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Executives

Susan White – Director, IR

Dana Russell – SVP and CFO

Ron Hovsepian – President and CEO

Analysts

John DiFucci – JP Morgan

Abhey Lamba – UBS Securities

Mark Murphy – Piper Jaffray

Analyst for Michael Turits – Raymond James

Brent Williams – The Benchmark Company

Richard Williams – Cross Research

Katherine Egbert – Jefferies

Brian Denyeau – Oppenheimer

Novell, Inc. (NOVL) F2Q09 Earnings Call May 28, 2009 5:00 PM ET

Operator

Welcome everyone to the Novell second quarter 2009 financial earnings release conference call. (Operator instructions) Ms. White, you may begin your conference.

Susan White

Thank you. Good afternoon, everyone, and thanks for joining us. I am Susan White, Director of Investor Relations for Novell and with me today from our executive offices in Waltham, Massachusetts are Ron Hovsepian, President and Chief Executive Officer and Dana Russell, our Chief Financial Officer.

We are here this afternoon to discuss Novell's financial results for the second fiscal quarter of 2009. If you don’t yet have our press release, you can access it by visiting our Investor Relations web page at www.novell.com/company/ir. This call is also being broadcast through our website and will be available on our website for a minimum of 12 months.

Before I turn the call over to Dana, I would like to take a moment to say that we will be providing non-GAAP financial measures during today’s call. We believe that these measures enhance an overall understanding of our current financial performance and prospects for the future and enable investors to evaluate our performance in the same way that management does. Management uses these same non-GAAP financial measures to evaluate performance, allocate resources and determine compensation. The non-GAAP financial measures do not replace the presentation of GAAP financial results but they eliminate expenses and gains that are excluded from most analyst consensus estimates that are unusual and/or that arise outside the ordinary course of business such as, but not limited to, those related to stock based compensation, acquisition related intangible asset amortization, restructuring, asset impairments, litigation, judgments and settlements, purchased in-process research and development and the sale of business operations, long-term investments and property, plant and equipment.

We’ve included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in our earnings release. As I mentioned, a copy of that release is on our website.

We may also provide projections of our non-GAAP financial measures such as non-GAAP operating margin, projected non-GAAP tax rates and so forth. The corresponding forward-looking GAAP financial measures are not available and cannot be provided without undue effort because we are unable to accurately forecast information regarding expenses or gains such as, but not limited to those previously described.

We believe the corresponding GAAP financial measure is not likely to be significant to the understanding of our business because there is likely to be substantial variability between projected and actual realization of the expenses and gains described above and/or that such expenses or gains are likely to arise outside of the ordinary course of business.

Finally, please note that during today’s call we may make forward-looking statements. You should be aware that our actual results could differ materially from those contained in the forward-looking statements, which are based on current management expectations and are subject to a number of risks and uncertainties, including but not limited to those factors described in our annual report on Form 10K filed with the Securities and Exchange Commission on December 23, 2008 and in the press release we issued earlier today.

Forward-looking statements do not reflect the occurrence of unplanned or unanticipated events and cannot take into account unforeseen circumstances. Actual results for future periods may differ from those projected. Any forward-looking information that we provide in this call represents our outlook as of today, May 28, 2009, and we do not undertake any obligation to update our forward-looking statements except as may be required by the law.

With that, we are ready for our CFO, Dana Russell.

Dana Russell

Thanks Susan. Good afternoon, everyone. Novell's second fiscal quarter 2009 results were released a short time ago. The company reported net revenues of $216 million. GAAP income from operations was $18 million which equates to an 8% operating margin. GAAP net income was $16 million or $0.05 per share. Non-GAAP income from operations was $35 million, at 16% operating margin and non-GAAP net income was $29 million or $0.08 per share.

Foreign currency exchange rates negatively impacted revenue by $6 million and positively impacted operating expenses by $13 million and operating income by $7 million on a year-over-year basis.

Our results this quarter are similar to last quarter where maintenance revenue held steady due to strong renewal rates while license and services revenue declined. Our Linux business improved over last quarter and its profitability continues to move in the right direction. We also feel good about our Identity business and its outlook for the rest of the year. This business unit is approaching break-even and is on a clear path to profitability.

On the expense side, operating margins showed strong improvement in the face of a challenging demand environment. We continue to be aggressive in managing our expenses to enable us to meet our objective of double digit non-GAAP operating margins this year.

Now I will highlight some of our results by business unit. You can see the results on the revenue schedule on page 10 of our press release. Within Open Platform Solutions, Linux platform products revenue in the quarter was $37 million, increasing 25% from the year-ago quarter. Linux invoicing was $40 million, up 2%. To date we have invoiced $213 million or 89% of our original $240 million agreement with Microsoft. We continue to gain traction in the Linux market and we are pleased with our progress. We had several competitive wins during the quarter and are encouraged by our success and ability to compete in the market place.

We have invested heavily in our Linux business to gain market share and acquire new customers. While the business is not yet profitable, we are making steady progress and plan for it to be break-even no later than 12-18 months from today.

The business unit P&L schedules as seen on page nine of our press release only allocates cost of revenue and product development expense for each business unit. We plan to provide fully allocated P&L’s for each business unit beginning in the first fiscal quarter of 2010.

Moving on to our Identity and Security Management business unit, Identity, Access and Compliance Management revenue was $28 million, up 2% and invoicing declined 7% due to lower licensing. Even in this challenging environment we feel good about our pipeline. We believe our Identity business will grow at or better than market growth rates and we are well positioned in this market.

Next, Systems and Resource Management. Revenue was $40 million, down 2% and total invoicing decreased 13%. We remain bullish on investments we have made in this business unit and are confident they will be successful. We plan to continue to invest in this business while maintaining its profitability.

Turning to Workgroup, revenue was $79 million, down 14% and invoicing was down 24%. Within our Workgroup category the combined OES and NetWare related revenue was $45 million, down 13% from the year-ago quarter. Combined OES and NetWare invoicing declined 28%. Workgroup is experiencing trends similar to those experienced by other comparable businesses in the IT industry. However, we believe the decline rates will moderate to single digits over the longer term.

Services revenue declined 33% to $27 million during the quarter similar to the Q1 2009 levels. As we discussed in Q1 we expect services revenue to be at or slightly lower than its run rate for the rest of the year.

Before I turn to expenses I have some comments on revenue for the rest of the year. Historically, revenue in the second half of the year has been higher than the first half. However, we don’t believe this trend will necessarily continue due to the lower invoicing levels in the first half of the year which will impact recognized revenue in the second half of the year. It is possible that revenue will remain near the current quarterly run rate.

Now on to expenses. Cost of sales and operating expenses were down compared to a year ago due to the continued focus on expense management and the impact of foreign exchange rates. While we initially expected expenses to be about $10 million higher than the Q1 2009 levels we aggressively managed expenses down during the quarter. For the rest of the year we expect base expense to be $3-5 million higher per quarter than Q2 levels due to several factors including increased royalties and product development expenses. This excludes the impact of potential expense reduction efforts in the second half of the year. Also, we expect the non-GAAP tax rate to be 30-32% for the year.

We incurred $7 million of restructuring charges in the second quarter most of which represented a continuation of our 2008 restructuring activities. In the second half of fiscal 2009 we expect to be aggressive in reducing our expenses through a variety of means. Total headcount at the end of the quarter was approximately 3,900 in line with the prior quarter.

Now turning to the balance sheet and cash flow. Cash and short-term investments were $1 billion, in line with the prior quarter. Cash flow from operations for the quarter was negative $26 million, in line with the historical Q2 trends.

Now I will turn the call over to Ron for an update on our business units.

Ron Hovsepian

Thanks Dana. I am pleased that our focus on operational efficiencies resulted in our non-GAAP operating margin more than doubling year-over-year. Within our portfolio our growth businesses, Linux, Identity and Systems and Resource Management have strong prospects and continue to show promise going forward.

Our Linux and Identity businesses have the greatest potential to continue to expand operating margins and we plan to have these businesses be profitable no later than 12-18 months from now.

While the macro economic situation continues to be challenging I am seeing early signs of improvement. IT budgets with near term ROI and those related to cost reduction, security and compliance are getting approved. It feels like we have approached the bottom in the U.S. although this is not the case in Europe which appears to be lagging the U.S. by about six months. The general trends in Asia don’t appear to be as severe as the rest of the world. So overall I am still cautious about our near-term outlook but I feel better than I did last quarter.

Now let me update you on our business units. Beginning with Open Platform Solutions I am pleased that results improved compared to last quarter. Our core invoicing remains solid and continues to grow year-over-year due to improved sales execution. We continue to be aggressive in the marketplace through pricing and partnerships to acquire new customers.

Our new partner program which launched in February is directed at driving more deals through the channel. Historically our Linux business has been concentrated on larger deals, resulting in quarterly fluctuations of invoicing. Increasing the volume of channel deals should help reduce this variation over time. We are encouraged by the quality and quantity of deals registered in the partner pipeline and expect this to be an important sales channel in the future.

While our Linux business serves an important role in acquiring new customers and selling our complementary cross-platform management solutions and Identity and Systems Resource Management its strategic importance as an enabling technology platform will allow us to deliver our solutions in a variety of traditional, appliance, public and private cloud environments. With continued improvement of our go-to-market execution, we expect to reach profitability in our Linux business no later than 12-18 months from now.

On to Identity and Security Management. Results this quarter improved over last quarter as the market is starting to thaw and projects are starting to proceed. More often than not the original purchase consideration is driven by access and governance needs and customers are opting to purchase solutions in phases, one piece at a time rather than a total solution. This plays well into our product set which can be purchased as a point solution or as an integrated platform.

We continue to focus our efforts on growing our channel sales through solution providers and consulting and systems integration partners. These efforts are paying off. This quarter the percentage of invoicing from partners increased compared to last year. For example, we worked with HP to migrate several of its Identity customers including a large insurer and an aerospace company to our platform.

Also, CIS, a regional systems integrator, and Accenture were instrumental in signing a large deal with the New York City Department of Information Technology and Telecommunications. We are encouraged by the effectiveness of our new deal registration program and the engagement of our partners. While the market is still challenging we are making solid progress and plan to reach profitability in our Identity business no later than 12 months from today.

With respect to our Systems and Resource Management business unit, short-term results were below our expectations. Long-term we continue to believe that we can leverage growth opportunities in this business. We plan to further develop our customer and partner network to increase platform acceptance.

Turning to our newer SRM products, we remain excited about the opportunities for PlateSpin and Managed Objects, which provide cross-platform data center solutions. The market opportunity has moved towards large, complex, multi-site consolidation initiatives. We believe our premium virtualization and workload life cycle management tools provide superior solutions for companies seeking enterprise class capabilities for management of their mixed IT environments.

During the quarter several product updates were launched including PlateSpin Orchestrate, PlateSpin Recon and Business Service Management.

Next, Workgroup. Workgroup maintenance held relatively steady but licensing was under pressure. Overall, results were below our expectations due to the economy but generally correlate with the results in comparable businesses in the IT market. We recently launched a number of campaigns to focus on customer retention and migration to stabilize the business. The most recent migration survey indicates that 75% of our NetWare and OES base has migrated some portion of their product servers to OES Linux. We believe this data is encouraging and we expect the business to return to single digit decline rates longer term.

I would like to announce an exciting strategic partnership with ACS (Affiliated Computer Services) that will be announced later today as it validates our software strategy and develops a strong go-to-market partner. The partnership has two components; First, ACS has agreed to purchase at least $30 million of Novell products and services over the next three years to enhance its global data center operations.

Secondly, ACS will provide IT outsourcing services for Novell’s internal operations and provide SAP, consulting and systems integration services as part of a $135 million five-year contract. By way of background, our relationship with ACS began last year when ACS purchased our Identity products for their internal data centers. Subsequently, while we were evaluating IT outsourcing options ACS was recommended by one of our strategic partners. During this time, ACS was also considering purchasing Novell’s Service Data Center Solution.

As our conversations evolved, it made sense from both perspectives to elevate this strategic partnership. In addition to the strategic importance and improved operational efficiencies we expect this deal to have a positive financial impact on our revenue and operating margins. ACS will be an important customer and partner for SRM. ACS will invest in Novell’s technology in a number of areas including PlateSpin Workload Management and Managed Objects Business Service Management to deploy in its own data centers.

ACS evaluated several technologies and concluded that our service-driven approach best matches its technical vision to support ACS’ management platform, the delivery platform for its portfolio of IT outsourcing service offerings.

In closing, I am pleased with the continued expansion of our operating margin and our customer and partner reaction to the value proposition of our Linux and Identity businesses. We remain focused on growing our systems and resource management business and stabilizing our Workgroup business through improved sales execution and partner channel development.

The diversity of our portfolio and our focus on addressing critical customer issues of cost, complexity and risk mitigation give me confidence for our prospects. With that I will open the call up to questions. Operator please open the call up to our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of John DiFucci – JP Morgan.

John DiFucci – JP Morgan

It looks like the top line looks to have stabilized here and operations continue to improve here but I guess deferred revenue was weaker than we had modeled anyway and caused cash flow to be a little weaker than I had planned for. Can you comment on that? I think you mentioned earlier too that revenue recognition in the second half probably won’t go up like it has in other years given relatively weak bookings. Is that what we are seeing here?

Dana Russell

I think there are a couple of points there. First of all deferred revenue balance is down mainly as a result of the recognition of revenue in the Microsoft arrangement where we are actually seeing that placed in customers hands. If you were to take out the Microsoft impact, the deferred revenue actually would be up. However, we are seeing an impact. We will see an impact in recognized revenue in the second half of the year as a result of the weaker invoicing in the first half of the year. Even though we feel good and we are sending a positive message about where we think the business is going, directionally that invoicing has already transpired. It started taking place in the first half of the year and will have an impact on the second half revenue.

John DiFucci – JP Morgan

Just to be clear though, excluding Microsoft deferred revenue would have actually been up. Would it have been up sequentially excluding?

Dana Russell

Not up sequentially. We are talking year-over-year.

John DiFucci – JP Morgan

A follow-up to that, it was nice to see in print here 12-18 months to profitability for the open platform solutions group. It actually looks like at least in this quarter, sequentially and certainly year-over-year you saw some pretty nice improvement. Nicer than we had been looking for. This 12-18 months, I just want to sort of understand what is in there. It seems like longer than given the improvement you are showing, I realize you want to be prudent when you throw out numbers like that but is that time frame due to some of the uncertainty around the renewals of these Microsoft related subscriptions? Is that included in there? Some type of prudence in regard to those?

Dana Russell

I think we are being prudent or being cautious when we give the number out. However, I think you look at the numbers. We think there is steady progress. Very good progress. We are calling that out and we think that progress will continue. We are not trying to indicate a slow down to the progress we are making. In fact, we feel good about that business and feel like we are making very good headway towards profitability here.

Operator

The next question comes from Abhey Lamba – UBS Securities.

Abhey Lamba – UBS Securities

You mentioned second half revenues would not see a similar bump up that we see from first half in typical years. Could your second half revenue actually be down from the first half? Also, typically second quarter represents a quarterly trough in your margins. Should that pattern hold this year as well? Should we expect margins to go up from here? Are there reasons why that shouldn’t happen this year?

Dana Russell

If you look in the prior year you are going to see a fairly significant ramp in revenues. I think we went up in revenues. Recognized revenues were up about $24 million in the second half of the year over the first half of the year in 2008. What we are really calling out there is we don’t expect to see a bump like that in 2009. We are not suggesting it would be down but it could be flat. It could be slightly up. We are trying to give you a range here to model that out. As far as margins go and expansion of margins from where we are today we think it is steady course. One of the big factors there obviously is foreign exchange rates and assuming constant currency we are feeling relatively confident we can continue to maintain margins.

Abhey Lamba – UBS Securities

At some point you had mentioned we should expect a sequential bump up of $10 million from Q1 levels but total expenses were flat in the second quarter. In the third and fourth quarter what should we be expecting?

Dana Russell

We mentioned a $3-5 million increase in the base of expense rates for the second quarter as a result of royalties going up. Royalties are tied to invoicing and then we also have some development R&D projects we are spending some money on. However, we also mentioned we are going to be continuing to work on efficiencies and profitability through expense reductions through a variety of different ways so overall I wouldn’t expect to see any kind of significant increase in expenses from what you saw in Q2.

Abhey Lamba – UBS Securities

At Analyst Day you had given us an update on the uses of cash and the criteria you would use for any potential acquisitions. Can you just give us an update on that if there is one? Also, if you were to think of relaxing one of those conditions or some of those conditions that you look for in acquisitions what would they be?

Ron Hovsepian

I think our intentions actually just remain the same in terms of what we have shared with you in the past and the criteria by which we are looking through those pieces has not changed in terms of strategic fit, financial fit and operational fit. Those three dimensions haven’t changed or the categories. So we still remain focused on those things that would fit in there that would help continue to drive and accelerate the company.

Operator

The next question comes from Mark Murphy – Piper Jaffray.

Mark Murphy – Piper Jaffray

I’m just interested to get your thoughts on Oracle and Sun and specifically what do you think is going to happen with some of the key open source assets in the mix? Open Solaris, My SQL and Open Office or Star Office. How do you think it might impact the landscape? Are there any ways in which you think it might benefit Novell?

Ron Hovsepian

Obviously it is a question a number of us have been laying out different scenarios depending upon how the transaction finally closes. Assuming everything Oracle has said publicly about keeping all the pieces I think it actually raises some interesting opportunities for ourselves. If you look, for example, at the identity business Oracle now has two identity businesses. One group of those customers, in my opinion, will be migrating from one spot or another and I don’t think they know how or which one it is going to be. We haven’t heard anything and obviously they can’t say anything but one group of customers I think will become available for transition for us to attack and we are already launching the right kind of campaigns there.

In terms of the open source pieces here that is a much more complex answer because you have several different dimensions at play here. So let’s just start with the hardware piece of it. Oracle is in the hardware business if the transaction goes through. Inside of that when it closes you have to run that hardware and that chip set and you now need the operating system to run that. They now have those two operating systems and we are not sure what their longer term intention would be with that. Traditionally they have said they have supported up to 12 or 13 different operating environments which is great. If they continue that it is a positive for us. If they go with Solaris, we were fighting Solaris before and we will continue to fight those proprietary operating environments. So I don’t think anything dramatically changes there.

We do see it as an opportunity again because of the change and we are convinced the customers will just want some more choices there. In terms of the Open Office piece of it I really don’t have any direction to give you on that one in terms of other directional pieces with them. In terms of the rest of the portfolio of Open Source products like My SQL, I imagine there will be some positioning and we don’t really have any overlapping or competing products there. I see it as a chance to continue to work closely with them as we have in the past in some categories and compete in other categories. I’m glad we are just not a Linux only distribution company.

Mark Murphy – Piper Jaffray

From what you can tell is it a big enough realignment to the hardware and software landscape that it could drive a bigger M&A consolidation wave or do you think that people are kind of over-estimating the impact of this?

Ron Hovsepian

I think you have to look at the facts and the facts are the industry has been doing some level of consolidation over the last 3-5 years. I think just factually the number of companies that are independent have consolidated. I wouldn’t buck the market trend. That being said the one great thing about this industry is it has an incredible propensity to redefine itself and create new roles because the technology enables you to do that.

I believe also that the customers really want a certain level of choice in the market. I think those two factors give me a lot of promise as to the need for alternative choices in the market and that hopefully heightens that alternative choice in the market place for us which I think is good. The facts of what you highlighted are very real so I wouldn’t want to push against those.

Mark Murphy – Piper Jaffray

The CapEx has been very low for two consecutive quarters now. Should we think about that as essentially a maintenance CapEx run rate with minimal new investment going in there and should that trend at this level for the rest of the year or do you see that bouncing or moving higher?

Dana Russell

I think that may go up a little bit but I wouldn’t expect that to go up very much. We are going to continue to be pretty stingy on how we spend our money on anything inside the company here and do it prudently and efficiently. So I would expect fairly stable capital spending.

Operator

The next question comes from Michael Turits – Raymond James.

Analyst for Michael Turits – Raymond James

Can you talk about how the linearity was during the quarter and maybe how May looks and what your sales guys are telling you so far?

Dana Russell

Linearity meaning how the deals flowed in through the quarter? Is that what you are asking?

Analyst for Michael Turits – Raymond James

Was it back-end weighted or was it pretty much in line with other quarters?

Dana Russell

I think it was similar to other quarters from the standpoint that so much of the business comes in at the end of the quarter. As we talked about in the first quarter we had a lot of things we were actually caught off guard I think on some deals that didn’t close in the first quarter and the fact that people were very hesitant to sign things and it maybe didn’t represent trends that we had seen in prior quarters. I think we were more prepared for that in the second quarter even though there was still some hesitancy to sign deals but we felt like there was definitely some thawing going on and it was back to a little bit more normal to what we have seen in past trends.

Analyst for Michael Turits – Raymond James

On invoicing for Microsoft is that the new coupons or is that the older ones?

Dana Russell

This is the original $240 million arrangement that we had with Microsoft. There was some of the new arrangement of that first trench of $25 million and some notable customers who signed up for that and I think we will talk more about that later.

Analyst for Michael Turits – Raymond James

The majority was the old stuff?

Dana Russell

The majority was the old stuff.

Operator

The next question comes from Brent Williams – The Benchmark Company.

Brent Williams – The Benchmark Company

When you talked about in Workgroup the performance being “in line with comparable businesses” which comparable businesses were you thinking about and then that sort of keys up to another couple of related questions.

Ron Hovsepian

If you look for example on some of the more mature type market segments and look at Compuware their revenue I think was down 25% if memory services me. If you look at our product revenue specifically you can take a look we were down 3% on the product side, pretty much in line with Citrix and I think they were down 2% as memory serves me. Therefore on those newer businesses we were pretty much in line with them from an overall perspective. In particular I was referring to like a Compuware.

Brent Williams – The Benchmark Company

That sort of keys up on Workgroup but I think more interestingly in the Open and Linux businesses, how much of those things have been tied to hardware sales recently? Is that changing? Particularly, and maybe even just on the Workgroup business, is virtualization helping people to upgrade their workgroup systems without necessarily having to shell out the money for hardware? I have gotten the impression people are more reluctant to shell out money for hardware than they are to buy software to go on it.

Ron Hovsepian

The general comment on the server side is absolutely correct. People are trying to repurpose those servers and take advantage of Linux. We think that is great because you don’t have to spend the money on the hardware there. In terms of bundling deals around some virtualization and those pieces the answer is yes. Part of our strategy was to enable the customer to virtualize their NetWare application that they have, pick them up and put them on top of Linux Virtualized and then go allow the customer to have a very simple migration and use some of the exact same tools to manage that OES version on top of Linux. We have definitely enabled that.

As I had indicated our customer migration survey and upgrade survey showed some level of activity in migration of servers by about 75% of customers inside of there. We got a good indication out of the survey results. That is why I said I would like to see us get that back down to the single digits as a place, I would like to see it flat personally, but the single digits is something we can manage to much more effectively.

Brent Williams – The Benchmark Company

On the ACS deal, $135 million over five years is that a couple of million in savings per year versus what you would have spent under the old regime or is it dramatically more than that? When would we expect the financial impact of that to come up to full speed? Is this going to take 12-18 months or is it pretty much flipping a light switch?

Ron Hovsepian

I think the savings are out in year two in particular but I think you have to understand the nature of the deal because the good part of what is inside this deal from our perspective is solid savings over the life cycle but more importantly we are going to get updates to the hardware environment and other pieces here as well as I shared with you the role out of our CRM system that I referred to, the SAP piece of it there.

So there is a couple of other things that are very important to us as a business we are getting done that also then would include the savings piece of it on top of that. I think it is really important to understand. The ACS piece to me, the real exciting part, is the validation of our core strategy in that arena to me is the biggest take away because you have someone who has multiple global data centers around the world and really we exercised each other a lot on how and where our visions were going and how well they lined up on how to handle processing and different workloads around the globe and around the different tiers of processing; internal, external, clouds, etc.

Dana Russell

One thing I would say on that too just to add another comment is we have a first class IT organization that is extremely capable and very efficient. We are not in a position where we are going to see tremendous savings as a result of that and that wasn’t really the reason why we entered into this arrangement. We really entered this arrangement we feel that ACS is going to use our Provo facility where much of our IT resources are located as a showplace for them and their business. We are going to continue to have those resources working with Novell as they have in the past. We feel very good about that. Like Ron said it is a validation of our data center story, the use of products we have been talking about, PlateSpin, Managed Objects and very, very good synergistic transaction for both parties. So I wouldn’t completely focus on the cost savings there because that really wasn’t necessarily the motivation for doing that.

Operator

The next question comes from Richard Williams – Cross Research.

Richard Williams – Cross Research

You mentioned that the OES deal had other competitors with ACS. Can you tell us who they were?

Ron Hovsepian

I didn’t catch the question.

Richard Williams – Cross Research

I was just wondering who the competition was for the ACS deal?

Ron Hovsepian

In terms of different data center technologies?

Richard Williams – Cross Research

You said you were in competition.

Ron Hovsepian

They were looking at the traditional players that you would see in the market. All the regular brand names that were there and some of the incumbent vendors that they have inside of there right now.

Richard Williams – Cross Research

The key points that resonated with ACS?

Ron Hovsepian

The key points that resonated was the vision and the approach we have taken to the way we have developed and drive the workloads and manage the workloads in a service driven data center I think was probably the most important part. The sheer vision around compliance and security that go along with that for them, then obviously the ability to be cross-platform in that mixed IT environment to make all that work as one really was something that differentiated us versus a lot of the competition.

Richard Williams – Cross Research

Can you give us some color in terms of the geographies? I know you said Europe was about six months behind the U.S. and Asia not as bad as the U.S. but I wonder if you could give a little more color by market.

Ron Hovsepian

My comments there on the macro economic environment were just what I got from my last set of travels which is dated now by about a month and a half. What I saw as I hit all the major continents were I use the word thaw. I saw some thawing inside of the U.S. I see Europe lagging us by maybe 6-9 months in terms of where they are in the cycle. They are easy to see the pattern there comparatively. Asia you really have to look at it by country. Obviously Japan’s economy continues to have some struggles there in terms of flat GDP or down GDP. However, when we look at China and India they are still showing good strength in their economies. So it varies by country in Asia which is what you would expect.

Operator

The next question comes from Katherine Egbert – Jefferies.

Katherine Egbert – Jefferies

Can you tell us right now what the aggregate losses are for the Open Platform and the Identity area? You seem to indicate that Identity was fairly close to break even. Is that right?

Ron Hovsepian

I think the words that we have used is leaning on profitability. We are not profitable there at this point but we are getting close to that.

Katherine Egbert – Jefferies

But the majority of the loss is then on the Linux side, right?

Ron Hovsepian

That is the biggest consumer of resources. Yes.

Katherine Egbert – Jefferies

On invoicing, your invoicing was down last quarter and you have kind of plus/minus this quarter on invoicing. What is the definition of invoicing? What is the length of these invoices? Also, is the $30 million from ACS invoiced and if it is what areas is it in?

Ron Hovsepian

The $30 million is not showing up in invoicing at this point. There is a $30 million hard commitment from ACS to purchase Novell products and services over a three year period. Now just a point on that, to clarify that, that is very good. We are very happy about that and we know that ACS is committed to the product that Novell has which includes some of these products we have been working hard to implement, PlateSpin, Managed Objects, etc. but the larger benefit is associated with the influence we can both have to increase revenues through their influence with partners, customers, etc. That is really what we are looking for there. None of that $30 million showed up in invoicing in any category this quarter.

Katherine Egbert – Jefferies

What is the definition of invoices? Are these 90 days or one year or all in? How do we trend the invoicing?

Dana Russell

For example, invoicing could be used interchangeably with bookings but most of the time the arrangements are 1-3 year arrangements and it is based on what we actually invoice to the customer and what they would pay us. If we have a transaction and we sell Identity or any other product and the customer is signing up for one year use of that product then the invoicing would be a one-year arrangement.

Katherine Egbert – Jefferies

What made you decide to break out the P&L by segment starting in Q1?

Dana Russell

I think we have been saying we were headed in that direction for some time so it is not new news. We have been putting more information in those business units throughout the last couple of years. I think we are getting to the point with enough definition and clarity around how the consumption of our sales and marketing resources are occurring to be able to identify those pretty accurately and be able to show that on a fully loaded basis by business unit.

Operator

The next question comes from Brian Denyeau – Oppenheimer.

Brian Denyeau – Oppenheimer

At the Analyst Day you really lumped RD&S around together as being on the way and pretty close to break even. Today you are talking about ID taking about a year to get profitable and 18 months for Linux. Would it be fair to reason of that you are shifting more of the savings you are going to get from Linux into the ID business than perhaps you had expected a few months ago?

Dana Russell

We didn’t catch actually the very front end of your question. I think the question was the profitability of Identity versus the profitability of the Open Source business?

Brian Denyeau – Oppenheimer

I guess just kind of change in packaging. You had sort of grouped ID and SRM together as being near break-even at the Analyst Day. You are approaching it differently so I’m wondering would it be fair to reason that versus early April you plan to shift more of the savings from Linux into the ID business than you were thinking a few months ago.

Dana Russell

No, I don’t think we have any change to what we have been talking about and we were not trying to say that Identity is in a different position than what we were saying on the date there in New York. I feel like Identity is very close to break even and moving in that direction fairly rapidly. What we are giving there are sort of the maximum time frames as well. We are trying to give a window there and put some framework around it but I don’t think there is a new message here at all.

Operator

I am showing no further questions.

Ron Hovsepian

Let me just close with saying again I am pleased with the continued operational discipline that the management team is bringing to the environment here at Novell and what we are getting done. I do want to emphasize what I see as this ACS deal as a critical strategic impact it could have for us in multiple dimensions. Beyond the economics of the arrangement there was the discussion that Dana had highlighted about them being a strategic partner, being a showcase site for us, taking a big role and also helping drive us in terms of product, features and function. That is a very unique relationship we can build on and we build on it right in our own backyard of one of our development labs right in Provo and we get to leverage our employees in this situation. It is a really strong opportunity together from my perspective. Let alone the solid economics that will follow on the $30 million in invoicing in our future. I am really pleased with that and excited about the strategic impact that both companies can bring to market in the long-term. I like the validation. I appreciate it and thank you all for joining us on the call.

Operator

This concludes today’s conference. You may now disconnect.

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Source: Novell, Inc. F2Q09 (Qtr End 04/30/09) Earnings Call Transcript
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