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Novell, Inc. (NASDAQ:NOVL)

F4Q07 Earnings Call

December 13, 2007 5:00 pm ET

Executives

Susan White - Director, Investor Relations

Dana C. Russell - Chief Financial Officer, Senior VicePresident

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

Operator

Good afternoon. My name is Robert and I will be yourconference operator today. At this time, I would like to welcome everyone tothe 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 yourconference.

Susan White

Thank you and good afternoon everyone and thanks for joiningus today. I am Susan White, Director of Investor Relations for Novell and withme today from our executive offices in Waltham, Massachusetts, are RonHovsepian, President and Chief Executive Officer; and Dana Russell, our ChiefFinancial Officer.

We are here this afternoon to discuss Novell's financialresults for the fourth fiscal quarter and full fiscal 2007. If you don’t yethave our press release, you can access it by visiting our investor relationswebpage at www.novell.com. This call is also being broadcast on our website andwill be available on our website and for telephone playback through December28, 2007.

The domestic toll-free replay number is 800-642-1687 and theinternational replay number is 1-706-645-9291. Replay listeners must enterconference ID number 28171181.

Before I turn the call over to Dana, I would like to take amoment to say that we will provide non-GAAP financial measures during today’scall. We believe that these measures enhance an overall understanding of ourcurrent financial performance and prospects for the future and enable investorsto evaluate our performance in the same way that management does.

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

Finally, please note that during today’s call, we may makeforward-looking statements. You should be aware that our actual results coulddiffer materially from those contained in the forward-looking statements whichare based on current management expectations and are subject to a number ofrisks and uncertainties, including but not limited to factors described in ourannual report on Form 10-K filed with the Securities and Exchange Commission onMay 25, 2007.

Any forward-looking information that we provide in this callrepresents our outlook as of today, December 13, 2007, and we do not undertakeany obligation to update our forward-looking statements except as required bythe securities laws.

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

Dana C. Russell

Thanks, Susan. Good afternoon, everyone. We appreciate yourparticipation on the call with short notice. As you know, we voluntarilydelayed the release of our earnings due to review of the financial filings bythe SEC. There have been a number of complex accounting matters which wereported and disclosed in our financial results in the past year, including theagreement with Microsoft and as part of the normal process, the SEC reviewedour financial filings and has not taken exception to any of our accounting. Webelieve our financial results for the quarter and the full year are verypositive, show great progress, and we wanted to make sure the SEC had time tocomplete their review prior to release our earnings.

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

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

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

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

So we made great progress this year, exceeding our financialguidance for revenue, operating income, and exit rate targets. At the beginningof the year, our revenue guidance was $945 million to $975 million. During theyear, we divested our remaining general business consulting activities, whichaccounted for $46 million of planned revenue. If we back this out of ouroriginal 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 wasbreak-even to $10 million. For the year, non-GAAP operating income was $38million 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 yearcompared to the revenue for the full year. We recorded operating margin in thethird and fourth quarters of 5% and 8% respectively, which demonstratedprogress toward improved profitability as we exited the year.

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

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

In the fourth quarter, Linux platform products invoicing was$46 million. That’s up 108% and for the year, invoicing was $209 million, up200%.

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 accessmanagement revenue was $104 million, up 7% compared to a year ago.

During the fourth quarter, invoicing for identity and accessmanagement increased 13% on a year-over-year basis and for the year, invoicingwas 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 $135million, relatively flat year over year. Fourth quarter invoicing was up 9% andannual invoicing was up 3%.

In the quarter, workgroup revenue of $88 million was relativelyflat 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 down5% in the quarter and down 9% for the year. During the quarter, invoicingdeclined 1% year over year and for the year, invoicing was down 7%. Thesefigures exclude the impact from Microsoft.

Within our workgroup category, the combined OES and NetWarerelated revenue in the fourth quarter was $51 million, down 9% from theyear-ago quarter and for the year, OES and NetWare related revenue was $201million, down 12% year over year. Combined OES and NetWare invoicing decline11% in the quarter and declined 13% for the year.

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

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

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

Product development expenses were reduced late in the fourthquarter and on an annual basis, excluding stock-based compensation, we expectproduct 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 anannual 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 thisquarter. For the plan to date, we incurred $47 million, which is slightly aboveour communicated range of $35 million to $45 million.

Headcount reduction of 640 was on plan. We expectrestructuring charges of $15 million to $25 million in fiscal 2008 and for moredetail, 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 isdown substantially from last quarter due to restructuring and the divestment ofbusiness consulting.

In summary for the year, total revenue grew but moreimportantly, product revenue grew. That was driven by strength in Linux andbetter than expected results in Workgroup. We were able to see revenue growthwhile making significant changes to almost every area of the company. Even withthe transitional expenses incurred this year, as well as $5 million unfavorableimpact on operating income from FX, we’re able to exceed our financialguidance. In addition, we tightened our strategic focus by exiting all generalbusiness consulting during the year.

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

Ronald W. Hovsepian

Thanks, Dana. 2007 was a year of significant transformationfor Novell. We established specific milestones and financial objectives for theyear and we achieved the majority of them. We delivered product revenue growth,improved operating margins, and exceeded our exit rate targets while weimplemented 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 thequarter and the year and we remain focused on achieving long-term sustainableprofitability.

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

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

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

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

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

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

Gardner recently positioned three Novell identity andsecurity products in the leader’s quadrant, making us the only company to beplaced in the leader’s quadrant in all three solution areas. We will continueto emphasize partnerships, specialization, and training to achieve marketgrowth rates.

Our systems and resource management unit was in transitionthis year. We invested in this business to be a new source of growth in thefuture. In the fourth quarter, we launched seven products in seven days. Thisincluded our re-architected ZENworks configuration management product, whichallows 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 heterogeneousphysical and virtual environments. While it is still early, these new productshave all been well-received by customers.

Workgroup delivered better-than-expected results thisquarter and for the year. We continue to see positive impact from our bundledoffering, Novell Open Workgroup Suite. In October, we had two major productreleases, Open Enterprise Server Two and Novell Teaming and Conferencing. Withthe release of OES Two we have completed the transition of delivering NetWareservices on Linux.

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

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

Now I would like to turn to our strategic initiatives for2007. A year ago, I outline three initiatives to redesign our business with theultimate goal of achieving sustainable profitability. These initiatives requiretemporary investments of $23 million, all of which have been removed from themodel 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. Wehave completed this on time. Our TeleWeb centers are up and running and will beresponsible for our renewal business in fiscal 2008.

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

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

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

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

We’ve also invested in an integrated product developmentprocess to improve the overall quality and to assure our products addressmarket needs. While we undertook these changes, we launched or refreshed mostof our major product lines.

Initiative three, back office; we increased the efficiencyand cost control in the back office by moving many finance and HR functions toshared service centers. During the year, we made significant progress againstthe strategic initiative of enhancing our sales model, improving our productdevelopment processes, and optimizing the performance of the back office. Allthree initiatives resulted in transformation and overall cost improvement andwill continue in fiscal 2008.

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

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

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

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

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

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

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

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

Here’s an overview of these four initiatives. Initiativeone, the sales model -- in fiscal 2008, we will continue to shift from directto indirect coveraging capabilities. We will accomplish this in three ways.First, our new TeleWeb organization will be responsible for our renewalbusiness. Second, we will continue to increase specialization of our salesforce. Third, we will expand our partner relationships through improvedrecruitment and management. The impact of these changes will be a moreefficient and cost effective sales model.

Two, R&D processes -- we will continue to mature ourintegrated product development process and further refine our engineeringexcellence. Through these efforts, we will improve our product lifecyclemanagement and enhance our off-shoring integration throughout the year.

Initiative three, back office -- we will substantiallycomplete our transition of back office functions to a shared service model. Wewill continue our efforts to centralize many of our finance and human resourcefunctions, such as payroll, accounts payable, billing, travel, andentertainment.

Initiative four, services business -- this year, we aretransforming our services business to be more focused and efficient. In thebeginning of 2007, we began a process to become more software-centric andorganized our company around business units. Historically Novell services hasbeen run independently to drive services revenue. During the year, we divestedour general business consulting so that our remaining services business wassolely focused on Novell products and services.

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

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

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

Milestones for 2008 -- in order to track our progress on ourinitiatives, we have five milestones for fiscal 2008. These are: number one,achieve revenue of $920 million to $945 million; number two, grow productrevenue at or better than market growth rates in the Linux platform products,identity and access management, and systems and resource management. Accordingto 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, achieveWorkgroup revenue of $285 million to $300 million; number four, expandrelationships 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 grewrevenue 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 over8300 new customers and launched or refreshed most of our major product lines.We are beginning to see the benefits from our transformational activities andwe feel good about the progress we have made, creating a solid foundation forfuture success.

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

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

Dana C. Russell

Thanks, Ron. In continuing with the guidance that Ron justprovided, we expect product related revenue growth in 2008. However, we willcontinue to refine our services activities as Ron mentioned to drive highermargin product revenues and create more opportunities for our partners.Revenues for services will be down and total revenues will range from $920million to $945 million, compared to the $932 million we achieved in fiscal2007.

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

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

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

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

Question-and-AnswerSession

Operator

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

Abhey Lamba - UBS

Thank you. I just want to get an understanding of whatassumptions you are making for the macro environment and IT spending in yourfiscal ’08 guidance -- are you assuming any improvement, worsening, or statusquo of the macro environment?

Dana C. Russell

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

Again, we tend to be serving markets that are necessarymarkets, meaning an operating system or meaning regulatory and compliance basedissues that are in high demand, so take my point of view in those marketsegments.

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 onthe growth track in fiscal ’09? And what type of revenue growth can you postbeyond ’08?

Ronald W. Hovsepian

I think as we are indicating here from our performance in2007, we really focused on getting the transformational activities done. Thereal focus on 2008 is now really refinement of those processes and therefinement of the business processes to back up getting the product revenue tocontinue to grow and as you heard, that’s a big piece of the focus of what weneed to get done.

So as you look at the overall guidance as Dana hadhighlighted, there will be some changes in that services revenue and I hadindicated there will be some changes there, but overall we are looking to drivethat product revenue growth as a key part of what we want to get done forfiscal 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 SunTrustRobinson Humphrey.

Terry Tillman -SunTrust Robinson Humphrey

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

Ronald W. Hovsepian

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

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

Terry Tillman -SunTrust Robinson Humphrey

Okay, and then in terms of when I looked at FY08 revenueguidance, I hadn’t been backing out any Swiss consulting business, so I guesswhat I would like to get a sense on is you guys talked about $46 million inservices revenue this year that needs to be normalized, so to speak, and backedout. Could you give us any kind of apples-to-apples basis for ’08, what weshould 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 consultingbusiness. We also mentioned earlier in the year that we disposed of our U.K.consulting business, general consulting business, and that had an annualrun-rate somewhere around $20 million but those results -- so the results forthe year here have been restated, so you can look at the results and say theseresults represent the results without any of those businesses in them. Theyhave all been taken out. They are in discontinued ops, so that $932 millionthat we reported for the full year, it excludes any of the business that we’vedisposed of.

Ronald W. Hovsepian

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

Dana C. Russell

So just to go back over what we said in the script, andTerry, I’m not sure if this is what you are asking but at the beginning of theyear, we said $945 million to $975 million in revenues. That was where we wereat for the full year, prior to disposing of these general business consultingactivities. 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 havejust now entered into an agreement to get rid of and that, the results havejust been excluded in the fourth quarter.

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

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

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

Terry Tillman -SunTrust Robinson Humphrey

Okay, that’s helpful, Dana. And I guess Ron, just a toughone 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 atwhere the stock is bid, who knows how it will open up but maybe there’sdisappointment over the revenue guidance. You know, if it were to open up atthat level, we’re talking about cash representing close to 60% of your marketcap. Can you maybe give us a sense -- I know you say you are always looking atthings to do with the cash but why not think about maybe revisiting a stockbuy-back? Thanks.

Ronald W. Hovsepian

Obviously as I’ve stated before, we do look at all thosepieces. 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 onthe revenue guidance. I think Dana did a very good job of explaining what theputs and the takes are on that revenue guidance for ’08, meaning the servicesis going to come down from an overall perspective.

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

And then, to the core of your question, of course we are lookingat all the things we could do to use the cash. I am aware of what it is as apercentage and my expectation is that we will continue to look at that with ourboard 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 dothink there is some confusion on the revenue guidance. But is it fair to say atthe midpoint, you are guiding to 932, sort of flat year-on-year on anapples-to-apples basis if you continue to dispose of services or push that topartners that you are more optimistic in the other part, or the product side ofthe revenue guidance?

Dana C. Russell

Absolutely, Aaron, and thanks for -- you know, I did want tojump back in here and give a little more clarity. So as Ron mentioned, we arevery, very focused on improving operating margins. I mean, that’s been ourfocus. We want to do that while we are growing in our strategic areas. Theproduct revenues we talked about, you know, we are expecting growth in everyproduct area that Ron called out there -- Linux, our identity and accessmanagement 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 thosecategories.

So it’s not that we’re not focused on the top line. Weexpect that top line to continue to grow in those strategic areas but we aresaying what we really want to do is, and we said this at the beginning of 2007when we started, we want to change the structure of this company to optimize itto create a different environment where we can operate in a much more efficientmanner. The only way that we can do that is to invite the channel and partnersto participate with us in a more meaningful way. We’re doing that and that’swhat -- you know, we may give up a little bit on the services line, which isthe lower margin business and like I said before, it’s not that we’re notfocused on services. We’re intensely focused on services, improving thoseservices, 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 goingup in all the strategic areas that we talked about, in the product areas, andthe focus is on driving costs out of the business so we can continue to improvenot 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 structurethat’s more in line with our peers in the industry. So that’s what’s happeninghere.

Aaron Schwartz - J.P.Morgan

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

Dana C. Russell

I don’t know that we’ve actually given guidance out on grossmargin but you can see that we have -- if you look at the -- take a look at thegross margins this year as we’ve exited the year. We’re expecting to continueto 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, therewere other areas that we didn’t call out and make -- you know, that we didn’tcall out at the beginning of 2007 that we made significant changes to. Servicesis one of those areas. Ron did not call out and say specifically that we are goingto change the services component and dramatically reduce expenses but in fact,we did.

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

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

Ronald W. Hovsepian

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

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

Aaron Schwartz - J.P.Morgan

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

Dana C. Russell

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

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

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

So I think these are very aggressive targets that we’ve setout. We had aggressive targets in the prior year. We continue to be aggressiveand 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 Platformgroup, can you talk about the profitability there, if there’s an inflectionpoint now that you’ve had a year of revenue coming from the Microsoft agreementand the cost structure there? How do you think about margins just for that groupand with the ratable revenue recognition, have you hit the inflection point tosee material margin expansion there?

Dana C. Russell

You’re looking from material margin expansion in the Linuxbusiness?

Aaron Schwartz - J.P.Morgan

Yes, that’s right.

Dana C. Russell

Okay, well, so as you know, we’ve given indications beforethat the revenue recognition obviously is impacting us. This invoicing is veryhigh, 200% growth in the year and as you take a look at that and model that outin terms of growth using those growth rate comparisons that we’ve given in thesecond half of the year here, you’re going to see a fairly significant up-tickin terms of revenue recognition. That’s obviously going to help us improve ourgross margin.

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

Ronald W. Hovsepian

The other thing I would point out is Dana was highlightingthe invoicing growth last year. The one thing I will say on Q1 is obviously wehad an unnatural but I would take it again if I could, invoicing quarter inQ107 on the Linux platform products piece of it. I would guide you folks tolook at quarters two, three, and four last year, to be more in the generalrange of how to think about the year as you look at that from an invoicingperspective.

Again, those invoicing won’t have that much impactfinancially in terms of revenue but I do want to call that out. Obviously thatwas 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 withJefferies.

Katherine Egbert -Jefferies & Company

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

Dana C. Russell

No, it was -- you know, it was very -- it was close tobreak-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 notcome down or change our point of view in terms of guidance on the operatingincome margin. You said that we came down on that. We did not. The 12 to 15 wasan exit rate discussion from the prior year and we are not using that based onsome of your guidance. We’re just focusing on the annual improvement.

So the way to think about it is the ’07 year non-GAAPoperating income margin was approximately 4% for the full year and the guidancewe 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 wewant to get to that then position us for ’09 but we are not going to get intothat 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 bitof confusion as we gave exit rates out. That wasn’t something that you couldactually get a report and calculate. It was a number we were giving you and sobecause of that, we’re saying we are going to state operating income for thefull year, not an exit rate calculation. And we gave that full year guidance of7% to 9%.

However, we have not moved off of the aggressive run-rateimprovement that we’ve been talking about and we still believe that we aregoing to be significantly improving above the results that we report for thefull 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 youto 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 ratetargets.

Ronald W. Hovsepian

Those are internal things. We’re not going to report on thembut we’ve set internal targets to get ourselves positioned for ’09, as Dana’shighlighting. I just want to make sure that it didn’t confuse people on thephone 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 fullyear, 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 youlook to ’09, you are through -- you are looking at the last 12 months of thisrestructuring, which you’ve done a good job on. As you look in ’09, can yougive us a sense of what you are thinking, longer term strategy? And do you needto get more aggressive, you know, product development or inorganically to growrevenue?

Ronald W. Hovsepian

The answer is yes. As we talk, we’re getting the bodypositioned to be a stronger software company and a stronger player in theecosystem 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 companypositioned 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 inorganicthings and take advantage of the markets that we are serving that I think willaccelerate our overall growth and relevance in the marketplace. Around thatsoftware-centric model, probably we would have increased our risk had we addedto the body prior to making the model changes.

Now with the clarity and the focus and the work that’s goneon, 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 youget more aggressive with your R&D spend or with your pace of acquisitionsas you look to ’09?

Ronald W. Hovsepian

I will be conservative in my comments but I believe ourexecution has been fairly aggressive, given the depth and the volume of thethings we’ve historically taken on. I think you can look at the aggressivenature of those things. However, in terms of forecasting anything in ’09, Idon’t want to get into that. I think the exit rate discussion we just had is anindicator 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 otherindustry players into those zones who do aggressive things and we have enoughroom there to continue to approve our operations and get more aggressive. It’sabout prioritizing the business and focus, focus, focus in terms of where weattack in the market, meaning sales, development, marketing, support andservices 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 PacificCrest Securities.

Brendan Barnicle -Pacific Crest Securities

Thanks so much. I was hoping to get some clarity on theWorkgroup business, which if I heard you right in the prepared remarks, you arelooking 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 consensusis but you’ve got $35 million or so that could just be attributed just to thischange year over year that you are having on the Workgroup business. That lookslike a little bit bigger deceleration than what you saw last year. Is theresomething that’s kind of contributing to why that would accelerate?

Ronald W. Hovsepian

Right now, from what we’ve seen inside the business, we justshipped our new OES product that’s out into the marketplace and our earlybetas, we’re getting good feedback but I’ve got five, 10 years of historicaldeclines 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 tomaintain those historical points of view at this point in time because that’sthe appropriate approach to take with that particular business.

I am encouraged by the collaboration business’ overallgrowth for the year. I am encouraged by our focus and our effort in that areabut when I just look at the raw, hard numbers of our combined NetWare and OESbusiness last year and NetWare, other related pieces of it, for the quarter itwas still down 9% year over year. So we tried to reduce the ultra-conservativeapproach that we took to it last year in terms of looking and modeling it andwe 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 downfrom a 261 or 262 call it that you had this year, can you give us -- you saidit is going to be down. Is it going to be down $20 million? Is that fair tomodel? It comes in at like a 240 range or should we be modeling something evenlower than that?

Dana C. Russell

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

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

Brendan Barnicle -Pacific Crest Securities

You did. We can back into that. I just thought it might helpsince there’s been some confusion around it on the call. And then just goingback over to the Linux business, 105% growth in invoicing, obviously you’ve hadsome benefit from the Microsoft piece but now, talking about it just growingfaster than the 22% that Linux industry growth is expected to be at, do you seea big deceleration related to annualizing the invoicing piece or can that Linuxgrowth 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 thelast sentence in particular, the annualized, I just didn’t --

Brendan Barnicle -Pacific Crest Securities

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

Ronald W. Hovsepian

At a high level, we’re here to take market share so that’swhy 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 appropriateapproach, so we look at those growth rates and we model those pieces. As youhighlighted, we took some services down and we focused on product growth soyes, there is a good aggressive plan inside of here but in terms of thinkingabout how to model us, I think the guidance that you just went through withDana is the right way to think and look at us, and understand that we are goingto 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 therecompetitively? That name comes up a lot.

Ronald W. Hovsepian

The only thing I’ve seen is that the open Solaris projectover a two-year window has only had about 60,000 downloads. When you look atwhat Linux did just last year alone, it was over 2 million downloads, so I’mnot seeing much up-tick there. I think it’s a good marketing campaign. I don’tsee it much beyond that.

Brendan Barnicle -Pacific Crest Securities

Thanks for your help.

Operator

Your next question is from Brent Williams from BenchmarkEquity Research.

Brent Williams -Benchmark Equity Research

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

Ronald W. Hovsepian

We’ve done some modeling there but that’s not in theguidance that we’re going to give at this point. We did the modeling as we wentinto ’07 in that arena and in ’08, both at the revenue and at the headcountlevel 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 channelsubtleties that are inside the market. We’re catching up on it so in terms ofwhat I would call quality data that I would report to you, I will probably lookto review something like that at the end of the year as my systems and datamature 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 wantedyou to understand we’ve looked at it, we’ve modeled it, it’s in the plan and itis a balanced increase there. And we will continue -- our leverage for ourbusiness model is around focusing on product and leveraging that channel andthe more we can do to drive more into that channel, we are going to do asaggressively as we can.

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

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

Brent Williams -Benchmark Equity Research

Okay, and then next, any changes in the average length ofthe 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 numberof deals on the Linux business during the quarter? You know, how many units oranything like that?

Ronald W. Hovsepian

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

Brent Williams -Benchmark Equity Research

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

Operator

Your next question is from Kirk Materne from Banc of AmericaSecurities.

Kirk Materne - Bancof America Securities

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

Ronald W. Hovsepian

What I would share with you is we’re not getting into therenewal rates just yet in terms of sharing anything like that but I would sharewith you that we’ve got very good control over our large renewals and we’ve gota very tight, good clean tracking approach and process to that and we’re seeinga very good renewal rates inside that part of the marketplace, significantimprovement 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 TeleWebteam this year. That’s really where I’m looking to see the improvement, havingthat team over that piece of the equation.

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

Kirk Materne - Bancof America Securities

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

Ronald W. Hovsepian

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

Kirk Materne - Bancof 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. Aquestion on operating income relative to cash flow; if I use the midpoint ofthe 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 thatfor ’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 sortof compares, I think. It will be improved from what we saw in 2007. The onething that you will want to consider is that we did have a significant amountof restructuring activity occur in the fourth quarter of 2007 and that willdrive some cash flow out of 2008 but overall, it will be -- cash flow will beup.

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 restructuringin Q4, mix of cash and as you said, is that the bulk of that really going tohit 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 Q1of 15 to 25. Should we expect that to be the last of these restructuringcharges related to this transformation that you’ve undertaken?

Dana C. Russell

I think as part of this, we started out with really atwo-year plan and we talked about the first year of that and so yep, this isthe second half and hopefully we’ll be able to accomplish everything that we’retrying to accomplish here and I think this will close out the charges aroundthat 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, sowe’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 whatpercentage of the consulting business or professional services actually stillrelated 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 $46million, that was -- we had carved that out -- I don’t know what page of the pressrelease it’s on anymore. I apologize. It was 10 or 11 in the last one, I don’tknow 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 thatpage, 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 outthere, Jason, where we were talking about the separate business units and ifyou will look at the prior quarters, we had a separate column that had generalbusiness consulting or consulting and that’s gone away now, so there is no morecolumn there. That’s because it’s all disappeared.

Jason Maynard -Credit Suisse

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

Ronald W. Hovsepian

Yeah, and it’s aligned by the business unit focus also tohelp drive both the services that support the implementations for the customerand the partners that do that by business unit. So again, there’s a very heavyproduct 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 butI just wanted to dot my I here -- in the guidance -- the Swiss consultingbusiness, I think you said it was $6 million this quarter. Were you assumingthat it was going to do $25 million next year? And I guess the reason I askthis question is if I take your guidance and sort of add --

Dana C. Russell

Yeah, for sure. You know, it did $26 million or somethinglike that this year and we operated it for the entire year. In fact, we stillactually own that business. We’ve just made a commitment to sell it and that’swhy we reported that $6 million to discontinued operations. But that $6 millionis pretty much a quarterly run-rate. It’s been slightly ahead of that orsomewhere in that range. So we would have expected to see that in 2008 had weretained 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 heador a request -- as all of you look at your models, obviously we’d be asking youto readjust your models for those divested businesses and so please feel freeto contact Susan or any individual calls to make sure that we get you theproper understanding of what should be divested, if there is any questions asyou rework your models there.

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

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 - CrossResearch

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

Ronald W. Hovsepian

What we feel really good about in terms of our strategy nowis that we’ve laid out a very clear strategy of what we want to get done withLinux and a number of the enterprise management’s software pieces that are veryclose to the operating system stack. So at this point, obviously we wouldconsider any of those pieces to, as a good business practice, you’d considerany of the things that would accelerate your model. But in general, I feel verygood that our customers make a key impact, both our older customers -- theyplay a very important role in terms of a customer base and a opportunity toup-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 stronglyline up with where our growth is at this particular point in time.

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

James Gilman - CrossResearch

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

Ronald W. Hovsepian

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

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

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

James Gilman - CrossResearch

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 haveobviously the big one, Red Hat, but you also have Oracle out there. Maybecomment to the greenfields and/or maybe displacements of competitors there.

Ronald W. Hovsepian

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

In terms of overall competition, obviously we do run intoRed Hat much more frequently. In terms of head-to-head competition, we’vereally done quite well in a couple of areas; one, in beating them on technicalinnovation 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 amuch higher customer satisfaction and experience there. And then three, wherewe 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 bothfootprints in there. They are going to have Windows, they are going to haveLinux inside those environments and we’ve just fundamentally made it easier tosupport Linux and Windows in a SUSE platform than anyone else in the market, aswell as what we’ve done with virtualization.

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

And as you pointed out in the app server layer, us having astrong 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 theywant to emphasize as the app server layer. That is something we are not gettinginto as a market segment. We are going to continue to support our partners likeIBM and WebSphere CE.

James Gilman - CrossResearch

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

Ronald W. Hovsepian

I know that the Blue Code acquisition, the Geronimo piece ofit, I know they’ve been outpacing in terms of number of downloads. I don’tremember the exact numbers but my last update, the downloads from them wasgoing extremely well when I talked to Tom Rosamilia over at IBM.

James Gilman - CrossResearch

Thank you for taking my questions.

Ronald W. Hovsepian

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

Operator

This concludes today’s conference call. You may nowdisconnect.

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