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Novell Inc. (NASDAQ:NOVL)

Q3 2010 Earnings Call

August 26, 2010 5:00 PM ET

Executives

Robert Kain – Vice President, Investor Relations

Ron Hovsepian – President and CEO

Dana Russell – Chief Financial Officer

Analysts

Brad Zelnick – Macquarie

Mark Murphy – Piper Jaffray

Jonathan Doros – Raymond James

Richard Williams – Cross Research

James Gilman – Capstone Investments

Katherine Egbert – Jeffries

Brad Whitt – Gleacher & Company

Operator

At this time, I would like to welcome everyone to the Novell Third 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)

Thank you. I would now like to turn the call over to Robert Kain, Vice President of Investor Relations. Mr. Kain, you may begin.

Robert Kain

Thank you. Good afternoon, everyone and thanks for joining us. I’m Rob Kain, Vice President of Investor Relations for Novell. And with me today from our executive offices in Waltham Massachusetts are Ron Hovsepian, President and Chief Executive Officer; Dana Russell, our Chief Financial Officer.

We are here this afternoon to discuss Novell’s financial results for the third fiscal quarter 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 webcast for a minimum of 12 months.

But 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 our 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 analysts’ consensus estimates that are unusual and/or that arise outside of the ordinary course of business, such as, but not limited to those related stock-based compensation, acquisition related intangible asset amortization, restructuring asset impairments, litigation judgments and settlements, strategic alternative review and the sale of business operations, long-term investments and property plant and equipment.

We have included reconciliations for these non-GAAP measures to the 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 Q3 fiscal year ‘10 GAAP net income of $16 million and GAAP earnings per share of $0.04.

We may also provide information regarding Novell’s general product direction and roadmap as intended for information purposes only and may not be incorporated into any contract. Is not a commitment to deliver any material, code or functionality and should not be relied upon in making purchasing decisions. The development, release and timing of any features or functionality described for Novell’s products 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 the 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 quarterly report on Form 10-Q filed with the Securities and Exchange Commission on June 8, 2010 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 26, 2010 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 Rob. Novell’s third fiscal quarter 2010 results were released short time ago. The company reported net revenue of $199 million, GAAP income from operations was $21 million, non-GAAP income from operations was $30 million, non-GAAP net income was $22 million or $0.06 per share, foreign currency exchange rates favorably impacted revenue by $1 million, operating expenses by $1 million and income from operations by $2 million on a year-over-year basis. Revenue was below expectations and non-GAAP operating margin was at the high end of our guidance.

Now, I’ll highlight some of our business unit results on pages nine and 10 of our press release. Our Security Management and Operating platforms product revenue was $108 million, down 2% year-over-year. Invoicing was down 8% year-over-year.

Linux platform products revenue in the quarter was $36 million, decreasing 7% from the year ago quarter. Linux invoicing was down 11% year-over-year.

As expected, depletion of the original Microsoft certificates this year makes for a challenging year-over-year comparison. However, this business continues to perform well even in a difficult environment, excluding Microsoft certificates, core invoicing was up 15% year-over-year and year-to-date core invoicing is up 41%.

Moving on to Identity, Access and Compliance Management, product revenue was $30 million, up 8%, while invoicing decreased 8%. Systems and Resource Management product revenue was $38 million down 4%, while invoicing declined 8%.

Turning to our Collaboration Solutions business unit, product revenue was $69 million, down 14% and invoicing was down 17%. Within Collaboration Solutions, the combined OES and NetWare related product revenue was $40 million, down 11%.

Operating expenses were down compared to the year ago period due to expense management and favorable foreign exchange rates. Total headcount at the end of the quarter was approximately 3,450, down from approximately 3,500 in the prior quarter.

Turning to our balance sheet and cash flow, cash and short-term investments was $143 billion, compared to $980 million last quarter. Cash flow from operations was $26 million for the quarter, down from $30 million in the year ago quarter.

As we saw this quarter, our financial performance has been disrupted by the process associated with the Novell Board of Directors ongoing review of various alternatives to enhance shareholder value. Accordingly, we are not seeing expected trends in our operating results and therefore, we will not be providing financial guidance at this time.

With that, I’ll turn the call over to Ron.

Ron Hovsepian

Thanks Dana. As I stated in our press release today regarding our Q3 earnings, our third quarter revenue results were below our initial expectations, which we believe is principally related to customer uncertainty associated with the Novell Board of Directors ongoing review of various alternatives to enhance stockholder value as described in Novell’s March 20, 2010 press release.

As we stated in the March 20, 2010 release, we do not intend to disclose developments with respect to any of these alternatives unless and until our Board has approved a specific course of action. Accordingly, we will not be answering any questions regarding the matter during this call and I ask for your cooperation in this regard.

We continue to make progress enabling and leading the rapidly growing market for intelligent workload management. Last week, we announced WorkloadIQ, our strategy for leading in this emerging market.

Our differentiated approach which is based on our ability to integrate identity and security into IT workloads, gives customers the confidence and flexibility needed to deliver IT services to end users across physical, virtual and cloud environments. With WorkloadIQ, Novell addresses fundamental security and automation concerns by taking a unique identity centric approach to Workload Management.

When we announced our strategy to compete in the IWM market last December, we indicated we would introduce eight new IWM products in 2010. Novell has already shipped seven of these products and plans to ship five additional products before year end. These 12 products provide the foundation for WorkloadIQ.

Customer and partner support of WorkloadIQ has been strong. More than 30 new customers and major partners have already committed by purchasing one or more of our WorkloadIQ products. Some early customers include ACS Xerox, Ericsson, GE, Monsanto and Sony. Partners large and small have identified WorkloadIQ as the strategy of choice for Intelligent Workload Management.

In June, VMware announced it will include an OEM copy of SUSE Linux Enterprise Server with every shipment of its vSphere product at no additional cost to the end customer. VMware and its extensive network of solution provider partners will also be able to offer customers the option to purchase technical support for SUSE Linux Enterprise Server delivered directly by VMware for a seamless support experience.

Finally, VMware also announced it is standardizing its virtual appliance program on SUSE Linux Enterprise Server. This expanded relationship between VMware and Novell benefits customers by reducing the cost and complexity of deploying and maintaining an enterprise operating system with VMware solutions.

In addition to the VMware announcement, Novell has signed significant cloud partner agreements with Amazon Web Services, Atos Origin, BasisOne, [Alisa Corporation], Fujitsu and Vodacom Business, adding to the previously announced support from ECS Technology, Gen-i, IBM, Tencent and Trustmark.

Each of these cloud vendors is using various components of the WorkloadIQ architecture to help them securely manage their cloud environments and to help their customers realize Intelligent Workload Management.

Although, our third quarter revenue results were below our initial expectations, the end result was not unexpected given the uncertainty created by the process. We will continue to closely manage expenses to maintain profitability while focusing on returning to topline growth. Our confidence in our strategy with WorkloadIQ and the growth prospects of our chosen markets is strong.

With that, I would like to turn the call over to the Operator. Would you please open the call for questions? Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brad Zelnick of Macquarie.

Brad Zelnick – Macquarie

Thanks. Ron, I know the past, when it’s come to virtualization, Novell’s positioned itself as hypervisor-agnostic with SUSE as both the perfect host and perfect guest operating system. But with the expanded relationship with VMware, I’m hoping you can maybe talk a little bit about the value proposition behind this partnership and specifically, what it means competitively against virtual infrastructure from Red Hat and Microsoft?

Ron Hovsepian

Thanks Brad. There’s a couple of questions you had in there. In terms of what it means to us being a preferred Linux guest environment on those hypervisors that means that we’ll be able to ship with the hottest software in the virtualization market, VMware, ship our SUSE Linux as I said with every addition of vSphere that goes out. So that gives us a very unique position to really be a guest in their environment and behave accordingly inside that market.

Additionally, as you look at it from the standardization on SUSE Linux Enterprise server with the appliance tool as well, that also will allow us to take advantage of the wide range of application vendors that we’ve built on top of and certified on top of our platform. SUSE Linux leads by a wide margin over Red Hat, the number of applications certified on its platform.

The closeness of this relationship will allow us to bring about 5300, 5400 application vendors into the combined world of pre-certification into the VMware world with our platform because it’s certified on our Linux platform. So this creates a market value proposition where the customer can get the hottest hypervisor in the market as well as creating the opportunity to bring across all those applications.

So what that translates to from a competitive perspective is it really allows our operating system to play a much bigger role inside of those VMware shops for the customer and be very collaborative and co-operative inside of that environment versus competitive.

Brad Zelnick – Macquarie

Thanks Ron. And just if I could, on the 3Q revenue miss, obviously there are a number of factors at play here but specific to the distractions of your ongoing strategic review, I was hoping maybe you could give us more visibility, perhaps commenting on the relative impact of -- were there deals here where customers turned to competitors, simply because of this overhang versus deals that you got done but just perhaps at a deeper discount and lastly, you know, distractions both through the indirect and direct sales channels, are you losing talent? Are folks just maybe not keeping their eye on the ball as they would ordinarily without this distraction?

Ron Hovsepian

To answer your first question, obviously this has affected us in the three categories. Some deals you lose straight up, some deals get delayed, some deals get discounted. So as you can imagine, we have felt all of those derivatives that can happen inside the environment.

So from a past quarter perspective, we definitely felt that from my perspective and then as you appropriately said, does then -- it gives you an extra set of selling that you have to do out with your partners and we just have to continue to communicate the strength of our value proposition and our products.

Brad Zelnick – Macquarie

Thanks Ron. Just one quick last question, it’s been five months since your Board initiated this review with absolutely no updates and it’s clearly having an impact on the business. I appreciate that you can’t provide an update at this time on the process but is there anything that you can tell shareholders to give them confidence that their best interests are being looked after here. Thanks.

Rob Kain

Hey, Brad, this is Rob. Pretty much like you said, we can’t say much else or much more than we already said in the March 20th press release. As soon as the Board has reached a conclusion, we will make a public statement on it.

Brad Zelnick – Macquarie

Thanks for taking my questions.

Ron Hovsepian

No problem, Brad.

Dana Russell

Thanks Brad.

Operator

Next question comes from the line of Mark Murphy of Piper Jaffray.

Mark Murphy – Piper Jaffray

Yeah. Thank you. Dana, in the press release you indicated that the deferred revenue would be up year-over-year, if you exclude the impact of Microsoft. And I guess, I’m just wondering if you can put any numbers around that. In other words, would it be barely up. Would it be up 5%? Any more color would be appreciated.

Dana Russell

Let me flip right here to the schedule. So I think close to that 5% mark is where we would be marked in terms of being up year-over-year, if you exclude Microsoft.

Mark Murphy – Piper Jaffray

And I guess Dana, what do you attribute that growth to primarily?

Dana Russell

Well, certainly the Linux business. As we stated, the Linux business continues to grow and if you exclude Microsoft, we’ve had terrific growth year-to-date with that business and so that’s been a very much a catalyst in increasing deferred revenue.

Mark Murphy – Piper Jaffray

Okay. And then a second question, when you reported earnings last quarter you did indicate that the recent events had had a negative impact on the business at that point in time. I think especially in identity and security but you stated that you were optimistic about the future.

So I guess my question is that given that you had already experienced this customer uncertainty when you provided the Q3 guidance, I guess, I’m just wondering what changed during the quarter? Was it -- did you like originally expect that the process would be concluded at some point during Q3 but it kind of dragged on or did you -- was it just difficult to sit there and try to estimate the magnitude of the effect?

Dana Russell

Well, we provided revenue guidance last quarter as you know, Mark and we fell short of that revenue guidance. I think that was the first time in Ron and my tenure that we have not met our revenue guidance but I mean, I’m not exactly sure about that. But in terms of a range there, we’ve always been pretty close there. And so yeah, there was more disruption than we had anticipated and the numbers were short -- shorter than what we expected.

Mark Murphy – Piper Jaffray

Okay. And I guess by kind of -- by not providing guidance going forward at this point, I mean, you’ve given guidance consistently through certainly at least recently you’ve been providing that guidance and some choppy periods. Is it impossible to say, can you say directionally, I mean, do you think you’ll feel the seasonal Q4 effect to some extent or is it possible that revenue would be sequentially down here?

Dana Russell

Well, it’s hard to know, I think as we said in the prepared remarks, we’re not seeing the expected trends that we would normally see. And so our historical information doesn’t provide us a whole lot of guidance as to how we could be impacted here as we go through the fourth quarter.

Aside from that, if we were to look back at our historical information, we would expect some uptick but because of the uncertainty that surrounds us at this point, we’re just having a difficult time providing guidance. And so that’s what we’re doing is not providing guidance at this time.

Mark Murphy – Piper Jaffray

Okay. And then, one last one on the VMware OEM agreement. Is there anything you can provide in terms of either how material that appears in terms of bookings or any indirect benefit to Novell. And I guess more broadly, just any insights into how successful you think VMware will be in OEMing less in comparison to what you experienced with Microsoft?

Ron Hovsepian

Hey Mark, this is Ron. I think the agreements were really two different agreements into the market. So when you go to compare them, Microsoft acquired certificates that they distributed to their customers and they managed that from their perspective. I think what’s unique and exciting about the VMware one is this is going to ship with their product in an activated manner to every one of their customers that is very uniquely different.

Secondly, it is embedded inside of the -- inside of their service contract where they will drive the sale of the support that goes with it and they will handle the level one and two, so they will have a -- the customer will have a seamless support experience. So it’s really an apple and an orange in terms of how to compare the two of them. Because when you look at it, Microsoft was really focusing on interoperability where VMware is really focused on having a teaming relationship that is critical toward building a long-lasting relationship with them, with the customer and giving the customer the option here.

Mark Murphy – Piper Jaffray

Okay. That makes sense and then Ron, just to clarify one last item, I guess. Is it safe to assume that the scale, the monetary scale of the VMware agreement is, say, a small fraction of what it was with Microsoft?

Ron Hovsepian

I think the way to think about it is to look at the penetration of VMware at the customer and then look at the penetration of Linux at the customer and then look at what the opportunity is to intersect those two pieces and which share, project which share you think we could grab of that.

Mark Murphy – Piper Jaffray

Okay. Thank you very much.

Ron Hovsepian

Thank you.

Operator

Your next question comes from the line of Jonathan Doros of Raymond James.

Jonathan Doros – Raymond James

If you look at your results, pipeline, excluding the Novell specific customer uncertainty, from a geographical and vertical perspective can you just talk about any strength or weakness you’re seeing, like for example, are you seeing any additional weakness coming out of Europe?

Ron Hovsepian

I don’t think we saw additional weakness coming out of Europe but we did see weakness throughout the world. And I think it was relatively consistent across the board as it pertained to Novell. So Asia, Europe and the Americas all had some weakness on a year-over-year basis.

Now, that’s a bit unique, we haven’t had that sort of dynamic happen that I can remember where all of our geographies were off a bit but we’re in an environment that’s a little different than what we’ve been in before.

Jonathan Doros – Raymond James

And you said that Linux invoicing X-Microsoft was up 15%. Linux revenues are down 7%. Can you give that -- what Linux revenues would have been X-Microsoft?

Ron Hovsepian

Yeah. I think we can provide that, recognized revenue. You know what, if you’ve got another question, let me get back to you on that and I’ll look that up here, X if we were to take out the Microsoft factor.

Jonathan Doros – Raymond James

And then of that $25 million in Microsoft certificates, how much of that have you guys gone through and what are your expectations around that going forward?

Ron Hovsepian

Sorry, missed that question.

Jonathan Doros – Raymond James

Of the $25 million in new Microsoft certificates, wonder how much of that was invoiced during the quarter?

Ron Hovsepian

So to-date, we have not invoiced very much of the $25 million. And I think in the last quarter we provided an update that said that it was in the low single digits, $5 to $6 million. We haven’t -- it’s in that range there’s not been a lot invoiced of that next tranche of take out -- the next tranche of the $25 million.

Dana Russell

As we shared with you, that’s a very specialized use case certificate versus the generic ones as before.

Jonathan Doros – Raymond James

That’s all I had. Thanks.

Dana Russell

Great. Thank you.

Operator

Your next question comes from the line of Richard Williams of Cross Research.

Richard Williams – Cross Research

Hi, guys. How you doing?

Ron Hovsepian

Good Rich. How are you?

Richard Williams – Cross Research

Very well, thanks. Could you take us through the progress on the new products and give us an idea of the five that you expect to launch by year-end, just an idea of what they’re doing and which markets?

Ron Hovsepian

Could you repeat the question, I don’t know if you’re on a speakerphone or not but I couldn’t make out the question.

Richard Williams – Cross Research

I’m sorry. Is it better now?

Ron Hovsepian

Little bit, yeah.

Richard Williams – Cross Research

Okay. Just wondering if you can go through the new products and give us an idea of how each of the launched new products have performed and then talk about the five that you anticipate launching by year-end, which area they’re in and what product it is that you’re launching?

Ron Hovsepian

Yeah. The major products that we had announced or the Identity Manager 4 which is cloud enabled and that was well received by the analysts and being shipped now into the marketplace. Novell cloud security service is a product that we’re just getting out the door now and again, the launch on that particular one is coming shortly and feel good about that. And then when you go through the -- just give me one second here. The way we looked at it was that there were larger set of products that we were focused on in terms of key releases. The ones that we have coming in Q4 is the 1.0 of the cloud security service which is in the beta phase, wrapping that up.

Cloud Manager is another key product that we’re getting out the door that we’ll get. Then there are a series of other products around our network -- our Novell operations center, repackaging of some of the Xen works componentry and our Novell service desk but the major ones that we focus big launch programs around were the Identity Manager 4 was a key one, our cloud security service was a major, Novell Cloud Manager is a major and those products get a how -- I am sorry, including all the plate spin pieces as part of that plate spin, migrate protect and forge, all of those get what we call a Tier 1 launch versus a Tier 2 launch as some of those products, because the others are complementary or adjacent products.

And the ones that we’ve launched have been well received so far and the adjacent products have been well received. Cloud Manager and cloud security service this quarter are really key products for us that we’re very excited about and those betas have gone extremely well, one of the Cloud Manager products I just reviewed yesterday and there’s a multi-data center customer who has eight to 10 customers up on it right now and has another 20 in the pipe they’re bringing on so we’re very excited about where that’s going.

Richard Williams – Cross Research

And Cloud Manager is that essentially SRM made applicable for the cloud?

Ron Hovsepian

No, what that really is the ability to do self-service provisioning with an identity in security centric orientation and allows the customer to in their -- to build their private cloud and to allow them to move irrespective of hardware or hypervisors or operating systems, for that matter they can move those pieces around pretty comfortably but again, do it from an identity and security centric manner are not just a physical resource and it’s done in a very simple user interface where the ensuing go that line of -- that line of business exec can get their services.

Richard Williams – Cross Research

How about cloud security, can you give a little more color there?

Ron Hovsepian

Yeah. Cloud security services is really a trusted broker approach and this is where if you’re an enterprise and you want to go and use a SaaS application, the SaaS application vendor, their number one objection from the enterprise is usually security protocols and how are you going to manage that and I don’t -- I as an enterprise do not want to give you those protocols. So what this product does is this allows the SaaS vendor to inherit the security protocols from the enterprise without ever allowing the protocols to leave the enterprise, so there’s a trusted broker in between.

Richard Williams – Cross Research

Interesting. Okay. That’s it for the moment. Thanks.

Ron Hovsepian

Okay. Great. Thank you.

Operator

Your next question comes from the line of James Gilman of Capstone Investments.

James Gilman – Capstone Investments

Good afternoon, gentlemen.

Dana Russell

Hey, James, before you ask the questions here I just wanted to make sure I got back with John and his question. John had asked a question about the recognized revenue for Linux platform products and how much that would be up if we excluded the impact of Microsoft and year-to-date that’s up about 9%. James?

James Gilman – Capstone Investments

Yeah. All right. Thank you. Question is going back to let’s say the VMware and the SUSE relationship and I know there’s several questions there. I want to make sure I hear this correctly. The opportunity around or the opportunity for Novell is really from a cross-sell standpoint, is that correct? You get into that customer base that you may not already have and then sell your additional solutions and maybe continue to…

Ron Hovsepian

I believe there’s two pieces to it. One is the opportunity to up-sell more Linux into the customer’s environment is option one. And then option two is the cross-sell as you highlighted, the ability then to sell other products with it. That would be the straightforward way to think about it and to take advantage of their big partner network.

James Gilman – Capstone Investments

Okay. Now, in reference to -- let’s dove tail that and look at the Microsoft deal. One of the things the opportunity with the Microsoft was somewhat similar, though maybe additional licenses above and beyond, maybe the opportunities that may be presented. Looking back on that that relationship I guess, you know four years, whatever how would you say that the cross-sell opportunities were presented and how well were you able to capitalize on that?

Ron Hovsepian

I think you had two different points in time. And these are two different situations in terms of the relationship. The relationship with Microsoft was to accomplish several objectives. One was to bring the brand back to relevance in the marketplace and to demonstrate that through a very deep interoperability relationship with a Microsoft and to create an environment where the customer -- where we could gain new customers through that interoperability relationship.

The VMware relationship is we now have a -- depending on how you count it, somewhere in the mid-20s for a market share in the Linux -- paid Linux server marketplace. So when you look at it and you look underneath it, the first relationship got us brand awareness and got us some customers and got us going again in the market.

The second relationship builds on that to allow us to take advantage of interoperability but more importantly to get a wider net of channel partners as well as key customers where we can do a better job as you are highlighting on the up-sell and the cross-sell opportunities. So from my vantage point, they really were -- really served two different points, two different goals at two different points in time in the company in the last three years.

James Gilman – Capstone Investments

Okay. In reference to let’s say Linux and virtualization and more specifically let’s say VMware, since they have the largest market share, most of the VMs are going to be for more windows based apps and versus let’s say a Linux.

And also Linux on top of that I would argue, you would know maybe more than I, given your look into the enterprise, is that Linux has a tendency -- Linux based apps have a tendency to fully utilize the box where a Windows app may not and so hence the consolidation around that. So I wonder how much opportunity is there, Linux and a VM, any thoughts there?

Dana Russell

Yeah, I think there is two very clear opportunities here. One, you are absolutely correct, there is more virtualization of the Microsoft platforms on top of the hypervisors today. And that’s because, fundamentally, it is just more market share for them. However, those environments as they continue to get consolidated have applications on top of them that run in a Windows world and that will continue to happen. What we’re trying to do is make sure that we introduce to the customer the opportunity to run those applications in a Linux environment as well.

And as the customer gets comfortable with the hypervisor, they may choose to run it on the hypervisor, they may choose to run it as a physical OS, as a guest on the operating as a guest on the hypervisor and what this does is it gives the customer just many more choices in the marketplace. The good news is, the range of opportunity to do consolidation I think is very high and as the customer continues to migrate Linux to Linux, that’s going to continue to create growth opportunities for virtualization on just a pure Linux platform.

And as I said before, as you go to build more virtual appliances, the operating system becomes less known. However required in the virtual appliance and when you do that, the customer really is looking at the hypervisor and to have that standardized on our OS would allow our OS to be in a lot more spots but it will just be hidden from people. So you may not know what it’s running under there in that scenario.

James Gilman – Capstone Investments

Okay. Last part of that, of your statement there, it really evolves around the monolithic and the customizedable OS. Can you maybe give some quick thoughts on the trends there and when you might see more of the customizeable OS and less of the monolithic OS?

Dana Russell

In the Linux world, Linux has designed in a module manner. So it has the ability to be customized. We’ve delivered that now with SUSE Studio, so the application vendor or the customer can customize Linux right now and do that in a very quick manner, takes about 10 minutes to build out your own customized distribution, optimized for your environment and we’re doing that now.

We’ve probably had about 370,000 appliances already built, virtual appliances already built in our SUSE toolkit and our toolkit does that in and it allows you to deliver the virtual appliance in a variety of hypervisors, so whatever the customer chooses.

James Gilman – Capstone Investments

Okay. Last question here. Let’s set the bid -- the whole increasing shareholder value bid process aside and just look at the businesses. You have the collaboration and you have your Security Management and open platform. The latter there continues to have…

Dana Russell

Hey, James.

Dana Russell

Hey James, you’re fading out. I’m having a hard time hearing you.

James Gilman – Capstone Investments

I’m sorry about that. So I was going to ask about separate the bid out of this whole thing and just looking at your business. The collaboration business continues to run at a 45% op margin. The rest of your business is at a loss. What are some of the things that you can do to generate a profit from those other groups?

Dana Russell

Well, James, like we said before, we had some pretty -- we had some significant momentum in the first quarter. We saw our invoicing, revenue streams were ticking up. We have been able to contain expenses and so we think on a longer term basis, we even think we’ve made tremendous progress over the last couple of years. Those continue to advance, our profitability gets better and I don’t see why we can’t continue to increase profitability on a longer term basis here.

So if we’re looking at it from a historical standpoint over the past several years, we’ve just made significant progress in those businesses. We have a long ways to go and the current process hasn’t helped in our momentum there, but we certainly feel like everything’s in place there to make those businesses progress and continue to become more profitable.

James Gilman – Capstone Investments

Thank you for taking my questions gentlemen.

Operator

Your next question comes from the line of Katherine Egbert of Jeffries.

Katherine Egbert – Jeffries

Hi. Good afternoon. Quick question. On this partnership, did you approach VMware or did they approach you?

Dana Russell

I’m trying to remember now. I believe we approached them, as memory serves me.

Katherine Egbert – Jeffries

Okay. And then if I can, if I go back and look at the March 20 press release, the options you were looking at were stock repurchase, dividend, partnership and alliance, a joint venture, recapitalization or a sale of the company. We’ve not seen repurchases or dividends, I think we saw partnership with VMware, we’ve not seen alliances, any joint ventures or a recap. So it was just comment, it looks like the outcome here is going to be discrete which is the last option and I think by not updating us, that you’re creating that impression. Just a comment.

Rob Hovsepian

Hi, Katherine. This is Rob. I appreciate the comment but as you said, we can’t comment on it and won’t until the board reaches a conclusion.

Katherine Egbert – Jeffries

Okay. Thanks.

Rob Hovsepian

Thanks Katherine.

Operator

Your next question comes from the line of Brad Whitt of Gleacher & Company.

Brad Whitt – Gleacher & Company

Hey, guys. Thanks for taking my question. Rob, just curious as to -- it sounds like VMware will ship SUSE and didn’t sound like they were charging customers for that. So I’m curious, what is the monetization strategy for Novell specifically? I know you talked about possibly up-selling and cross-selling but on the initial sale, do you guys recognize revenue? How does that work?

Rob Hovsepian

Yeah, just overall the agreement is confidential in nature but the way we would up-sell without getting into all the numbers, the way we would up-sell inside of here is built into the agreement. So their sales teams are incented to -- and partners are incented to sell the technical service, support service on our behalf. Which I think is the most critical piece of it.

So their sales teams are incented by quota and quota retirement to sell our technical support which is where we make our money. So that’s the incentive mechanism. It’s very strong and very tight. So from my vantage point, that’s a very good use of a partnership from our perspective in terms of getting reach and a lower cost manner.

Brad Whitt – Gleacher & Company

Okay. Because I was confused, I thought you said that VMware was going to provide the support, at least level.

Rob Hovsepian

They’ll do the level one and level two inside of that to deliver the support, so that the VMware customer has a seamless experience. We’re behind that delivering support to them. Very similar to some of the other agreements that us and our competitors have with the large hardware vendors, as an example.

Brad Whitt – Gleacher & Company

Okay. So are you seeing significant revenue -- Linux revenue recognition now or is that something that’s going to be gradual over time.

Rob Hovsepian

Yeah, I believe it will be gradual over time and while we’ve announced the agreement, obviously it takes time to ramp all these pieces up and all that stuff is being done right now and I’d ask you to go attend VMware.

Brad Whitt – Gleacher & Company

Okay. Thanks for taking my questions.

Rob Hovsepian

Thanks.

Operator

Ladies and gentlemen, we have reached the end of the allotted time for questions. Are there any closing remarks?

Rob Hovsepian

No. At this point there are no closing remarks. I thank everyone for joining us on the call.

Operator

This concludes today’s conference. Thank you for your participation. You may now disconnect.

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