Analyst Conference Summary

conference date: December 4, 2008 @ 2:00 PM Pacific Time
for quarter ending: October 31, 2008 (4th quarter fiscal 2008)

Forward-looking statements

Overview: Not a bad quarter, considering the economy, but further from profitability and with much less cash on hand than on 2007. Cash flow was good.

Basic data (GAAP) :

Revenues were $244.7 million, flat sequentially from $245 million and also flat from $245.9 million year-earlier.

Net income was negative $17.8 million. In Q3 2008 it had been negative $15 million. Year-earlier it had been negative $9.2 million.

EPS (earnings per share) were negative $0.05, worse sequentially than negative $0.04, but flat against negative $0.04 year-earlier.

Guidance:

For fiscal year 2009 Novell expects an operating margin of no less than 10%, non-GAAP. Not enough visibility to put numbers on the future at this time. Will adjust costs down if revenues decline. However, the first fiscal quarter looks good so far.

Conference Highlights:

Completed the two-year transformation to an infrastructure software company. Still had $1.1 billion in cash at the end of the quarter. Cash flow from operations in quarter was $67 million.

Microsoft agreement has been very beneficial to revenues and margins. Last month Microsoft purchased the first $25 million of new certificates. Partnership with SAP for SUSE Linux is doing well. Believes gained market share in Linux and Identity.

The GAAP net loss included a $14 million impairment charge for devalued auction-rate securities. Excluding that net loss would be $4 million. Operating expenses saw a $1 million positive impact from exchange rates.

Non-GAAP net income was $20 million or $0.06 per share, down from $23 million year-earlier. This includes the loss on securities, but excludes $8.4 million in stock-based compensation expense, $4.5 million in amortization of intangibles, and $17.3 million for restructuring.

Operating margins: non-GAAP 13.1%, GAAP negative 2.6%, both improved over year-earlier.

Software license revenue was $51.4 million.

Maintenance and subscription revenue was $158.8 million.

Deferred revenue ended at $730 million.

Product revenue increased 6% from year-earlier. Open Solutions had $36 million product revenue, $33 million of it from Linux, which was up 33% from year-earlier. Identity and Security Management revenue was $37 million, up 11%, with invoicing up 35%. Systems and Resource Management revenue was $45 million, up 15%. Workgroup revenue was $92 million, down 6%, but above goals.

Services revenue was $34.6 million, a planned, significant decline.

Cost of revenue was $57.8 million, leaving gross profit of $186.9 million. Operating expenses were $193.2 million (sales expense $88.9 million, development $52.3 million, general $26.5 million, other $25.5 million) left a loss from operations of $6.3 million. Other income loss was $8.1 million. Income tax expense $3.3 million. Loss from continuing operations was $17.8 million. Discontinued operations showed a benefit of $1.5 million.

$22 million of cash was used to repurchase stock in the quarter. Some was used to acquire Managed Objects. $314 million was used to acquire some of its 0.5% senior convertible debentures at a meaningful discount. $400 million of cash is in foreign accounts, which would be highly taxed if repatriated. Priorities for cash are acquisitions and paying off debentures; stock repurchases will be cut back.

There may be further restructuring changes in 2009. Headcount was down in the quarter.

Plan is to use aggressive Linux pricing to acquire customers that can be sold higher margin products.

Has made several deals with large PC companies to use Linux desktops.

Q&A:

Factors that could impact 2009 margins? We exited 2008 with non-GAAP margin of 13%. In 2009 we should be lower about $5 to $10 million on costs, but this excludes possible restructuring expenses, which depends on revenues.

Economic impact on segments of your business? Linux market may show strength as enterprises attempt to reduce costs, but the timing is uncertain. In Systems and Resource Management we feel decent. In Identity there may be pricing pressure but we want to be aggressive about acquiring customers. In Workgroup the switching cost is high, so we may retain customers well when their budgets are lean.

Sense of dependence of margin on revenues? The 10% floor assumes some negative impact on revenues from economy. If revenues are better, margins should be better.

Foreign exchange impact? It tends to be offset itself because of balancing impact on revenues and expenses.

Linux geography variations? Nothing significant.

Competitive landscape? For servers it is us and Red Hat. For desktop it is a different group and changes by geography. No big changes.

Microsoft? Should be more of a contributor to profits in 2009 than in 2008. In 2008 revenue was about $70 million, in 2009 should be at least $90 million. But we already have the cash for this, so the revenue recognition won't generate more cash.

Managed Objects impact? Revenue was $20 to $30 million, will be less for us until they are integrated.

Any insight on customer budgeting process? IDC says overall IT spend will be up 1 to 2%, but we have a concern that in Q1 customers are going to be cautious.

SRM segment? Overall, for the year, we were pleased, in particular with the Platespin progress. Zenworks did not grow as fast as we would have liked; we are focused on sales execution now. VM giving away their capacity planning tool had some impact.

Has pricing environment for acquisitions improved? People are still clinging to lofty expectations, but that is changing.

Health of verticals you are concentrated in? We have significant revenue from the public sector, which we feel good about. We expect some pain in financial services sector.

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