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August 23, 2002

When Novell bought SilverStream Software, some analysts thought it might be too late to wrest Web services business from BEA Systems, IBM, Microsoft and Sun Microsystems.

And though it's too soon to say whether $212 million wager will pay off, it's clear that CEO Jack Messman is happy to be in the Web services game, despite competition from the biggest names in IT.

"Novell is no longer tied only to the growth and utilization of network infrastructure," Messman said in a call with analysts and reporters. "Increasingly we are tied to the development of new IT solutions, which have a higher growth rate."

Broadly defined, Web services allow different applications from different sources to communicate with each other without time-consuming custom coding. And because all communication is in XML, Web services are not tied to any one operating system or programming language. For example, Java can talk with Perl, Windows applications can talk with UNIX applications.

Novell's Web services strategy is straightforward: help enterprise customers build and deploy Web services applications in 30 percent to 50 percent less time than competitors, for less money, and with other offerings such as secure identity management.

Initially, many of these Web service projects will be small, but hold the prospect of follow-on orders as IT budgets are gradually increase. Because of this, execution is key, and Provo, Utah-based Novell is striving to improve communication between its business units that must collaborate on projects.

Messman, formerly chief of Cambridge Technology Parnters before Novell acquired it, said the groups were historically "silos" unto themselves.

Growth in Web services increasing important as other parts of Novell's business flag.

Overall the company had a surprisingly good third quarter, posting a 4 cent per share profit (excluding charges) on $282 million in revenue. Software sales accounted the 73 percent of revenues, up 5 percent sequentially. SilverStream contributed revenue of $300,000 in the 11 days that it was part of the company in the third quarter.

But consulting services dropped another 2 percent, and accounted for $20 million in red ink to the balance sheet. The outlook for consulting for the fourth quarter is not cheery either. Novell said it will try and offset flat consulting revenues by operating more efficiently.

Also, with IPO market moribund and mergers and acquisitions not paying nearly the premium they once did, Novell has scrapped plans to raise a second venture capital fund.

Despite some bright spots, Messman, who formerly led systems integrator Cambridge Technology Partners, Novell's last major buy, offered "restrained expectations" for the fourth quarter. They are unsure they'll be able to sustain gains in Europe in the third quarter, are wary of consulting arm and the continued reluctance of IT budgets into 2003.

So now, Messman and company will have to execute on their Web services strategy and hope that it can carve out enough market share provide a new and sustainable income stream.

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