Novell Inc. F1Q08 (Qtr End 01/31/08) Earnings Call Transcript

Feb.28.08 | About: Novell, Inc. (NOVL)

Novell Inc. (NASDAQ:NOVL)

F1Q08 (Qtr End 01/31/08) Earnings Call

February 28, 2008 5:00 pm ET

Executives

Ron Hovsepian - President and CEO

Dana Russell - CFO

Susan White - Director of IR

Analysts

Abhey Lamba - UBS

Aaron Schwartz - JPMorgan

James Gilman - Cross Research

Katherine Egbert - Jefferies

Dana Russell

Brent William - The Benchmark Company

John Walsh - Citi

Terry Tillman - Suntrust Robinson

Ajay Kasargod - Piper Jaffray

Operator

At this time, I would like to welcome everyone to the Novell first quarter 2008 financial earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will a question-and-answer session. If you would like to ask a question during this time, (Operator Instructions). Thank you.

I would now like to turn the call over 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'm Susan White, Director of Investor Relations for Novell. And with me today from our executive offices in Waltham, Massachusetts are Ron Hovsepian, President and Chief Executive Officer, and Dana Russell, our Chief Financial Officer.

We are here this afternoon to discuss Novell's financial results for the first fiscal quarter of 2008. 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 March 14th 2008. 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 33480646.

Before I turn the call over to Dana, I would like to take a moment to say that we maybe providing non-GAAP financial measures during today's call. We believe that these measures enhance an overall understanding of our current financial performance and prospects for the future, and enable investors to evaluate our performance in the same way that management does. We have included reconciliations of these non-GAAP measures to their most mostly 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 December 21st 2007 and in the press release we issued earlier today.

Any forward-looking information that we provide in this call represents our outlook as of today February 28, 2008 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 Russell

Good afternoon, everyone. Novell's fiscal quarter 2008 financial results were released a short time ago.

For the quarter the company reported net revenues of $231. Income from operations was $8 million, non-GAAP income from operations was $24 million, and non-GAAP net income was $29 million or $0.08 per share.

Foreign currency exchange rates positively impacted revenue and negatively impacted operating expenses by $7 million, but did not materially affect operating income on a year-over-year basis. We delivered strong financial results this quarter exceeding consensus estimates on both the top and bottom line.

Product revenue grew 9%, total revenue grew 6% and non-GAAP operating margin was 10%. Also, license revenue was up year-over-year in all product categories and in total.

Now, I will highlight some of our quarterly results by business unit. You can see the results on the revenue schedule on page 11 of our press release. Within open platform solutions, Linux platform products revenue was $28 million, increasing 65% from the year-ago quarter. Linux platform products invoicing was $38 million, inline with the level seen in the second third and fourth quarters of fiscal 2007.

While invoicing was down 59% year-over-year this was expected, due to the tremendous initial start we enjoyed from our relationship with Microsoft last year, when we invoiced a record 92 million.

Within our identity and security management business unit, identity and access revenue was $28 million, up 15% from the year ago quarter. Invoicing for identify and access management increased 17% on a year-over-year basis.

Systems and resources management revenue was $37 million, up 5% from the year ago quarter and invoicing was up 14%.

Workgroup revenue of $90 million, was up 1% from the year ago. Excluding the impact from Microsoft Workgroup revenue was flat year-over-year. During the quarter invoicing increased 3% year-over-year, excluding the impact from Microsoft. Within our Workgroup category the combined OES and network related revenue was $54 million, down 4% from the year ago quarter. Combined OES and NetWare invoicing was flat year-over-year.

Now on to our expenses for the quarter. Non-GAAP operating margin was 10% up significantly from a negative 1% a year ago and 8% last quarter. Gross margin improved to 75% from 71%, due to a revenue mixed change, more higher margin product revenue and less lower margin services revenue. This is consistent with our service business realignment. Total operating expenses were down on year-over-year basis as the result of the restructuring activities last year.

Cash flow from operations was negative $26 million compared to $348 million a year ago. This quarter, cash flow includes special interest and restructuring payments. The year ago figure is considerably higher due to payments from Microsoft. If we normalize for unusual items, cash flow from operations would be $5 million in Q1’08 compared to $8 million in Q1’07.

We incurred $4 million of restructuring charges this quarter inline with plan, most of which was headcount related. Total headcount at the end of the quarter was approximately 4000, down slightly from last quarter.

Now I'll turn the call over to Ron for an update on our business units, as well as the progress report on our strategic initiatives and milestones.

Ron Hovsepian

Thanks, Dana. We delivered a strong quarter and I'm very pleased with our results. Product revenue increased 9% year-over-year and non-GAAP operating margin was 10% in the quarter. All four Novell business units achieved revenue growth, led by a strong performance form our EMEA geography. These results are indicative that our strategic initiatives are yielding tangible results and that we are on the right path to achieve long-term sustainable profitability.

During today's call, I will review each of our business units, briefly update you on our strategic initiatives and milestones, and close with a discussion of our recent acquisitions.

Let me begin with our business unit review. Within our open platform solutions business unit, out Linux business had another great quarter, with revenue up 65% year-over-year. Invoicing of $38 million was inline with the run rates of the second, third and fourth quarters of last year, but down as expected from our record $92 million of invoicing in Q1'07.

Our partnership with Microsoft maintained its momentum. During the quarter we signed several major deals and to-date we have invoiced $141 million or 59% of the five year $240 million agreement.

On the desktop side, our partners Dell and Lenovo began shipping PCs preloaded with SUSE Linux enterprise desktop or SLED.

The Dell deal was a replacement of red flag Linux in the China market, and we are excited about the reach this gives Novell in this very important market. Our Lenovo partnership is truly global with SLED preload offered on Lenovo high-volume Enterprise notebook lines as a completely alternative to Windows XP or Vista. This offering includes a one or three year subscription and level one support directly from Lenovo. Our shipments just started last month the product is being well received in the market.

On to Identity and Security Management. Identity and Access Management had a strong revenue growth of 15% and invoicing growth of 17%, exceeding market growth rates of 11% to 13%. Our investment in sales specialization and new partner recruitment is showing signs of improvement. We've made progress expanding our partner network with many regional systems integrators, as well as multiple new customer wins with larger consulting and systems integrators.

We've enhanced our product leadership with the announcement in the delivery of our new Roles Based Provisioning Module for our Identity Management Suite, which together with our Payment Card Industry offering for [SetNo] gives us a strong integrated platform to help customers address their governance, risk management and compliance needs.

Going forward our business focus will be on a consistent pipeline and partner developments

Now turning to our systems and resource management. We saw good results with revenue up 5% and invoicing up 14%. We recently announced the acquisition of PlateSpin, a Toronto based Software Company whose products allow organizations to adopt, manage and extend the use of server virtualization in the data center. I'll discuss the deal in more detail later on the call.

Next, Workgroup had better than expected results with revenue up 1% year-over-year driven in part by our bundle offering Novell open Workgroup suite. While we are pleased with these results Open Enterprise Server 2 was just launched late in the fourth quarter and will need a few more quarters of consistent performance before we call this a trend and modify our outlook.

Within Workgroup collaboration had another strong quarter with year-over-year growth in both revenue and invoicing. We further our commitment to secure reliable and Open Enterprise collaboration solutions by acquiring SiteScape, a leading provider of teamwork space, enterprise social networking and real time collaboration technology earlier this month. I'll provide more details on this acquisition in a few minutes.

Turning to our strategic initiatives. This year we had four initiatives focused around our sales model, R&D processes, back office optimization and services business realignment. Our first three initiatives were started last year and they are tracking on plan. Our fourth initiative, services realignment is focusing our services business to drive product revenue while transferring services revenue to our partners.

Our results this quarter are showing early signs of success in shifting to a more profitable revenue mix. Product revenue was up 9% and total revenue was up 6%.

In order to track our progress on our initiatives we have five milestones for fiscal 2008. These are, number one, achieve revenue of $940 to $970 million, reflecting our upwardly revised revenue guidance, based on our pending acquisition of PlateSpin and our results this quarter. I am confident we’ll achieve this milestone.

Milestone two. Grow product revenue at or better than market growth rates for Linux Identity and Access Management and SRM. This quarter Linux and Identity exceeded market growth rates and Systems Management was just shy of this goal.

Linux revenue grew 65% well in excess of the 22% market growth rate. Identity and Access increased 15%, slightly above the 11% to 13% market growth rate and SRM was up 5%, just below the 6% to 8% market growth rates.

Milestone three we achieve Workgroup revenue of at least $285 million to $300 million, Based on our better-than-expected Workgroup revenue of $90 million in the first quarter this milestone remains on track.

Milestone four, expand end relationships with one to two more global strategic partners. We are making good progress across a number of fronts on this milestone.

Milestone five achieved non-GAAP operating income margin of 7% to 9%. For the quarter our non-GAAP operating margin was 10%, which positions well us for the year. We have worked diligently to grow revenue and reduce expenses and I am pleased with the progress we've made.

Before I close, I want to discuss our recent acquisitions. Earlier this month we announced the acquisition of two companies, SiteScape and PlateSpin. We've been patient and diligent in our evaluating potential uses of cash. We've determined that these acquisitions provide excellent strategic fit and the best long-term return on our investment. We are very excited about these opportunities, these acquisitions bring to Novell and I would like to discuss each in more detail starting with SiteScape

Our acquisition of SiteScape extends our leadership position in open enterprise collaboration and social networking offering. This acquisition is the next logical in a partnership that has already yielded significant market interest and the successful launch of Novell Teaming plus Conferencing. This solution is yet another example of Novell's commitment to support heterogeneous environments. With it's ability to support multiple platforms, Linux and windows and applications, Novell's group wise Lotus Notes and Microsoft exchange.

No other teaming and real time collaborations solution offers these customers, benefits and flexibility. Our projected revenue for Novell Teaming plus Conferencing is expected to be modest this year. It competes in a rapidly growing market. According to Gartner, the social software market is projected to grow 30% compounded annually to over $700 million by 2011. We are well positioned to participate in the growth of this market.

Our acquisition of PlateSpin will significantly transform our Novell business at large and our SRM business in particular. With PlateSpin we extend our next generation data center capabilities by giving customers the flexibility and agility to manage work loads across both physical and virtual infrastructure environments.

Together we'll provide our customers the only unified work load management framework that includes both integrated virtualization platform and a management suite for balancing workloads between the physical and virtual worlds.

Consistent with our cross platform philosophy, the joint Novell ad PlateSpin solution will offer full workload lifecycle management and optimization for Windows, UNIX, Linux operating systems in both the physical and virtual data center.

As I stated, this acquisition will position us to be a leader in the management of heterogeneous virtualization solutions. As you know, virtualization is a fast growing market. IDC projects, the virtualization software market to grow almost 20% compounded annually to $1.8 billion by 2010.

PlateSpin has grown significantly faster than these rates and we intend to invest in the company to further accelerate its growth. Dana will provide the financial impact of the PlateSpin acquisition in a few minutes.

In closing, I am very pleased with our results. Revenue grew and operating margin was ahead of target. We saw good performance across all business units. Our strategic initiatives are progressing are according to plan and we’re excited about our acquisitions.

The year is off to a string start. Now I’ll turn the call back over to Dana.

Dana Russell

Thanks Ron. I would like to finish the call with our house keeping item of the financial details of the PlateSpin acquisitions and some guidance.

First the house keeping. We are changing reported product maintenance revenue as a result of our service business realignment. Historically, a portion of our product maintenance revenue was reported in services revenue. Starting in Q1’08 all product maintenance revenue is reported in maintenance and subscription revenue.

In prior periods approximately $20 million of product maintenance revenue was reported in service revenue each quarter. Our trended revenue schedules for 2006 and 2007 have been updated to reflect this change and these are available on our investor relations website. Overall, there’s impact to total revenue or income in any period presented.

Next turning to the financials of the PlateSpin acquisition and guidance. The acquisition price is $205 million, as we previously stated. It is an all cash deal and it’s expected to close in fiscal Q2. Based on the expected contribution from PlateSpin for the rest of the year and our performance this quarter, we are raising our 2008 revenue guidance, as Ron talked about earlier to $940 million to $970 million from $920 million to $945 million

In conjunction with standard M&A purchase accounting adjustments that negatively affect results and the investment opportunities we see in PlateSpin, we expect the deal to be dilutive to the income from operations and net income in 2008. However, given the strong operating margin we saw this quarter we're maintaining our fiscal 2008 non-GAAP operating margin guidance of 7% to 9%, excluding all amortization of intangibles.

And to help you build your models, here are some specific guidance for fiscal 2008 annual non-GAAP expenses. Quarterly results may vary due to our normal seasonal fluctuations. Starting with gross margin, we expect gross margin to be 75% to 76%. Sales and marketing expenses will be 36% to 37% of revenue. Product development expenses will be 20% to 21% of revenue and G&A expenses will be 10% to 11% of revenue.

I will stop there now and I'll put it up for questions. Operator would you please open the queue for our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Abhey Lamba with UBS.

Abhey Lamba - UBS

Hi guys this is Abhey. Ron, a quick question on Microsoft coupons, since you anniversaried them this quarter, any color on the renewal dates or any opportunity to up sell customers?

Ron Hovsepian

Hi Abhey how are you? In terms of up-selling let me start with the last part of your question. In terms of up-selling we absolutely are seeing good up-selling opportunities inside those relationships. So as we added the thousands of customers that we added is new Linux customers last year what we're doing now is making sure that we focus the teams to expand the relationship inside those customers. Now, obviously we're implementing a lot of the Linux footprint with those customers but the strategy is to make sure that we extend our reach in to those customers and help them solve other problems in their business with our technologies.

And I can tell you that is something tracking as a management team. It's nothing I am going to share on the call but it is absolutely something I tracked at the management level with our whole team as to how we extend that base of customers (a) to increase it and (b) to expand once we are in inside of them .Those are two metrics we look at. And I can tell you personally, I know a number of situations where we have expanded ourselves inside of that footprint.

Abhey Lamba - UBS

Okay thanks. And secondly your systems management the growth rate between invoicing and revenue was quite a -- there is a big delta over there, whereas in identity management they're relatively in line. Can you just help us understand why the difference is there in systems management?

Dana Russell

Abhey, let me take that. This is Dana we do have some fluctuation there and at times even the identity, it can be more extreme with identity and access management as well, where we’ll see there will be a timing difference. It can be a fairly significant timing difference between the recognized revenue and the bookings. So our bookings maybe up, especially if we have any kind of a consulting or any other services that we are providing or it maybe delayed in recognizing revenue and that’s generally the fact pattern with our SRM business this quarter.

Abhey Lamba - UBS

Got you. Thank you.

Operator

(Operator Instructions) And our next question comes from the line of Aaron Schwartz of JPMorgan.

Aaron Schwartz - JPMorgan

On the guidance PlateSpin instead of follow up question given you pointed out the M&A accounting. Does the revenue include a maintenance add back?

Ron Hovsepian

Does the revenue include a maintenance add back. I am not sure what that means.

Aaron Schwartz - JPMorgan

In terms of on the GAAP basis you would have to write that maintenance down and I am just wondering if you can talk about it.

Dana Russell Representative

You’re talking about the deferred revenue?

Aaron Schwartz - JPMorgan

Yes.

Dana Russell

Yes there is a little bit of deferred revenue write-off Aaron and so we will see that impact. Keep in mind as we talked about here, just a little more clarification on the revenue guidance that we’ve updated here, besides the PlateSpin acquisition been added, sort of mid-way through the year and so we’ve got a couple of things going on. Number one, the timing of when we are bringing them into the body. Two, you do have some impact from the deferred revenue write-off and then just the other things that will happen around in acquisition with normal change and some integration.

Aaron Schwartz - JPMorgan

Okay. So the revenue guidance is on a GAAP basis?

Dana Russell

Yes.

Aaron Schwartz - JPMorgan

Okay understood. And then Ron you talked about some re-investments in the acquired assets and just had a sort of high level question how you manage growth for your re-investment, given you have a legacy business and then you also now have some high-growth assets. Are you going to migrate resources from the legacy business to these growth areas or is this incremental investment in the growth areas and still further cost reductions on the legacy side?

Ron Hovsepian

At the macro level Aaron, we're committed to deliver that 7% to 9% even though we'll be taking on in the acquisitions, some obviously some dilution there. So at the macro level, we are going to continue to focus on running our businesses as effectively as we can. Therefore there will be some -- as you can see from the map, there has to be some level of redeployment or focus of resources to get that growth that we want. The good news is by us moving to the business unit structure, we have really good clarity as to how and where, and what we want we to do, whether it’s from more sales specialization or product development, on how we can leverage those businesses to get more growth in a quicker manner, But at the top view and the macro view there is -- we will continue our efforts to leverage and to deliver our plan, we're going to do the things that it takes to redeploy expense to get the growth that we want rather than why we delivered the course 7% to 9%.

Aaron Schwartz - JPMorgan

Okay and given some of the recent acquisition activity particularly on the PlateSpin side being the largest transaction you've done as a management team, should we expect the pace of M&A to slow until you see some or until the deal closes and actually you see some integration?

Ron Hovsepian

In particularly on this one I think you'll see us try to do things in a orderly manner and orderly you can take on, I think two different accesses to it. One is there is integration where appropriate and I think one of the important things that I should take a moment to call out, is as I look at PlateSpin and as we in our attentions with that particular asset is we really want to leverage what they’ve built at two levels, obviously the product and the market momentum but also they've done some nice things on their sales model, their support models where we can leverage their business in a better way and leverage some of our products.

So candidly on that particular asset combined with looking back at some of the historical things that we have done and trying to learn from those historical transactions, what we've concluded is a couple of things. One we're going to run this team fairly independently because it really is our first major entry in to the data center, so it is easy to isolate how we manage and do that. Two we've hired Accenture to be our partner in the integration process and I think having them here, laying out the frame work leveraging their frame works, leveraging their discipline of the way we are going to manage this integration, it's going to be critical for us. That's what gives me the confidence on the first and second accesses around using the word orderly with you. Because we have to have an orderly approach to it.

Now the good news is by leveraging other people to help us, that can give us more speed if we need it. At this point we're going to move at appropriately down the path that we've laid out in the areas that we’ve told you, in terms of markets around Linux and around our SRM to make sure that we best position this company for the long term. I am not going to give any timeframes in terms of what we will do but we will do it in an orderly managed manner to make sure that we take advantage of these investments appropriately and we are doing it a little bit differently, which is another important call out, Aaron.

Aaron Schwartz - JPMorgan

Okay and I guess naturally the next question would be you still have a quite bit of cash on the balance sheet post these transactions. Should we still expect similar uses of cash or would you look to further utilize what you have on the balance sheet or you just adjust this?

Ron Hovsepian

Yes, I think in general the priorities that we are looking at is how do we make sure we build a long-term sustainable business for our shareholders and how do we make sure we are able to take advantage of this market opportunities that are in front us. And in order to do that, right now the priorities that we have in front of us, are to look at using the capital in that area, in those two market segments and identity been the third market segment. Our growth markets that we would look focus our capital on. That would be the first priority.

Then the second priority would obviously be then look at where buyback would be yield wise. I don’t want to rule anything out, I just want to be clear that; that’s the priority that we’re looking at it, subject to changes in the market, on both sides of that prioritization.

Aaron Schwartz - JPMorgan

Okay congratulations on the results and thanks for taking my questions.

Ron Hovsepian

Thanks Aaron.

Dana Russell

Thanks Aaron.

Operator

Okay our next question comes from the line of James Gilman with Cross Research.

James Gilman - Cross Research

Good afternoon gentlemen. Again congratulations. So I have several questions here. First on the maintenance renewals. If I did my math correctly, it seems that you had a higher renewal rates than maybe in the past. If that’s correct what you attribute that to?

Ron Hovsepian

We don’t break out any of the details on the renewals what I would tell you is that we’ve done a good job in focusing in on our larger renewal contracts. We’ve dedicated a team and our dedicated team to the renewals. And I think overall for the company renewals did a better job. We do track and we have the data, but that’s something that we don’t break out and share. But I will tell you our focus on renewals as a total category is improving and I hope to see it continue to improve.

And then specifically on Linux we have very good focus and controls on the renewals and we see very good execution of that on the larger contracts. There is still work to be done in improving on the smaller ones in my opinion.

James Gilman - Cross Research

Okay. Keeping that thing about the dedicated team to drive renewals, sales and marketing on a non-GAAP basis and the percentage had gone up over the last two quarters. There are assumed to be some improvements in the third and fourth and I was wondering if those initiatives to drive the renewals impacted the sales and marketing cost?

Dana Russell

James, I am not sure if I understood the question exactly.

James Gilman - Cross Research

I was wondering if you had any special incentives to drive sales, which you know drove the sales and marketing costs up on a percentage basis?

Dana Russell

Yes, sales and marketing on the percentage basis, I think if you look at this on where we are standing on a non-GAAP basis, sales and marketing from the way I am calculating would actually be down. So excluding stock based compensation, I am looking at sales and marketing expenses at somewhere around $83 million in the first fiscal quarter against about $88 million and I calculate that to be about 40% last year versus 36% this year. So I think we actually dropped in terms of a percentage of revenue.

James Gilman - Cross Research

Right I was comparing it from the third and fourth quarter where you had seen that you had made some improvements over the year and that we've made an object going into the first quarter, can talk to the important points about this.

Dana Russell

Yeah our revenues James, our revenues are always going to be somewhat seasonal and typically we're going to have a lower revenue stream in the first quarter we do and the fourth quarter. Third and fourth quarters are big revenue quarters and so we are going to gain some efficiencies as a result of that but I think overall if you are looking out on a year-over-year basis, which is the best way to compare it, I think you're going to see some pretty significant improvements here.

James Gilman - Cross Research

Okay. Moving on I just wanted to also reconcile some comments here made by, lets say, management recently I think your Chief Marketing Officer John Dragoon had commented that there's a roughly about 2 million SUSE Linux servers running on SLES. Then you say compare that to, let's say your top competitor Red Hat. I think they also mentioned they have roughly 2 million. If you look at overall revenue and then you also may be dealing and maybe there is some difference there and I was wondering if you can provide some colors that due to that SLES are either much more cost or something of those free versions.

Ron Hovsepian

Well, I think if I understand question correctly that the -- in the SUSE platform because we shipped it about eight months ahead 7 to 8 months ahead of our competition we are able to get more ZEN enabled Linux platforms in to the market place. So what we have out here now in front of us, as a company, is the opportunity to now go help our customers implement and take advantage of ZEN being shipped with our SUSE footprint. So that's what John specifically referred to that, in the PlateSpin set of announcements as well as myself, was that particular install base that we have. So that would be how we'd reconcile against our competition it's because we shipped ZEN ahead of them and secondly the tools in PlateSpin now would allow the customer to take advantage of moving those physical work loads to a virtual work load on the ZEN, SUSE Linux platform.

James Gilman - Cross Research

Okay. Lastly on the -- a little house keeping here, on the balance sheet we have restricted balance sheet and cash flow statement, restricted cash resulting in reference to litigation. Which litigation is that associated with?

Dana Russell

Yeah that’s actually the [Emir Zenith] litigation, you can read about that in our Q or K James.

James Gilman - Cross Research

Okay all right. That does it for my questions, thank you.

Ron Hovsepian

Thanks James.

Operator

Our next question comes from the line of Katherine Egbert with Jefferies.

Katherine Egbert - Jefferies

I just wanted to know is the guidance that your increasing for the year roughly $20 million - $25 million is that all from PlateSpin?

Dana Russell

No it’s a combination of PlateSpin plus results this quarter. So as we mentioned Katherine, PlateSpin had in excess of $20 million on a calendar year basis in revenues that generated in 2007. We acquired it mid-way through the year, they are growing quickly and then we also had what we think are good results in the first quarter. So its combination of those two things.

Katherine Egbert - Jefferies

Can you break out what PlateSpin is? Is it like 8 to 10 or more?

Dana Russell

Well that’s the amount of guidance that we’re going to give there on that, just in terms of total guidance. We have given you the numbers that say what PlateSpin was in 2007 which was in excess of $20 million and so that’s where we’re going to leave that.

Katherine Egbert - Jefferies

Okay. And another question what are you thinking about OES in front of the Windows for 2008 launch, when typically you know Windows product cycle has not been good for network in OES

Ron Hovsepian

Yes. In terms of it’s impact the good news is that we've got a very loyal customer base and that customer base, in particular this core customer base has been with us for a long time and shown all the right indications to us, through the data process, that we're heading in the right direction with that product. I think what’s fundamentally different is OES2 will run on a Linux. So what it does is it opens the whole conversation again in that market segment for us to work with the customer and to differentiate ourselves. So what we're hearing is out of the early acceptance of OES2 is all good and positive feedback. I think also the numbers would indicate the customer’s intentions, at least short-term right now as they are renewing and we saw the kind of performance that we saw inside of the OES business at this particular point, in terms of what we want to get done inside in the market.

Katherine Egbert - Jefferies

Are you seeing any Microsoft running any discounting or any promos in front of Window Server 2008 as it had done in the past?

Ron Hovsepian

Yeah. From what I can tell initial read of their promotions actually, it appears that they are targeting their core base. So when you look at their core base they still have a bunch of older Window versions out in the market that are not moving at this particular point in time that they have got to bring along.

So I think is as they’ve matured earlier -- if you go back ten years these two companies were vigorously competing in that particular market space. Now that Microsoft has another releases of their code they are managing the outwork competition, but they are also focused on managing their older install basis and different versions that there on and we see that also as an opportunity for our company to attack that install base. So I haven’t seen any promotions, I am sure the competitive fires will remain strong between both companies in those areas.

Katherine Egbert - Jefferies

Okay and then speaking of competition, my last question can you just talk about what you have seen in Linux and Red Hat, virtualization side. How're you growing head to head with them? Do you feel like you're getting in to as many [consults] they are these days?

Ron Hovsepian

Overall, I think we're doing a good job. Our revenue will indicate that, the bookings would indicate that. So overall I feel good about that. I am not happy with the rate and pace at which were pushing more and more new partners in to our body. Now we are doing in a very high rate, so I feel good about that. But I you can never have enough partners extending your story and your promotion in to the market place and Red Hat had a good lead on us in that place, but a four year running stock.

But I feel like we're making a lot of good penetration, I think a lot of the environment on Red Hat and in particular for ourselves is really we're seeing our range of performance and our story of desktop to data center Linux really elevate ourselves in the conversation with the customer.

I am also seeing that our support and our leadership around support is what's going to continue to differentiate ourselves in the market space. So the broad strategy of desktop to data center Linux, I think is taking hold. Thing is our ability to deliver some of the real time Linux and some of these other pieces I think is working well in front of the customer, not to mention the big broad ecosystem partnerships that we've had with, obviously with SAP, with, Microsoft. Those things are paying solid dividends as well. So those take time to filter through the market place but I am seeing those things pay a good dividend.

Katherine Egbert - Jefferies

Okay, sure. Congratulations. Thanks.

Ron Hovsepian

Thanks Katherine.

Operator

Our next question comes from the line of Brendan McCabe with Oppenheimer.

Dana Russell

Hi Brendan.

Brendan McCabe - Oppenheimer

Hi. So I have two question for you. Ron you mentioned strength in EMEA I was wondering if you can give qualitatively touch on some other geographies, which you were seeing there and maybe some color on the verticals and then for Dana, just a last question on my guidance. Does this include some upside potential of PlateSpin, are we basically kind of layering on what their growth rate was on to revenue and then were there any changes to your foreign exchange assumption for the year because it seems to have a somewhat meaning full impact to this quarters results. Thanks.

Ron Hovsepian

Okay, I’ll start off. In terms of overall geography performance EMEA as I had indicated t had a strong performance and they really lea the way for the company. So I feel very good about that particular piece. In the other geographies we layered in some big structural changes in to the Americas as well as into our Asia Pacific, to further advance our specialization and I think those things are taking hold, I see the focus. So I feel good about all those pieces. But at a macro level the sales maturity of those changes is still young at this point in time and I am more hopeful overtime that we’ll continue to see the same kind of results that we got out of Europe in those other geographies.

But in general the team is heading in the right direction. I feel good about those pieces. You know as always there is for points of improvement that we're very focused on and the teams are focused on. But in general heading in the right direction those two geographies had a bigger structural sort of changes occur in Q1 which I believe will yield much higher productivity for us in the long run.

Brendan McCabe - Oppenheimer

Great.

Dana Russell

And Brendan, I can follow-up on the last questions there. So, on the guidance - revenue guidance we took a fairly middle of the road perspective on guidance as it relates to the PlateSpin acquisition. You think about bringing in a fairly significant acquisition and then trying to plan for lots of synergies; that’s probably not going to happen. We're optimistic that it could happen, but we're not going to plan for that in the first quarter or two. So the guidance doesn’t reflect lots of upside from potential synergies. As far as FX is concerned, in terms of the guidance we really didn’t change the guidance associated with FX or you know bring that in to play there.

We are really focused not only on revenue growth, but our real focus is on our operating income, and making sure that we're balanced there. As you saw this quarter we had an uplift in revenues associated with FX, but we also had a negative impact on expenses, and so we need to keep that in balance, and our hope is that we can continue to drive those operating margins up.

Brendan McCabe - Oppenheimer

Great, thanks a lot.

Ron Hovespian

Thank you. Operator next question.

Operator

Yes sir, our next question comes from Brent William with Benchmark Company.

Brent William - The Benchmark Company

Question, so you talked about how you know where the renewals are coming up on Linux that you're trying to cross sell other product lines from the business. Now most Linux renewals I assume are mostly telesales. Are you training up the telesales guys to actually sell stuff or are you basically just using this as lead generation? My purpose is to try to understand what kind of timeframe it might be, what kind of lead time it is to start seeing some benefits from that approach?

Ron Hovsepian

For 2008 Brent our focus with our renewal team is to make sure we have a smooth running renewals operations and very efficient and effective. That is the number one goal. Obviously as we plan for 2009, the next natural set of development things that you would do is want to take that lower cost channel capability or more productive channel capability and cross-sell and up-sell. Now our renewal team has been up-selling on the renewals themselves, but not necessarily in to new product areas. So I want to be careful when I make that distinction. So they selling renewals and broader volume there which is all good, selling new products that way also is more complex and takes some more work. That team will and is capable of doing more like the up-sell and cross-sell that we are talking about. However at this point we have clearly [taxed] them with, let's get this thing to be a finally tuned machine in '08 and then we'll extend it and build it out in '09 in terms of what else we think we can get done with it.

Brent William - The Benchmark Company

Okay, great. Now moving over on the OES and NetWare business where we saw better than expected. You cited that the OWS partner was a major factor, but how much of it was that versus other factors like just macro environment or just better execution in terms of asking for renewals or other sorts of tailwind?

Ron Hovespian

Yeah I think as we've said before we continue to see good success out of our Novell's bundle. So the Novell's bundle continues to show nice signs of growth. We are doing all the other basic blocking and tackling though as you are highlighting. We are making sure that we have a good renewals process in place, we’re making sure we do our audits and true-ups; we’re making sure that we’re selling more and generating more leads back into our partners to make sure that we drive this thing out the right way with our partners.

So all of those things are absolutely combining to make sure that we get a good disciplined approach, and I couldn’t be happier with those results other than if it was 20% growth to see that happen inside of that market for this company. Because what it does, I think really came true in this earnings call was it really showed you that as we can get those base stabilized and we demonstrated only for one quarter. But when it stabilized all these other businesses that we’ve been talking to you about that are growing in the background it brings them to the fore front and you start to see this company in a very different light.

And I think that’s what to me and the rest of the management team was very exciting for our companies long-term prospects. And so that’s kind of a quick overview of what I see inside of there. So, that’s in good shape because they are locked down for three. But there’s nothing that would sound any -- other variances inside the renewal business for that particular part of our company.

Brent William - The Benchmark Company

Okay, great. I just wanted to make sure I clarify that. Thanks for taking my questions.

Ron Hovespian

No problem up, thank you. Operator?

Operator

Yes sir our next question comes from the line of John Walsh with Citi.

John Walsh - Citi

The thing is on the gross margins on the services side. I realized you moved some of the revenue over into the maintenance side, but what’s left is a negative gross margin on the service side. So is that kind of an accurate depiction of how that revenue stream is running?

Dana Russell

Hey John I think I understood your question. We have looked at the businesses differently than we did in the past. So when you think about it in our services business we used to run this really as a standalone business, really thinking about this, really trying to generate profits for services in and of themselves. Now we're thinking about at much, much differently and I think more appropriately so.

All of our services revenues that we generate there or any expense that we incur in services are really for the promotion of our product revenues to try to grow those high margin revenues and so we're not really taking the approach of trying to generate our margin necessarily on the services business, we're definitely going to maximize that, it’s critical that our services are first rate and that we continue to promote them and make them best in the world, but we're looking at it much differently and making sure that we classify all of our revenues and identify them specifically to the products that they are associated with and make sure that we can manage the expenses around those products in the best and most efficient manner.

John Walsh - Citi

And so going forward you're not – is there a target to have that to be at least zero contribution or anything or is it just really whatever kind of falls out from the expense as long as --.

Dana Russell

Yeah we don’t really have a specific target that we're going to point to and say the services have to be in this range. What we're saying is that we're committed to make sure that our services are done in the best way that we can to promote the products business. We also want to make sure that partners in channel and other activities are well suited so that they actually have the opportunity to participate with us in the sales of our products, and so I am not going to give you a specific target. I would say that we don’t expect dramatic you know drop-offs or changes from where we are today in terms of those numbers.

John Walsh - Citi

Okay. Is all the services business now focused on that product generation, is there any still supporting third party non-Novell product?

Dana Russell

Well for the most part we're all oriented toward Novell's products.

John Walsh - Citi

Okay.

Dana Russell

As you know from last year's conversations we eliminated all of our general business consulting. All of that's gone and so we are completely focused on Novell products at this point.

John Walsh - Citi

Okay. Overall invoicing do you have a number? I know give in certain segments, but is there an overall invoicing number? And then I guess just help us because I know there's a couple of moving parts especially with the Microsoft deferred piece that came in last year. How are you defining invoicing? Does it mean three year deals that in the invoicing number?

Dana Russell

Yeah we don't give out an overall invoice number, but I can't say that the overall invoice number was up. I mean we invoiced more and we invoiced more at every category there. The thing that we are very interested in is the product invoicing specifically and that was up and I didn't I missed the second half of your question there.

John Walsh - Citi

Just when you're defining invoicing if it's a multi-year deal? Do you put that full three year amount in the invoicing if it's all build upfront or invoiced upfront?

Dana Russell

Yes. Any thing that's the way we define is, anything that we build for we account as invoicing or bookings. So if we have a three year deal and we invoice it all upfront and collect those funds upfront then we count that as bookings.

John Walsh - Citi

Okay, great.

Ron Hovespian

That's been historical so the good news when you look back at our numbers those are very consistent.

John Walsh - Citi

Okay, great. That's all the questions I had thanks a lot.

Ron Hovespian

Thanks.

Operator

Okay. Our next question comes from the line of Terry Tillman with SunTrust Robinson.

Terry Tillman - Suntrust Robinson

Thanks for taking my question.

Dana Russell

Hi Terry.

Terry Tillman - Suntrust Robinson Humphrey

Hey Dana. First question, Ron relates to the Linux revenue recognized revenues for about 65% growth, but I am equally interested in the invoicing and we’ve seen I guess you had commented $38 million is kind of roughly in line or out of run rate that's what you had seen in the back half of the year. I guess and my thinking is wrong or to me Linux is a secular still growth business, why shouldn’t it be growing sequentially the invoicing?

Dana Russell

Yeah Terry if you look at the invoicing, I think we mentioned that in my prepared remarks there where we talked about tremendous invoicing we had on a last year in the first quarter. We invoiced $92 million total invoicing, and I think we broke that out $73 million of that was through the Microsoft relationship in the first quarter. So the compare would be pretty difficult, if you are looking back, that was when we first initiated that relationship with Microsoft we had some very, very significant deals in that first quarter and I think we did make the statement in the fourth quarter that as we look forward here, our invoicing will be more consistent with what we saw in those quarters subsequent to Q1 last year.

We still continue to expect significant growth when we look at this next quarter where we expect to see significant growth on a year-over-year basis.

Terry Tillman - Suntrust Robinson Humphrey

Okay, well now I know what are you saying Dana. I mean I wasn’t talking about year-over-year, but I am just thinking in this Linux market should we almost kind of stair step in terms of not assuming any one wind falls with Microsoft again like we saw last year. The business should be on a trajectory though with sloping higher though right, not necessarily going sequentially every quarter but shouldn’t the bias be towards sequential growth in invoicing?

Dana Russell

Yeah I think generally we can say that, that the bias would be towards sequential growth and invoicing. The one thing I would say Terry is as you look at our existing customer base and as we sell into that base, there are certain seasonality patterns that we're still going to fall into here especially because those customers are, you know, the whole budgeting cycle everything that we're faced with the rest of our business we're faced with still in the Linux business.

Terry Tillman - Suntrust Robinson Humphrey

Okay.

Ron Hovespian

Yeah I also think as you look at it Terry, you also should take into account that you could have perhaps some more one-year deals that could show up in one quarter versus three year. But in general I agree with you that we would like to see it sequentially growing obviously for a whole bunch of reasons, but all-in-all I don’t see anything here that tells me that there's. I see still good fundamental growth occurring across the Board and as I look at the pipe as to what we can do?

Terry Tillman - Suntrust Robinson Humphrey

Okay – Okay. And then in terms of PlateSpin you know there's been a bunch of question, but I guess is there anyway that you can help us a little bit more with. Dana you had mentioned there was in excess of $20 million and I know it’s not a lot small numbers so the growth rates will be really high. But can you give us a sense on maybe how it was in '06 and/or '05? And then secondly because this is a larger deal in terms of transaction value, could we see an 8-K 90 days out that actually have some historicals?

Dana Russell

Yeah we're not going to provide the historical information. Well we will state whatever historical information that we're required to state as we publish our 10-K etcetera, you know the Qs and the Ks. So you'll see some of that. At the end of the day PlateSpin was growing very quickly, I mean it was growing well beyond market growth rates and I think that’s about as specific as we'll get there, and we expect to continue to see that momentum continue on.

Terry Tillman - Suntrust Robinson Humphrey

Okay. And Ron I know you want to be conservative especially in the network area and then we always ask you well if this is a new trend line, you know, gosh! Can at some point that would grow again. So I know we are all kind of wondering about this and you want to be conservative, but I mean it is down 3% or 4% this time, I don’t remember being down that -- the rate of decline being that low. In OES Version 2 is this something potentially there could be another lever in terms of [staving] off declines. Is it much of a swing factor potentially or do you not know yet?

Ron Hovespian

Two things. One, on this particular piece of revenue conservative or not I've been cautious in the approach that we fought through in this area for a variety of reasons that and historical being the number one reason. You can't all of a sudden magically wave a wand and say you are going beat history where we were having over 15% growth rates.

Now that being said, I feel very good about where this business is migrating to. I feel good that OES 2 is sending the right message to that customer base that you've got a product built on a Linux platform that can expand and can do other things in their shop. I won't talk about it being a gross business just yet, because you have to work at getting it flat first. And like you said, we were down about 4% on that particular piece of the equation in the NetWare OES part of it.

But as you can see it's definitely heading in the right direction, feel good about that. And again that will only - for this company that will only seek to do two big things; continue to stabilize and allow us to grow our customer base, and two, allow you to see the financial returns so we can get out of this company as we get that stabilized. So I have a good hopes for OES 2 in terms of the core base as we know it. It'd be too speculative for me to say any thing about growth, but I do like the direction that it is absolutely heading, and I was so bold that I actually said that I might modify my outlook in my comments. So a little joke there for you. The intention is to track this, continue to tighten down our processes, and let you see the real possibilities of the revenue growth of this company overtime.

Terry Tillman - Suntrust Robinson Humphrey

Okay and I actually did laugh. I am just kind of cold you may not have heard that.

Ron Hovespian

That’s alright. Cliché.

Terry Tillman - Suntrust Robinson Humphrey

Nice job at the quarter guys.

Ron Hovespian

Thank you.

Operator

And our final question of the evening comes from the line of Ajay Kasargod with Piper Jaffray.

Ajay Kasargod - Piper Jaffray

Good on the quarter I just wanted a couple of quick points with you Ron, and that’s. when you're looking at the current economic environment, weakening environment that we have, can you just talk to us about how they impact Open Platform, ID and Access management, and also system resource management in those buckets? Thanks?

Ron Hovsepian

Yeah, in terms of the macro economics for identity management, let’s start with that particular piece of the equation. I can tell you personally for our company, things that have to do governance, risk management, and compliance are projects that are going to get done from an IT spend perspective, and I don’t think we are any different than any other company out in the market place that are going to see the needs for that.

Now, that being said, I think the market is going to continue to see that 11% to 13% growth rate. I think the customer might have a little more negotiating power in the discussions with all of us, and they may elongate those decision cycles, but in general I feel good that the macro economics actually play to the prioritization of this as a good market segment for growth and growth in inside of our business.

Now in terms of SRM the way I think about the SRM and candidly our Linux business is the macro economics of us being - trying to be more efficient in our IT spend will drive a conversation around consolidation, around virtualization and optimization of all of your physical and virtual resources. And the good news is Linux and SUSE Linux in particular allow you take advantage of that data center consolidation.

Our PlateSpin acquisition will allow you to help move your physical platforms and do that data center consolidation in the market. When the customer then moves the conversation from consolidation of physical servers to virtual servers then the customer has an opportunity to take advantage of future virtualization capabilities and the heterogeneity that PlateSpin could bring to the marketplace for us.

So when I look at that particular segment that’s a growth segment and that’s growing well over 20%. And then when the customer sees the last leg of what they’ve got to do to optimize all the physical and virtual again the macro economics is only going to play towards reducing costs for our customers and going through that life cycle of consolidation, virtualization and optimization of their physical and virtual resources. So I actually think again the macro effects of these markets on our Linux and our SRM business actually play to our favor to accelerate how customers look at their platform and how they are going to consolidate on their platforms.

So again I feel good that the macro economics work in our favor for these markets and we've just got to make sure we take advantage of it.

Ajay Kasargod - Piper Jaffray

And Ron to your points if really the macros work in your favor has there been any near term negative impact to the pipeline just because the economic environment?

Ron Hovespian

Nothing of significance to report. I think the only thing I would say is, you're seeing stronger and healthier negotiating from our customers.

Ajay Kasargod - Piper Jaffray

Yeah that's fair enough I'll ask you one more quickly and I know that you are probably trying to close up here. But I think when you look at Novell going in to last year's [brain] sharing, I think one of the key things you are focusing on was kind of identity of Novell where the strengths are of the company and what the different offerings are. How do you feel like that that message has been - I guess as you approach [Brainshare] '08 how do you feel that message has been delivered in '07, where do you need to improve? Thanks.

Ron Hovespian

In terms of the overall image of the company I feel actually very, very good about it because it’s the core DNA of the company. And I mean that in two domains, one is we've made sure that we have refocused the company on being a product company, that's what the company does best and we're demonstrating with that 9% growth rate that you saw this quarter.

The second thing is that the company has a great DNA for dealing with heterogeneity in the interoperability of different platforms. And I think the strategy, I feel very good that the strategy has been embraced by our team, embraced by the company, our partners, and the message is getting out in to the market about our ability to help a customer in their mixed environment. About us being able to bring all the IT pieces together for that customer and help with that interoperability.

So in general I feel good that we are heading in the right direction, customers are learning that message, there's obviously more work to be done there, but in general I feel very good about those pieces. And the most important part that we need to do as a leadership team is to make sure we hold steady as we go through any chops along the way that we may have or any bumps, is to really hope steady to that because that consistency over time will shine through for the company.

Ajay Kasargod - Piper Jaffray

Thanks Ron.

Ron Hovespian

Thank you. So with that operator, I would like to close the call and thank everybody for their participation and speak to you all soon. Thank you.

Operator

That does conclude today's teleconference. You may now disconnect.

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