Novell F4Q07 (Qtr End 10/31/07) Earnings Call Transcript

Novell, Inc. (NOVL)

F4Q07 Earnings Call

December 13, 2007 5:00 pm ET

Executives

Susan White - Director, Investor Relations

Dana C. Russell - Chief Financial Officer, Senior Vice President

Ronald W. Hovsepian - President, Chief Executive Officer, Director

Analysts

Abhey Lamba - UBS

Terry Tillman - SunTrust Robinson Humphrey

Aaron Schwartz - J.P. Morgan

Katherine Egbert - Jefferies & Company

Brendan Barnicle - Pacific Crest Securities

Brent Williams - Benchmark Equity Research

Kirk Materne - Banc of America Securities

John Walsh - Citigroup

Jason Maynard - Credit Suisse

James Gilman - Cross Research

Presentation

Operator

Good afternoon. My name is Robert and I will be your conference operator today. At this time, I would like to welcome everyone to the Novell fourth quarter 2007 financial earnings release conference call. (Operator Instructions) I would now like to turn the call to Ms. Susan White, Director of Investor Relations at Novell. Ms. White, you may begin your conference.

Susan White

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

We are here this afternoon to discuss Novell's financial results for the fourth fiscal quarter and full fiscal 2007. If you don’t yet have our press release, you can access it by visiting our investor relations webpage at www.novell.com. This call is also being broadcast on our website and will be available on our website and for telephone playback through December 28, 2007.

The domestic toll-free replay number is 800-642-1687 and the international replay number is 1-706-645-9291. Replay listeners must enter conference ID number 28171181.

Before I turn the call over to Dana, I would like to take a moment to say that we will provide 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.

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.

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 May 25, 2007.

Any forward-looking information that we provide in this call represents our outlook as of today, December 13, 2007, and we do not undertake any obligation to update our forward-looking statements except as required by the securities laws.

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

Dana C. Russell

Thanks, Susan. Good afternoon, everyone. We appreciate your participation on the call with short notice. As you know, we voluntarily delayed the release of our earnings due to review of the financial filings by the SEC. There have been a number of complex accounting matters which we reported and disclosed in our financial results in the past year, including the agreement with Microsoft and as part of the normal process, the SEC reviewed our financial filings and has not taken exception to any of our accounting. We believe our financial results for the quarter and the full year are very positive, show great progress, and we wanted to make sure the SEC had time to complete their review prior to release our earnings.

Before I discuss Novell's fourth fiscal quarter and 2007 annual results, I would like to note that due to the pending sale of our Swiss-based business consulting unit, we’ve excluded its financial results from Novell's continuing operations. These results are reported in discontinued operations in all periods presented. I’ll talk about that a little further in a minute.

With that said, the company reported net revenues of $245 million during the quarter and $932 million for the year. As I previously mentioned, the Swiss-based consulting unit results are reported in discontinued operations and that reduced revenues by $6 million for the quarter. So just to be clear, $6 million on top of the $245 million reported, so total operations in the quarter was $251 million.

In addition, total dispositions of general business consulting during 2007 reduced revenue by an estimated $46 million on a full year run-rate basis. Loss from continuing operations was $9 million for the quarter and $26 million for the year. Non-GAAP income from operations was $20 million in the quarter and $38 million for the year, and non-GAAP net income was $20 million or $0.06 per share for the quarter, and $54 million, or $0.15 per share for the year.

For the quarter, foreign currency exchange rates positively impacted revenue by $6 million but did not materially affect operating loss on a year-over-year basis. And for the year, FX positively impacted revenue by $15 million but negatively impacted loss from operations by $5 million.

So we made great progress this year, exceeding our financial guidance for revenue, operating income, and exit rate targets. At the beginning of the year, our revenue guidance was $945 million to $975 million. During the year, we divested our remaining general business consulting activities, which accounted for $46 million of planned revenue. If we back this out of our original revenue guidance, our guidance would be $899 million to $929 million. We delivered revenue of $932 million, exceeding guidance.

Second, our non-GAAP operating income guidance was break-even to $10 million. For the year, non-GAAP operating income was $38 million and finally, we guided non-GAAP exit rate operating margin of 5% to 7% defined as the annualized expense structure on the last day of the year compared to the revenue for the full year. We recorded operating margin in the third and fourth quarters of 5% and 8% respectively, which demonstrated progress toward improved profitability as we exited the year.

The second half operating results as well as the additional expense reductions in the fourth quarter put us in a position to exit the year with operating margins slightly ahead of our stated exit rate objectives of 5% to 7%. We expect to sustain this exit rate cost structure and operating improvements for the full year in 2008.

Now I’ll highlight some of our quarterly and annual results by business unit. You can see the results on the revenue schedule on page 11 of the press release. Within Open Platform Solutions, Linux platform products revenue in the fourth quarter was $22 million, increasing 69% from the year-ago quarter and for the year, Linux platform products revenue was $77 million, also up 69%.

In the fourth quarter, Linux platform products invoicing was $46 million. That’s up 108% and for the year, invoicing was $209 million, up 200%.

Within our identity and security management business unit, identity and access management revenue in the fourth quarter was $30 million. That’s up 27% from the year-ago quarter. For the year, identity and access management revenue was $104 million, up 7% compared to a year ago.

During the fourth quarter, invoicing for identity and access management increased 13% on a year-over-year basis and for the year, invoicing was up 11%, which is in line with market growth rates.

Systems and resource management revenue in the quarter was $36 million, up 5% from the year-ago quarter. For the year, revenue was $135 million, relatively flat year over year. Fourth quarter invoicing was up 9% and annual invoicing was up 3%.

In the quarter, workgroup revenue of $88 million was relatively flat from the year-ago quarter and annual revenue of $335 million was down 4% year over year. Excluding the impact from Microsoft, workgroup revenue was down 5% in the quarter and down 9% for the year. During the quarter, invoicing declined 1% year over year and for the year, invoicing was down 7%. These figures exclude the impact from Microsoft.

Within our workgroup category, the combined OES and NetWare related revenue in the fourth quarter was $51 million, down 9% from the year-ago quarter and for the year, OES and NetWare related revenue was $201 million, down 12% year over year. Combined OES and NetWare invoicing decline 11% in the quarter and declined 13% for the year.

Now on to our expenses for the quarter -- non-GAAP operating margin was 8%. Total cost of sales and operating expenses were $225 million, up from $215 million in the year-ago quarter. This was due to transitional and overlapping expenses, most of which were eliminated as we exited the year.

The total cost structure for the company will be reduced from the reported numbers due to the restructuring activities we took at the end of the fourth quarter. On an annual basis, we aggressively reduced expenses in services and sales, much of which occurred prior to the fourth quarter.

Product development expenses have run higher than the prior year due to overlapping expenses, FX, acquisitions, and expenses associated with the technical collaboration agreement with Microsoft.

Product development expenses were reduced late in the fourth quarter and on an annual basis, excluding stock-based compensation, we expect product development expenses to decline 5% to 8% as compared to fiscal 2007.

G&A expenses have run higher in 2007 due to FX, transitional costs, and legal fees that we’ve previously discussed, and on an annual basis, we expect G&A costs to decline 4% to 6% as compared to 2007, excluding stock-based compensation.

We incurred $25 million of restructuring charges this quarter. For the plan to date, we incurred $47 million, which is slightly above our communicated range of $35 million to $45 million.

Headcount reduction of 640 was on plan. We expect restructuring charges of $15 million to $25 million in fiscal 2008 and for more detail, you can see our Form 8-K that we filed with the SEC today.

Total headcount at the end of the quarter was 4100. This is down substantially from last quarter due to restructuring and the divestment of business consulting.

In summary for the year, total revenue grew but more importantly, product revenue grew. That was driven by strength in Linux and better than expected results in Workgroup. We were able to see revenue growth while making significant changes to almost every area of the company. Even with the transitional expenses incurred this year, as well as $5 million unfavorable impact on operating income from FX, we’re able to exceed our financial guidance. In addition, we tightened our strategic focus by exiting all general business consulting during the year.

Now I will turn the call over to Ron for an update on our business units as well as a progress report on our strategic initiatives. Ron.

Ronald W. Hovsepian

Thanks, Dana. 2007 was a year of significant transformation for Novell. We established specific milestones and financial objectives for the year and we achieved the majority of them. We delivered product revenue growth, improved operating margins, and exceeded our exit rate targets while we implemented significant changes in almost every aspect of the business -- services, sales, R&D, and G&A.

So overall, I am very pleased with our results for the quarter and the year and we remain focused on achieving long-term sustainable profitability.

Today I will provide a review of our business units, strategic initiatives, and key milestones for fiscal 2007. I will conclude with our outlook for fiscal 2008, outlining our initiatives and milestones for the year.

Let me begin with the business unit update, starting with Open Platform Solutions. Fiscal 2007 was a big year for Open Platform Solutions. For the year, Linux platform product revenue increased 69%, invoicing was up 200%, and we added 4700 new customers. At the beginning of the year, we signed a major agreement with Microsoft. Just one year into our five-year agreement, we have invoiced $122 million, or 51% of the $240 million deal.

We have signed major customers, including Wal-Mart, AIG, Credit Suisse, HSBC, Zabka Polska, T Systems, and Wachovia. Novell and Microsoft also opened an interoperability lab in Cambridge, Massachusetts, delivered important milestones to our technical collaboration agreement around virtualization and interoperability. In addition, SAP selected Novell as a preferred Linux provider and in our initial rollout, 15 customers have upgraded to SUSE Linux enterprise server priority support for SAP.

We have also seen early customer validation of our desktop to data center strategy. We signed major deals with PSA Peugeot, Tamil Nadu to roll out SUSE Linux enterprise across 50,000 desktops and 4300 servers.

And lastly, we signed landmark enterprise Linux deals with Dell and Lenovo to offer notebooks and PCs preloaded with SUSE Linux enterprise desktop.

In identity and security management, our business grew more in line with the market rate of 11% to 13%. The company remains well-positioned in this market and our products continue to be recognized for their technical innovation.

Gardner recently positioned three Novell identity and security products in the leader’s quadrant, making us the only company to be placed in the leader’s quadrant in all three solution areas. We will continue to emphasize partnerships, specialization, and training to achieve market growth rates.

Our systems and resource management unit was in transition this year. We invested in this business to be a new source of growth in the future. In the fourth quarter, we launched seven products in seven days. This included our re-architected ZENworks configuration management product, which allows us to sell into markets beyond our current installed base.

Additionally, we launched our new data center offering, ZENworks Orchestrator, which provides automated management for heterogeneous physical and virtual environments. While it is still early, these new products have all been well-received by customers.

Workgroup delivered better-than-expected results this quarter and for the year. We continue to see positive impact from our bundled offering, Novell Open Workgroup Suite. In October, we had two major product releases, Open Enterprise Server Two and Novell Teaming and Conferencing. With the release of OES Two we have completed the transition of delivering NetWare services on Linux.

With the introduction of Novell Teaming plus Conferencing, we are providing real-time teaming and conferencing capabilities while extending the value of our collaboration offering.

While early market reaction has been positive, it’s premature to assess the long-term impact of these releases. We are also seeing momentum in our GroupWise offering in the Linux market and total GroupWise invoicing was up 6% year over year in fiscal 2007.

Now I would like to turn to our strategic initiatives for 2007. A year ago, I outline three initiatives to redesign our business with the ultimate goal of achieving sustainable profitability. These initiatives require temporary investments of $23 million, all of which have been removed from the model as we exited fiscal 2007. I am pleased with the progress we have made. Here’s a brief overview.

Initiative one, sales model; in our sales model initiative, we undertook a major shift from direct to indirect coverage and capabilities. To build out our TeleWeb capabilities was a large part of this transition. We have completed this on time. Our TeleWeb centers are up and running and will be responsible for our renewal business in fiscal 2008.

Another component of our indirect model was to expand relationships with global strategic partners. In addition to our successful partnership with Microsoft, we have expanded relationships with Dell, Lenovo, SAP, and Cap Gemini.

The third part of our sales model initiative was to increase specialization of the sales force, which we tripled during the year.

Initiative two, R&D processes; in fiscal 2007, we improved the cost and productivity balance between on and off-shore R&D locations, substantially completing these activities. While we achieved our organic cost reductions, we took advantage of the opportunities in the marketplace to expand our footprint and growth the business long-term.

For example, our R&D expenses increased due to the technical collaboration agreement with Microsoft and the build-out of R&D capabilities around end point, security, and virtualization.

We’ve also invested in an integrated product development process to improve the overall quality and to assure our products address market needs. While we undertook these changes, we launched or refreshed most of our major product lines.

Initiative three, back office; we increased the efficiency and cost control in the back office by moving many finance and HR functions to shared service centers. During the year, we made significant progress against the strategic initiative of enhancing our sales model, improving our product development processes, and optimizing the performance of the back office. All three initiatives resulted in transformation and overall cost improvement and will continue in fiscal 2008.

Our milestones -- now I would like to report on our six milestones for fiscal 2007.

One, deliver revenue that is flat or near flat on a year-over-year basis -- we achieved this milestone. For the year, total revenue of 932 was up slightly and product revenue of 671 was up 3%.

Number two, increased growth of recognized and invoiced Linux revenue from fiscal 2006 levels -- we exceeded this milestone. For the year, Linux revenue of $77 million was up 69% compared to 26% in fiscal 2006. Invoicing of $209 million grew 200% during the year, as compared to 31% a year ago.

Three, sustain the growth of 30% for recognized and invoiced identity revenue -- we did not achieve this milestone. This was an aggressive goal targeting to grow almost at three times the market growth rate. We had revenue growth of 7% and invoicing growth of 11%.

Four, expand global strategic partnerships -- we achieved this milestone with the introduction and expansion of several relationships, including Microsoft, SAP, Cap Gemini, Lenovo, and Dell.

Five, improve operational efficiencies and six, achieve non-GAAP exit rate operating margin of 5% to 7%. We exceeded our exit rate goal. Fueled by improved operational efficiencies, our exit rate operating margin was higher than 7%.

Now I would like to turn to our outlook from fiscal 2008. We will focus on leveraging our transformation activities in 2007 by refining the improvements we made in our sales, R&D, and back office initiatives.

In addition, we will implement a new model for our services business. Many of these initiatives are process improvements, so I will report on our efforts towards these goals at the end of the year.

Here’s an overview of these four initiatives. Initiative one, the sales model -- in fiscal 2008, we will continue to shift from direct to indirect coveraging capabilities. We will accomplish this in three ways. First, our new TeleWeb organization will be responsible for our renewal business. Second, we will continue to increase specialization of our sales force. Third, we will expand our partner relationships through improved recruitment and management. The impact of these changes will be a more efficient and cost effective sales model.

Two, R&D processes -- we will continue to mature our integrated product development process and further refine our engineering excellence. Through these efforts, we will improve our product lifecycle management and enhance our off-shoring integration throughout the year.

Initiative three, back office -- we will substantially complete our transition of back office functions to a shared service model. We will continue our efforts to centralize many of our finance and human resource functions, such as payroll, accounts payable, billing, travel, and entertainment.

Initiative four, services business -- this year, we are transforming our services business to be more focused and efficient. In the beginning of 2007, we began a process to become more software-centric and organized our company around business units. Historically Novell services has been run independently to drive services revenue. During the year, we divested our general business consulting so that our remaining services business was solely focused on Novell products and services.

As we move forward with our efforts to further drive efficiencies and continue our transformational activities, we are aligning our services business with each business unit to drive product revenue.

The services business will also become more partner friendly to increase the number of qualified partners. We will make it easier for partners to sell Novell products, as well as provide partners with increased opportunities to sell their services.

A likely result of this strategy will be a decline of lower margin services revenue as the organization will be more focused on driving higher margin product revenue and shifting services revenue to our partners.

Milestones for 2008 -- in order to track our progress on our initiatives, we have five milestones for fiscal 2008. These are: number one, achieve revenue of $920 million to $945 million; number two, grow product revenue at or better than market growth rates in the Linux platform products, identity and access management, and systems and resource management. According to IDC, the market growth rates are at 22% for Linux, 11% to 13% for identity, and 6% to 8% for SRM, systems and resource management; milestone three, achieve Workgroup revenue of $285 million to $300 million; number four, expand relationships with one to two more global strategic partners; milestone five, achieve non-GAAP annual operating income margin of 7% to 9%.

In closing, I am pleased with our results this year. We grew revenue while improving our operating margin while undergoing a major overhaul. Our team took on a lot this year and it rose to the occasion. We added over 8300 new customers and launched or refreshed most of our major product lines. We are beginning to see the benefits from our transformational activities and we feel good about the progress we have made, creating a solid foundation for future success.

I believe the company is well-positioned as we enter 2008.

Now I will turn it back over to Dana for financial guidance for fiscal 2008. Dana.

Dana C. Russell

Thanks, Ron. In continuing with the guidance that Ron just provided, we expect product related revenue growth in 2008. However, we will continue to refine our services activities as Ron mentioned to drive higher margin product revenues and create more opportunities for our partners. Revenues for services will be down and total revenues will range from $920 million to $945 million, compared to the $932 million we achieved in fiscal 2007.

The shift in revenue mix will help continue the optimization of our expenses, improve margins and profitability, and it’s a necessary step in meeting our immediate and longer term goals. We expect non-GAAP operating margin of 7% to 9% for the year, and this is a significant expansion over the fiscal 2007 operating margin of 4%.

As I mentioned on the call last quarter, we will be providing guidance for operating income on a full year basis rather than discuss exit rates for 2008. However, we will continue to diligently move the company to higher profit targets and efficiency through the year, with the expectation that we will exit the year in a more profitable and efficient operating structure than what we report for the full year operating income.

We expect the seasonal -- the historical seasonal pattern for revenue expenses to hold in fiscal 2008. By way of other guidance, we estimate stock-based compensation expenses to be somewhere in the range of $40 million to $45 million, shares outstanding for the year to be between 350 million to 360 million, and we will have an annual effective tax rate on a non-GAAP basis of 40% to 45%.

With that, I will stop there and open it up for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Abhey Lamba with UBS.

Abhey Lamba - UBS

Thank you. I just want to get an understanding of what assumptions you are making for the macro environment and IT spending in your fiscal ’08 guidance -- are you assuming any improvement, worsening, or status quo of the macro environment?

Dana C. Russell

In terms of the macro environment, in terms of the markets that we serve, right now we are not seeing any macro effect in the Linux market or the identity market as a key marketplace. So overall, I’m not seeing any slowdowns at this particular point in time, from a macroeconomic effect.

Again, we tend to be serving markets that are necessary markets, meaning an operating system or meaning regulatory and compliance based issues that are in high demand, so take my point of view in those market segments.

Abhey Lamba - UBS

And lastly, Ron, can you talk about the business transition? Do you think you will complete the business transition in fiscal ’08 and get on the growth track in fiscal ’09? And what type of revenue growth can you post beyond ’08?

Ronald W. Hovsepian

I think as we are indicating here from our performance in 2007, we really focused on getting the transformational activities done. The real focus on 2008 is now really refinement of those processes and the refinement of the business processes to back up getting the product revenue to continue to grow and as you heard, that’s a big piece of the focus of what we need to get done.

So as you look at the overall guidance as Dana had highlighted, there will be some changes in that services revenue and I had indicated there will be some changes there, but overall we are looking to drive that product revenue growth as a key part of what we want to get done for fiscal 2008.

Abhey Lamba - UBS

And any comments beyond that?

Ronald W. Hovsepian

Nope.

Abhey Lamba - UBS

Thank you.

Operator

Your next question comes from Terry Tillman with SunTrust Robinson Humphrey.

Terry Tillman - SunTrust Robinson Humphrey

Ron, first question just relates to the Linux business. If I were to back out the Microsoft influenced business, it looks like it’s $29 million in just core Linux invoicing in the quarter and it was $24 million in the prior quarter. And on a year-over-year basis, it was up substantially. Can you maybe talk through -- are you seeing any benefit in the fourth quarter from Dell, SAP, or Lenovo or the hardware OEM guys? Or is this more just improved internal execution for just the core Linux invoicing?

Ronald W. Hovsepian

As I’ve said to all of you guys, Terry, it’s very difficult to decipher the overall halo that Microsoft has. I will tell you the other relationships, like the SAP one that I had indicated in our early rollout, we saw some up-tick there and I am tracking the Lenovo and the Dell numbers. I’m just not sharing those in public but I have looked at them and those things are directionally correct in terms of where we want to see the relationship go.

But again, I’m just much more focused on driving that overall Linux invoicing number for the company and I obviously look at each stream and each route to market but not breaking any of that out in terms of commentary beyond what I just said.

Terry Tillman - SunTrust Robinson Humphrey

Okay, and then in terms of when I looked at FY08 revenue guidance, I hadn’t been backing out any Swiss consulting business, so I guess what I would like to get a sense on is you guys talked about $46 million in services revenue this year that needs to be normalized, so to speak, and backed out. Could you give us any kind of apples-to-apples basis for ’08, what we should think about? What’s going out of the model here on the revenue side?

Dana C. Russell

Well, when you look at the revenue for the fourth quarter, what you saw was $6 million of revenue associated with the Swiss consulting business. We also mentioned earlier in the year that we disposed of our U.K. consulting business, general consulting business, and that had an annual run-rate somewhere around $20 million but those results -- so the results for the year here have been restated, so you can look at the results and say these results represent the results without any of those businesses in them. They have all been taken out. They are in discontinued ops, so that $932 million that we reported for the full year, it excludes any of the business that we’ve disposed of.

Ronald W. Hovsepian

You may want to run through those high level numbers again like you did, just to make sure everybody -- because I know that’s been an area of confusion in terms of less the consulting. I know you said it in the script but you may want to hit that one more time.

Dana C. Russell

So just to go back over what we said in the script, and Terry, I’m not sure if this is what you are asking but at the beginning of the year, we said $945 million to $975 million in revenues. That was where we were at for the full year, prior to disposing of these general business consulting activities. That was about $46 million of planned revenue for the year. Now, part of that we disposed of earlier in the year and then part of it we have just now entered into an agreement to get rid of and that, the results have just been excluded in the fourth quarter.

So we delivered against what would be revised guidance, $899 million to $929 million, and we delivered $932 million revenue, and so the guidance that we’ve come out with in 2008 of $920 million to $945 million, is compared to that $932 million.

And as we said, we will see product revenue grow. So if you look on those press release schedules and you look at the product revenue numbers there, they were in fact up in 2007. We expect them to continue to be up in 2008. It’s not that we’re not focusing on services. We actually are focusing more on services, trying to optimize them, trying to make them exactly what they need to be for the products we are offering but we are doing it as an effort to enhance our high margin product business and to invite partners in the channel to do more business with Novell and I think that’s what we are trying to accomplish.

But in that change or that transition, we will see some decline, at least initially, to the services revenue and we hope and we believe that will result in higher future product revenues that will help Novell in the future.

Terry Tillman - SunTrust Robinson Humphrey

Okay, that’s helpful, Dana. And I guess Ron, just a tough one for you; you now have, based on my calculation, $1.3 billion in net cash. You’ve got a lot of cash on hand, arguably maybe too much cash. I’m looking at where the stock is bid, who knows how it will open up but maybe there’s disappointment over the revenue guidance. You know, if it were to open up at that level, we’re talking about cash representing close to 60% of your market cap. Can you maybe give us a sense -- I know you say you are always looking at things to do with the cash but why not think about maybe revisiting a stock buy-back? Thanks.

Ronald W. Hovsepian

Obviously as I’ve stated before, we do look at all those pieces. I’m actually hopeful that as people understand the revenue guidance, I’m getting a little concerned when I hear you saying that it’s a negative on the revenue guidance. I think Dana did a very good job of explaining what the puts and the takes are on that revenue guidance for ’08, meaning the services is going to come down from an overall perspective.

And again, the operating margin piece of what we want to emphasize is what we’ve focused on around that annual operating, non-GAAP annual operating margin of that 7% to 9%. So we are shifting around some of the revenue mix underneath the body here, so I want to be a little careful with that top line piece of it, as you look at it.

And then, to the core of your question, of course we are looking at all the things we could do to use the cash. I am aware of what it is as a percentage and my expectation is that we will continue to look at that with our board and focus in on the best use of that cash for our shareholders.

Operator

Your next question is from Aaron Schwartz with J.P. Morgan.

Aaron Schwartz - J.P. Morgan

Good afternoon. Sorry to keep revisiting this, but I do think there is some confusion on the revenue guidance. But is it fair to say at the midpoint, you are guiding to 932, sort of flat year-on-year on an apples-to-apples basis if you continue to dispose of services or push that to partners that you are more optimistic in the other part, or the product side of the revenue guidance?

Dana C. Russell

Absolutely, Aaron, and thanks for -- you know, I did want to jump back in here and give a little more clarity. So as Ron mentioned, we are very, very focused on improving operating margins. I mean, that’s been our focus. We want to do that while we are growing in our strategic areas. The product revenues we talked about, you know, we are expecting growth in every product area that Ron called out there -- Linux, our identity and access management areas, our systems and resource management. If you look at that, we’re calling for at or above market growth rates in each one of those categories.

So it’s not that we’re not focused on the top line. We expect that top line to continue to grow in those strategic areas but we are saying what we really want to do is, and we said this at the beginning of 2007 when we started, we want to change the structure of this company to optimize it to create a different environment where we can operate in a much more efficient manner. The only way that we can do that is to invite the channel and partners to participate with us in a more meaningful way. We’re doing that and that’s what -- you know, we may give up a little bit on the services line, which is the lower margin business and like I said before, it’s not that we’re not focused on services. We’re intensely focused on services, improving those services, but we also need other folks to play in those activities and help us.

So overall, I just want to be clear that revenues are going up in all the strategic areas that we talked about, in the product areas, and the focus is on driving costs out of the business so we can continue to improve not only at a gross margin level but also just operating income and net income, all the way down the line so that we just have a more profitable structure that’s more in line with our peers in the industry. So that’s what’s happening here.

Aaron Schwartz - J.P. Morgan

Okay, that’s helpful and then a follow-up on that, if we look at sort of the, some of the consulting businesses that you’ve disposed of or pushing some of that revenue off to partners, what’s your view for your gross margin on your services business longer term? How should we think about the expansion there?

Dana C. Russell

I don’t know that we’ve actually given guidance out on gross margin but you can see that we have -- if you look at the -- take a look at the gross margins this year as we’ve exited the year. We’re expecting to continue to improve gross margin overall. And by the way, when you think about this, this is very dynamic so as we are going through significant changes here, there were other areas that we didn’t call out and make -- you know, that we didn’t call out at the beginning of 2007 that we made significant changes to. Services is one of those areas. Ron did not call out and say specifically that we are going to change the services component and dramatically reduce expenses but in fact, we did.

And if you look at the revenue schedules in our press release for the quarter and for the full year, you will see that there was a decline in some of those revenues, also a very significant decline in expenses and that led to some improved profitability.

So it’s not like we are changing things dramatically from the course that we’ve been on. It’s just a continuation of that course. We are continuing on doing those things to try to optimize.

Ronald W. Hovsepian

The only thing I would add for everyone is again, where we were one year ago was we were a generalist, very diversified software and services company at $1 billion. Where we are now and where we are going to continue to go is to be a very focused software company and a software-centric company focused in a couple of key markets that we want to grow down in the infrastructure layer and therefore it’s changing our whole ecosystem to match that is what we’ve been doing.

In the same time, the financial dimension of that should translate to while we make those changes is what we delivered in terms of operating income improvements this past year and that 7% to 9% operating margin percentage for next year on a non-GAAP basis. That’s really what we are trying to do. So we are changing a lot of pieces while making sure that we are delivering something back to our shareholders.

Aaron Schwartz - J.P. Morgan

Okay. Also understanding that you are not giving quarterly guidance, you did have a lot occur at the end of your fiscal year and I’m wondering if you could provide any color on the non-GAAP absolute dollar expense level for Q1, just for modeling purposes.

Dana C. Russell

I think in my script there when I read through the -- I tried to give some color in terms of the exit rates and how we were going to improve certain categories, so what we mentioned was that most of the expenses in the sale, in the area of sales and services as we enter the year, those won’t -- you don’t need to confuse that in terms of how we exited or significant actions that were taken at the end of the year. So the results that you saw in the fourth quarter, you can take a look at those and model those results and get a pretty good feel for how we are going to enter the year from an expense standpoint.

What I did say though was that we would expect product development expenses to decline 5% to 8% from what was stated for the full year. That’s excluding our stock-based compensation and I also said that we would expect G&A expenses to decline 4% to 6%. So that should give you a little bit of color.

And just to go back and re-emphasize this point, we operated this year at 4% operating income. That was what we attained for the full year and when you think about where we exited last year, for the full year last year it was around 4% but our expenses were going up and our revenues were coming down. We’ve reversed that trend. I mean, our product revenues have begun to climb up organic growth, and we’ve also brought expenses down. So we are essentially saying that we are doubling the operating income targets over the next year and also moving to improve on an exit rate standpoint as we exit next year.

So I think these are very aggressive targets that we’ve set out. We had aggressive targets in the prior year. We continue to be aggressive and we are laser focused on increasing the profitability of this business.

Aaron Schwartz - J.P. Morgan

Okay, and last question for me in terms of the Open Platform group, can you talk about the profitability there, if there’s an inflection point now that you’ve had a year of revenue coming from the Microsoft agreement and the cost structure there? How do you think about margins just for that group and with the ratable revenue recognition, have you hit the inflection point to see material margin expansion there?

Dana C. Russell

You’re looking from material margin expansion in the Linux business?

Aaron Schwartz - J.P. Morgan

Yes, that’s right.

Dana C. Russell

Okay, well, so as you know, we’ve given indications before that the revenue recognition obviously is impacting us. This invoicing is very high, 200% growth in the year and as you take a look at that and model that out in terms of growth using those growth rate comparisons that we’ve given in the second half of the year here, you’re going to see a fairly significant up-tick in terms of revenue recognition. That’s obviously going to help us improve our gross margin.

I’m not going to give specific targets around that but we continue to see better scale, economies of scale in that business because of improved revenue recognition around that business.

Ronald W. Hovsepian

The other thing I would point out is Dana was highlighting the invoicing growth last year. The one thing I will say on Q1 is obviously we had an unnatural but I would take it again if I could, invoicing quarter in Q107 on the Linux platform products piece of it. I would guide you folks to look at quarters two, three, and four last year, to be more in the general range of how to think about the year as you look at that from an invoicing perspective.

Again, those invoicing won’t have that much impact financially in terms of revenue but I do want to call that out. Obviously that was a great start to the relationship.

Aaron Schwartz - J.P. Morgan

Understood. Thanks for taking my questions.

Operator

Your next question comes from Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies & Company

Good afternoon. Was that Swiss-based consulting unit profitable? And if so, is that the reason why you previously put out a bogey kind of in the low to mid teens for operating margin, and now it’s kind of high single digits? Is that the reason that’s come down?

Dana C. Russell

No, it was -- you know, it was very -- it was close to break-even, Katherine. We really didn’t have any -- pretty close to break-even, so that should give you your answer.

Ronald W. Hovsepian

Just for clarification, I want to be clear -- we did not come down or change our point of view in terms of guidance on the operating income margin. You said that we came down on that. We did not. The 12 to 15 was an exit rate discussion from the prior year and we are not using that based on some of your guidance. We’re just focusing on the annual improvement.

So the way to think about it is the ’07 year non-GAAP operating income margin was approximately 4% for the full year and the guidance we are giving you is the 7% to 9% for that year. So in essence, as Dana said, if you took the midpoint that would be doubling the profitability.

We will still internally have particular targets that we want to get to that then position us for ’09 but we are not going to get into that in the public, because we felt it just added too much confusion, bluntly.

Dana C. Russell

Katherine, as we talked about before, there was quite a bit of confusion as we gave exit rates out. That wasn’t something that you could actually get a report and calculate. It was a number we were giving you and so because of that, we’re saying we are going to state operating income for the full year, not an exit rate calculation. And we gave that full year guidance of 7% to 9%.

However, we have not moved off of the aggressive run-rate improvement that we’ve been talking about and we still believe that we are going to be significantly improving above the results that we report for the full year. That was also a comment that I made in my prepared remarks as well.

Katherine Egbert - Jefferies & Company

Okay, is the 12% to 15% reasonable? I mean, I won’t hold you to it but is that -- could it be double digits by the end of the year?

Dana C. Russell

Yeah, I think we haven’t moved off of double digit exit rate targets.

Ronald W. Hovsepian

Those are internal things. We’re not going to report on them but we’ve set internal targets to get ourselves positioned for ’09, as Dana’s highlighting. I just want to make sure that it didn’t confuse people on the phone there. I thought I heard exit rates so I want to make sure I clarified -- annual operating income is what we are giving the guidance for for the full year, 7% to 9% on the operating margin, non-GAAP annual income versus the 4% from last year, ’07.

Katherine Egbert - Jefferies & Company

Okay, thanks, I got it now. So the other thing is as you look to ’09, you are through -- you are looking at the last 12 months of this restructuring, which you’ve done a good job on. As you look in ’09, can you give us a sense of what you are thinking, longer term strategy? And do you need to get more aggressive, you know, product development or inorganically to grow revenue?

Ronald W. Hovsepian

The answer is yes. As we talk, we’re getting the body positioned to be a stronger software company and a stronger player in the ecosystem and we’re going to continue to emphasize that. I think we are -- in ’07 I think we did a good job doing the major overhaul work to get the company positioned for that. ’08 is now refining those processes and to your point, we’ve got to do some organic things and then we’ve got to do some inorganic things and take advantage of the markets that we are serving that I think will accelerate our overall growth and relevance in the marketplace. Around that software-centric model, probably we would have increased our risk had we added to the body prior to making the model changes.

Now with the clarity and the focus and the work that’s gone on, it will make it easier for us to absorb things as we consider acquisitions.

Katherine Egbert - Jefferies & Company

What I wanted to focus on with that question was will you get more aggressive with your R&D spend or with your pace of acquisitions as you look to ’09?

Ronald W. Hovsepian

I will be conservative in my comments but I believe our execution has been fairly aggressive, given the depth and the volume of the things we’ve historically taken on. I think you can look at the aggressive nature of those things. However, in terms of forecasting anything in ’09, I don’t want to get into that. I think the exit rate discussion we just had is an indicator of where we see overall expenses so I think you could read into that.

As I said all along, we’ve got to get aligned with other industry players into those zones who do aggressive things and we have enough room there to continue to approve our operations and get more aggressive. It’s about prioritizing the business and focus, focus, focus in terms of where we attack in the market, meaning sales, development, marketing, support and services and that’s really what we are doing.

Katherine Egbert - Jefferies & Company

Okay, got it. Thanks, Ron.

Operator

Your next question is from Brendan Barnicle with Pacific Crest Securities.

Brendan Barnicle - Pacific Crest Securities

Thanks so much. I was hoping to get some clarity on the Workgroup business, which if I heard you right in the prepared remarks, you are looking at 285 to 300 versus 335 last year. Is that right?

Ronald W. Hovsepian

Yes.

Brendan Barnicle - Pacific Crest Securities

So the guidance is about $40 million below where consensus is but you’ve got $35 million or so that could just be attributed just to this change year over year that you are having on the Workgroup business. That looks like a little bit bigger deceleration than what you saw last year. Is there something that’s kind of contributing to why that would accelerate?

Ronald W. Hovsepian

Right now, from what we’ve seen inside the business, we just shipped our new OES product that’s out into the marketplace and our early betas, we’re getting good feedback but I’ve got five, 10 years of historical declines in that marketplace and until I’ve gotten this thing into that market, OES Two in particular into the market and adopted at some rate, I’m going to maintain those historical points of view at this point in time because that’s the appropriate approach to take with that particular business.

I am encouraged by the collaboration business’ overall growth for the year. I am encouraged by our focus and our effort in that area but when I just look at the raw, hard numbers of our combined NetWare and OES business last year and NetWare, other related pieces of it, for the quarter it was still down 9% year over year. So we tried to reduce the ultra-conservative approach that we took to it last year in terms of looking and modeling it and we took that down a little bit. But it’s still a healthy number.

Brendan Barnicle - Pacific Crest Securities

And on the services business, obviously that could be down from a 261 or 262 call it that you had this year, can you give us -- you said it is going to be down. Is it going to be down $20 million? Is that fair to model? It comes in at like a 240 range or should we be modeling something even lower than that?

Dana C. Russell

I think as far as guidance goes on that, we did give you the overall revenue guidance. We gave you the growth rates for the products, in terms of we would be at or above those growth rates in product revenue and also gave you a solid number in the Workgroup area.

So with that said, you should be able to model out pretty effectively what the services area is.

Brendan Barnicle - Pacific Crest Securities

You did. We can back into that. I just thought it might help since there’s been some confusion around it on the call. And then just going back over to the Linux business, 105% growth in invoicing, obviously you’ve had some benefit from the Microsoft piece but now, talking about it just growing faster than the 22% that Linux industry growth is expected to be at, do you see a big deceleration related to annualizing the invoicing piece or can that Linux growth be substantially higher than that 22%?

Ronald W. Hovsepian

Could you just repeat that last sentence? I caught all of it -- just on our end the phone is a little hard to hear your question, just the last sentence in particular, the annualized, I just didn’t --

Brendan Barnicle - Pacific Crest Securities

Could the Linux business actually end up growing substantially faster than that industry growth rate of 22%, given what we’ve seen from the invoicing?

Ronald W. Hovsepian

At a high level, we’re here to take market share so that’s why I say at or exceed, so there is no doubt that we want to take market share. In modeling a business a year out, we’ve got to take a logical and appropriate approach, so we look at those growth rates and we model those pieces. As you highlighted, we took some services down and we focused on product growth so yes, there is a good aggressive plan inside of here but in terms of thinking about how to model us, I think the guidance that you just went through with Dana is the right way to think and look at us, and understand that we are going to try to grow faster than the market in these markets that we are serving.

Brendan Barnicle - Pacific Crest Securities

Great, and Sun Solaris, are you seeing anything there competitively? That name comes up a lot.

Ronald W. Hovsepian

The only thing I’ve seen is that the open Solaris project over a two-year window has only had about 60,000 downloads. When you look at what Linux did just last year alone, it was over 2 million downloads, so I’m not seeing much up-tick there. I think it’s a good marketing campaign. I don’t see it much beyond that.

Brendan Barnicle - Pacific Crest Securities

Thanks for your help.

Operator

Your next question is from Brent Williams from Benchmark Equity Research.

Brent Williams - Benchmark Equity Research

In looking at the channel business, do you have any way to think about what the channel revenue was in ’07 and is that a dramatic leap forward or is it a smooth, reasonable, incremental progress the percentage of business is going indirect in ’08?

Ronald W. Hovsepian

We’ve done some modeling there but that’s not in the guidance that we’re going to give at this point. We did the modeling as we went into ’07 in that arena and in ’08, both at the revenue and at the headcount level and how we are looking at it. We’ve gotten stronger in the modeling. We’re a little behind in terms of the systems that track those specific channel subtleties that are inside the market. We’re catching up on it so in terms of what I would call quality data that I would report to you, I will probably look to review something like that at the end of the year as my systems and data mature behind that.

But I know from a planning perspective what we are doing -- again, I’m not going to share that as part of the guidance here but I wanted you to understand we’ve looked at it, we’ve modeled it, it’s in the plan and it is a balanced increase there. And we will continue -- our leverage for our business model is around focusing on product and leveraging that channel and the more we can do to drive more into that channel, we are going to do as aggressively as we can.

So for example, we’ve shifted our partnering team to have named partners, and they only get paid when that partner or the three partners that they are covering drive and make their revenue number, where before they had more opportunity to cherry-pick through a territory or a zip code base, now they’ve got to get these name partners by business unit focus and that’s really what we’ve done. And so I’m very hopeful that we will see growth in those areas.

Obviously as we bring new partners on, which is another weak area for ourselves in terms of adding new partners, it’s something that we’ve really focused on addressing in 2008.

Brent Williams - Benchmark Equity Research

Okay, and then next, any changes in the average length of the contracts you signed in the Linux business during the quarter?

Ronald W. Hovsepian

There were no peculiarities.

Dana C. Russell

No, I wouldn’t say there were any changes to that model.

Brent Williams - Benchmark Equity Research

Okay, and any color on the largest, handful-ish type number of deals on the Linux business during the quarter? You know, how many units or anything like that?

Ronald W. Hovsepian

We don’t break out the units or the contracts. We have shared, if you go out and look, there was a press release that had approximately 30 customer names inside of there this past quarter of some of the key wins that we did have. I don’t remember the exact date of the press release, I apologize. But there’s one out there that’s got a list of the customers there.

Brent Williams - Benchmark Equity Research

All right, that’s it for me. All the other ones have been asked. Thank you.

Operator

Your next question is from Kirk Materne from Banc of America Securities.

Kirk Materne - Banc of America Securities

Thanks very much. Ron, could you just talk a little bit about the progress in terms of the renewal rates in the Linux business? I know when SLES 10 came out, you were hoping to get a little bit better I guess granularity on the customer base there and just how that’s been tracking, say for at least the one-year annual deals?

Ronald W. Hovsepian

What I would share with you is we’re not getting into the renewal rates just yet in terms of sharing anything like that but I would share with you that we’ve got very good control over our large renewals and we’ve got a very tight, good clean tracking approach and process to that and we’re seeing a very good renewal rates inside that part of the marketplace, significant improvement over the prior years.

And now, as we continue on in the smaller customer set, that’s where we are looking to see continued improved with our focused TeleWeb team this year. That’s really where I’m looking to see the improvement, having that team over that piece of the equation.

But I will say very good progress on the majors and we feel very good about that as to where it could lead to in the long run.

Kirk Materne - Banc of America Securities

Okay, and last question just on the Linux business again, geographically are you seeing any sort of differences between the pace of adoption in Europe or Asia-Pac relative to the U.S.? I mean, are there any sort of stand-outs in terms of geography in your view right now?

Ronald W. Hovsepian

Yeah, our European business had a very good quarter last year and the Linux business. I don’t know if that’s indicative of a market statement so I don’t want you to connect that dot but we had a very good adoption in that particular market segment in Europe. Asia, we’re seeing good up-tick on some of the desktop stuff. So overall, I’m seeing in general still across the board based on our numbers, in terms of Linux I’m not seeing any big slow-downs in terms of those pieces of the equation right now.

Kirk Materne - Banc of America Securities

Okay. Thanks very much.

Operator

Your next question is from Brent Thill with Citigroup.

John Walsh - Citigroup

Good afternoon. This is John Walsh for Brent Thill. A question on operating income relative to cash flow; if I use the midpoint of the revenue range, I get about $62 million to $84 million of operating income. Should we expect cash flow to be roughly the same or higher or lower than that for ’08?

Dana C. Russell

Well, you can look at the cash flow from operations in 2007, I will say we haven’t given guidance on that but we would expect the same sort of compares, I think. It will be improved from what we saw in 2007. The one thing that you will want to consider is that we did have a significant amount of restructuring activity occur in the fourth quarter of 2007 and that will drive some cash flow out of 2008 but overall, it will be -- cash flow will be up.

John Walsh - Citigroup

So normalizing, you’re taking out the Microsoft payments, you’d expect cash flow to be up?

Dana C. Russell

Yes.

John Walsh - Citigroup

And then you I think had said $25 million of restructuring in Q4, mix of cash and as you said, is that the bulk of that really going to hit actually the cash flow statement next year?

Dana C. Russell

That’s right, yes, the bulk of that will.

John Walsh - Citigroup

Okay, and then I think you said restructuring charge in Q1 of 15 to 25. Should we expect that to be the last of these restructuring charges related to this transformation that you’ve undertaken?

Dana C. Russell

I think as part of this, we started out with really a two-year plan and we talked about the first year of that and so yep, this is the second half and hopefully we’ll be able to accomplish everything that we’re trying to accomplish here and I think this will close out the charges around that activity.

John Walsh - Citigroup

So Q1 will likely be the last that --

Dana C. Russell

No, if you’re talking about it being Q1, the $15 million to $25 million, that’s -- the 15 to 25 was a full year restructure activity, so we’ll expect to see that come in over the course of the year.

John Walsh - Citigroup

Okay. Thank you.

Operator

Your next question is from Jason Maynard with Credit Suisse.

Jason Maynard - Credit Suisse

I have one question about the ’08 guidance around what percentage of the consulting business or professional services actually still related to I guess what you would characterize as general consulting?

Dana C. Russell

None.

Ronald W. Hovsepian

None. That big chunk that Dana talked about, the $46 million, that was -- we had carved that out -- I don’t know what page of the press release it’s on anymore. I apologize. It was 10 or 11 in the last one, I don’t know this one but you will see it broken out by our units and if you look, you’ll see -- 11, thank you. The team is pointing to me 11. If you flip to that page, you’ll see general business consulting. No, actually --

Dana C. Russell

No, you won’t see it. It’s gone. We had a column broken out there, Jason, where we were talking about the separate business units and if you will look at the prior quarters, we had a separate column that had general business consulting or consulting and that’s gone away now, so there is no more column there. That’s because it’s all disappeared.

Jason Maynard - Credit Suisse

Okay, so everything in your services business is related to products that you are selling today?

Ronald W. Hovsepian

Yeah, and it’s aligned by the business unit focus also to help drive both the services that support the implementations for the customer and the partners that do that by business unit. So again, there’s a very heavy product focus around what we are trying to get done here.

Jason Maynard - Credit Suisse

Okay, and then this is the last sort of mundane question but I just wanted to dot my I here -- in the guidance -- the Swiss consulting business, I think you said it was $6 million this quarter. Were you assuming that it was going to do $25 million next year? And I guess the reason I ask this question is if I take your guidance and sort of add --

Dana C. Russell

Yeah, for sure. You know, it did $26 million or something like that this year and we operated it for the entire year. In fact, we still actually own that business. We’ve just made a commitment to sell it and that’s why we reported that $6 million to discontinued operations. But that $6 million is pretty much a quarterly run-rate. It’s been slightly ahead of that or somewhere in that range. So we would have expected to see that in 2008 had we retained that business.

Jason Maynard - Credit Suisse

Okay, that’s what I --

Ronald W. Hovsepian

Just in that spirit, you’re prompting a question in my head or a request -- as all of you look at your models, obviously we’d be asking you to readjust your models for those divested businesses and so please feel free to contact Susan or any individual calls to make sure that we get you the proper understanding of what should be divested, if there is any questions as you rework your models there.

Again, the two dimensions are the divested business and then as you work through our emphasis on the product growth and moving away from some of the lower margin services business, because I think that’s the story that we have to make sure -- the message, not the story. It’s the message that we want to deliver to you of why we are driving that overall annual operating income of that 7% to 9% on the non-GAAP basis. That’s the important shifting that’s going on here, or important by-product that we don’t want to get lost in the discussions.

Jason Maynard - Credit Suisse

Fair enough. Thank you.

Ronald W. Hovsepian

We probably have time for one more question.

Operator

Your final question comes from James Gilman with Cross.

James Gilman - Cross Research

Good afternoon. Several questions here; you’ve divested several businesses this past year. You are aligning your company along business units, which includes the sales force, the service and such. Would you ever consider or are you considering at some point in time shedding one of those units or more as time goes on?

Ronald W. Hovsepian

What we feel really good about in terms of our strategy now is that we’ve laid out a very clear strategy of what we want to get done with Linux and a number of the enterprise management’s software pieces that are very close to the operating system stack. So at this point, obviously we would consider any of those pieces to, as a good business practice, you’d consider any of the things that would accelerate your model. But in general, I feel very good that our customers make a key impact, both our older customers -- they play a very important role in terms of a customer base and a opportunity to up-sell and they’ve demonstrated that in the past to us.

And then the new businesses that I’ve highlighted to you, they are all growing at market growth rate or beyond, really very, very strongly line up with where our growth is at this particular point in time.

So again, we will always be open to things but at this particular point in time, we see that we are getting a ship lined up very clearly to what our customers want to get done and we want to make sure the rest of the body stays lined up with that.

James Gilman - Cross Research

And talking about identity management, you have one of the highly rated solutions available. It seems that it hasn’t performed up to the expectations, you know, reference to year-over-year growth. What do you attribute to that and how can you possibly accelerate that?

Ronald W. Hovsepian

As you highlighted, the good news is we’ve got a very strong technical product. As I shared with you, we struggled in the Americas specifically in Q2 and Q3 and somewhat in Q1 but primarily in Q2 and Q3. We had a decent Q4 in terms of our overall identity business. Invoicing was up approximately -- sorry, revenue was up approximately 27% year over year in the identify and access management marketplace in Q4. So I do feel good that that’s beginning to head in the right direction.

However, there is still work to be done there in terms of getting into other companies’ ecosystems and that is a very high priority for the sales team, the support team and services team to really ensure that we get these partners enabled with ourselves in that business.

I believe there’s a lot of acceleration out there for us in that business, if we can get those pieces enabled for us.

James Gilman - Cross Research

Okay, and then just in general in the open source arena, more specifically in two areas, let’s say Linux and then maybe the app server. On the Linux front, can you provide some color around the competition? We have obviously the big one, Red Hat, but you also have Oracle out there. Maybe comment to the greenfields and/or maybe displacements of competitors there.

Ronald W. Hovsepian

Obviously it’s a good greenfield. We’re continuing to see the UNIX to Linux migration as the primary market source for revenue.

In terms of overall competition, obviously we do run into Red Hat much more frequently. In terms of head-to-head competition, we’ve really done quite well in a couple of areas; one, in beating them on technical innovation of our platform in terms of what we put into our Linux distribution; two, our support model is much, much stronger for the customer. They’ve got a much higher customer satisfaction and experience there. And then three, where we take on all the competitors in a really strong way is, and in a unique way, is our interoperability relationship because again, the customers have both footprints in there. They are going to have Windows, they are going to have Linux inside those environments and we’ve just fundamentally made it easier to support Linux and Windows in a SUSE platform than anyone else in the market, as well as what we’ve done with virtualization.

So those things really begin to differentiate us in the marketplace and continue to let us beat Oracle and Red Hat in the marketplace from a competition perspective. So we continue to feel very good about those particular pieces.

And as you pointed out in the app server layer, us having a strong relationship with the BEAs and the IBM WebSphere CE team in particular, we’ve allowed the customer and the partners to have choices as to what they want to emphasize as the app server layer. That is something we are not getting into as a market segment. We are going to continue to support our partners like IBM and WebSphere CE.

James Gilman - Cross Research

I know it’s quite granular, but in reference to the latter part, what are you -- what kind of adoption are you seeing in the open source app server? Maybe more specifically in the WAS CE area?

Ronald W. Hovsepian

I know that the Blue Code acquisition, the Geronimo piece of it, I know they’ve been outpacing in terms of number of downloads. I don’t remember the exact numbers but my last update, the downloads from them was going extremely well when I talked to Tom Rosamilia over at IBM.

James Gilman - Cross Research

Thank you for taking my questions.

Ronald W. Hovsepian

Operator, we will wrap it up. I just want to thank everybody and we will close the call now.

Operator

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

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