technology in IntraNetware). They are now seeing IntraNetware revenue outpace NetWare 4 shipments as this technology accelerates and Netware 3 declines have levelled off. They do not expect their new IntraNetware for Small Business solutions to significantly erode NetWare 3 revenue since the new product targets the low end of the market with 25 users or less while their NetWare 3 product also addresses the midrange and low-cost 50-250 user network market.

NETWORK SERVICES REVENUE. Revenue from network services which includes GroupWare and management applications totalled $81 million in their first quarter compared to $94 million a year ago and $91 million in the fourth quarter. In the current quarter, GroupWise contributed $28 million which is up 34% year over year, although down slightly from the fourth quarter when the new release of GroupWise 5 shipped. ManageWise totalled $17 million in the current quarter compared to $18 million a year ago and $20 million in the fourth quarter. A new release of the ManageWise product is expected out in Q2. Overall, in this category of network services, the year-over-year strong growth in GroupWise was offset by the declines in their older LAN Workplace and SAA product.

REVENUE BY TYPE. Revenue from all network software totalled $332 million in the quarter which was up 3% from the year-earlier period. Revenue from UNIX licenses was $10 million in the quarter and services, education, and other revenue totalled $33 million, both of these approximately equal to their prior quarter. Their corporate, channel, and OEM licensing programs continued strong and grew 42% from the year-earlier quarter and accounted for $150 million of their software revenue or 40% of that revenue this quarter, primarily on the strength of their directory-enabled network solutions.

GROSS MARGINS. Gross margins in the quarter decreased slightly to 80% from 83% in the fourth quarter. That change is due primarily to royalties they pay to IBM for their NetWare for SAA product line which they help market and support. They scrapped some returned down-rev products due to the significant product introductions in the prior quarter and a slight increase in their service and support costs, though well within the gross margins they have been experiencing over the last year.

OPERATING EXPENSES. Total operating expenses declined $11 million from their fourth quarter. Sales and marketing expenditures decreased $15 million sequentially which reflects the decrease in advertising during their November and December order holiday season as well as fewer trade shows and fewer new product launches in Q1. Now in their second quarter, they have resumed normal advertising with rollouts of their new "rock the net" advertising campaign and a new major key account marketing program called "Unleash the intranet hidden in your Netware." Product development expenses were $72 million in the quarter, up 1.7% from the fourth quarter, principally to support their expanding network services software business. General and administrative expenses totalled $38 million, approximately even with both fourth quarter and year-ago levels. Other income and expense of $14 million was also approximately even with the prior and year-earlier quarters.

TAX RATE AND NET INCOME. Their tax rate for Q1 and expected for the full year was 32.5%. In their November teleconference they indicated they expected that their first qaurter tax rate would be up slightly to year end when their tax rate was lowered to bring their 1996 effective rate to 30% for that whole fiscal year. Net income for the quarter was $51 million or 14% of revenue after tax compared with $64 million a year earlier and $59 million in the fourth quarter, both of which represent 15% of after tax revenue. Earnings were $0.15 per share calculated on 347 million weighted average shares outstanding.

BALANCE SHEET. Cash and short-term investments ended the quarter at $1.1 billion, still no debt, and that is up from $1 billion at fiscal year end primarily due to cash flow from operations. Accounts receivable decreased $59 million during the quarter from their prior fourth quarter end and days sales outstanding declined from 107 days to 96 days.

SUMMARY OF FINANCIAL ACCOMPLISHMENTS FOR Q1. Although they did not achieve the sequential revenue growth that they had expected during their first fiscal quarter, they did achieve very strong growth in their directory-enabled server platform business, record unit shipments in the quarter, stability well above their third quarter 1996 revenue baseline of $365 million established after our sale of two business units last year, expenses under control with lower sequential operating expenses, a reduction in their accounts receivable days sales outstanding, continued strong profitability, and progress in the delivery of new future revenue-generating products. In the second fiscal quarter they intend to continue building on their base, and guidance for Q2 would be for a sequential increase in both revenue and earnings.

REVIEW OF OPERATIONS

NEW CEO SEARCH. The company has engaged a prominent executive recruiting firm to assist the board in finding a new CEO. They have moved forward in the selection process and are making progress, but have nothing definitive to report. They hope to have a solution to announce before too long. The board has been very pleased with the job Joe Marengi has been doing in terms of running the company on a day-to-day basis and accelerating the execution of their product program.

PROGRESS ON DEVELOPING A STRATEGIC DIRECTION. A team has been fully engaged for the last four months in understanding customer needs for networks, competitive directions, and the core capabilities of Novell. Over 70 in-depth customer visits have been made by the team and a wide range of input was received by channel partners and strategic input from OEMs has added to their market understanding. Earlier this week marked the culmination of this activity with senior management signing off on the program. IntraNetware will continue to be an important component of the strategy and in addition Novell intends to become a major force in the areas of collaboration and network services. The strategy implementation phase begins this week and they will be making signficant resource and management realignment. The management and many employees involved in this exercise are very excited about this much-needed roadmap for the future.

BUILDING BACK GROWTH AND CONSISTENCY. In November they said they would build back one quarter at a time. They are doing that. Novell is a very different company today than it was a year ago. Yet, in spite of the significant change in their business model, they posted revenues that were basically flat compared to last year. Separate of geographic market issues, their results reflect some of the growth and consistency they are working so hard to build back into their business. They are posting tremendous growth in their directory-enabled server business. It is up 41% year-over-year and is also up sequentially. IntraNetware continues to surge in major account licensing, up 67% year over year.

GOOD PROGRESS ON NDS. Their directory initiative is moving. Eleven different UNIX OEMs and HP now ship NDS with their Intel servers. Sun anticipates having NDS available this Fall but still to come is the bundling of NDS with HP-UX and IBM's AIX. They are on track for their release of the directory for NT servers by early this Fall. Their objective is for NDS to become the user registry for all networks, whatever the servers are they rely on.

WHAT HAPPENED WITH REVENUES & EARNINGS. Revenue was $375 million in the first quarter, $8 million below fourth quarter 1996 results and below their expectations for sequential revenue growth. However, first quarter revenue was up $10 million from the financial baseline that they established in the third quarter of 1996. There was unanticipated market weakness in Europe and Japan, both came in below their targets. Both markets were projected to be flat, but declined sequentially resulting in $17 million less revenue for those markets in the first quarter.

THE STORY IN EUROPE. European revenue of $107 million in Q1 was down $12 million or 10% from their fourth quarter. This decline reflects weakness in the expanding market for small network solutions in the area. It is a small network problem made worse by economic conditions. In the large network space, as in the US, in Europe they continued to expand and gain new customers around their directory. In Q1 they had major wins with both BAS in Germany and Ericsson in Sweden. With the introduction for IntraNetware for small business, they are better positioned to address small networks in Europe and elsewhere.

THE STORY IN JAPAN. Asia/Pacific contributed $42 million in the first quarter with Japan accounting for $17 million which was $5 million less than in Q4. After seeing continuing weakness in Japan in 1996, they expected to hold revenue flat at about $20 million. This market weakness was compounded by the devaluation of the yen during the quarter. By the end of this year, they intend to have their business in Japan back on a growth track. They have been turning around a business that became a significant drag on their performance as it shifted from growth that was above 50% before 1995 to a year-over-year decline of 41% in the first quarter of 1997 not accounting for discontinued products. The problem has been how their Novell Japan subsidiary historically positioned itself as a provider of solutions for small networks, rather than as a supplier of scalable solutions for small networks to large enterprise solutions. They are taking measures to move this market to their primary strength as a provider of large solutions for enterprise networks. They took their most important step in January when they hired a new President for Novell Japan. Before joining Novell, he was responsible for all the Intel-based server products for Hewlett-Packard Japan, was the President of Apple Computer Japan, and held key positions with Toshiba and Toshiba America. He has the management experience to make a difference. In the 5 years he was at Apple Japan, he increased market share from less than 2% to over 20%, with sales in excess of $1 billion. Under his leadership, Novell Japan will be in a much stronger position one year from now.

SOME THINGS DID WORK OKAY. While these two shortfalls are disappointing, there were many positive factors in the first quarter that reflect what Novell is doing to increase the competitive posture of their business. Business outside the European and Japanese markets has been steady. Revenues grew 24% sequentially to $23 million in the Americas which includes Canada. In the US, revenue increased 2% to $203 million. Revenue from server operating systems totalled $251 million, up 10% from the year earlier quarter and up $4 million from their fourth quarter of 1996. Demand for Novell's directory-enabled intranet and Internet solution was very strong. Sales of IntraNetware increased 41% year-over-year to $185 million, reflecting the growing value organizations are placing on Novell's directory service. The strength of this segment is especially gratifying coming on the heels of the IntraNetware product introduction in the fourth quarter. Sequentially, Netware 3 revenue was flat. For the first time in 8 quarters, they saw no decline in the Netware 3 revenue line. Corporate, channel, and OEM licensing revenue increased by 42% from the year-earlier quarter and contributed at record 40% of total revenue, reflecting the growing strength that they are having with major account customers.

OBJECTIVE & STRATEGY FOR 1997. Their top-level objective for 1997 is to clearly recapture leadership in networking software. Their strategy is to support the heterogeneity and offer customers freedom of choice. Changes in their markets are playing to Novell's strengths today. Better than any other vendor, Novell supports the shift in value of information from the individual operating system, individual applications and files, to the network. The network will be the key information outfit going forward. Novell's job is to provide the services and infrastructure for that network. They wanted to reiterate how the direction in Novell's business reflects a shift in customer thinking. Customers are expecting to create intranets across their local and wide area networks. They want to ensure buying decisions today give them a freedom of choice in the future. They want the best network solutions, meaning those that support the value of all the resources on the network including service, whether IntraNetware, NT, UNIX, or others. They have oriented Novell to lead in this change. They are extending their product reach to benefit not only from expanded IntraNetware opportunities, but also from the growth in the NT and UNIX markets. The job they will perform is to make NT better, to make UNIX, and to improve network performance across all platforms. Last quarter they discussed some benchmarks by which their progress could be measured.

DIRECTORY-ENABLED SERVER BUSINESS. First, their directory-enabled server business, IntraNetware, is building the strength they expected. They are accelerating their work with Sun Microsystems to make IntraNetware the best environment for hosting Java applications across business networks. In Q1 they shipped the IntraNetware SDK for Java. It means that developers can take advantage of Novell directory services and the scalability of IntraNetware services to build network applications that are both platform and location independent. They rely on NDS for access, security, and management across business intranets and the Internet. According to IDC, Novell is far and away the leading provider of network connections in 1996. This number one position in the network server market is one they will maintain in 1997. No other software vendor comes close to the level of value Novell provides in this market space. It is important to understand what lies behind the high-profile front end applications and makes them useful to an increasingly mobile and knowledge-centric workforce. Novell software is connecting the enterprise and is the value.

KEY WINS AND POSITIVE FEEDBACK ON DIRECTORY-ENABLED SERVER SOLUTIONS. Licensing revenue from Novell directory-enabled servers in major accounts increased 33% year over year. More than 50% of this revenue was from new servers. These numbers are echoed by customer commentary. In a recent 1997 survey of 5000 IT managers conducted by Computerworld, IntraNetware and GroupWise were ranked highest in customer satisfaction. They continue to see customers who install NT for network services come back to Novell to run their network. Oracle Corporation is a case in point. After an Oracle division in Europe tried unsuccessfully to deploy NT, the US-based Oracle Education, which contributes a large percentage of Oracle's revenues, upgraded from NetWare 3 to IntraNetware and ManageWise in the first quarter. The sale was won based on flexibility, ease of administration, and the power of connecting wide area networks. Some other significant wins in Q1 include Ericsson SA in Sweden, which selected IntraNetware and ManageWise for their mixed IT environment, and also the US Federal Highway Administration, which significantly expanded its adoption of Novel directory-enabled servers. These organizations joined companies like CBS, Merrill Lynch, Taco Bell, PepsiCo, AlliedSignal, UPS, Southwest Airlines, Hallmark Cards, and thousands more around the world that are going with deployment of Novell directory-enabled platforms.

ADDRESSING THE SMALL NETWORK MARKET. Novell is also working to rebuild their competitive posture in the small network market. With the worldwide availability of IntraNetware for Small Business, they are now better positioned to participate in the 25-user and under network market. This product includes single site directory for easy network administration, management, and installation; includes the Novell Web server, Netscape Navigator, and compatibility for Novell's messaging system, GroupWise 5. They need to revitalize their presence in this market, they are aware of that and are driving back into that space. They are doing it in partnership with their reseller channel which now can deliver stronger solutions and better support with Novell products than with those of Novell's competitors. User-based licensing allows customers to buy the product in small increments and add individual users, reducing the cost of growing a small business' network. The most important issue for Novell in the small network market is getting repositioned to carry users into their large network IntraNetware environment as their businesses grow.

ENHANCING NT FUNCTIONALITY WITH NDS-BASED SOLUTIONS FOR NETWORK MANAGEMENT. Since last Fall, they have emphasized the importance of establishing their NDS as the industry standard for open directory solutions across the network. Making NT better in network solutions is a key part of this effort. Throughout 1997 they will bring products to market that make NT and UNIX work better. In Q1 they advanced this strategy with the open beta release of Novell Workstation Manager. Novell software integrates Microsoft Windows NT desktops with IntraNetware servers and NDS. Through NDS, network administrators can centrally manage NT workstations as part of their collective network resource, eliminating the need to control NT workstations through the cumbersome NT server domain. Users can securely access their desktop and network resources from any workstation on the network from a single logon. They have had very favorable customer reaction to Workstation Manager, reflecting the compelling power of a single logon to the network and all its resources. For example, JP Morgan which has standardized on NT workstations for over 13,000 desktops worldwide, scrapped plans to implement NT Server Domain and installed Novell's Workstation Manager. Through NDS, Workstation Manager provides cost-effective user mobility, security, and centralized management. JP Morgan's Vice President responsible for desktop strategies told Information Week on January 20th that they are committed to open industry standards and will only support those initiatives that move them in that direction. Ironically, the weakness of NT domain is becoming more apparent as customers roll out NT servers for applications. The only way to get account and desktop configuration management with NT is to install numerous domains. According to the Gartner Group, domains are one of NT's weakest features. By late Summer, Novell will make NDS available to run on Windows NT servers and fully integrate them with other distributed network services.

GROUPWISE FUNCTIONALITY TO BE EXPANDED. Although product transition issues held back the growth in network applications revenue in Q1, they are confident as ever in the value in Novell going forward. They believe GroupWise could take the number two spot in messaging this year. GroupWise is a client/server network application for IntraNetware, NT, and UNIX servers that offers customers flexible valued choices. In the first quarter they posted GroupWise revenue of $28 million, up 34% year over year. The same Computerworld survey mentioned earlier gave GroupWise the top spot in customer satisfaction from number two last year with strong grades in all categories and particularly strong in "comfort in doing business with the vendor" and "software quality." Representative GroupWise customers such as Blue Cross/Blue Shield, Nintendo, TRW Automotive, and the City of Seattle value GroupWise's broad Internet capabilities including support for all major browsers and Java. This quarter, Novell is making available a new version of GroupWise Web Access that utilizes Java applets to deliver the full-featured GroupWise client to users who access their messaging systems from across the Internet. At the end of March, Novell will release GroupWise 5.1 featuring scalability, speed, performance, and Internet enhancements that build on the current release of GroupWise 5. In the Summer, they will enhance GroupWise with Web publishing capabilities. This technology enables any GroupWise user to easily publish information on the Internet. Using GroupWise document management features, documents stored within GroupWise libraries can be dynamically published on the Web in HTML and assigned a Web address. This product will go into open beta in April and will be available to GroupWise running on both IntraNetware and Windows NT servers.

MANAGEWISE FUNCTIONALITY TO BE EXPANDED. They intend to expand their lead in network applications providing management services in 1997. In addition to evolving ManageWise, they are bringing new management applications to the market. Directory-enabled management of heterogeneous environments is a new opportunity for Novell. On Friday of this week they will release the Novell Administrator for Windows NT. This product will enable customers to utilize NDS as the central administrative backbone for Microsoft NT domains. It provides an easy, automated mechanism for integrating existing Microsoft NT domains into NDS and demonstrates Novell's continued commitment to managing their customers' heterogeneous environments. This Spring, look for ManageWise enhancements to include support for remote downloading of software across the network. Using NDS-based security and administration, ManageWise Application Manager will allow administrative central enterprise-wide control of automated application distribution to the desktop, thereby substantially lowering customers overall desktop cost of ownership. In the second half of 1997, ManageWise gains Java capabilities for management over the Internet. They are expanding the breadth and depth of their network services software. They are beginning to compete in the Internet/intranet markets that they define and can potentially win.

NEW PRODUCTS FOR "NETWORK BORDER" SERVICES. During 1997, they will build new network services around the border. Border services go between any network and the Internet. Border services from Novell will not just be for Novell networks, they will work with any network and are expected to improve performance of intranets with the Internet by up to 10 times. They will offer border services products that include proxy caching, firewall services, and virtual private networks. Proxy caching from Novell will provide 2.5 times as much Internet throughput over their customers networks. Firewall services from Novell will provide fine grain security control to vary access as appropriate across large populations of users. The uniqueness of their firewall products will be from the integration with their directory. Virtual private networks from Novell will support secure remote access and electronic commerce with trading partners via tunneled encrypted data over the public Internet. In 1997, their directory-related network services software will also include expanded security offerings that allow network administrators to choose different security combinations to fit their network needs, including secure socket player encryption, secure ID cards, and support for digital certificates. Replication services will allow customers to scale their servers for larger networks. It will allow NDS and files to be replicated between different server platforms, whether it is IntraNetware, NT, or UNIX. Synchronization services will allow customers using domain into Microsoft Exchange or Back Office to synchronize NDS with Microsoft. Changes made in NDS will be replicated in the NT servers.

PROMOTING AND EXTENDING JAVA. In addition to solutions developed by Novell, they intend to expand their network services software by making Java a serious business tool for corporate networks beyond its use for animating Web pages. They will be the first to provide the execution environment for Java applications, the Java Virtual Machine, on low-cost high-performance Intel servers. They are betting on Java because they believe that, combined with Novell products and services, it will become the best platform for their customers applications. Its advanced development environment will empower the huge population of Java developers to create a new class of directory-enabled network services that run independently of operating systems and processes on intranets and the Internet. With its write-once/run anywhere capability, Java gives people the real power to enable distributed processing. Last week, Novell launched a co-partnered market education effort with IBM, Netscape, and Sun called the Java Education World Tour. It underscores the importance of a pure Java environment that doesn't become fragmented like the UNIX environment did. As the industry standard development environment for network applications, Java has the potential to pull the industry together. The tour will go to 41 cities around the world, bringing the most up-to-date information to developers about Java so they can participate in the transformation that it will bring.

STRATEGIC SUMMARY. Their strategy is to help customers integrate the technologies and advantages of the Internet into their existing environment. The fundamental tenets guiding everything Novell does is to support heterogeneity and offer customers the freedom of choice across the network.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.