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

Novell, Inc.
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122 East 1700 South
Provo, UT 84606
(801) 861-7000
http://www.novell.com

UNION CITY, CA (June 3, 1997)/FOOLWIRE/ --- Novell, Inc. released second quarter 1997 results after the close of the market yesterday. They reported revenues of $273 million, a decline from the $375 million reported in the first quarter. This approximately $100 million sequential reduction occurred primarily in two areas -- channel box software products and OEM royalties.

DECLINE IN BOX PRODUCT SHIPMENTS. The first area of decline was in shipments of boxed software products into the distribution channel. This category declined by approximately $82 million sequentially to $109 million and reflects both reductions in the box product sell-through by distributors as well as less sell-in by Novell than the sell-through. That is, they began to bring channel box inventory down to reflect the decline in sell-through and the continued movement to their licensing programs. These reductions impacted all boxed software product lines. During their worldwide close process this month, as they received point of sale and inventory reports from many of their key distributors for the month of April, they left approximately $20 million of reserves on their books which they previously expected to be able to reverse. Reversing these reserves would have increased Q2 revenue by $20 million and brought the reported loss of $(0.04) per share to an approximate break-even. But they believe the action they have taken is consistent with their decision to further withhold shipments of boxed software products into the channel during their third quarter in order to ensure that they bring distribution box inventories in line with anticipated customer requirements around the globe.

IS IT AN INDICATION THEY ARE LOSING RESELLERS? The company was asked if the declines in the distribution channel revenues indicated that they were losing resellers. They responded that they don't see that they have had a reduction in resellers. They think that all of their resellers are, in fact, very loyal and continue to sell and install Novell products. But, of course, as NT is in the marketplace, many of them also carry NT as well as other competitive products on an increasing basis. As far as total units shipped in the quarter of IntraNetware, of total network operating systems it is in excess of 200,000 if they include both the boxed products and the licensed products.

DECLINE IN OEM ROYALTIES. The second area, OEM royalties, declined by approximately $18 million sequentially to $40 million in Q2. This reduction was spread across a variety of products including NetWare 3 and 4 operating systems, UNIX, and miscellaneous other royalties from older products. Their remaining revenue sources were approximately equal to their Q1 run rate. Master license and channel license business remained constant at approximately $92 million in Q2. Education, service, and other revenue remained constant at approximately $32 million in Q2.

TOTAL REVENUE BY PRODUCT. Reviewing the total revenue by product for the quarter, NetWare 3 was $35 million compared to $66 million in Q1. IntraNetware, including NetWare 4, which took the brunt of the channel reduction, was $132 million compared to $185 million in Q1. For server operating environments, the upgrade product accounted for approximately 41% of revenue compared to 46% last quarter. Their network infrastructure products accounted for $25 million compared to $36 million in the first quarter. Network management products were $14 million compared to $17 million. Groupware was $26 million compared to $28 million in Q1. UNIX royalties were $9 million compared to $10 million in Q1. Service, education, and other were $32 million compared to $34 million.

REVENUE BY GEOGRAPHY. On a geographic basis, Asia, Japan, and the non-US Americas were consistent with Q1 revenue levels, with the decline in revenue split approximately 60%/40% between the US and their EMEA region (Europe/Middle East/Africa).

COST OF GOODS/GROSS MARGIN. Going further down the income statement, cost of goods was approximately flat from Q1 as the decreases in direct material and royalty costs from lower revenue were offset by slightly increased scrap and excess obsolete inventory. Since most of their service, support, and operations costs are fixed in the short term, accordingly gross margin was 72%, down from 80% in Q1.

EXPENSES AND NET LOSS. Sales and marketing expenses declined by $12 million to $116 million. R&D expenses declined by $3 million to $68 million. G&A expenses increased by $2 million to $40 million and all of those comparisons are against Q1 of this year. Overall, total operating expenses decreased from Q1 by $13 million to $224 million. This left an operating loss of $28 million or 10% of revenue. Investment and other income was $6 million, reflecting a $7 million reduction from the Q1 rate, primarily due to decreases in the capital gains portion of their portfolio as well as slight decreases in their overall interest rates earned, although their average daily invested funds grew slightly compared to Q1. Income tax credits from book loss added back $7 million, yielding a net loss after tax of $15 million or $(0.04) per share on 348 million shares outstanding.

BALANCE SHEET HIGHLIGHTS. On the balance sheet, cash and short term investments ended the quarter at $1.044 billion. While this was down $58 million from the previous quarter, almost $50 million of this decline was due to decreases in the market values of certain stocks in their equity portfolios, primarily Corel and SCO (Santa Cruz Operation), during the quarter. However, during the four weeks subsequent to quarter end, this portfolio has rebounded by approximately $10 million. Net accounts receivable decreased by $61 million during the quarter, although because of the overall revenue decline, calculated DSO increased to 111 days.

PLANS FOR CASH - STOCK REPURCHASE? They were asked about a stock repurchase plan utilizing the $1 billion on the books, especially given the current stock price. They responded that they will be continuing to review that with the board of directors. There has not been an affirmative or negative decision at this point.

LONG-TERM PERSPECTIVE ON THE Q2 PERFORMANCE. The company felt that it is easy to let the negative element of the announcement to eclipse everything else the company is working on, so they asked people to keep a perspective and to recognize that underneath all of this, Novell feels it offers a strong, sustainable value proposition for customers and ultimately for their shareholders. At the most general level, they feel it is important to understand that Novell is in the midst of a transition from its traditional business to a new business premise on the Internet. When they met with some analysts in New York last week they underscored the fact that Novell is in the midst of this major transition from a company that relies on revenues from its network operating system business to a company that is a recognized leader in network services. They also mentioned that Novell successfully made a similar transition during the mid-1980s when it transitioned from a hardware business to one that thrived as an operating systems vendor. An important part of the difference they need to make is to get the transition done quickly and behind the company once and for all.

GOAL. They have also said that one year from now we can look for Novell to be a pure Internet/intranet leader product-wise and position-wise. The question today is how do they get there from here. They have to keep going and doing what is required to get their Internet products to customers, but they also have to take some corrective actions in their business.

COMPANY MUST FOCUS. To briefly summarize what ultimately matters most about this quarter to the company, if one word speaks to what the company must do more of is focus -- focus on what they do best as a company, focus on what translates to tangible benefits to the customer, and focus on initiatives that help the company advance in a new market for network services driven by the Internet.

INTERNET FOCUS. Novell's Internet focus has been taking shape since last Fall. To its credit, underneath the traditional business in Q2 a new business is emerging. Already this is evidenced by an IDC survey that just came out which asked corporate customers which information technology company is most important to the Internet. Novell is now tied for third with Netscape -- a result they feel probably surprises many people.

BORDER MANAGER WENT BETA. The Border Manager product went to beta during the second quarter. This product allows businesses to extend their corporate networks and intranets to the Internet while preserving security, manageability, and performance required for mission-critical operations. New products like Border Manager are the key to how Novell reclaims its leadership in network software.

NETWORK REPLICATION SERVICES WENT BETA. The company has also announced that NRS or Network Replication Services has also moved into beta. This is the first replication tool to allow the replication of files, applications, and web servers as well as their distribution and synchronization across the network. This product is clearly strategic for the company as they drive the business forward in several areas including network services.

OTHER PRODUCTS WELL RECEIVED. Other products in the Novell portfolio have also been well-received during Q2. For example, ManageWise has enjoyed much success in organizations such as Ernst & Young, State of Ohio, and Wal-Mart. This is due in part to the Novell Application Launcher which allows administrators centralized control and the ability to automatically distribute applications.

NEW PRODUCTS COMING. In addition, they are near the release of GroupWise 5.2, their Internet-ready product. They have had new customer wins like that at TRW. GroupWise also attracted a lot of attention at one of the biggest industry trade shows, Networld+Interop.

DIRECTORY-RELATED ALLIANCES. In addition to this, Novell embarked upon a number of directory related alliances with many of their partners in the industry -- Netscape, Sun, Oracle, H-P and others -- all with a view toward advancing the shared vision of heterogeneous network systems. Outside of their traditional data networking space, Novell continued to move the NDS standards forward. In March of this year Deutsche Telekom signed a contract to use Novell Directory Services for their directory-enabled Internet service. With Deutsche Telekom signed, Novell's relationships in this sector include the three largest telecommunications providers in the world -- NTT, AT&T, and Deutsche Telekom. All are deploying directory-enabled Internet services based on NDS.

LARGE NETWORK BUSINESS. Also, during the second quarter, Novell captured significant new business in the large business network sector. It is worth noting that many of the major air carriers in North America have now standardized on Novell technology and they continue to make significant headway in the entertainment and communications industries. Many of these announcements came at their major conference in March where they highlighted the breadth and depth of the Novell technology portfolio. The Brainshare event itself witnessed a 25% increase in attendance over last year in North America and a 40% increase in France.

NDS FOR WINDOWS NT COMING. On the product side, they expect to release NDS for Windows NT in September of this year and they can expect to see 75-85% of all UNIX servers to have NDS bundled with them or available on them by the end of the year. Moreover, strategic to Novell's future is the ability to manage NT better than anyone else in the industry and therefore they are incorporating NT even more fully into their product plans.

INTRANETWARE UPGRADE. The upcoming upgrade to IntraNetware which includes native IP support and superlative Java integration is scheduled for release in late 1997 or early 1998. They expect this concentrated focus on network services to translate into tangible benefits for their customers that will go a long way in securing their continued loyalty. Taken together, the IntraNetware announcement later this year and the NDS announcement later this Summer will contribute significantly to redefining Novell's trajectory for growth in the future. Moving forward, their number one priority during this business transition is to focus on customer needs and better align their resources with the realities of Novell's new business model. Their goal is to build a sustainable cost structure and disciplined management with all the focus on becoming the leading Internet/intranet software provider.

SMALL BUSINESS MARKET. They were asked about IntraNetware for small business and if they see pressure on the small business market if they anticipate they would lose some of those resellers over the next several quarters. They responded that the IntraNetware for small business did ship during the first quarter. They had reorders of that product from around the world during the second quarter, perhaps not stellar, but are continuing to move that product through. They think there is an opportunity for them there to stay engaged with the small business market, not only from a platform base but from some of the newer products and from the service offerings as well as the IntraNetware base. Because NetWare is not a general purpose application server, they think there are situations where the fact that Windows NT, in particular, is an applications server is a competitive issue there and they think they have highlighted that for some time. There are a number of things they can do, starting with IntraNetware for small business to try to attack that. Certainly a stronger Java story helps. Part of the reason they are seeing strength in the enterprise is because the current benefits of network computing are more to much larger enterprises which have heterogeneous and have the kind of total cost of ownership things which Novell does extremely well. They defined that same formula on the low end in this new model and they are working on it, it's on their list.

RESTRUCTURING NEEDED. Based on the information covered above, they have decided to take important actions to refocus the company. Frankly, the management performance has not been good. They outlined how they are making the necessary changes in response to some of the key observations that they have made.

MANAGEMENT LAYERS FLATTENING. First, they discovered too many layers of management and not enough communication between those layers. To that end, since CEO Eric Schmidt started, approximately 30% of executives have either left the company voluntarily, involuntarily, or have had their positions reduced to below-Vice President levels.

WORKFORCE REDUCTION AND Q3 CHARGE. Second, they have discovered that their expense base was too high for the businesses they are pursuing and that, unfortunately, the majority of these expenses were personnel related. In evaluating what actions to take, they made sure that whatever changes they would make would not affect their ability to sell, service, and develop the new hot products needed to drive their business forward. Accordingly, they are announcing a workforce reduction of approximately 18% or 1,000 employees. This reduction is already underway. Novell will become a more streamlined, more tightly managed and responsive organization totalling about 4,800 employees worldwide. This will result in a charge in the third quarter of between $25-35 million to account for this restructuring.

NO SHIPMENTS INTO CHANNEL UNTIL INVENTORY LEVELS DROP. Third, and finally, as they have indicated, competitive pressures have meant that their business is quickly shifting from a primary reliance on their traditional red box business to a mixture of red box and licensed products that are sold through both direct and indirect sales channels. They have, therefore, concluded that the current levels of product inventories are too high and have stopped shipping products into these channels until the distributors' inventories decline to a level that Novell's ongoing business will support. This correction will result in an operating loss for their third fiscal quarter.

PROJECTIONS FOR FOURTH QUARTER? They were asked about the fourth quarter and responded that with some of these things being real-time and going on during the quarter it is difficult to forecast fourth quarter. But, it is certainly their objective to run the company as an independent company, to continue through their transition, and emerge as a successful company which would mean profitability and growth. But they have to get through this transition to assure that they achieve that. The revenue recover is going to be product-based. Obviously they will continue to aggressively sell products through their direct business and it is their objective to make the necessary changes in the balance they maintain between ongoing sales and inventory in the channel in order to stay ahead of these issues in the future. Taken as a whole, they believe these are the right steps to get the company focused on its core mission of being the world's networking leader.

COMPETITIVE PRESSURES, GOOD SURPRISES, AND BAD SURPRISES. They were asked about competitive pressures and how much of what happened was a surprise. They responded that there are good surprises and bad surprises. The good surprises include the quality of the technical talent and the loyalty deep inside the customer base. That loyalty is seldom reflected in the press coverage and the industry analyst coverage but there is a tremendous loyalty to the company and the brand. On the negative surprise side, they think they have been struggling with the inventory, business sell-through kinds of issues and that was a surprise to the degree to which it was a hard problem. With regard to competitive pressures, they feel they are always under competitive pressure and they think they should expect that whatever historic exclusivity Novell may have had in the channel, if not gone now, will be gone simply because most of the channels are supporting more than just Novell. That does not mean that Novell cannot compete and win. There are many areas where Novell's products are better. Their assessment is that the biggest problem is actually not a product problem, but more of a positioning problem. Numerous customers have told them that Novell's products are better however the Microsoft machine in terms of the press and the perception of their ubiquity is affecting strategic decisions. Eric Schmidt was aware of that coming in and he continues to believe that is a huge marketing challenge for Novell and for everyone else in the industry who is not Microsoft. They think they are running as fast as they can on the marketing and positioning of the company. The company has a lot of marketing resources and a lot of channel resources. They also believe that the best thing they can do right now is focus on the customers they have because they have such a large installed base. They can touch almost every customer, make sure they are comfortable and grow their relationship with Novell and have Novell come to represent a broader offering than the traditional file and print product line.

EXPECTED SAVINGS FROM REDUCTIONS. They were asked about the run-rate savings after the changes are completed and the reductions made. They responded that subsequent to having accomplished the reductions and that will be both headcount and related expenses as well as facilities expenses, savings should approach $100 million per year. That is their best estimate at this time.

DISMISSED WORKERS REDEPLOYED AT NOVONICS? They were asked if some of the 1000 people would be transferred to Novonics to support the joint venture. They responded that they think that would be a good idea; they are not specifically allocating or mandating people to go to Novonics. Obviously they would be delighted if the talent that is inappropriate for Novell's current situation finds itself in Novonics, that would be great.

WHAT'S GOING ON WITH "WOLF MOUNTAIN"? They were asked about the product code named "Wolf Mountain" and the circumstances surrounding those employees that recently left. They responded that they need to be careful because they are in litigation, so they preferred to simply note that three employees, in Novell's opinion, did some things which Novell got a judge to tell them they can't do. They are still in discussions and working with all the necessary players in that space. The vast majority of that team remains in their offices, working hard, building deliverables. The underlying technology for leadership in clustering is central to the recovery they are describing. They intend to productize those products and have them as quickly as possible as a first generation coming out in the IntraNetware upgrade timeframe. They are very excited about it. This issue has not particularly affected the outcome of that.

WHAT HAPPENED SINCE APRIL 22ND? They were asked what happened between April 22nd, when they pre-announced the shortfall for this quarter, and today that causes their prediction of further revenue shortfalls. They responded that the early indication in the middle of April was when they started seeing less-than-anticipated sell-through from distribution reporting. They saw that continue during the month of April, which reports they only got during May. That caused them to re-look at the mix in terms of licensing versus boxed products. As an example from one year ago to today, the licensing business is up about 50% or some $30 million per quarter. That has an impact. Second, yes, competition in the marketplace and less total sell-through also has an implication for making decisions about what the right mix of inventory throughout the world in distribution channel is appropriate. They see most of those trends, certainly the licensing trend, to continue and they are trying to get in front of that curve so they don't have it as an open issue to continually monitor. They were asked what is going on beyond the channel that is different from April 22nd. They responded that they aren't sure this is some huge change. They have seen an increase in competitiveness with Windows NT, that's not a surprise to anyone. They seem to be seeing that particularly on the very low end and less so in the enterprise market. They don't think it was some huge shift. They think what we are seeing is the success of the Microsoft marketing machine and something which Novell needs to counter through new products, stronger positioning and more aggressive activities.

BUSINESS MODEL FOR NDS FOR NT. They were asked about the business model they want to adopt for NDS for NT given the fact that IntraNetware is fairly high priced. They responded that the adoption of the directory is not, in and of itself, a huge revenue driver for the company. It is, however, incredibly strategic because it then drives the adoption of many of their other products which are directory integrated and those products have nice high gross margins and growth paths, etc. If they lead with the directory and the Novell Application Launcher product, the customer buys more NetWare servers. So it is a classic example of ubiquity first, revenue later.

* 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.