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Novell Inc. (NASDAQ:NOVL)

F3Q09 Earnings Call

August 27, 2009; 5:00 pm ET

Executives

Ron Hovsepian - President & Chief Executive Officer

Dana Russell - Chief Financial Officer

Susan White - Director, Investor Relation

Analysts

Aaron Schwartz - Ladenburg

John DiFucci - JP Morgan

Katherine Egbert - Jefferies & Co.

John Doros - Raymond James

Brad Whitt - Broadpoint AmTech

Brent Williams - Benchmark Co.

Richard Williams - Cross Research

Susan White

Thank you and good afternoon everyone and thanks for joining us. I’m 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 third fiscal quarter of 2009. If you don’t yet have our press release, you can access it by visiting our Investor Relations webpage at www.novell.com/company/ir. This call is also being broadcast through our website and will be archived on our website for a minimum of 12 months.

Before I turn the call over to Dana, I’d 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 our 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 projected 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 factors described in our Annual Report on Form 10-K 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, August 27, 2009, and we do not undertake any obligation to update our forward-looking statements except as maybe required by the law.

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

Dana Russell

Good afternoon everyone. Novell’s third fiscal quarter 2009 results we’re released short time ago. The company reported net revenue of $216 million. GAAP income from operations was $21 million which equates to a 10% GAAP operating margin. GAAP net income was $17 million or $0.05 per share.

Non-GAAP income from operations was $33 million a 15% non-GAAP operating margin. Non-GAAP net income was $25 million or $0.07 per share. Foreign currency exchange rate negatively impacted revenue by $6 million and positively impacted operating expenses by $8 million and operating income by $2 million on a year-over-year basis.

Our results this quarter are similar to many of our peers, a strong focus on expense control, against the back drop of declining revenue and invoicing. Changes from the first half of the year continue into the third quarter as we continue to expand operating margins through diligence expense management. Revenue was flat compared to last quarter but declined year-over-year primarily due to the weaker economy.

Now I’ll highlight some of our results by business units. You can see the results on page 10 of our press release. Within open platform solutions Linux platform products revenue in the quarter was $38 million increasing 22% from the year ago quarter. Linux invoicing was $39 million down 24% in part due to declining service shipments and increased virtualization, which negatively impacted Linux demand.

In addition our Linux business remains depended on large deals which result in fluctuations of quarterly invoicing and has been amplified by the weak economy. Today we’ve invoiced $226 million or 94% of our original $240 million agreement with Microsoft. Given current run rates we expect the remainder of the original agreement to be invoiced in the fourth quarter.

Moving onto identity and security management business unit, identity access and compliance management product revenue was $28 million down 16% and invoicing declined 4% due to lower licensing. Our outlook for the identity business remains quite positive. Next systems and resource management revenue, product revenue was $40 million down 15% and invoicing decreased 16%.

Workgroup revenue was $81 million down 12% and invoicing was down 14%. Within our Workgroup category the combined OES and network related revenue was $45 million down 12% from the year ago quarter combined OES and network invoicing declined 13%. Services revenue of $25 million declined 30% compared to the year ago quarter and was down slightly from last quarter, we expect services revenues to continue to trend lower in the fourth quarter.

Now on to expenses, cost of sales and operating expenses were down compared to the year ago primarily due to continued focus on expense management. As expected cost of sales increased from Q2 ‘09 levels due to higher royalties, but operating expenses excluding restructuring were unchanged due to the continued cost control measures. Total headcount at the end of the quarter was 3700, down from 3900 in the prior quarter primarily due to our outsourcing agreement with ACS.

Turning to our balance sheet and cash flow, cash and short term investments were $921 million, down from the prior quarter due to the retirement of our convertible debentures. Cash flow from operations for the quarter was $35 million. Finally I want to comment on our outlook for the fourth quarter across our industry many companies are seeing declining revenue and double digit declines in invoicing similar to our results.

While we remain optimistic about our long term prospects we don’t expect to turnaround in the fourth quarter. We expect the fourth quarter revenue run rate to be add or slightly below third quarter levels and operating margins to remain in double digits.

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

Ron Hovsepian

Thanks Dana. This quarter we continued our focus on managing expenses which yielded in press of year-over-year operating margin expansion and while the demand environment remains challenging we are positioning the company to take advantage of the opportunities when the market recovers. I’m pleased with the progress we’ve made to build our partner network.

We continue to innovate creating transforming of technologies such as Novell cloud security service which addresses critical security concerns gaining cloud adoption. Additionally, we are leading business a major business models for software deployment and use with the introduction of our SUSE Appliance Program. We remain focused on delivering strong operating margins even as we continue to invest to generate long term revenue growth.

Now let me update you on our business units. Beginning with our open platform solutions, our product portfolio and partner ecosystem continue to strengthen. We believe positions as well for the future. IDC recently released its latest forecast of the Linux market. It projects the Linux market to grow at 17% gaga through 2012.

More importantly, IDC estimates the Novell gained five points of market share in 2008 which means that we have doubled our market share since 2005, demonstrating that our strategy is paying dividends. We also see our opportunities for Linux business in the emerging software appliance market. Last month we launched the SUSE Appliance Program and saw overwhelming positive responses from our customers, partners and the press.

Design for independent software vendors the SUSE Appliance Program provides the technical and business capabilities; ISVs need to shorten their sales cycle reduce support cost and extend existing applications to the cloud. All accomplished by building software appliances on SUSE Linux Enterprise foundation.

Since the program launched four weeks ago, we’ve had more than 2,000 ISV account signed up for the appliance program, which has built thousands of virtual appliances. While the appliance market is still in its infancy, it is projected to become a sizable market in just a few years. IDC projects over $1 billion of software appliances will be sold worldwide by 2012. While it’s difficult to predict our near term revenue impact, we are excited with about its long term opportunities and potential to transform our Linux business.

Onto Identity and Security Management, our strategy focuses on building an industry leading ecosystem of partners and continuing to deliver innovation and thought leadership in our product sweet, which help customers to address their identity, security and compliance needs across the enterprise. In this quarter, we saw continuing momentum and wins that came from some of our key partnerships.

In conjunction with our partner Mycroft, we signed a seven figure deal to provide core identity infrastructure and create a new business service for Cerner, a global supplier of healthcare solutions, who is a new Novell customer. Our global strategic partner Infosys was instrumental in helping us consummate a deal with the IGO, a new customer to the ISM business.

Western & Southern Financial Group went live with Novell access covenant suite with the help of the Lloyd, demonstrating both the importance of this technology and the leverage of our strategic relationship with Lloyd. I’m pleased with the progress we’ve made with our partners to drive new opportunities and expand our Identity and Security footprint in the market.

We’ve had several product releases this quarter, but one deserves special mention. We announced Novell compliance management platform extension for SAP environments. The only product offering in the industry to leverage a customer’s investment in SAP applications, map directly to other enterprise applications through Novell’s identity management technology, this solution improves performance and risk management through the strategic combination of business relevance in IT assurance and it continues to enhance Novell’s strategic relationship with SAP.

Finally, we unveiled Novell’s cloud service, which enables cloud’s providers, SaaS vendors, manage service providers, and outsourcers to offer customized security to their enterprise customers. We believe IT organizations want the same security in access technology for the cloud as they use in their enterprise, a concept we call the annexation of the cloud.

Novell Cloud Security service enables businesses to treat the cloud as a natural extension of their data center. In essence, we provide a transparency so that IT organization does not need to know whether their workloads are running locally or in the cloud. By alleviating security concerns in managing compliance, we believe this technology has the potential to accelerate the widespread adoption of cloud computing.

Turning to our systems and resource management business unit, we focused on improvements in product quality and sales performance for our end point management products. This quarter we made important strides around industry recognition and customer traction coupled with the recent release of the zcm10.2-, we expect increased customer awareness, which in turn should drive demand.

We made several targeted investments over the past few years to increase our skills, products, market awareness and opportunities in the data center market. We continue to believe the market is attractive, but it’s changing quickly, which adversely affected and impacted the PlateSpin performance. We plan to better address rapidly evolving customer needs through delivering product releases over shorter cycle times.

We believe that our partnership with ACS will be an effective catalyst to improve our development cycles and to ensure we are meeting anticipated customer needs. We also expanded our partner relationship with Dell to include place the end products. These products are critical to accelerating virtualization adoption and delivery of virtualization assessments and rapid deployment engagements for Dell’s consulting Group.

Dell ProConsult, we expect the agreement to increase the use and visibility of the PlateSpin products. Next Workgroup, while revenue declines were greater than last year due to the economy, we continue to manage this business efficiently. When IT spending improves we expect Workgroup decline rates to moderate and Workgroup to continue to be a strong contributor to profitability.

In closing, we continue to manage our expenses efficiently to build a solid foundation for future growth and expansion of our operating margins. We remain optimistic about our long term opportunities and believe we are well positioned as the market recovers.

With that, I’ll open the call to questions. Operator, please open the lines for our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Aaron Schwartz - Ladenburg.

Aaron Schwartz - Ladenburg

I had a question on the maintenance line. If I look at your maintenance taking out the open platform business, it looks like a pretty strong number this quarter and up nicely on a sequential basis and I just want to reconcile that with the guidance you provided in terms of Q4, why total revenue would be flat to down.

Do you expect licensed actually trend lower in the Q4 that would seem in a very different from prior years or is there a one time component maintenance that you don’t expect to repeat in Q4?

Dana Russell

No, Aaron I think we’ve seen maintenance fee strong throughout the year and we continue to be quite good at renewing the maintenance contracts that we’ve had in place. We have had a weakness throughout the years as you’ve seen in licensing and also we have suggest the services will also be down a bit.

So the invoicing that we’ve had is obviously impacting our ability to recognize revenues here as we go forward and will have some impact in the maintenance line, but overall that the major impact with this being flat to slightly down in the fourth quarter would be a result of our licenses and our services revenue.

Aaron Schwartz - Ladenburg

Then taking a look at cash flow historically Q4 has been a good cash flow quarter for you. Is there anything to suggest that cash flow shouldn’t be up directionally on a sequential basis and I know it’s hard to talk on just quarterly basis but, directionally can you provide any look into Q4 on cash flow?

Dana Russell

The same pattern where we’ve had strong cash flows in the fourth quarter will continue I think as we model this out, we’ll continue to see the expense structure being relatively consistent with the expense structure that we saw in the third quarter and we’ll continue to see good cash flows in the fourth quarter.

Aaron Schwartz - Ladenburg

I think the first can release was early or in the early part of the summer of ‘06 and you had a number of three year agreements within, I believe. Can you talk anything about those three year renewals is they come up are those renewing for this year or is there any change in duration on the three years that started to renew?

Ron Hovsepian

The first set of renewals won’t really happen until Q1 next year for ourselves and begin really in Q2 almost, but in general renewals it remain strong as Dana if said across the board, contract lengths have shortened up for a lot of the customers is a general statement. In terms of the Microsoft certificates, we’ll start to see how those will behave in Q1 and Q2 as we go into next year.

Obviously there’s been a set of price pressure in the market that I would anticipate that will be some pressure on that number as we go into next year and particular in that first wave as we roll them out. Additionally that first wave had good penetration into the financial services sector, which we all know has gone through a lot of change and some of those companies have gone through significant changes in the way they process or the way they organize or exist for that matter.

Aaron Schwartz - Ladenburg

In terms of just looking throughout the year around some of those issues highlight, is that something you’ll provide more color on the December call or how should we think about that in terms of growth going into next year?

Ron Hovsepian

Like we usually try to do on that Q4 call, Aaron will tried making sure that we give proper direction as much as we can as we go into the next year. We’ve tried to be pretty straightforward on that.

Operator

Your next question comes from John DiFucci - JP Morgan.

John DiFucci - JP Morgan

We know it’s tough out there for everybody and it remains pretty tough, but I guess Ron, can you talk a little bit more about your strategy to sell ISM and SRM into new enterprise Linux customers? Is there anything more you can give us there on metrics and how this might be working realizing you’re up against a tough macro right now? So a lot of strategies are operating a little bit differently than you’d have hoped.

Ron Hovsepian

As I said, John, on the Linux and the connections to the Linux business, it’s very important that Linux for us is viewed as a key enabling technology in our strategies. From my vintage point that’s really to help us get new customers and to enable us to do things in a different manner with those customers like the appliance program that we announced. In terms of actual tax rate, I don’t have any data to share with you.

We’re still in the anecdotal phases of what we are seeing there, but part of our longer term strategy, is to make sure that we leverage that enabling technology at Linux. I think you could see that the appliance would give us a tool by which we could leverage some of those types of technologies for some of the customer.

As the ISV in particular, builds application that they’re going to need a particular security or compliance need as an example or the management required with that, but at this point, I don’t have any core data to share with you at this point.

John DiFucci - JP Morgan

At this time Ron, just to understand you big clients business, it’s a SUSE Appliance, but could you envision that becoming more than that and just being at few stage less to ISM appliance?

Ron Hovsepian

I think that’s kind of what my point as I think Customers, ISVs will begin to build different appliances within the market. So what we’re seeing is a whole range of pure application vendors and system vendors looking to build that new. You will see appliances that were actually already announced one inside of our identity business and you’ll see more appliances like that as and enabling technology for us. I think it opens up opportunities for us to do some better embedding and positioning of our technologies out into the marketplace.

John DiFucci - JP Morgan

What I’m trying to get at, because you can envision people wanting to buy SUSE, but that could be the road people take. I can envision other security vendors saying we really want partner closely with Novell, but just on the Linux side.

Ron Hovsepian

You’ll absolutely be able to do that. That’s absolutely design point. So we’re not going to force anybody’s hand. There’s not going to be any unnatural acts there, but on the support side we’ll obviously make it convene for them to buy our products, we are not that naive.

John DiFucci - JP Morgan

Dana, can you give some data on foreign exchange impact? I assume that’s on the GAAP results. Obviously, it’s the same impact on the top line on revenue, but on operating expenses is it a different impact than non-GAAP?

Dana Russell

Well, I think if you look at it on a non-GAAP basis, in comparing we had non-GAAP operating income of 15%. On a constant currency basis, if you looked at constant currency from the prior quarter, it would have been over 16%. So we’ve actually had a little bit of increase in terms of operating income. So we did have a consistent decline in revenues as a result of currency, and we picked up a benefit on the expense line just given and to point out a couple of things.

If you look at the identity business, for the quarter we were down 4%, but if you were to look at it on a constant currency basis with prior year, we’d have been or quarter-over-quarter, we’d actually been slightly up. So it is an impact. It is reasonably significant.

John DiFucci - JP Morgan

Just on the year-over-year, you just mentioned quarter-over-quarter would have been, you would have seen another percentage point of operating margin, but year-over-year what impact would that have been, you reported 15% on non-GAAP basis, but year-over-year I would assume you got some benefit relative.

Dana Russell

We definitely got some benefit. I think if we were comparing to the prior year, I think we would have been roughly in the 13% range.

John DiFucci - JP Morgan

Because the one thing I’m trying to gauge and looking at our model and I’m sure others are too and it’s not just you guys, it’s others you guys have actually shown some nice increase in operating margins year-over-year and long strain of quarters here and that’s great to see, but at the same time some of that benefit comes from foreign exchange. I just don’t want to for ahead of ourselves if that benefit starts to go away a little bit.

Ron Hovsepian

Yes, agreed. We’ve been very open about sharing those numbers, making sure everyone understands on a constant currency basis where we stand. We have shown improvement irrespective of currency whether you are looking at it sequentially or in a year-over-year basis.

Operator

Your next question comes from Katherine Egbert - Jefferies & Co.

Katherine Egbert - Jefferies & Co.

It looks like there was a draw down in deferred revenue around $52 million quarter-over-quarter. What is that and is any of it currency related?

Dana Russell

The major draw down in deferred revenue is a result of the Microsoft impact. So, if you were to take out the Microsoft invoicing in terms of deferred revenue, so if we are looking from the prior quarter, we are actually up in deferred revenue and on a year-over-year basis we are also up in deferred revenue.

Katherine Egbert - Jefferies & Co.

What about next quarter it sounds like you are going to take that last bit of Microsoft invoicing would deferred be down again?

Dana Russell

I would think on a year-over-year basis, yes, they would be down again if you are looking at the absolute number for deferred revenue, taking out the impact of Microsoft, I think you would be up or flat.

Katherine Egbert - Jefferies & Co.

Then it’s a pretty big difference licenses year-on-year again I think somebody asked about it earlier. If given your invoicing numbers it seems like the licenses are dropping more precipitously what the invoicing numbers are telling us, why is there disconnect?

Dana Russell

I’m not sure I’m following you. If you look at the invoicing numbers, the invoicing numbers are down quite significantly across all of our product groups and the majority of the reason for that invoicing decline has been a result of the drop in licensing and services revenue. So, I think it’s actually quite consistent with the drop that we are seeing in licensing.

Katherine Egbert - Jefferies & Co.

Maybe a different way to ask it is of your invoicing down, I mean say like Workgroup down 14%, the regional maintenance is up and licenses is down more than 28%, say? What I’m asking is 14 an average where the maintenance is actually still growing and the licenses are down 28% or 30%. Is that the right way to look at those invoicing numbers that you give us?

Dana Russell

If you look on the front page, I guess Katherine you are looking on page 5 of 11 on our press release schedule there you are seeing licensing drop on a year-over-year basis from $53 million down to $27 million and you can also see a pretty big decline in the services revenue from $36 million down to $25 million and the maintenance and subscription revenue is up or increasing year-over-year, which is consistent with what we’ve been saying. So, I think it does all reconcile back to the drops that we are seeing on invoicing.

I think there is a couple other things that I would point out in terms of invoicing. Number one, our contract durations are shortening a bit and that is impacting the invoicing number. So we are seeing a little more resistance to longer term deals or longer contracts and people shortening those contracts up, retain the same level of technology, but signing up for lower number of years, and then also the currency impact is affecting those numbers as well.

Katherine Egbert - Jefferies & Co.

Then last one. Since you’re going to breakout operating profit by business unit in a couple of quarters, can you give us any color on what it was this quarter?

Dana Russell

I think the only thing, the color that we have is in the press release schedule there. I think the thing that we haven’t broken down is the sales and marketing across the different business units. We can give you macro statements around that to say that we’re very, very profitable in our legacy businesses. We’re continuing to invest heavily in these new emerging businesses. Identity is getting closer to profitability as we’ve talked about the before we’re making very good progress in the open source business as well.

Operator

Your next question comes from John Doros - Raymond James.

John Doros - Raymond James

You mentioned that could be impact from virtualization on your Linux business. Can you give us some more detail on that?

Ron Hovsepian

The comments that we made there is that, server shipments are down and probably the servers folks are feeling a little bit of the impact of virtualization contributing on top of the economic worlds John I think is, what the intention was of that particular comment.

John Doros - Raymond James

Anything new from the last couple of quarters, are you seeing what an increase in more consolidation ratios or anything like that?

Ron Hovsepian

No. I don’t think it’s increased. I think customers are just trying to use up all the capacity they have and defer as much capital as they can and expenses and virtualizations is one of the many catalysts where people just think those things through and try to manage it as best they can. So I don’t see anything newer happening from it so to speak, pretty consistent when you look at servers being down. Everybody HP, IBM and Dell are all ranging in that 20% zone give or take a couple of points.

John Doros - Raymond James

From a geo perspective, you talked about strength, weakness, and any recovery you’re seeing in Europe at all?

Ron Hovsepian

In addressing Europe, I think our team there has done a nice job of focusing in on the partners, and I would say our team in Europe actually has a good running start going on over there for our business. None of the geographies are perfect, but I would say that EMEA for us is actually doing a little better than I anticipated given all the economic woes in Europe.

Operator

Your next question comes from Brad Whitt - Broadpoint AmTech.

Brad Whitt - Broadpoint AmTech

A question about, you mentioned that there are some market changes that have impacted the PlateSpin business. I just wonder if you could give us some more clarity on that.

Ron Hovsepian

Sure. Part of our strategy was to strengthen our position in the data center market and the key acquisition of PlateSpin was really to get us some brand awareness, market awareness, get us into that opportunity around the virtualization and the tool space associated with that. Obviously, that space has a lot of competition, a lot of different things happening inside of it.

What would be an example of that is that we saw for example, one of the planning tools that we used to sell quite regularly had begun to be given away by to the partners versus being afore charge asset. That’s an example. So we’ve had to adjust our model and we also had to work harder to develop some of our bigger relationships. So how we’ve responded is, we’ve changed our model and changed our offering so that we also have those consultants taking advantage of our planning tool, the PlateSpin Recon product.

Also what we’ve done now as we’ve signed relationship with Dell, where their whole consulting team is going to use that and from my point of view they probably did many, many thousands of assessments out there in the virtualization world. That is a big strong consulting unit.

Brad Whitt - Broadpoint AmTech

Another question around the subscription and maintenance business, are there any other products other than Linux that you sell on a subscription basis, any of the other segments?

Ron Hovsepian

Any of the other segments on a subscription basis?

Brad Whitt - Broadpoint AmTech

Correct.

Ron Hovsepian

We’ve made an announcement recently that all of our products are available on license and subscription based except Linux. So we do have that model to offer to the market and to the customers, and I would say we’re in the beginning phases of looking at, what would occur from those subscription based models, but we did make an announcement this past quarter in that area offering our customers the choice of either method.

Brad Whitt - Broadpoint Amtech

That primarily market driven based on what you’re seeing in?

Ron Hovsepian

Yes, absolutely.

Operator

Your next question comes from Brent Williams - Benchmark Co.

Brent Williams - Benchmark Co.

A couple of quick questions for you, so going back to the question about Europe, so you were talking about the relative strength there being principally execution. I just wanted to sort of find out. Are you seeing any positive upturn in the economy there? Most people have not. I mean I wondering, if you’re seeing any of those tabled green shoots over there or are you just powering through on execution alone?

Ron Hovsepian

I would say that it’s an execution statement by the team more than anything. I love to give better signals to you, but I think it was just our execution.

Brent Williams - Benchmark Co.

Just our macho execution is certainly better than the tailwind that benefits everybody. So I’ve been sort of detecting a little bit of change in tone from the folks over at BM were lately, and I think they are sort of becoming a little more passionate about being vertically integrated perhaps even than they have been historically and I think there’s kind of a little tension between them and some of their technology partners.

Are you seeing any changes there and is there any impact on PlateSpin or is the momentum for stuff out there, just so unstoppable that it doesn’t matter what they do?

Ron Hovsepian

A couple of questions in there and so I think all of us in the market have to be customer focused, and we’re all stoppable. It’s just a question of how long before you slowdown as part of that.

I do think VMware is very much aware of what is happening in the market. I think the acquisition of spring source by them introduces a very clear signal to the market that they do want to offer good, open source development platforms into the marketplace, which we think is great. So we welcome further validation of that part of the open source market.

In my conversations, they remained pretty consistent that they are agnostic on the physical operating system platform in their world. So I don’t think that part will change anytime soon. In terms of putting together a vertically integrated environment, I think if you look their vSphere plan, they’ve been pretty open to partners and relationships inside of their and I don’t think they’d clearly called out that they want to own and dominate every single stack.

I think they want to have pieces that they still put together there, obviously that changes. We’re all under pressure to grow revenue and sometimes you think you can grow revenue faster by owning it. Our view right now for our company is to stay focused on markets we’re in and continue to be the strongest partner in those particular marketplaces, because we do think, while the vertically integrated story is very important to certain sized customers. I believe the need for better integrated components will open up more market opportunities for the best of breed.

What I mean by that is there’s a whole camp of vertically integrated players and then there’s the whole camp of best of breed and if someone like us were to give an appliance tool to put the pieces together, that would accelerate and create better opportunities for those smaller companies to compete in a simpler form factor that’s more easily delivered to the market. So I think we haven’t kind of seen that rest of the story play out and VMware has to decide where they want to play. We’ve decided where we want to play.

Brent Williams - Benchmark Co.

Then my last one was just real simple quantitatively, when you talk about the length of the contracts of the multiyear deals coming down versus maybe the quarter at year ago, can you give us how much is that sort of downwards?

Dana Russell

I can’t give you an exact number, but I can say that we’ve certainly seen an impact there and it’s somewhat meaningful in terms of the year-over-year impact. It’s not necessarily the last quarter or two but I think over the last year or so, and if you look at it on a year-over-year basis, there’s a meaningful impact in terms of contact duration.

Susan White

I think we are ready for our last question.

Operator

Your final question comes from Richard Williams - Cross Research.

Richard Williams - Cross Research

Could you give us little color on Latin America and also Asia?

Ron Hovsepian

Let’s start with Asia-Pacific. We continue to see, when we look at the macro level data, we continue to see the Asian economies doing a little better in the GDP basis with the exception of Japan. You are still seeing some level of growth in those market segments. We’ve had some good wins inside of our China market and continue to see ourselves play a leadership role in several of those markets Linux being one of them on the server side.

So, I continue to see good performance in country-based markets from an overall perspective. We like to see more growth in those markets from our vantage point. When you are looking at Latin America, you really again like Asia-Pacific, you have kind to look country-by-country.

Brazil I think two quarters ago announced their first downward GDP and I haven’t seen the last quarter of data for them on GDP, but they were off for the first time two quarters ago I believe and when you look at those markets, they are still small, but growing markets is the way we look at them and we’re still seeing good interest, good penetration.

Overall as we rely on partners more and more as we have, those markets we’re more helpful we’ll get more penetration through the partner ecosystem into Asia-Pacific as well as Latin America.

Richard Williams - Cross Research

All my other questions got answered. Thank you very much. Good luck.

Ron Hovsepian

So, with that I’ll wrap up the call. I thank everyone for coming and joining us and we’ll talk to you next quarter. Thank you.

Operator

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

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Source: Novell Inc. F3Q09 (Qtr End 31/07/09) Earnings Call Transcript
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