Novell Reports Fourth Quarter and Full Year Fiscal 2000 Results

PROVO, Utah -- Nov. 21, 2000 -- Novell, Inc., today reported fourth fiscal quarter revenue of $273 million. Previously announced restructuring charges of $48 million in the quarter resulted in diluted loss per share on a reported basis of $0.11. Excluding the impact of restructuring charges, earnings on a diluted basis were $0.00 per share. These results are in line with statements from the company characterizing its expectations of revenue, earnings and restructuring charges in the quarter, and compare to revenue of $345 million, and earnings per share on a diluted basis of $0.21 in the same period a year ago.

For the fiscal year ended Oct. 31, 2000, revenue of $1.16 billion compared to $1.27 billion in fiscal 1999. Net income for the year was $49 million, or $0.15 per share on a diluted basis, compared to $191 million, or $0.55 per share in 1999.

"Fiscal 2000 has been a very difficult year for Novell following dramatic declines in traditional packaged software sales," said Novell chairman and chief executive officer, Eric Schmidt. "Growth in new Net services did not accelerate fast enough to offset this decline. In 2001, our aim is to improve Novell's overall business performance around growth in new Net services.

"By the end of 2001, we intend to have gained broad market recognition of Novell as an eBusiness Net services platform provider that delivers must-have capabilities including security, identity, acceleration and management. Novell's future business is based on Net services that enable traditional, and new Internet-based, IT resources to be mixed-and-matched as components of eBusiness solutions."

Central to the company's ability to support mixed eBusiness solutions, Novell released new Net services connector software, called DirXML, during the quarter. Initial contracts included the Bank of Montreal, which licensed DirXML connectors to PeopleSoft* and Lotus Notes*, for eDirectory based security and deployment of business processes to more than 10,000 employees.

In addition, United Airlines purchased 110,000 user licenses for DirXML, iChain security software, and eDirectory, to support an initial deployment of personalized Web portals for employees and business partners. Also during the quarter, and as first announced last week, the Ministry of Defense in the United Kingdom, with Cap Gemini Ernst and Young, have selected DirXML, iChain, and eDirectory for a unified global network, and business-to-business eCommerce exchange, as part of a ten-year agreement for IT services.

Novell executive vice president and chief financial officer Dennis Raney said, "As expected, fourth quarter marked only a slight improvement in revenue over the $270 million reported in the prior quarter. The results reflect both additional erosion in package software sales, and continued weak performance in Europe where revenue declined 33 percent year-over-year."

For the fiscal year, Novell packaged software sales declined by $243 million, or 47 percent, to account for 23 percent of total Novell revenue. The magnitude of the decline was too great to be fully offset by 12 percent growth in Novell's large network site-license and OEM business during the year. Revenue from large network site-licenses, and OEMs, grew to $750 million, and accounted for 65 percent of total revenue in fiscal 2000.

"It is noteworthy that growth in site licenses has resulted in our highest deferred revenue level ever, with $203 million on the balance sheet, up 17 percent year-over-year" said Raney. These dollars represent pre-paid service and upgrade support associated with Novell's growing site-licenses business, that is first deferred to Novell's balance sheet, and then recognized over the life of the contract.

Novell is rebuilding its channel around partners who can deliver and support the company's new Net services platform that enables eBusiness solutions. Novell began to implement new channel programs in October, and expects to complete this task by the end of the company's first fiscal quarter. The company anticipates that the new programs will take several quarters before they can be fully effective.

"We expect overall Novell revenue performance to continue to be soft until we gain the combined benefit of new eBusiness deployments and complete a shift in channel programs to include a new group of partners from the ranks of consulting systems integrators and other service providers," said Raney.

Review of Q4 Performance

On a year-over-year basis, total quarterly revenue was down 21 percent in the fourth fiscal quarter. In addition to the decline in packaged software, especially strong buying in the previous year due to Y2K contributed to a decline in quarterly revenue compared to the same period of the prior year. For the entire fiscal year revenue declined 9 percent compared to fiscal 1999.

>>> Revenue by product category: Revenue in the fourth fiscal quarter from Net services (directory-enabled applications) was up 15 percent sequentially from the third fiscal quarter, to $90 million. In fiscal 2000, it was up 4 percent, compared to fiscal 1999, to $327 million. Strong growth from ZENworks, Novell Single Sign-On, eDirectory, DirXML and Novell Internet Caching System (ICS) contributed to the improvement.

ICS cache appliance royalties were up on accelerating unit deliveries by OEMs, in particular, Compaq and Dell. Novell's OEM partners shipped approximately 1,300 ICS-based cache appliances during the quarter, growing the worldwide installed base of ICS caches to more than 3,000 units.

Revenue from directory-enabled NetWare servers was down seven percent sequentially from the third quarter, to $112 million. For the fiscal year these products declined 24 percent. Service, education and consulting revenue was flat sequentially, compared to the third fiscal quarter of 2000, at $55 million. For the fiscal year this revenue was up 20 percent over fiscal 1999 to $217 million.

>>> Revenue by geography: During the fourth quarter, revenue in the United States declined three percent from the third quarter of fiscal 2000, to $155 million. For the fiscal year it was down 6 percent compared to fiscal 1999, to $658 million.

Revenue in the Europe, Middle East and Africa region was down slightly from the third quarter to $69 million in the fourth quarter. For the full year, revenue was down 20 percent to $323 million. A slowdown following strong Y2K spending, the weak Euro, and Novell management and organization changes are all seen by the company as contributing factors.

Asia Pacific revenue was up 18 percent over the third quarter 2000, to $26 million. For the year, revenue from this region was flat compared to fiscal 1999 at $99 million. Revenue from Canada and the Americas was up 33 percent, in the fourth quarter to $23 million. For the year, this region was up 13 percent, to $82 million.

>>> Expenses: Operating expenses, before restructuring, were up four percent over the previous quarter to $213 million. Savings from staff reductions were offset by new television advertising targeted to building the Novell brand. With the addition of a one-time restructuring charge of $48 million, expenses totaled $261 million.

>>> Other Income was $21 million in the fourth fiscal quarter, down $10 million from the third quarter, primarily from a decrease in gains from sales of equity securities.

On the balance sheet, cash and short term investments were $698 million at the end of the fourth quarter, compared with $895 million at the Oct. 1999 fiscal year-end. During the quarter, the company spent $17.5 million to repurchase 1.8 million shares of Novell common stock. During fiscal 2000, the company repurchased 12.4 million shares under its repurchase programs. Days sales outstanding (DSO) decreased to 65 days, down from 72 days at the end of the third quarter.

Business Outlook

Incremental expenses will be higher than previously anticipated for the first quarter, and full year in fiscal 2001 following Novell's decision to accelerate the deployment of Content Exchange services, for Web content delivery and acceleration, at leading Internet data centers. For the year, the investment in new Content Exchange services, and associated expenses, are now estimated to reach approximately $65 million.

The Content Exchange service became first available at the end of October from Global Crossing's Global Center Internet data centers. Equipment installations have been made at five of Global Center's North America sites. The first European site comes on-line in December. Novell plans call for equipment installations in as many as six additional data centers during the first fiscal quarter.

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Novell and NetWare are registered trademarks, and DirXML, eDirectory, iChain, Novell Internet Caching System and ZENworks are trademarks of Novell, Inc. in the United States and other countries. * All third-party trademarks are the property of their respective owners.

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