Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Novell, Inc. (NASDAQ:NOVL)

F1Q10 (Qtr End 01/31/10) Earnings Call

February 25, 2010 5:00 pm ET

Executives

Susan White - Director of IR

Ron Hovsepian - President & CEO

Dana Russell - CFO

Analysts

John DiFucci - JPMorgan

Abhey Lamba - ISI Group

Michael Turits - Raymond James

Brad Whitt - Broadpoint Capital

Richard Williams - Cross Research

Brian Schwartz - Piper Jaffray

Katherine Egbert - Jefferies

Operator

Good afternoon, my name is Ryan and I will be your conference operator today. At this time, I would like to welcome everyone to the Novell first quarter 2010 financial earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn the call over to our host Miss Susan White.

Susan White

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 first fiscal quarter of 2010. 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 to 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 compensations, acquisition related intangible asset amortization, restructuring, asset impairments, litigation judgments and settlements, purchase 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.

During our prepared remarks we will mention some non-GAAP measures, the corresponding GAAP measures are Q1 10 GAAP net income of $20 million and GAAP EPS of $0.06 per share, Q1 fiscal 2010 GAAP operating margins are 11%, up from 6% year-over-year. We may also provide projections for 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 efforts because we are unable to accurately forecast information regarding expenses or gains such as, but not limited to, those previously described. We believe that the corresponding GAAP financial measure is not likely to be significant to an 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 the ordinary course of business.

We will also provide information regarding Novell's general product direction roadmap is intended for information purposes only and may not be incorporated in to any contract, it should not, it is not a commitment to deliver any material code or functionality and should not be relied upon making purchasing decisions. The development, release and timing of any features or functionality described in Novell's product remains at the sole discretion of Novell.

Finally, please note that during today's call, we may make forward-looking statements. You should be aware that 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 22, 2009 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, February 25, 2010, and we do not undertake any obligation to update our forward-looking statements except as may be required by the laws.

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

Dana Russell

Thanks Susan. Novell's first fiscal quarter 2010 results were released a short time ago. The company reported net revenue of $202 million, GAAP income from operations was $21 million, non-GAAP income from operations was $33 million, non-GAAP net income was $25 million or $0.07 per share. The quarter's financial results included a $5 million change in accounting estimate related to 2009 sales compensation expense that increased profitability in the quarter. This benefit was more than offset by $6 million negative impact to income from operations from foreign currency exchange rate on a year-over-year basis.

Product invoicing was up year-over-year by 10% driven by strength in Linux and identity products; however revenue declined 6% due to softness in 2009 invoicing and weakness in our legacy products. In alignment with our intelligent workload management strategy which we announced last year, we have reorganized into 2 business units, the open platform solutions, identity and security management and systems and resource management business units have been combined into one business unit called security management in operating platforms.

The work group business unit has been renamed collaboration solutions. As a result we are reporting 2 business unit P&Ls instead of four as seen on page 9 of our press release. In addition we have also provided fully allocated BU P&Ls. Now I'll highlight some of our business unit results on pages 9 and 10 of our press release. Our security management and operating platforms product revenue was a $109 million up 3% year-over-year.

Invoicing was up 26% year-over-year. Operating margin were a negative 3%, improved from a negative 7% a year ago. We made a commitment that Linux would be breakeven at the end of this year, even though we don't report Linux separately this business was breakeven which is a significant milestone.

While operating margins for security management and operating platform business unit may fluctuate on a quarterly basis, we feel good about the progress we've made and expect margins to continue to improve.

Linux platform products revenue in the quarter was $37 million, increasing 6% from the year ago quarter. Linux invoicing was fairly consistent with the last few quarters, but was up 75% year-over-year.

Renewal of Linux distribution associated with Microsoft certificates began during the quarter, and as expected we realized much lower invoicing than the original agreement.

Lower invoicing associated with Microsoft certificates was offset by significant growth in our non-Microsoft invoicing.

Moving on to identity access and compliance management, product revenue was $29 million up 13% and invoicing increased 40%. Systems and resource management product revenue was $38 million, down 5%.

Turning to collaboration solutions business unit, product revenue was $71 million down 12% within collaboration the combined OES and network related product revenue was 42 million, down 6%.

Collaboration operating margin was 47%, since we have no current plans to reduce expenses in this business unit. Margins will depend upon revenue levels.

Operating expenses were down compared to a year ago primarily due to reduced sales in marketing and product development expenses. Q2 expenses are expected to increase compared to Q1 levels. Q1 expenses were naturally low due to the $5 million benefit I previously discussed.

Next, I will like to highlight a cost of revenue reclassification. We have historically reported all technical support cost in the services cost of revenue line. We have moved technical support cost associated with maintenance to the maintenance cost of revenue line.

This is approximately a $9 million quarterly change between line items in the cost of revenue section of the P&L. This change only impacts line items within cost of sales and does not impact revenue, total cost of sales or total gross profit. As schedule showing the recast of historical amounts is available on our IR website.

Total headcount at the end of the quarter was 3500 down from 3600 in prior quarter.

Turning to our balance sheet and cash flow, cash and short-term investments were $991 million up from the prior quarter. Cash flow from operations was $5 million for the quarter. This compares to the $13 million a year ago which included a $25 million payment from Microsoft, normalizing for this payment cash flow from operations was up $17 million year-over-year.

Turning to our outlook for the second quarter. We expect revenues to be similar to the Q1 levels, and non-GAAP operating margins of 12% to 15%. We assume FX rates hope steady with today's exchange rate.

With that I'll turn the call over to Ron.

Ron Hovsepian

Thanks Dana. I'm pleased we delivered the invoicing what have been predicted last quarter, while maintaining our non-GAAP operating margins. We saw signs that select markets improved particularly in the Americas and Asia Pacific. Customer and partner reaction to our intelligent workload management strategy has been encouraging. Consequently, we expect many of our other solutions within our security, management and operating platforms business unit to benefit.

Intelligent workload management, capitalizes on the emerging trends of virtualization and cloud computing. According to Gartner, 16% of computing workloads are virtualized today, growing to an estimated 50% of workloads by 2012. IDC estimates only about 1% of computing workloads are hosted in the cloud today and is expected to grow very quickly at about 30% [keggar].

The move to virtualization and cloud computing is motivated by two factors: minimizing cost and maximizing flexibility. So, while the prospect of lower cost and increased flexibility of these new business models is promising, issues around security, performance management and availability have slowed their adoption. Customers are seeking workload portability across their physical, virtual and cloud environments. While minimizing risk and complexity. They need integrated security, compliance and control. So they can trust their critical business processes and data to a cloud environment.

To satisfy these computing requirements they need tools that enable them to create and manage workloads that have built in security. Identity and management capabilities that travel with the workload as it moves from one environment to another. This intelligence inside the workload makes them portable and provides business flexibility.

These requirements prove well to our current and future capabilities. Our strategy is to help customers build secure manage and measure these portable intelligent work loads that can work across physical, virtual, or cloud environments.

Novell already has many of the technologies required to address the market. Our Linux solution to build workloads identity and security management to secure workloads and systems management to manage and measure work loads. I believe this combination of capabilities differentiates us from the competition. We have already begun delivering the intelligent workload management solutions to the market and our product road map for 2010 should further strengthen our portfolio to build secure manage and measure intelligent workloads.

Here is a brief preview of our product announcements we have planned for fiscal 2010. Starting with build, we help clients build intelligent workloads on the foundation of our SUSE Linux operating platform. In the first quarter we announced the SUSE appliance toolkit which further extends our SUSE studio capabilities. Taken together, these tools improve the efficiency of building, deploying and maintaining appliances or work loads in a physical, virtual, and cloud environments.

Next we help clients' secure intelligent workloads with products from our identity and security management portfolio. This year we plan to add new capabilities to these products that bring identity and policy awareness into the workload itself allowing it to be managed and moved with the appropriate security in the data centre and the cloud.

Later this year, Novell plans to ship two new products to further extend customers ability to secure their intelligent work loads. The first is the Novell cloud security service which is a new solution that would enable enterprises to enforce their own identity and security protocols in to the cloud.

The second offering is the Novell Identity Manager 4 which adds significant functionality to Novells flagship identity management product making it possible to securely mange identities and access across physical and virtual environments.

Moving on to manage, in 2010 Novell plans to introduce new products that integrate and extend our systems and resource management capabilities to the cloud to ensure optimal execution of work loads both on and off site. This product announcements include PlateSpin Atlantic which is a self service system that will provide on demand applications to business managers while automatically optimizing IT deployment of work loads using a combination physical, virtual and cloud computing resources.

And finally measure to help customers measure and gain real time insights in to IT operations Novell offers a suite of business service products. This year we plan to launch Novell Compliance Automation which is an integrated holistic view of both IT system performance and compliance. This will make it easier to optimize the deployment of work loads across physical, virtual and cloud systems as well as get real time alerts to compliance issues.

To align around our intelligent work load management strategy we have consolidated our operations from four business units down to two. The new security management and operating platforms business unit will be better equipped to address all the components to build, secure, manage and measure intelligent work loads. Leading this new business unit is Jim Ebzery, who formerly ran our identity and security management business unit. Jim's background in security fits well with our security focused approach to intelligent workload management. The collaboration solutions business unit is focused on expanding Novell's collaboration portfolio to address the unique requirements of this evolving market. Colleen O'Keefe is the general manager of the business unit.

We believe intelligent workload management is an attractive and growing market and that Novell has the assets to offer a differentiation solution. Our current product portfolio and product road map are focused to strengthen our capabilities to build, secure, manage and measure intelligent work loads. We are building our primary eco system to complement our solutions and expand our distribution channels, I am excited about our prospects and I believe Novell is well positioned to lead in the emerging market of intelligent work load management or extending our innovation and the collaboration market

With that we are ready for your questions. Operator, please open the line for our listeners

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John DiFucci with JPMorgan.

John DiFucci - JPMorgan

Thanks. Ron, can you give us a little more detail about the Microsoft renewals? Tell us, perhaps, what the renewal rate was on those original invoicing I mean invoices from Microsoft. I believe it was somewhere around $73 million about three years ago and so about that much would have come up for renewal right around now, I think everyone or at least we anticipate that you are going to see some capacity reductions given the downturn in the economy given that these customers and obviously it was supplemented by Microsoft so they got them at a much reduced rate themselves and also the pricing environment since then has gone down, can you give us some kind of idea what kind of renewal rate you did see on that?

Dana Russell

In terms of the renewals, let me give a more holistic statement about the way that we feel about the situation with the deployment of the Microsoft certificates and our ability to renew those. We feel very good about the ability to renew and we have been renewing very well and feel like we will continue to do that. When you look at the pricing though in terms of the financial impact of the financial statements, the original certificates we were paid from Microsoft at a 45% of list price, so a 45% discount. And in most of these certificates especially in the early part of this program went out to very large strategic customers at fairly significant discounts.

And so as we look at the renewals, the expectation is that we could see especially for very large strategic customers the pricing now has changed dramatically and what we are seeing is something more akin to 80% to 90% discount. And so if you do the math on that that would give you a bit of an indication and give you a very good indication on what we expect as we go forward here with the program and the financial impact associated with it.

John DiFucci - JPMorgan

Dana, just a quick follow-up to that, would you expect also, capacity reductions on those renewals in addition to that 80% to 90% or would that be included in that number?

Dana Russell

There's certainly some things that John, you mentioned that there were couple of accounts that we originally sold to that were large sales, that their businesses changed a lot. They were disrupted or they've actually gone away and from that standpoint, yes I think there could be some reduction from a capacity standpoint, but overall I would say for the majority of the program we would expect that what was distributed will be utilized and we will be able to renew that even though it would be at a much reduced price.

John DiFucci - JPMorgan

Dana, just quickly on the $5 million change in accounting, is that a one-time thing and I know it has something to do with sales, but could you give us a little bit more on that?

Dana Russell

Yes, let me give you color on that. So in 2009, especially as we got mid-way through the year, we introduced some compensation programs in the sales organization with some accelerators to try to generate some additional revenues. It was outside of our normal program so to speak and it was a result of the softness that the entire industry was feeling and so we felt like some additional motivation might be necessary.

We over expensed in 2009 to put it simply, and as we got through and made the final calculations, the accelerators and things that we had out there that we thought we're going to payout. We just didn't achieve the revenue numbers that we thought we are going to achieve and basically, we reversed out $5 million of expense, it was actually about $4.5 million in 2010.

So it is a one-time event and it was really associated with the anomalies that we had in 2009 general economic circumstances that we were faced with there, the lack of invoicing that we saw throughout the year as well as programs that we'd implemented that were sort of outside of our norms. And we ended up with a reversal of an expense in 2010.

John DiFucci - JPMorgan

If we change that, we would be adding $5 million to the January 2010 sales and marketing expense to normalize that?

Dana Russell

Right, we wanted to call that out specifically and let you know that the run rate needed to be $5 million higher.

John DiFucci - JPMorgan

You did mention on prepared remarks that the new Linux bookings, excluding Microsoft, were actually pretty strong. Can you give us some idea of what that was? Because I was surprised to see the deferred revenue decline so much sequentially, knowing that you had a lot of renewals coming due right around now. I was just a little surprised to see that?

Dana Russell

Well the bookings were strong; we were buoyed up by several fairly significant deals in Asia and other places, so we did have a very strong quarter in terms of core non-Microsoft activity. In terms of the deferred revenue, I think what we saw we thought was reasonably within our expectation. So, it wasn't anything that we thought was abnormal.

Operator

Your next question comes from Abhey Lamba with ISI Group.

Abhey Lamba - ISI Group

I just want to switch gears a little bit over to your legacy business. Can you help us understand what's happening over there? It's been in double-digit decline for quite a while now. Even though we saw improvement in your NetWare plus OES revenues, the other collaboration and all remained pretty weak in over there. What would it take for that business to turnaround? And should we expect these types of declines over what period?

Dana Russell

I think if you look at the collaboration solutions there as a business, we'll see in the other collaboration line item if were to look at that in particular, specially if you were to turn that page 10 of 11 on the press release schedules, you'd see that there was a reasonably sharp decline there from Q1 '09 to Q1 2010 and that was really associated with some unique situation that wasn't related to NetWare, OES or group wise. So from that standpoint if you were to look at the overall invoicing or recognized revenue, it would be less than what we would be showing in terms of the total recognized revenue drop of 12%.

With that said I can't give you a whole lot of color in terms of what to expect as we go forward here, we did have higher than expected declines in 2009. We did see that diminish a bit here in the first quarter. Looking out into the forecast where I guess we could catch that as cautiously optimistic that we will have better run rates in a more muted decline, but we don't have great insight into that. What we know about is the large accounts, the accounts we work with directly, I think the things that we have less information, it can feel less comfortable on giving guidance about where all the mini small accounts that we don't work with directly and we don't have great insight in to their holdings and what they are doing with those installations.

Abhey Lamba - ISI Group

Got you. Can you give any qualitative color around, are people just migrating away from it or it's just capacity reductions? Or it's just lack of head count growth is kind of impacting their ability to grow this revenue?

Ron Hovsepian

Abhey I'll add a little bit there in terms of color. There is absolutely in terms of some of the licensing we saw some of the reduction there as people did consolidate those types of footprints, obviously we have always had a strong public sector dimension to our base business and that actually is where we saw some of the erosion as Dana was describing it, so we saw some of the invoice erosion occur inside of that public sector in particular for the first time really seeing that get hit as government reduce their foot prints or try to reduce their overall spending is one segment. And then two, we have driven a conversation with the customer to make the migration to open enterprise server and I do think there is some of that affecting which I can't quantify it for you but I'd like to say that I do believe that transition is absolutely affecting some of the number as we look at the invoicing.

Operator

Your next question comes from Michael Turits with Raymond James.

Michael Turits - Raymond James

Hey, guys. I want to go back to where John left off on the Linux invoicing. So first question is about the total invoicing. I think you said about 75%. I get that you had been reporting the dollar amounts, that gets me to about $40 million does that makes sense for this quarter?

Dana Russell

Yeah I mean reasonably close.

Michael Turits - Raymond James

Okay. And then on the renewals, you said the pricing was 50% below, it kind of works out to 50% because it would have been whatever, about half the discount, twice the discount that you were getting before. So of that $73 million since we came up for renewal, how much did you do in invoicing of renewals this quarter? Couple of million or somewhere close to half of that $73 million?

Dana Russell

I think what I said Michael may if we work through the numbers and we can definitely talk to you more about this after as well but it's as we said instead of a 45% discount we are talking about an 80% to 90% discount. So cut back into the math if you look at the, its possible but a $73 million invoicing number in the first quarter trending to something that could be 10% of that in this quarter. So, from 2009 to 2010 and so that's, those are along line of the invoicing that we saw.

Michael Turits - Raymond James

Okay. So you end up with more like $7 million or so from Microsoft renewals. And then, was there anything from the new tranche that you sold to them or are you getting any invoicing out of that?

Dana Russell

No, no material amounts with that, very small.

Michael Turits - Raymond James

And then as these renew, are they renewing at three-year terms?

Dana Russell

Yes.

Michael Turits - Raymond James

Okay. Same terms there. All right. That's all; I'll let other people jump in. That was the main thing I wanted to work on.

Operator

Your next question comes from Brad Whitt with Broadpoint Capital.

Brad Whitt - Broadpoint Capital

Do you have a percentage increase in your core Linux invoicing? I think last quarter it was 5%?

Dana Russell

[Sales] increased in our core Linux invoicing are you talking year-over-year or quarter-over-quarter?

Brad Whitt - Broadpoint Capital

Yeah well, both, yeah, year-over-year.

Dana Russell

Yeah year-over-year there is core Linux invoicing was up significantly. So you know if you were to break it down I think the numbers that we report in Q1 of '09 that was less than $4 million associated with Microsoft and so we did have a significant improvement in our core Linux invoice. Now the thing that we did point out and talked about in the prepared remarks was that our invoicing has been reasonably consistent over the last several quarters, but we did have a very favorable comparing Q1 of '09. So when you look at the invoicing against the first quarter in 2009, even though this is a very substantial jump from where we were in Q1 of '09 its not materially different than what we've been experiencing over the last two or three quarters.

Brad Whitt - Broadpoint Capital

Okay. And just so I'm clear, on the revert of the commission, did that show up in a reduction in sales and marketing or is it in the other income line?

Dana Russell

Reduction of sales and marketing.

Brad Whitt - Broadpoint Capital

Okay. So what attributed to the big increase in other income?

Dana Russell

Those were sales, some auction rate securities that we had previously written down.

Brad Whitt - Broadpoint Capital

Okay. So would the run rate be more like what we had in the October quarter going forward?

Dana Russell

Run rate for other income?

Brad Whitt - Broadpoint Capital

Yeah net interest and other income.

Dana Russell

Yeah the run rate the guidance that we gave for the year was $5 to $8 million in other income. We maybe running a little bit higher than that. But our interest income is we also said that, that was going to be something maybe less than 1%. So, yes I think you can use the first quarter as a guide for how that's going to end up for the year. I think we would be closer to the run rate taking out the anomaly for to sale of the auction rates securities through the guidance that we did for the full-year.

Brad Whitt - Broadpoint Capital

Okay. And just curious, may be final question, have you seen any stability yet in contract durations?

Dana Russell

I wouldn't say we've had a material change in contractor durations in the first quarter what we saw over the last few quarters. So I think we are similar, really haven't had any significant movement that I am aware of. Which were sort of on the previous run rates.

Operator

Your next question comes from Richard Williams with Cross Research.

Richard Williams - Cross Research

I wonder if you could talk about what, if any, impact you could foresee as it relates to Linux, going through the corporate refresh cycle? Just thinking most of the corporations that are going to do a hardware refresh are also going to do a Windows software refresh. I'm wondering is there a competitive element as far as the IT staff time is concerned?

Dana Russell

It got a little muted. I'm just trying to make sure I understand the question. Your question was as the hardware refresh happens with the impact on Linux and how does that just oppose it self against the Windows 7 type stuff is that the question?

Richard Williams - Cross Research

Essentially, yes.

Ron Hovsepian

In terms of those applications that were written and designed for a Java environment or Linux environment, as the customers go through and refresh that type of hardware from a risk based processor to an Intel based processor or X86 processing environment and I expect that we will continue to see the majority of that land in the Linux platform.

The trick will be as Microsoft goes through its Windows refresh out into the marketplace is either applications over there that were written in Java that we can get onto a Linux platform in a less expensive manner than it would cost to run on a Windows environment. And that's where the opportunity is for us.

They are obviously trying to attack the Unix to Linux conversions and trying to get over as much of that footprint as they can. In terms of inside the shop which was kind of your other part of your question.

When you look underneath it, almost all the customers I have spoken to personally have both footprints in their shop and anticipate having both the .NET framework in their shop as well as a Java based framework in their shop. Therefore having multiple platforms and that is strategically part of our bet in the market is that the customer will have multiple platforms. They will have multiple hypervisors as well as another dimension of this conversation then and then operating platform because you have the two core stacks of Linux and Windows but then you will also have multiple hypervisors into the marketplace obviously ESX from VMware and Hyper-V from Microsoft but the additions of Zen from the open source community KVM, et cetera are going to be critical as part of that thought process.

So, I think both camps existed most customers. I don't see one particular group winning or loosing at a noticeable rate they tend to stand each side of the fence so to speak if that helps answer your question.

Operator

Your next question comes from Mark Murphy with Piper.

Brian Schwartz - Piper Jaffray

Yeah, hi this is Brian Schwartz for Mark Murphy. Most of my questions have been asked and answered, but I do have two quick ones here. First for Dana, I was wondering if you could comment on the renewal rates for your non-Microsoft customers and how they went in the quarter?

Dana Russell

Well, we had a very strong quarter for our if you are talking specifically Linux there in terms of the renewal rates I think from a historical standpoint they were very good, I don't think we have ever disclosed the exact renewal rates but they are strong, we felt good about it the core business was very, very good. So, we were excited about the quarter and the way we finished up there with Linux.

Brian Schwartz - Piper Jaffray

Is it fair to say, Dana, that there was a slight improvement sequentially then, in that core business or was it stable compared to the previous quarter?

Dana Russell

Well they are certainly stable we had, there is some seasonality that we have in that business but it was very it was stable, I could say that.

Ron Hovsepian

Question on the renewals.

Dana Russell

Are you talking about the total?

Brian Schwartz - Piper Jaffray

Yes, really for the total. Just wondering how the core business. I know there's a big focus here and you guys have gone into the adapt on the Microsoft customers that were up for renewals. Just wondering if there's any improvement out there on the core on the non-Microsoft group.

Dana Russell

Yeah I think the prepared remarks we mention that we were quite consistent with the previous couple of quarters there and fourth quarter tends to be the strongest for us and we were quite consistent with that so hopefully that answers your question.

Brian Schwartz - Piper Jaffray

Yes. That's helpful, Dana. And then, Ron, just on a big picture question, just wondering if you're seeing conversations you're having with customers as well as your sales people in regards to the IT budgeting process so far here in calendar 2010. Just wondering if you're seeing any difference compared to last year, if budgets are potentially getting firmed up faster here than they were last year, which could maybe potentially speed up closure rates as we move through the year. Thanks.

Ron Hovsepian

Yeah I would say mileage varies by geography what you are seeing is as budgets firm up I think in the America's you are going to see flat to slightly single digit kind of IT improvements and Europe I think they are going to be under more pressure and I think in Asia Pacific it will varied by country I was just in India, China and Japan and in the India and China markets you can see the good GDP growth that they're having and therefore IT is getting some very good growth rate inside there Japan continue to grow but obviously at a much slower rate as a mature market.

So I do see the variations and each of them in the budgets as I having chance to chat with customers on this last trip I just finish literally probably a week and half ago spending time with those customers so it really varies along those line. So you see different economies recovering at different rates or some economies that never had a problem

Operator

Your next question comes from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies

I just have a quick question on that non-Linux invoicing. They looked like they were pretty good this quarter. Can you give us a little more color? Is there some seasonality there?

Ron Hovsepian

Non-Linux invoicing, it was lead by our identity business that Dana had said in his comments that product revenue invoicing was at 40% year-over-year type growth. So positive from that prospective with another contributor. So that full business unit of the Linux products and the identity and security management was overall 26% invoicing growth and Linux was very strong and identity was very strong this quarter it was represented by 75 and the 40.

Katherine Egbert - Jefferies

Okay. A little more specifically in the past that identity area has seen some really large, lumpy deals. Was that the case again this quarter or was this more a string of smaller-sized wins?

Dana Russell

We had a couple of nice wins there, but I think in terms of balancing this out on the conversion here, the identity business we felt very good about we have talked about that for some period of time as a business. But we continue to have big expectations for and it continues to grow with that there is some lumpiness as you just mentioned in the billed tender coming way and so sometimes we don't care we do get some lumpiness for quarter-to-quarter and by the way the compare that we had a year ago in Q1, those were low numbers that we were comparing to. So even though it was a very good, very solid quarter and we saw a lot of recovery in the invoicing from what we saw a year ago, you just have to look at it against what our overall trends have been. You'd still feel good about it, but you have to keep that in mind as you are thinking about the numbers.

Katherine Egbert - Jefferies

One quick one. The 12% to 15% margins for the quarter, can you give us any indication for the year? Should we continue to expect 12% to 15%? Or is there going to be seasonality in the numbers? Can you give us any color?

Dana Russell

Well, like the comments that we made about the collaboration solutions business or our work group business there, the margins are quite high in that business, our operating margins. And it's really dependent on be able to maintain those margins or improve those margins based on the revenues that we see. So having some lack of clarity ourselves in terms of how those revenues will perform, it's hard to give out margin guidance because we have optimized that, we are not planning for more expense reductions in those areas and so we are going to have to leave it at that. I think we certainly feel like we want to be able to maintain the ground that we've taken.

Operator

Your final question comes from John DiFucci with JPMorgan.

John DiFucci - JPMorgan

Ron, a question to go back to the NetWare business. I believe that NetWare 6.5 general support is going to run out in a couple of weeks. First, is that still the case? And then if it is the case and typically you have extended support after that, this is obviously a legacy business that gives you a lot of maintenance revenue and you just wonder why you would force or make customers start to think about having to make a decision.

In other words, they have to go to OES 2 or to Windows. And why you would even want customers to be thinking that way with a legacy product like this because any time you force them to make a decision, some of them are just going to get off of Novell. If you could just give us a little bit of your thoughts on that?

Ron Hovsepian

One yes, it does end on March 7th, there is an extended support contract for the customer that will give them an additional two years of support coverage. Three, the thought processes links back to the overall company direction. If you're going to try to optimize the financials for the company inside of that business, you get a lot of lines of code to support on a specialized operating system, which is what NetWare is, there is a ton of lines of code inside of that and the key for us was to get that migrated over to a generalized operating system, which is SUSE LINUX. So underneath OES that's really what is critical from my point of view?

Also additionally as you listen with the customers, they are looking for additional flexibility from that specialized operating system and as you know the life cycles go the amount of training and skills that are in the market shrinks and you are managing a very large code base at that point. So, that's the trade off and the juggling act that we approached that with. And it is a fine line of balancing that, but we also saw the opportunity that bring the customers over and give more flexibility with OES was really the key and bring forward some of those features while trying to optimize that financial stream, optimize the customers and really keep those customers with us.

We don't want them to leave obviously and we obviously want to maintain those revenue relationships as long as we can. So that's why the extended support addresses one group, and then the group that's ready to move to a new operating platform, we think we have to attack that group equally as aggressive or else we are going to loose them to Windows or to another platform.

So from my perspective you are definitely in a vice on it and you have to give the customer choices and we've give them two choices in our mind. One where they can migrate to a new environment that provides longer-term flexibility and then two, they can get the extended support.

The issue is going to be as we add new features and where we take that product is really the challenge given that older code base and you are talking millions and millions of lines of code are inside of this. So, you have to juggle that expense and deal with that as part of what we are dealing within and managing that situation.

John DiFucci - JPMorgan

I understand all that, Ron. That's the logic that goes with any product. But in this particular product, it is certainly a legacy product and you're also giving them another choice. You're almost forcing them to make a choice, which it seems like the absolute worst thing you could have them do because the third choice is they go to Windows. If you lose any customers to Windows, that's just a negative to you. You're not necessarily going to get any new customers here.

Ron Hovsepian

No, I accept that answer John and the additional part is we have gone from over the last 15 years, its gone from 70% market share down to about 6 or 5 in that specialized operating system environment. So it's been happening for a long time John, I mean a really long time and the time to have broken that curve passed by before I got to the company candidly some time ago. So, from my advantage point the question is how you bring those customers forward and make the most of the situations.

John DiFucci - JPMorgan

Can you tell us how many customers or even a percentage of your OES/network customers are still network customers or roughly a percentage? That way we can sort of gauge as to how much you could, might lose or even like a certain, we can use our own judgment. It just gives us an idea of what can happen to that business going forward. Your stock doesn't necessarily, I mean it sort of implies you are going to lose them, some anyway. But at the same time, it may not be that bad if we knew that let's say, 40% of those of the people are NetWare/OES out of the data we have so far are NetWare or 30% or maybe it's 80% to 85%?

Ron Hovsepian

I think the best thing for you to look at in looking at that is you got to look at the last few quarters decline rates that we have seen in that business and use that as the best indicator right now because the number of customers we have that, we survey them, we understand the surveys we look for what they are looking for and making the migration, which ones why they are not making the migration I have a lot of quantitative and qualitative information that we can get in that I can get into, I am not going to get into the quantitative stuff, but we have that data the real question really is I think as you try to model which is a fair question is really just to use those rates that you have seen from us and as Dana had referenced earlier I really don't want to dig in to that any deeper than that from a competitive prospective.

John DiFucci - JPMorgan

Okay. And if I just might ask one last question I'll let you go so that you follow up Katherine's question I just, I look at the model and Dana, you say you're not going to really, there's not plans to cut expenses.

But and then I look at like this quarter, so I add $5 million to sales and marketing, in the non-GAAP sales and marketing. And I see a quarter where you put up license revenue of $21 million, which is even and this is your first easy comp where some companies are finally showing because it's an easy comp, some companies are actually showing a little bit of growth.

And realize it's still tough out there, but that's down 25% from a year ago in license revenue, which was down 30% from the year before that. So I just, it's hard to understand why sales and marketing in a company that's doing $21 million in license revenue and I add a new license and just not the renewals of the Linux business. But the new Linux business, whatever that is and you try to come up with something, whether it's $5 million, $10 million, whatever it is.

And you have $72 million or actually, I don't know whatever that comes out to be in sales and marketing costs? It implies you're spending a lot on sales and marketing for maintenance renewals or something. And maybe there's just a huge marketing. You guys stand way out there compared to any other software company and it just trying to understand why.

Dana Russell

John I think I may have not been clear on the comment, so with Katherine I was talking specifically about collaboration, the collaboration business unit when I was talking about cutting expenses and the fact that those margins were 47%, we didn't have plans to cut cost and to cut expense in that particular area, that's not to say that we wont continue to optimize experiences and work on and address expenses in the overall business.

But, so much of our margin is dependent on that collaboration business unit which is one of the reasons you were asking the question about the health of that business and its longevity.

We understand where we stand with sales and marketing especially as it relates to software licenses, we do have to factor in that none of the Linux business is included in the software license category and then that at least has to be considered and then we also and even with that we would say that we have been higher than industry standards, even if you consider that.

However, that has been an area of specific focus where we have been moving two or more indirect model as a way to optimize our expense structure and so we continue to work on that if we think are getting traction there and are doing a better job and that's going to be a continued area of focus as we go forward.

John DiFucci - JPMorgan

But don't you think that it's time for perhaps dramatic change there, Dana? You guys have shown improvement over the last few years, but sales and marketing, even product development, which by the way, Novell, as you know, is known for good product development. But again, your expenses relative to what's happening appear very much out of [act] when you look at the entire enterprise software peer group.

Ron Hovsepian

Hey John let me answer this question and wrap up on this. We absolutely look at pure assessments. We do that all the time as part of both our planning process as well as our quarterly looks as we look at the company and as you referenced we are taking close to $60 million out of the sales of line item over the prior two years.

So we've been very focused on driving those costs out. What we share with you is its time to make sure that we get the company going in the right direction and we've shared that strategy with you at the kick off in December as to where we think those things can go to get the leverage for the company where we see these emerging markets and where we see the growth of those products and as you know to get some of those things going we are going to have to invest appropriately in the sales and marketing and product development to get ourselves there.

So I think you've referenced things appropriately. We've gotten the company to a good stabilized spot. We weren't planning on the economic recession obviously last year and we are working our way through regrouping and driving this company to the next level as part of the strategy that we've laid out so those are the investments we've chosen to make and we are working hard to make sure we get that return from the shareholder. So with that I've got to warp it up here.

I'll thank everyone appreciated for joining us in the call. Susan I don't think there is anything else.

Susan White

So that's it. Thank you very much. Good evening. Bye.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Novell, Inc. F1Q10 (Qtr End 01/31/10) Earnings Call Transcript
This Transcript
All Transcripts