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Novell trips over its Linux strategy

Major layoffs may loom as firm's missteps threaten to sink its reinvention

Two years after the rebirth of onetime computer networking titan Novell Inc., the Waltham company is still having trouble learning to walk.

At a time when organizations of every kind depend on masses of networked computers, Novell should be prospering. Its software for letting computers share the same files and printers had made Novell the world leader in networking during the early 1990s. And now the company has embraced the free Linux operating system at a time when demand for Linux is soaring.

Instead, Novell may be poised to lay off hundreds of employees because of missteps that have cost it the loyalty of once-faithful customers like Jim Klein, director of information services and technology at the Saugus Union School District in Santa Clarita, Calif. After eight years of using Novell software, Klein expected to move to Novell Linux software during an upgrade last year. Instead, he settled on Linux software from rival Red Hat Inc.

''We really wanted to go with Novell in the beginning. We really did," said Klein. ''But they just didn't have it together. I think that's the industry perception as a whole."

Novell's revenue has barely budged over the past two years, and the company's bottom line has bounced from red to black to red again. Last week, Business Week magazine and the ZDNet Internet news service reported that Novell could soon lay off hundreds of its 5,800 employees after the close of its third quarter, which was yesterday.

In September, Blum Capital Partners, which owns 5 percent of Novell's stock, called for Novell to sell its two jet aircraft, slash research and development spending, and fire 400 engineers. The stock, which traded from $35 to $40 in 1993 and again in 2000, has been languishing below $10 for the past year. Yesterday, Novell gained 5 cents to close at $7.62 on the Nasdaq Stock Market.

And last month, Credit Suisse First Boston analyst Jason Maynard boosted his rating on Novell -- on condition the board oust chief executive Jack Messman and his team. ''If they don't make bold moves in the next 12 months, they'll move into irrelevance," Maynard said.

But members of Messman's team say that their two-year plan to revitalize the company is on the verge of bearing fruit.

''The whole platform is progressing very rapidly," said Novell vice president and Linux general manager David Patrick. ''I think we're making good progress in our core markets."

Those core markets are a sizable but dwindling number of businesses and government agencies that rely on NetWare -- an operating system developed by Novell in the 1980s, but now withering away. Messman is now banking on Linux, one of the most popular platforms for heavy-duty data processing.

Even as he moved Novell's headquarters from Utah to Massachusetts because most of its top management was based here, Messman decreed that NetWare should be rewritten to run on top of Linux. In November 2003, Novell paid $210 million for SUSE AG, a German firm that was the second-biggest Linux distributor, after Red Hat Inc. of Raleigh, N.C. At one stroke, Novell absorbed a well-regarded version of Linux, and a small army of Linux specialists to help transform the company.

Even Novell's sternest critics like Messman's basic plan; they just think he's done a lousy job of carrying it out. ''Our conviction is firm in the future promise of the company," said a letter to top Novell managers from Blum Capital Partners. ''The question is whether the current management and board will execute."

Novell certainly didn't meet Jim Klein's expectations. He wanted to run a network based entirely on Linux and other ''open source" software -- programs that are available for free in their raw form. Open-source code doesn't belong to any one company, giving its users a great deal of flexibility in how it's used. But Novell offered its Open Enterprise Server, which runs on top of Linux, but is owned by Novell. Klein said Open Enterprise Server cost too much, and didn't work consistently with other open-source programs.

He also found it nearly impossible to find books or Internet documentation on Novell's Linux offerings. In contrast, there are dozens of books and vast amounts of online aid for Red Hat Linux. So Klein replaced his Novell NetWare system with Red Hat Linux instead of Novell's.

In 2002, SUSE accounted for 25 percent of all Linux revenue, according to Credit Suisse First Boston; last year, under Novell's ownership, SUSE garnered just 19.9 percent. During the same period, total Linux revenue jumped to $198 million from $83 million, most of which went to Red Hat.

Novell's revenue from new software licenses fell in 2004, and has dropped for the first three quarters of 2005 as well. Still, Novell has about $1.6 billion in cash and short-term securities. Messman, under pressure from Blum Capital, has agreed to spend $200 million buying back stock.

Novell users aren't complaining about the quality of the company's software. Josh Turiel, a network management consultant and former president of the Boston Novell Users Group, said his customers love the reliability of Novell products.

Novell even attracts some defectors from Microsoft. Brian Scott, the information technology manager for LA Gym Equipment Inc., a chain of Southern California fitness stores, got sick of constant problems on a network of servers running Microsoft's Windows NT operating system.

''I didn't want to keep patching the things," Scott said. ''It was causing me a headache. I couldn't focus on my other tasks." Rather than upgrade to Windows XP, Scott ripped out the NT servers this year and installed Novell NetWare running on SUSE Linux.

''We saved about $400,000," Scott said, and repair calls from the company's 15 stores have dwindled to almost nothing.

Hiawatha Bray can be reached at bray@globe.com.

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