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| NOVL > SEC Filings for NOVL > Form 10-Q on 10-Mar-2008 | All Recent SEC Filings |
10-Mar-2008
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements, other than statements of historical fact, regarding our strategy, future operations, financial position, estimated revenue, projected costs, projected savings, prospects, plans, opportunities, and objectives constitute "forward-looking statements." The words "may," "will," "expect," "plan," "anticipate," "believe," "estimate," "potential," or "continue" and similar types of expressions identify such statements, although not all forward-looking statements contain these identifying words. These statements are based upon information that is currently available to us and/or management's current expectations, speak only as of the date hereof, and are subject to risks and uncertainties. We expressly disclaim any obligation, except as required by federal securities laws, or undertaking to update or revise any forward-looking statements contained herein to reflect any change or expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statement is based, in whole or in part. Our actual results may differ materially from the results discussed in or implied by such forward-looking statements. We are subject to a number of risks, some of which may be similar to those of other companies of similar size in our industry, including pre-tax losses, rapid technological changes, competition, limited number of suppliers, customer concentration, failure to successfully integrate acquisitions, adverse government regulations, failure to manage international activities, and loss of key individuals. Risks that may affect our operating results include, but are not limited to, those discussed in the "Risk Factors" section of our Annual Report on Form 10-K for fiscal 2007 filed with the Securities and Exchange Commission ("SEC") on December 21, 2007. Readers should carefully review the risk factors described in the Annual Report on Form 10-K for fiscal 2007 and in other documents that we file from time to time with the SEC.
Introduction
We are a global infrastructure software and services company. We develop, implement, and support proprietary, mixed source and open source software for use in business solutions by providing our customers with enterprise infrastructure software and a full range of training and support services. We help customers lower costs, manage complexity, and mitigate risk, allowing them to focus on business innovation and growth. Our products enable customers to solve business challenges by maximizing the effectiveness of their information technology ("IT") environments.
Our singular focus is providing global leadership in enterprise-wide, desktop to data center operating systems based on Linux and open source, and the software required to secure and manage mixed IT environments. We enable customers to build their own Open Enterprises by adding the strength, flexibility and economy of open source software to their existing IT infrastructures. We offer an open source platform along with fully integrated identity, security, and systems management solutions. Our technologies allow us to help our customers manage both our open source platform and the other heterogeneous components of their IT infrastructures. By delivering these solutions to our customers, either directly or through our global network of partners, we are able to help customers achieve increased performance from their IT infrastructure at a reduced cost.
Our business unit segments are Open Platform Solutions, Identity and Security Management, Systems and Resource Management, and Workgroup. They are described below in more detail.
Open Platform Solutions. We deliver Linux solutions for the enterprise, and the SUSE Linux Enterprise platform underpins all of these products. SUSE Linux Enterprise is a leading distribution that focuses considerable effort on interoperability and virtualization within both open source and proprietary systems and provides ease in usability and management. Our primary Open Platform Solutions offerings are:
• SUSE Linux Enterprise Server
• SUSE Linux Enterprise Desktop
• openSUSE
• SUSE Engineering (product development work we perform for customers)
Introduction (Continued)
Identity and Security Management. Our identity, security, and access management solutions help customers integrate, secure and manage information assets as well as reduce complexity and ensure compliance. Adding intelligence to every part of a customer's IT environment makes their systems more agile and secure. Our solutions leverage automated, centrally managed policies to support the enterprise. Our partners' expertise, experience and technology provide some of the most comprehensive information security solutions in the industry today. Our primary Identity and Security Management offerings are:
Identity and Access Management products:
• Identity Manager
• Access Manager
• SecureLogin
• Sentinel
Other Identity and Security Management products:
• Novell eDirectory
Systems and Resource Management. With our resource management solution, customers can define business and IT policies to automate the management of multiple IT resources, including the emerging challenge of managing virtual environments. As a result, customers reduce IT effort, control IT costs, and reduce IT skill requirements to fully manage and leverage their IT investment. Our primary Systems and Resource Management offerings are ZENworks management products.
ZENworks management products:
• ZENworks Suite
• ZENworks Patch Management
• ZENworks Asset Management
• ZENworks Linux Management
• ZENworks Configuration Management
• ZENworks Orchestrator
• ZENworks Endpoint Security Management
Workgroup. We provide comprehensive and adaptable workgroup solutions that provide all the infrastructure, services and tools customers require to effectively and securely collaborate across a myriad of devices. We offer the security, reliability, and manageability our customers' employees need to efficiently get their jobs done at lower cost. Our primary Workgroup products are:
• Open Enterprise Server ("OES")
• NetWare and other NetWare-related products:
o NetWare
o Novell Cluster Services
• Collaboration products:
o GroupWise
o Teaming + Conferencing
• Other Workgroup products:
o BorderManager
o Novell Open Workgroup Suite, including:
o OES
o GroupWise
o ZENworks Suite
o SUSE Linux Enterprise Desktop - open source desktop
o OpenOffice.org for Linux and Windows - open source productivity suite
In addition to our technology offerings, within each of our business units we offer a worldwide network of consultants, trainers, and technical support personnel to help our customers and partners best utilize our software. We also have partnerships with application providers, hardware and software vendors, and consultants and systems integrators. In this way we can offer a full solution to our customers.
Overview
Below is a brief update on each of our business units:
• Within our Open Platform Solutions business unit segment, Linux and open source products remain an important growth business. In fiscal 2007, we established and expanded relationships with several strategic partners to increase the reach of both our server and desktop products. Revenue from our Linux Platform Products increased 65% in the first quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was complemented by higher services revenue of 41%, such that total revenue from our Open Platform Solutions business unit increased 56% in the first quarter of fiscal 2008 compared to the same period a year ago.
• We continue to expand our position in the market for our Identity and Security Management business unit segment by offering products that deliver a complete, integrated solution in the areas of security, compliance, and governance issues. Our unique role-based, policy-driven approach has received positive industry reviews. Within this segment, revenue from our Identity and Access Management products increased 15% in the first quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was more than offset by lower services revenue of 18%, such that total revenue from our Identity and Security Management business unit decreased 1% in the first quarter of fiscal 2008 compared to the same period a year ago.
• Systems and Resource Management products continue to be an important part of our product offering. Our strategy is to provide a complete "desktop to data center" offering, with leadership in virtualization for both Linux and mixed-source environments. At the end of fiscal 2007, we announced the general availability of two major products, ZENworks Configuration Management and ZENworks Orchestrator. We believe these products will become a new source of growth in the future. Systems and Resource Management product revenue increased 5% in the first quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was partially offset by lower services revenue of 12%, such that total revenue from our Systems and Resource Management business unit increased 2% in the first quarter of fiscal 2008 compared to the same period a year ago.
• Our Workgroup revenue base is an important source of cash flow and provides us with the potential opportunity to sell additional products and services. We continued efforts to stabilize the decline of revenue from our legacy products, such as OES, NetWare and NetWare-related products. At the end of fiscal 2007, we announced the general availability of OES 2, which completes the transition of delivering NetWare services on Linux. We also introduced Novell Teaming + Conferencing, which extends the value of our collaboration offering. Our Workgroup products increased 1% in the first quarter of fiscal 2008 compared to the same period a year ago. This product revenue increase was more than offset by lower services revenue of 11%, such that total revenue from our Workgroup business unit decreased 1% in the first quarter of fiscal 2008 compared to the same period a year ago.
Our services business is focused on supporting product sales, not generating stand-alone revenue or profits. This is in line with one of the initiatives of our two-year strategy to transform our business, which is to realign our services business to be more efficient and product focused. This includes focusing our services business to drive product revenue while transferring service revenue to our partners. Our results for the first quarter of 2008 are showing early signs of success in this initiative to shift to a more profitable revenue mix. Though services revenue was down 9%, total revenue was up 6% in the first quarter of fiscal 2008 compared to the same period a year ago.
In continuation of our two-year strategic plan, during fiscal 2008 we will refine the improvements we have made in our sales, product development, and back office initiatives. In addition, we will realign our services business to improve its efficiency and focus. In conjunction with these initiatives, we expect to incur restructuring charges of $15 million to $25 million in fiscal 2008. While our initiatives and their implementation involve opportunities, risks, and challenges, we believe they will result in long-term, sustainable profitability.
Subsequent to the first quarter of fiscal 2008, we acquired SiteScape, Inc. ("SiteScape"), a provider of open collaboration software for approximately $19 million in cash, and entered into a definitive agreement to acquire PlateSpin, Ltd. ("PlateSpin"), a leader in support solutions for complete workload lifecycle management and optimization for Windows, UNIX and Linux operating systems in the physical and virtual data center for approximately $205 million in cash. SiteScape and PlateSpin will become part of our Workgroup and Systems and Resource Management business units, respectively.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments occur include, but are not limited to: revenue recognition and related reserves, long-lived assets, deferred tax assets, loss contingency accruals and restructuring, and share-based payments. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments included in these areas, refer to our Annual Report on Form 10-K for fiscal 2007.
Divestitures
CTP Switzerland
On October 31, 2007, we signed an agreement to sell our CTP Switzerland subsidiary to a management-led buyout group for $0.5 million at close, plus an additional contingent payment of up to approximately $0.3 million. The contingent payment will be received over the next year based on an earn-out model that is tied to CTP Switzerland's management bonuses. The $0.5 million was placed into an escrow account as of October 31, 2007 and was held until close. Final closing of the sale occurred on January 31, 2008. The cash was received by us in February 2008. There will be no further shareholder or operational relationship between us and CTP Switzerland.
When we signed the agreement, we began classifying CTP Switzerland's results as a discontinued operation in our consolidated statements of operations and reclassified our results of operations for the prior comparable period. In the fourth quarter of fiscal 2007, we recognized an estimated loss on disposal of $8.9 million resulting from the expected sale. During the first quarter of fiscal 2008 we recognized a gain on final liquidation of CTP Switzerland of $1.2 million, for a net loss of $7.7 million.
The net loss on the sale of CTP Switzerland was calculated as follows:
(In thousands)
Sales price $ 500
Costs to sell (304 )
196
Net book value of CTP Switzerland:
Cash 3,417
Accounts receivable, net 3,508
Other current assets 1,718
Other long-term assets 315
Current liabilities (3,322 )
Foreign exchange and other (1,668 )
Impairment of goodwill 3,903
7,871
Net loss on sale of CTP Switzerland before income taxes $ (7,675)
Loss before income taxes recognized in the fourth quarter of fiscal 2007 $ (8,855 )
Gain before income taxes recognized in the first quarter of fiscal 2008 $ 1,180
Salmon
On March 12, 2007, we sold Salmon Ltd. ("Salmon") for $4.9 million, plus an
additional contingent payment of approximately $3.9 million to be received if
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Divestitures (Continued)
The results of discontinued operations (CTP Switzerland and Salmon) for the
first quarters of fiscal 2008 and 2007 are as follows:
Three months ended
January 31, January 31,
(In thousands) 2008 2007
CTP Switzerland net revenue $ 6,566 $ 6,210
Salmon net revenue - 4,980
$ 6,566 $ 11,190
CTP Switzerland income before taxes $ 105 $ 21
Salmon income before taxes - 137
Income before taxes 105 158
Salmon impairment of long-lived assets - (10,848 )
CTP Switzerland gain on sale 1,180 -
Gain (loss) on discontinued operations 1,285 (10,690 )
Income tax benefit (836 ) (2,914 )
Income (loss) from discontinued operations $ 2,121 $ (7,776 )
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Results of Operations
Revenue
We sell our products, services, and solutions primarily to corporations, government entities, educational institutions, resellers, and distributors both domestically and internationally. In our consolidated statements of operations, we categorize revenue as software licenses, maintenance and subscriptions, and services. During the third quarter of fiscal 2007, we began reporting our services revenue and related cost of revenue in separate lines on our consolidated statements of operations. All prior periods have been reclassified to conform to the current period's presentation. Software licenses revenue includes sales of proprietary licenses, upgrade licenses and certain royalties. Maintenance and subscriptions revenue includes product maintenance agreements, Linux subscriptions, upgrade protection contracts, and engineering-related revenue. Services revenue includes technical support, training, and professional services.
Three months ended
January 31, January 31,
(Dollars in thousands) 2008 2007 Change
Software licenses $ 40,431 $ 38,553 5%
Maintenance and subscriptions 149,183 134,671 11%
Services 41,312 45,162 (9)%
Total net revenue $ 230,926 $ 218,386 6%
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Revenue in our software licenses category increased in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007 due primarily to increased license revenue from Identity and Security Management, Systems and Resource Management and Workgroup. Revenue from maintenance and subscriptions increased in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily due to increased revenue from Linux Platform Products, which increased $11.0 million, or 65%, over the prior year. This increase was offset somewhat by decreased maintenance and subscriptions revenue for combined OES and NetWare-related products, which decreased $1.0 million, or 2%. Services revenue decreased as anticipated, reflecting the impact of realigning our services business to be more efficient and product focused and the resulting change in revenue mix towards higher margin product revenue. Foreign currency exchange rate fluctuations favorably impacted revenue by $7.3 million in the first quarter of fiscal 2008 compared to the same period of fiscal 2007. Our revenue by reporting segment is detailed below.
Results of Operations (Continued)
Net revenue in the Open Platform Solutions segment was as follows:
Three months ended
January 31, January 31,
(Dollars in thousands) 2008 2007 Change
Software licenses $ - $ 194 - %
Maintenance and subscriptions 30,046 18,660 61 %
Services 6,753 4,774 41 %
Total net revenue $ 36,799 $ 23,628 56 %
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Revenue from our Open Platform Solutions segment increased in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily due to Linux Platform Products, which increased $11.0 million, or 65%. Software licenses within the Open Platform Solutions segment decreased as most of the revenue in this category is sold under subscriptions and upgrade protection contracts. Because much of the revenue we invoice is deferred and recognized over time, we consider invoicing, or bookings, to be a key indicator of current sales performance and future revenue performance. Invoicing for Linux Platform Products was $37.7 million, which was in line with invoicing levels seen in the second, third and fourth quarters of fiscal 2007. Invoicing for Linux Platform Products was down 59% in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007, primarily due to the high invoicing levels in the first quarter of fiscal 2007 that followed the November 2, 2006 signing of the Microsoft agreements. These agreements are discussed in more detail in our fiscal 2007 Annual Report on Form 10-K (See note F, "Microsoft Agreements").
Net revenue in the Identity and Security Management segment was as follows:
Three months ended
January 31, January 31,
(Dollars in thousands) 2008 2007 Change
Software licenses $ 12,618 $ 11,559 9%
Maintenance and subscriptions 19,710 18,045 9%
Services 14,702 17,947 (18)%
Total net revenue $ 47,030 $ 47,551 (1)%
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Revenue from our Identity and Security Management segment decreased slightly in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007. This decrease resulted primarily from lower services revenue reflecting the impact of realigning our services business to be more efficient and product focused and the resulting change in revenue mix towards higher margin product revenue, partially offset by higher Identity and Access Management product revenue. Invoicing for Identity and Access Management products increased 17% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.
Net revenue in the Systems and Resource Management segment was as follows:
Three months ended
January 31, January 31,
(Dollars in thousands) 2008 2007 Change
Software licenses $ 8,171 $ 7,502 9%
Maintenance and subscriptions 28,866 27,655 4%
Services 6,302 7,136 (12)%
Total net revenue $ 43,339 $ 42,293 2%
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Revenue from our Systems and Resource Management segment increased in the first quarter of fiscal 2008 compared to the same quarter of fiscal 2007 primarily as a result of ZENworks Asset Management, ZENworks Linux Management, and ZENworks Endpoint Security Management product sales. Invoicing in the Systems and Resource Management products increased 14% in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007.
Results of Operations (Continued)
Net revenue in the Workgroup segment was as follows:
Three months ended
January 31, January 31,
(Dollars in thousands) 2008 2007 Change
Software licenses $ 19,642 $ 19,298 2%
Maintenance and subscriptions 70,561 70,311 -%
Services 13,555 15,305 (11)%
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