Analyst Conference Summary


conference date: February 28, 2008 @ 2:00 PM Pacific Time
for quarter ending: January 31, 2008 (1st quarter fiscal 2008)

Forward-looking statements

Overview: Continuing slow but steady revenue growth and is now in the black, but cash flow from operations was negative.

Basic data:

Revenues were $231 million, up 6% from $218 million year-earlier.

Net income was $16.8 million, up from a loss of $19.9 million year-earlier.

EPS (earnings per share) were $0.04, up from a loss of $0.04 year-earlier.


Full fiscal 2008 revenue is expected to be $940 to $970 million. Non-GAAP operating margin expected between 7% and 9%, excluding acquisition-related amortization.

Conference Highlights:

Believes on the right strategic path with growing income and controlled expenses. Increased full fiscal 2008 guidance. Product revenue was up 9% y/y. Partnership with Microsoft maintained its momentum. Dell and Lenovo started shipping client computers loaded with SUSE Linux.

Non-GAAP numbers: operating income $24 million, up from a $1 million loss year-earlier. Income from continuing operations $29 million or $0.08 per share, up from $3 million or $0.01 per share year-earlier. Operating margin 10%.

GAAP operating income was $8 million, compared to a year-earlier loss of $21 million. Income from continuing operations was $15 million compared to a loss of $12 million year-earlier.

Foreign currency exchange rates impacted operating expenses unfavorably for $7 million.

Open Platform Solutions (mostly Linux) revenue was $30 milion, up 65% y/y. Identity and Security Management revenue was $32 million, up 15% y/y. Systems and Resource Management reveue was $37 million, up 5%. Workgroup revenue was $90 million, up 1%.

Software license revenue was $40.4 million, maintenance and subscriptions $149.2 million, services $41.3 million.

Cost of revenue was $58.5 million, leaving gross profit of $172.4 million. Operating expenses of $164 million included sales and marketing $86.6 million, product development $46.1 million, general and administrative $26.9 million and other $4.4 million. Income from operations was $8.5 million, operating margin 3.7%. Other income $17.2 million. Income tax expense $11 million. Income from discontinued operations $2.1 million.

Cash and equivalents ended at $1.8 billion. Deferred revenue was $723 million. Cash flow from operations was negative $26 million including $31 million interest and restructuring payments. Says normalized cash flow from operations was $5 million.

Stock-based compensation expense was $10.8 million, depreciation and amortization $9.0 million. Changes in current assets and liabilities created a loss of $66.3 million, which caused the cash flow loss.

4000 total headcount, down slightly sequentially.

Purposefully shifting service revenues to partners in order to get more high-margin product revenue. Continues to seek global partners. Sitescape and Platespin acquisitions provide excellent strategic fit. Platespin price $205 million all cash to close in fiscal Q2, and is cause for revenue guidance increase, but will be dilutive in 2008.

Product maintenance revenue no longer reported in Services revenue.


New Linux customer revenues? A major benefit of providing Linux is it allows us to upsell to those customers.

Systems management orders versus revenue? Timing differences occur between bookings and recognizing revenue sometimes in all our segments.

Investments in acquired assets versus legacy business? Overall we are committed to 7 to 9% margin despite acquisitions, so we will need to redeploy from legacy businesses.

Cash use? Yes, we continue to look for quality acquisitions, and we also look at stock buy-backs.

Maintenance renewal rate? We have done well focusing on larger renewal contracts; we have been doing better at renewals.

Sales and marketing as percentage up? Now, excluding stock-based compensation it was down y/y. Revenues tend to be somewhat seasonal but costs stay relatively even, so Q1 increase is just seasonal.

Believe you and Red Hat have similar number of installed Linux machines, but you have far less revenue. Why? Zen was shipped ahead of them. Platespin will allow moving to virtual workload on Zen-SUSE-Linux platform.

Platespin 2007 revenue was around $20 million. Guidance includes only moderate immediate revenue growth for Platespin. FX guidance also moderate.

OES 2 will run on Linux, so we should be able to keep our loyal customers and expand to other Linux users.

Windows Server 2008 competition? Mostly Microsoft is worrying about their established customers upgrading rather than going after our customers. With Red Hat our desktop-to-datacenter Linux strategy is taking hold.

Negative gross margin for services? We are looking at businesses differently. Services used to be run as a stand alone business. Now we see it as a way of promoting products. We want to have first-class services and manage the expenses well. No particular margin target.

Invoicing may cover several years, so may fluctuate versus revenue. For instance, Microsoft deal caused a spike in invoicing.

Macroeconomic impact? For Identity Management, these are projects that are going to get done. Expect 11 to 13% market growth, but some customers may delay decisions or seek discounts. SRM/Linux will be driven by consolidation, virtualization, and optimization, where we have a competitive advantage. Reducing costs is what customers are looking for.

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Copyright 2008 William P. Meyers