Analyst Conference Summary

conference date: May 30, 2007
for quarter ending: April 30, 2007 (2nd quarter FY 2007)

Forward-looking statements

Overview: Made it to break even and they have quite a bit of cash. Analysts raised questions about revenue from Microsoft deal going forward.

Basic data:

Revenue was $239 million, 4% sequentially from $230 milion and up 2.5% from $233 million in the year-earlier quarter.

Net loss was $110,000 or $0.00 per share, improved sequentially from a net loss of $20 million or $0.06 per share, but a decrease from a net gain of $2 million or $0 per share year-earlier.

Cash and equivalents were $1.8 billion.

Guidance:

Full fiscal 2007 revenue expected between $925 and $955 million. Non-GAAP adjusted income expected between zero and $10 million. Operating margin target is between 5% and 7%. Revenue guidance is down due to divestment of Salmon.

For ful fiscal year 2008 the target operating margin is between 12% and 15%.

Conference Highlights:

Results from Salmon UK consultancy have been exluded from continuing operations results.

Foreign currency rates improved total revenue by $4 million but hurt net income by $2 million compared to year-earlier.

Non-GAAP net income was $16 million or $0.05 per share. That includes a $0.02 favorable tax adjustment and excludes stock-based compensation and other items.

Linux Platform Product revenue was $19 million (83% annual increase). Identity and Access Management revenue was $23 million. Systems and Resource Management revenue was $32 million. Workgroup revenue was $84 million, declining less than expected. Global services revenue was $75 million.

Deferred revenue ended at $700 million, up 102% from year-earlier.

Cash flow from operations was negative $29 million.

The stock-based compensation accounting review was completed and SEC forms were filed up to the quarter ending January 31, 2007. Additional expense of $19 million was recognized over the revision period.

Expects some increases in costs in second half of year.

Microsoft agreement has had positive effects, about 25% of Linux Product revenue. Sales are going well.

3% non-GAAP operating margin.

Identity revenues are recovering but are still below plan and will not reach aggressive targets for year. SAP and Dell partnerships for Linux announced this quarter.

This summer will ship new configuration management solution, which customers have been waiting for.

Data center project has rapidly growing number of partners and will have general availability by end of year. Novell OpenWorkgroup Suite had good demand.

Still working on sales model implementation, R&D cost reduction, and back-office savings.

Stronger than expected results in Linux are offsetting fall in legacy business.

Q&A:

3.5 product release impact? Product is shipping now, there was a sales execution issue in Q1 and Q2, so should improve for rest of year.

Sales pipeline? Focus is shifting to new revenues, but does not give out pipeline data.

Improved consulting profitability? Salmon divestment did not drive that; been working on that issue for some time.

Capital structure? Plan on focussing on acquisitions rather than stock-buy backs, but will balance for best return.

One time factors in Workgroup sector? Licensing and GroupWise was up in workgroup sector, contributing to a better than expected quarter.

Microsoft partner stats? Has invoiced $91 million of $240 million, 6 months into a 5 year agreement; that is a better measure than number of licenses, so will give this metric going forward. Older higher number was a projection for the year, not the number actually done. There is no cap on the Microsoft relationship; they can come back and buy more.

Virtualization impact? Overall market of UNIX is migrating to Linux, so plenty of market growth left. Virtualization just beginning; we view as an accelerator of transition to Linux.

Did non-Microsoft Suse revenue decline sequentially? Inside sales was about a 50% split of Microsoft and Novell invoicing. Slightly up from a year ago. Now also have Dell as part of the equation, so it will be increasingly hard to split out. Will focus on total invoicing, not channel used. Dell had no impact on Q2 numbers. Yes, Q1 was an exceptional quarter for getting the relationship growing and Q2 was down sequentially.

Desktop Linux impact? Market is still early in lifecycle. Our strategy is to present a desktop to data center story so that they can pick any or all parts they need. We are seeing a lot of interest in thin clients. Sold 20,000 desktops to Peugot last quarter. Dell choice of Ubuntu is for different type of client.

Restructuring charges? $4.5 million this quarter, will continue to see charges going forward.

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