Analyst Conference Summary

conference date: May 29, 2008 @ 2:00 PM Pacific Time
for quarter ending: April 30, 2008 (2nd quarter fiscal 2008)

Forward-looking statements

Overview: Still no traction.

Basic data:

Revenues were $236 million, up 2% sequentially from $231 million and up 2% from $232 million year-earlier.

Net income was $6 million, down 65% sequentially from $17 million, but up from a loss of $3 million year-earlier.

EPS (earnings per share) were $0.02, down 50% sequentially from $0.04, but up from negative $0.01 year-earlier.

Guidance:

Full fiscal 2008 revenues of $940 to $970 million. Non-GAAP operating margin between 7% and 9%.

Conference Highlights:

Believes they are gaining momentum, especially from Platespin acquisition and deals with HP and SAP.

Non-GAAP numbers: income from operations $16 million. Net income $21 million or $0.06 per share, up from $16 million and $0.05 per share year-earlier.

Open Platform Solutions revenue was $30 million, with $29 million from Linux products (up 31% y/y). Identity and Security revenue was $31 million (up 13%). Systems and Resource Management revenue was $41 million (up 15%). Workgroup revenue was $92 million (down 1% y/y), but invoicing increased 6% y/y.

Cash and equivalents ended at $1.4 billion. Deferred revenue was $702 million. Cash flow from operations was negative $18 million. Some cash was used to by part of the 0.5% convertible debentures. No stock buy-backs were made.

Cost of revenue was $61 million. Gross profit $175 million. Operating expenses $173 million. Income from operations $2 million. Other income $18 million. Income taxes $14 million.

Foreign currency rates had an overall negative impact of $1 million.

Invoicing was strong.

$3 million of revenue was from the Platespin acquisition completed during the quarter.

Working on improving expense structure.

4200 employees, up about 200 due to acquisitions.

SAP has chosen Suse Linux as the sole recommended Linux for small and medium business clients. Microsoft partnership continues to expand. HP will preload Suse Linux on a PC aimed at the education market. HP and SAP are also partners for identity products.

Q&A:

Upside from Workgroup? Hoping it will continue; have worked hard for that.

Op ex for Platespin? Slightly dilutive, about $4 million. We have a number of potential partners for Platespin solutions.

Cash flow for the year? Definitely will be positive for the full year, and for the 3rd and 4th quarters.

HP identity client migration? This will be customer driven, but should take place over the next 24 months.

Interest income? Yes, that will probably do down due to lower cash balance and lower interest rates. Maybe around 3%.

Red Hat exit of PC market? They were never really in the PC market, so not why our Linux is growing. This is going to be a long slow climb for us. We will be focused on enterprise market, we aren't going to chase the consumer market.

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