##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Quarterly Period Ended January 31, 2007
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from     to
 Commission File Number: 0-13351
 
 NOVELL, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
    
    87-0393339(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 404 Wyman Street
Waltham, MA 02451
 (781) 464-8000
 N/A
 
 þ o
  þ o o
 o þ




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##### 



NOVELL, INC.
TABLE OF CONTENTS
 Explanatory Note
    
    
    3Part I  Financial Information:
    
    
    4Item 1: Financial Statements
    
    
    4Consolidated Balance Sheets at January 31, 2007 (unaudited) and October 31, 2006
    
    
    4Consolidated Statements of Operations for the three months ended January 31, 2007 and 2006 (unaudited)
    
    
    5Consolidated Statements of Cash Flows for the three months ended January 31, 2007 and 2006 (unaudited)
    
    
    6Notes to Unaudited Consolidated Financial Statements
    
    
    7Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4: Controls and Procedures
    
    
    35Part II  Other Information:
    
    
    35Item 1: Legal Proceedings
    
    
    35Item 1A: Risk Factors
    
    
    35Item 6: Exhibits
    
    
    35EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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EXPLANATORY NOTE
     3




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##### Table of Contents



Part I. Financial Information
 
 Item 1. Financial Statements
 NOVELL, INC.
 
 CONSOLIDATED BALANCE SHEETS
  January 31,
    
    
    October 31,2007
    
    
    2006(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,025,478
    
    
    $
    675,787Short-term investments
    
    
    790,033
    
    
    
    790,500Receivables (net of allowances of $6,347 and $5,574 at January 31,
2007 and October 31, 2006, respectively)
    
    
    146,291
    
    
    
    233,986Prepaid expenses
    
    
    38,099
    
    
    
    32,328Other current assets
    
    
    27,254
    
    
    
    28,524Total current assets
    
    
    2,027,155
    
    
    
    1,761,125Property, plant and equipment, net
    
    
    182,721
    
    
    
    184,084Goodwill
    
    
    420,275
    
    
    
    424,701Intangible assets, net
    
    
    38,980
    
    
    
    40,404Deferred income taxes
    
    
    4,586
    
    
    
    4,770Long-term investments
    
    
    
    
    
    
    2,263Other assets
    
    
    32,391
    
    
    
    32,376Total assets
    
    $
    2,706,108
    
    
    $
    2,449,723LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    41,592
    
    
    $
    44,419Accrued compensation
    
    
    71,031
    
    
    
    103,710Other accrued liabilities
    
    
    101,941
    
    
    
    106,837Income taxes payable
    
    
    47,560
    
    
    
    49,600Deferred revenue
    
    
    425,079
    
    
    
    380,979Total current liabilities
    
    
    687,203
    
    
    
    685,545Deferred income taxes
    
    
    4,119
    
    
    
    4,186Long-term deferred revenue
    
    
    303,285
    
    
    
    45,992Senior convertible debentures
    
    
    600,000
    
    
    
    600,000Total liabilities
    
    
    1,594,607
    
    
    
    1,335,723Redeemable securities:Series B Preferred Stock, $.10 par value, Authorized  1,000 shares;
Outstanding  0 shares at January 31, 2007 and 187 shares at October
31, 2006 (at redemption value)
    
    
    
    
    
    
    9,350Stockholders equity:Common stock, par value $.10 per share, Authorized  600,000,000
shares; Issued  361,750,215 and 358,512,471 shares at January 31,
2007 and October 31, 2006, respectively, Outstanding  346,603,749 and
343,362,534 shares at January 31, 2007 and October 31, 2006,
respectively
    
    
    36,175
    
    
    
    35,851Additional paid-in capital
    
    
    363,794
    
    
    
    338,954Treasury stock, at cost  15,146,466 and 15,149,937 shares at January
31, 2007 and October 31, 2006, respectively
    
    
    (124,655
    )
    
    
    (124,684
    )Retained earnings
    
    
    820,499
    
    
    
    840,449Accumulated other comprehensive income
    
    
    15,688
    
    
    
    14,080Total stockholders equity
    
    
    1,111,501
    
    
    
    1,104,650Total liabilities, redeemable securities and stockholders equity
    
    $
    2,706,108
    
    
    $
    2,449,723
  4




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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006(unaudited)Net revenue:Software licenses
    
    $
    38,351
    
    
    $
    42,102Maintenance, subscriptions, and services
    
    
    191,225
    
    
    
    200,192Total net revenue
    
    
    229,576
    
    
    
    242,294Cost of revenue:Software licenses
    
    
    4,227
    
    
    
    4,545Maintenance, subscriptions, and services
    
    
    69,986
    
    
    
    76,778Total cost of revenue
    
    
    74,213
    
    
    
    81,323Gross profit
    
    
    155,363
    
    
    
    160,971Operating expense (income):Sales and marketing
    
    
    90,872
    
    
    
    88,193Product development
    
    
    46,467
    
    
    
    43,724General and administrative
    
    
    31,157
    
    
    
    28,801Restructuring expenses
    
    
    7,351
    
    
    
    (1,000
    )Impairment of long-lived assets
    
    
    10,848
    
    
    
    Total operating expense
    
    
    186,695
    
    
    
    159,718Income (loss) from operations
    
    
    (31,332
    )
    
    
    1,253Other income (expense):Investment income
    
    
    20,717
    
    
    
    14,854Gain on sale of venture capital funds
    
    
    3,591
    
    
    
    Impairment of investments
    
    
    
    
    
    
    (387
    )Interest expense and other, net
    
    
    (6,249
    )
    
    
    (1,489
    )Total other income
    
    
    18,059
    
    
    
    12,978Income (loss) from continuing operations before income taxes
    
    
    (13,273
    )
    
    
    14,231Income tax expense
    
    
    6,672
    
    
    
    10,001Income (loss) from continuing operations
    
    
    (19,945
    )
    
    
    4,230Loss from discontinued operations before taxes
    
    
    
    
    
    
    (1,043
    )Income tax expense on discontinued operations
    
    
    
    
    
    
    1,322Loss from discontinued operations
    
    
    
    
    
    
    (2,365
    )Net income (loss)
    
    $
    (19,945
    )
    
    $
    1,865Basic earnings per share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income (loss) per share available to common stockholders
    
    $
    (0.06
    )
    
    $
    0.00Diluted earnings per share:Income (loss) from continuing operations
    
    $
    (0.06
    )
    
    $
    0.01Discontinued operations
    
    
    
    
    
    
    (0.01
    )Net income (loss) per share available to common stockholders
    
    $
    (0.06
    )
    
    $
    0.00Weighted-average shares outstanding  basic
    
    
    345,522
    
    
    
    385,787Weighted-average shares outstanding  diluted
    
    
    345,522
    
    
    
    394,534
  5




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NOVELL, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months EndedJanuary 31,
    
    
    January 31,2007
    
    
    2006(unaudited)Cash flows from operating activitiesNet income (loss)
    
    $
    (19,945
    )
    
    $
    1,865Adjustments to reconcile net income (loss) to net cash provided by operating activities:Stock-based compensation expense
    
    
    6,499
    
    
    
    13,695Tax effects of stock-based compensation plans
    
    
    1,986
    
    
    
    4,039Excess tax benefits from stock-based compensation
    
    
    (1,986
    )
    
    
    (4,039
    )Depreciation and amortization
    
    
    11,164
    
    
    
    11,511Increase (decrease) in accounts receivable allowances
    
    
    773
    
    
    
    (2,973
    )Utilization of previously reserved acquired net operating losses
    
    
    2,471
    
    
    
    544Impairment of long-lived assets
    
    
    10,848
    
    
    
    Gain on sale of venture capital funds
    
    
    (3,591
    )
    
    
    Impairment of long-term investments, net of gains on sale
    
    
    (1,738
    )
    
    
    387Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions:Receivables
    
    
    86,922
    
    
    
    111,349Prepaid expenses
    
    
    (5,771
    )
    
    
    (3,921
    )Other current assets
    
    
    1,243
    
    
    
    4,718Deferred income taxes
    
    
    117
    
    
    
    537Accounts payable
    
    
    (2,754
    )
    
    
    (1,843
    )Accrued liabilities
    
    
    (40,103
    )
    
    
    (72,446
    )Deferred revenue
    
    
    301,393
    
    
    
    (38,300
    )Net cash provided by operating activities
    
    
    347,528
    
    
    
    25,123Cash flows from financing activitiesIssuance of common stock, net
    
    
    7,385
    
    
    
    9,876Excess tax benefits from stock-based compensation
    
    
    1,986
    
    
    
    4,039Payment of cash dividends on Series B Preferred Stock
    
    
    (5
    )
    
    
    Net cash provided by financing activities
    
    
    9,366
    
    
    
    13,915Cash flows from investing activitiesPurchases of property, plant and equipment
    
    
    (4,958
    )
    
    
    (7,603
    )Purchases of short-term investments
    
    
    (76,358
    )
    
    
    (228,981
    )Maturities of short-term investments
    
    
    21,937
    
    
    
    24,083Sales of short-term investments
    
    
    54,553
    
    
    
    209,372Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Cash paid for acquisition of RedMojo, net of cash acquired
    
    
    (9,727
    )
    
    
    Cash paid for equity investment in Open Invention Network, LLC
    
    
    
    
    
    
    (4,225
    )Purchases of long-term investments
    
    
    
    
    
    
    (2,462
    )Proceeds from the sales of and distributions from long-term investments
    
    
    1,738
    
    
    
    2,206Other
    
    
    648
    
    
    
    2,462Net cash used in investing activities
    
    
    (7,203
    )
    
    
    (5,148
    )Increase in cash and cash equivalents
    
    
    349,691
    
    
    
    33,890Cash and cash equivalents  beginning of period
    
    
    675,787
    
    
    
    811,238Cash and cash equivalents  end of period
    
    $
    1,025,478
    
    
    $
    845,128Supplemental disclosure of non-cash activities:Conversion of Series B Preferred Stock to Common Stock
    
    $
    9,350
    
    
    $
    Contribution of patents to Open Invention Network, LLC
    
    $
    
    
    
    $
    14,383
  6




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NOVELL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 January 31, 2007
 A. Quarterly Financial Statements
  Reclassifications
  B. Significant Accounting Policies
 Recognition Policy  Microsoft Agreements-related Revenue
    
    
    Development of technologies to optimize SLES and Windows, each running as guests in a
virtualized setting on the other operating system;
    
    Development of management tools for managing heterogeneous virtualization environments,
to enable each partys management tools to command, control and configure the other partys
operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and
OpenOffice document formats; and
    
    Collaboration on improving directory and identity interoperability and identity
management between Microsoft Active Directory software and Novell eDirectory software.
  7




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C. Acquisitions
 RedMojo
   Estimated
    
    
    EstimatedFair Value
    
    
    Useful Life(In thousands)Identifiable intangible assets:Developed technology
    
    $
    2,370
    
    
    3 yearsGoodwill
    
    
    7,554
    
    
    IndefiniteTotal net assets acquired
    
    $
    9,924
     8




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D. Microsoft Agreements
   E. Cash, Cash Equivalents, and Short-Term Investments
     Fair Market(In thousands)
    
    Cost
    
    
    ValueLess than one year
    
    $
    245,842
    
    
    $
    244,161Due in one to two years
    
    
    175,097
    
    
    
    173,372Due in two to three years
    
    
    101,676
    
    
    
    101,222Due in more than three years
    
    
    186,919
    
    
    
    186,320No contractual maturity
    
    
    84,401
    
    
    
    84,958Total short-term investments
    
    $
    793,935
    
    
    $
    790,033
  Three months endedJanuary 31,
    
    January 31,(In thousands)
    
    2007
    
    2006Realized gains
    
    $
    105
    
    
    $
    126Realized losses
    
    $
    337
    
    
    $
    1,222
  9




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##### Table of Contents



F. Long-Term Investments
  G. Goodwill and Intangible Assets
 Goodwill
  January 31,
    
    
    October 31,2007
    
    
    2006(In thousands)SUSE
    
    $
    172,086
    
    
    $
    172,086SilverStream
    
    
    106,042
    
    
    
    108,253e-Security
    
    
    59,990
    
    
    
    59,699Ximian
    
    
    32,605
    
    
    
    32,605Tally
    
    
    14,909
    
    
    
    14,909Immunix
    
    
    13,967
    
    
    
    14,227Salmon
    
    
    2,106
    
    
    
    11,906RedMojo
    
    
    7,554
    
    
    
    Onward Novell
    
    
    2,010
    
    
    
    2,010Other technology companies
    
    
    9,006
    
    
    
    9,006Total goodwill
    
    $
    420,275
    
    
    $
    424,701
  
    
    Open platform solutions;
    
    Systems and resource management;
    
    Identity and security management;
    
    Workgroup; and
    
    Business consulting.
  
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
  (In thousands)
    
    Americas
    
    
    EMEA
    
    
    Asia Pacific
    
    
    TotalOpen platform solutions
    
    $
    35,565
    
    
    $
    32,394
    
    
    $
    7,960
    
    
    $
    75,919Systems and resource management
    
    
    72,688
    
    
    
    30,023
    
    
    
    525
    
    
    
    103,236Identity and security management
    
    
    14,120
    
    
    
    62,576
    
    
    
    10,640
    
    
    
    87,336Workgroup
    
    
    104,766
    
    
    
    29,075
    
    
    
    8,513
    
    
    
    142,354Business consulting
    
    
    
    
    
    
    15,856
    
    
    
    
    
    
    
    15,856Balance as of November 1, 2006
    
    $
    227,139
    
    
    $
    169,924
    
    
    $
    27,638
    
    
    $
    424,701
 10




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##### Table of Contents



Systems and
    
    
    Identity andOpen Platform
    
    
    Resource
    
    
    Security
    
    
    
    
    
    
    Business(In thousands)
    
    Solutions
    
    
    Management
    
    
    Management
    
    
    Workgroup
    
    
    Consulting
    
    
    TotalBalance as of October 31, 2006
    
    $
    75,919
    
    
    $
    103,236
    
    
    $
    87,336
    
    
    $
    142,354
    
    
    $
    15,856
    
    
    $
    424,701RedMojo acquisition
    
    
    
    
    
    
    7,554
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,554Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,207
    )
    
    
    (10,207
    )Adjustments
    
    
    (400
    )
    
    
    (544
    )
    
    
    (462
    )
    
    
    (754
    )
    
    
    387
    
    
    
    (1,773
    )Balance as of January 31, 2007
    
    $
    75,519
    
    
    $
    110,246
    
    
    $
    86,874
    
    
    $
    141,600
    
    
    $
    6,036
    
    
    $
    420,275
   Intangible Assets
  January 31, 2007
    
    
    October 31, 2006Gross
    
    
    Accumulated
    
    
    Net Book
    
    
    Gross
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Asset Lives(In thousands)Developed technology
    
    $
    33,299
    
    
    $
    (22,366
    )
    
    $
    10,933
    
    
    $
    30,929
    
    
    $
    (21,128
    )
    
    $
    9,801
    
    
    3-4 yearsTrademarks and trade names
    
    
    24,731
    
    
    
    (174
    )
    
    
    24,557
    
    
    
    24,731
    
    
    
    (131
    )
    
    
    24,600
    
    
    3 years or IndefiniteCustomer/contractual relationships
    
    
    22,436
    
    
    
    (18,982
    )
    
    
    3,454
    
    
    
    23,002
    
    
    
    (17,381
    )
    
    
    5,621
    
    
    3 yearsInternal use software
    
    
    5,193
    
    
    
    (5,157
    )
    
    
    36
    
    
    
    5,193
    
    
    
    (4,921
    )
    
    
    272
    
    
    3 yearsNon-compete agreement
    
    
    347
    
    
    
    (347
    )
    
    
    
    
    
    
    422
    
    
    
    (312
    )
    
    
    110
    
    
    3 yearsTotal intangible assets
    
    $
    86,006
    
    
    $
    (47,026
    )
    
    $
    38,980
    
    
    $
    84,277
    
    
    $
    (43,873
    )
    
    $
    40,404
    H. Income Taxes
  11




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I. Line of Credit
   J. Restructuring and Merger Liabilities
 Restructuring Liabilities
   12




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Fiscal 2007
    
    
    Fiscal 2006
    
    
    Fiscal 2005
    
    
    Fiscal 2004
    
    
    Fiscal 2003
    
    
    Fiscal 2002(In thousands)
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructurings
    
    
    Restructuring
    
    
    Restructuring
    
    
    TotalBalance at October
31, 2006:Workforce reductions
    
    $
    
    
    
    $
    3,097
    
    
    $
    1,333
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,430Excess facilities,
property and equipment
    
    
    
    
    
    
    15
    
    
    
    3,866
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    9,206Other
restructuring-related
costs
    
    
    
    
    
    
    128
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    185Total restructuring
reserve balance
    
    
    
    
    
    
    3,240
    
    
    
    5,256
    
    
    
    877
    
    
    
    2,212
    
    
    
    2,236
    
    
    
    13,821Adjustments/Original
Charge:Workforce reductions
    
    
    6,512
    
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,352Excess facilities,
property and equipment
    
    
    747
    
    
    
    
    
    
    
    126
    
    
    
    
    
    
    
    (60
    )
    
    
    (102
    )
    
    
    711Other
restructuring-related
costs
    
    
    282
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Total adjustments/
Original Charge
    
    
    7,541
    
    
    
    (160
    )
    
    
    132
    
    
    
    
    
    
    
    (60
    )
    
    
    (102
    )
    
    
    7,351Payments:Workforce reductions
    
    
    (4,127
    )
    
    
    (2,360
    )
    
    
    (164
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,651
    )Excess facilities,
property and equipment
    
    
    (747
    )
    
    
    (15
    )
    
    
    (93
    )
    
    
    (125
    )
    
    
    (476
    )
    
    
    (180
    )
    
    
    (1,636
    )Other
restructuring-related
costs
    
    
    (73
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100
    )Total payments
    
    
    (4,947
    )
    
    
    (2,402
    )
    
    
    (257
    )
    
    
    (125
    )
    
    
    (476
    )
    
    
    (180
    )
    
    
    (8,387
    )Balance at January 31,
2007:Workforce reductions
    
    
    2,385
    
    
    
    577
    
    
    
    1,169
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,131Excess facilities,
property and equipment
    
    
    
    
    
    
    
    
    
    
    3,899
    
    
    
    752
    
    
    
    1,676
    
    
    
    1,954
    
    
    
    8,281Other
restructuring-related
costs
    
    
    209
    
    
    
    101
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373Total restructuring
reserve balance
    
    $
    2,594
    
    
    $
    678
    
    
    $
    5,131
    
    
    $
    752
    
    
    $
    1,676
    
    
    $
    1,954
    
    
    $
    12,785
  Merger Liabilities
  Balance at
    
    
    
    
    
    
    
    
    
    
    Balance atOctober 31,
    
    
    Additions From
    
    
    Payments/
    
    
    January 31,(In thousands)
    
    2006
    
    
    Acquisitions
    
    
    adjustments
    
    
    2007Facilities related
    
    $
    14,457
    
    
    $
    
    
    
    $
    (280
    )
    
    $
    14,177Employee related
    
    
    85
    
    
    
    
    
    
    
    (85
    )
    
    
    Other
    
    
    102
    
    
    
    149
    
    
    
    346
    
    
    
    597Total merger liabilities
    
    $
    14,644
    
    
    $
    149
    
    
    $
    (19
    )
    
    $
    14,774
  13




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K. Senior Convertible Debentures
    L. Guarantees
    14




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##### Table of Contents



M. Legal Proceedings
     15




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##### Table of Contents



N. Redeemable Preferred Stock
  16




---



##### Table of Contents



O. Net Income (Loss) Per Share From Continuing Operations Available to Common Stockholders
  Three Months EndedJanuary 31,
    
    
    January 31,(In thousands, except per share data)
    
    2007
    
    
    2006Basic net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (19,945
    )
    
    $
    4,230Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Allocation of earnings to holders of Series B Preferred Stock
    
    
    
    
    
    
    (16
    )Net income (loss) from continuing operations attributable to
common stockholders
    
    $
    (19,945
    )
    
    $
    4,167Weighted-average common shares outstanding, excluding unvested
restricted stock
    
    
    345,522
    
    
    
    385,787Basic net income (loss) per share from continuing operations
attributable to common stockholders
    
    $
    (0.06
    )
    
    $
    0.01Diluted net income (loss) per share computation:Net income (loss) from continuing operations
    
    $
    (19,945
    )
    
    $
    4,230Dividends on Series B Preferred Stock
    
    
    
    
    
    
    (47
    )Allocation of earnings to the holders of Series B Preferred Stock
    
    
    
    
    
    
    (16
    )Diluted net income (loss) from continuing operations
attributable to common stockholders
    
    $
    (19,945
    )
    
    $
    4,167Weighted-average common shares outstanding
    
    
    345,522
    
    
    
    385,787Incremental shares attributable to the assumed exercise of
outstanding options, unvested restricted stock, and other stock
plans
    
    
    
    
    
    
    8,747Total adjusted weighted-average common shares
    
    
    345,522
    
    
    
    394,534Diluted net income (loss) per share from continuing operations
attributable to common stockholders
    
    $
    (0.06
    )
    
    $
    0.01
  P. Comprehensive Income
  Three Months EndedJanuary 31,
    
    
    January 31,(In thousands)
    
    2007
    
    
    2006Net income (loss)
    
    $
    (19,945
    )
    
    $
    1,865Change in net unrealized loss on investments
    
    
    (335
    )
    
    
    1,270Change in pension liability
    
    
    
    
    
    
    106Change in cumulative translation adjustments
    
    
    1,943
    
    
    
    641Comprehensive income (loss)
    
    $
    (18,337
    )
    
    $
    3,882
 17




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##### Table of Contents



January 31,
    
    
    October 31,2007
    
    
    2006(In thousands)Net unrealized loss on investments
    
    $
    (3,902
    )
    
    $
    (3,567
    )Cumulative translation adjustment
    
    
    19,590
    
    
    
    17,647Total accumulated other comprehensive income
    
    $
    15,688
    
    
    $
    14,080
 Q. Stock-Based Compensation
 Share-Based
Payment
   Quarter ended(shares/units in 000s)
    
    January 31, 2007
    
    January 31, 2006Stock options:Performance-based
    
    
    701
    
    
    
    1,036Time-based
    
    
    1,609
    
    
    
    1,225Restricted stock:Performance-based
    
    
    
    
    
    
    175Time-based
    
    
    
    
    
    
    275Restricted stock units:Performance-based
    
    
    175
    
    
    
    34Time-based
    
    
    571
    
    
    
    34
 Stock Options
 Performance-based.
 Time-based.
 Restricted Stock
 Performance-based.
 Time-based
 18




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##### Table of Contents



Restricted Stock Units
 Performance-based
 Time-based.
   Three months ended
    
    
    Three months ended(In thousands)
    
    January 31, 2007
    
    
    January 31, 2006Cost of revenue
    
    $
    1,047
    
    
    $
    1,062Sales and marketing
    
    
    1,860
    
    
    
    3,532Product development
    
    
    2,151
    
    
    
    2,637General and administrative
    
    
    1,441
    
    
    
    6,271Operating expense
    
    
    5,452
    
    
    
    12,440Tax benefit
    
    
    
    
    
    
    Stock compensation expense from
continuing operations
    
    
    6,499
    
    
    
    13,502Discontinued Operations
    
    
    
    
    
    
    193Total stock compensation expense
    
    $
    6,499
    
    
    $
    13,695
  Employee Stock Purchase Plan
  R. Segment Information
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
  19




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
    
    Americas  included the United States, Canada and Latin America
    
    EMEA  included Eastern and Western Europe, Middle East, and Africa
    
    Asia Pacific  included China, Southeast Asia, Australia, New Zealand, Japan, and India
  Three
Months EndedJanuary
31, 2007
    
    

January
31, 2006Operating
    
    
    
    
    
    
    
    
    
    
    Operating(in thousands)
    

Net revenue
    
    

Gross Profit
    
    

income (loss)
    
    

Net revenue
    
    

Gross Profit
    
    

income (loss)Open platform solutions
    
    $
    23,634
    
    
    $
    15,036
    
    
    $
    2,673
    
    
    $
    17,302
    
    
    $
    10,349
    
    
    $
    (1,100
    )Systems and resource
management
    
    
    42,275
    
    
    
    33,686
    
    
    
    26,393
    
    
    
    42,444
    
    
    
    34,409
    
    
    
    27,566Identity and security
management
    
    
    47,615
    
    
    
    18,937
    
    
    
    3,870
    
    
    
    50,273
    
    
    
    20,176
    
    
    
    6,911Workgroup
    
    
    104,862
    
    
    
    86,267
    
    
    
    74,587
    
    
    
    118,335
    
    
    
    93,136
    
    
    
    80,969Business consulting
    
    
    11,190
    
    
    
    1,437
    
    
    
    1,437
    
    
    
    13,940
    
    
    
    2,901
    
    
    
    2,901Unallocated stock compensation
    
    
    
    
    
    
    
    
    
    
    (6,499
    )
    
    
    
    
    
    
    
    
    
    
    (13,695
    )Common unallocated operating
costs
    
    
    
    
    
    
    
    
    
    
    (133,793
    )
    
    
    
    
    
    
    
    
    
    
    (102,299
    )Total per statements of
operations
    
    $
    229,576
    
    
    $
    155,363
    
    
    $
    (31,332
    )
    
    $
    242,294
    
    
    $
    160,971
    
    
    $
    1,253
   S. Derivative Instruments
   T. Discontinued Operations
  20




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U. Recent Accounting Pronouncements
    V. Subsequent Events
  21




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##### Table of Contents



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 law, 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 2006 filed with the Securities and Exchange Commission on
May 25, 2007. Readers should carefully review the risk factors described in the Annual Report on
Form 10-K for fiscal 2006 and in other documents that we file from time to time with the Securities
and Exchange Commission.
 Introduction
    Open Platform Solutions.
  
    
    SUSE Linux Enterprise Server 10
    
    SUSE Linux Enterprise Desktop 10
    
    openSUSE (formerly SUSE LINUX Professional)
    
    SUSE Engineering
 Systems and Resource Management.
 22




---



##### Table of Contents




    
    ZENworks Suite
    
    ZENworks Patch Management
    
    ZENworks Asset Management
    
    ZENworks Linux Management
 Identity and Security Management.
  
    
    Identity Manager
    
    Access Manager
    
    SecureLogin
    
    Sentinel
    
    eDirectory
 Workgroup.
  
    
    Novell Open Workgroup Suite
    
    Open Enterprise Server (OES)
    
    GroupWise
    
    NetWare
 Overview
  
    
    Open platform solutions
    
    Systems and resource management
    
    Identity and security management
    
    Workgroup
    
    Business consulting
  
    
    Within our open platform solutions business unit, Linux and Open Source products
remain an important growth business. Revenues from our Linux platform products
increased 46% year over year during the first quarter of fiscal 2007. In November
2006, we announced a significant partnership with Microsoft. While the agreement did
not
 23




---



##### Table of Contents



significantly impact recognized revenue in the quarter, a number of deals were signed
during the quarter which contributed to record invoicing levels. The momentum from the
Microsoft agreements remains strong. We expect strong revenue performance in open
platform solutions in fiscal 2007.
    
    Systems and resource management products continue to be an important part of our
product offering. As IT environments become more complex, the need to automate the
management and tracking of IT assets increases. We believe our solutions uniquely meet
these needs. In addition, we expect to release our data center automation offering at
the end of the year which will further enhance our systems and resource management
product offerings.
    
    We continue to grow our position in the Identity and Security Management market. We
expect to launch significant, new enhancements for our Identity Manager and Sentinel
solutions in the first half of this year. We expect strong revenue growth, in excess
of market growth rates, in fiscal 2007.
    
    We continue to manage the decline of our revenue from our Workgroup products, such
as OES and NetWare and NetWare-related products. Our Workgroup revenue base is an
important source of cash flow and provides us potential opportunity to sell additional
products and services. Our Workgroup business declined by 11% during the first
quarter of fiscal 2007 compared to the same period a year ago.
   Critical Accounting Policies
 Recognition Policy 
 Microsoft Agreements-related Revenue
    
    
    Development of technologies to optimize SLES and Windows, each running as guests in a
virtualized setting on the other operating system;
    
    Development of management tools for managing heterogeneous virtualization environments,
to enable each partys management tools to command, control and configure the other partys
operating system in a virtual machine environment;
    
    Development of translators to improve interoperability between Microsoft Office and
OpenOffice document formats; and
 24




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##### Table of Contents




    
    Collaboration on improving directory and identity interoperability and identity
management between Microsoft Active Directory software and Novell eDirectory software.
    Acquisitions
 RedMojo
  Results of Operations
 Revenue
  Three
Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    38,351
    
    
    $
    42,102
    
    
    
    (9
    )%Maintenance, subscriptions, and services
    
    
    191,225
    
    
    
    200,192
    
    
    
    (4
    )%Total net revenue
    
    $
    229,576
    
    
    $
    242,294
    
    
    
    (5
    )%
  25




---



##### Table of Contents




    
    Open platform solutions. Products include:
 
    
    Linux platform products  major products include SUSE Linux Enterprise Server
and our SUSE Linux Enterprise Desktop
    
    Other open platform products  major products include SUSE Linux Professional
 
    
    Systems and resource management. Products include:
 
    
    ZENworks
 
    
    Identity and security management. Products include:
 
    
    Identity and access management major products include Identity Manager, Secure Login, and Sentinel
    
    Other identity and security management products  major products include eDirectory and web services
 
    
    Workgroup. Products include:
 
    
    Open Enterprise Server (OES)
    
    NetWare and other NetWare-related  major products include NetWare and Cluster Services
    
    Collaboration  major products include GroupWise
    
    Other workgroup  major products include BorderManager and Novell iFolder
 
    
    Business consulting  Non-Novell product-related, general business consulting.
 Net revenue in the open platform solutions segment was as follows:
 Three Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    194
    
    
    $
    404
    
    
    
    (52
    )%Maintenance, subscriptions, and services
    
    
    17,193
    
    
    
    12,723
    
    
    
    35
    %Global services
    
    
    6,247
    
    
    
    4,175
    
    
    
    50
    %Total net revenue
    
    $
    23,634
    
    
    $
    17,302
    
    
    
    37
    %
  Net revenue in the systems and resource management segment was as follows:
 Three Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    7,465
    
    
    $
    6,372
    
    
    
    17
    %Maintenance, subscriptions, and services
    
    
    24,697
    
    
    
    26,786
    
    
    
    (8
    )%Global services
    
    
    10,113
    
    
    
    9,286
    
    
    
    9
    %Total net revenue
    
    $
    42,275
    
    
    $
    42,444
    
    
    
    
    %
 26




---



##### Table of Contents



Net revenue in the identity and security management segment was as follows:
 Three Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    11,407
    
    
    $
    12,717
    
    
    
    (10
    )%Maintenance, subscriptions, and services
    
    
    16,021
    
    
    
    17,129
    
    
    
    (6
    )%Global services
    
    
    20,187
    
    
    
    20,427
    
    
    
    (1
    )%Total net revenue
    
    $
    47,615
    
    
    $
    50,273
    
    
    
    (5
    )%
  Net revenue in the workgroup segment was as follows:
 Three Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    19,285
    
    
    $
    22,609
    
    
    
    (15
    )%Maintenance, subscriptions, and services
    
    
    61,195
    
    
    
    67,846
    
    
    
    (10
    )%Global services
    
    
    24,382
    
    
    
    27,880
    
    
    
    (13
    )%Total net revenue
    
    $
    104,862
    
    
    $
    118,335
    
    
    
    (11
    )%
  Net revenue in the business consulting segment was as follows:
 Three Months EndedJanuary 31,
    
    
    January 31,(dollars in thousands)
    
    2007
    
    
    2006
    
    
    ChangeSoftware licenses
    
    $
    
    
    
    $
    
    
    
    
    
    %Maintenance, subscriptions, and services
    
    
    
    
    
    
    
    
    
    
    
    %Global services
    
    
    11,190
    
    
    
    13,940
    
    
    
    (20
    )%Total net revenue
    
    $
    11,190
    
    
    $
    13,940
    
    
    
    (20
    )%
  Deferred revenue
  27




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##### Table of Contents



Gross profit
 Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006
    
    ChangeSoftware licenses gross profit
    
    $
    34,124
    
    
    $
    37,557
    
    
    
    (9
    )%percentage of related revenue
    
    
    89
    %
    
    
    89
    %Maintenance, subscriptions, and
services gross profit
    
    $
    121,239
    
    
    $
    123,414
    
    
    
    (2
    )%percentage of related revenue
    
    
    63
    %
    
    
    62
    %Total gross profit
    
    $
    155,363
    
    
    $
    160,971
    
    
    
    (3
    )%percentage of revenue
    
    
    68
    %
    
    
    66
    %
    Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006
    
    ChangeOpen platform solutions
    
    $
    15,036
    
    
    $
    10,349
    
    
    
    45
    %percentage of related revenue
    
    
    64
    %
    
    
    60
    %Systems and resource management
    
    $
    33,686
    
    
    $
    34,409
    
    
    
    (2
    )%percentage of related revenue
    
    
    80
    %
    
    
    81
    %Identity and security management
    
    $
    18,937
    
    
    $
    20,176
    
    
    
    (6
    )%percentage of related revenue
    
    
    40
    %
    
    
    40
    %Workgroup
    
    $
    86,267
    
    
    $
    93,136
    
    
    
    (7
    )%percentage of related revenue
    
    
    82
    %
    
    
    79
    %Business consulting
    
    $
    1,437
    
    
    $
    2,901
    
    
    
    (50
    )%percentage of related revenue
    
    
    13
    %
    
    
    21
    %Total gross profit
    
    $
    155,363
    
    
    $
    160,971
    
    
    
    (3
    )%percentage of revenue
    
    
    68
    %
    
    
    66
    %
  28




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Operating expenses
 Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006
    
    ChangeSales and marketing
    
    $
    90,872
    
    
    $
    88,193
    
    
    
    3
    %percentage of revenue
    
    
    40
    %
    
    
    36
    %Product development
    
    $
    46,467
    
    
    $
    43,724
    
    
    
    6
    %percentage of revenue
    
    
    20
    %
    
    
    18
    %General and administrative
    
    $
    31,157
    
    
    $
    28,801
    
    
    
    8
    %percentage of revenue
    
    
    14
    %
    
    
    12
    %Restructuring expenses
    
    $
    7,351
    
    
    $
    (1,000
    )
    
    
    
    %percentage of revenue
    
    
    3
    %
    
    
    
    %Impairments
    
    $
    10,848
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    5
    %
    
    
    
    %Total operating expenses
    
    $
    186,695
    
    
    $
    159,718
    
    
    
    17
    %percentage of revenue
    
    
    81
    %
    
    
    66
    %
      29




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##### Table of Contents



Other income (expense)
 Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006
    
    ChangeInvestment income
    
    $
    20,717
    
    
    $
    14,854
    
    
    
    39
    %percentage of revenue
    
    
    9
    %
    
    
    6
    %Gain on sale of venture capital funds
    
    $
    3,591
    
    
    $
    
    
    
    
    
    %percentage of revenue
    
    
    2
    %
    
    
    
    %Impairment of investments
    
    $
    
    
    
    $
    (387
    )
    
    
    
    %percentage of revenue
    
    
    
    %
    
    
    
    %Interest expense and other, net
    
    $
    (6,249
    )
    
    $
    (1,489
    )
    
    
    
    %percentage of revenue
    
    
    (3
    )%
    
    
    (1
    )%Total other income
    
    $
    18,059
    
    
    $
    12,978
    
    
    
    39
    %percentage of revenue
    
    
    8
    %
    
    
    5
    %
   .
 Income tax (benefit) expense on income from continuing operations
 Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006
    
    ChangeIncome tax expense
    
    $
    6,672
    
    
    $
    10,001
    
    
    
    (33
    )%percentage of related revenue
    
    
    3
    %
    
    
    4
    %Effective tax rate
    
    
    50
    %
    
    
    70
    %
  30




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##### Table of Contents



Net income (loss) components
 Three Months EndedJanuary 31,
    
    January 31,(dollars in thousands)
    
    2007
    
    2006Income (loss) from continuing operations
    
    $
    (19,945
    )
    
    $
    4,230Loss from discontinued operations, net of tax
    
    $
    
    
    
    $
    (2,365
    )Net income (loss)
    
    $
    (19,945
    )
    
    $
    1,865
  Liquidity and Capital Resources
 (dollars in thousands)
    
    January 31, 2007
    
    October 31, 2006
    
    ChangeCash, cash equivalents and short-term investments
    
    $
    1,815,511
    
    
    $
    1,466,287
    
    
    
    24
    %Percent of total assets
    
    
    67
    %
    
    
    60
    %
 31




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##### Table of Contents



Three Months Ended(in thousands)
    
    January 31, 2007
    
    January 31, 2006Cash provided by operating activities
    
    $
    347,528
    
    
    $
    25,123Issuance of common stock, net
    
    
    7,385
    
    
    
    9,876Purchases of property, plant and equipment
    
    
    (4,958
    )
    
    
    (7,603
    )Proceeds from the sale of venture capital funds
    
    
    4,964
    
    
    
    Cash paid for acquisitions, net of cash acquired
    
    
    (9,727
    )
    
    
    Cash paid for equity investment in OIN
    
    
    
    
    
    
    (4,225
    )Other long-term investing activities
    
    
    648
    
    
    
    2,462
        32




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##### Table of Contents



Recent Accounting Pronouncements
    Subsequent Events
  33




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Interest Rate Risk
  Market Risk
  Foreign Currency Risk
    34




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##### Table of Contents



Item 4. Controls and Procedures
     
 Part II. Other Information
  
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 6. Exhibits
  ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification31.2
    
    Rule 13a-14(a) Certification32.1
    
    18 U.S.C. Section 1350 Certification32.2
    
    18 U.S.C. Section 1350 Certification
 35




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##### Table of Contents



SIGNATURES
  Novell, Inc. (Registrant)Date: May 25, 2007
    By:
    /s/ DANA C. RUSSELLDana C. RussellSenior  Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) 36




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description31.1
    
    Rule 13a-14(a) Certification31.2
    
    Rule 13a-14(a) Certification32.1
    
    18 U.S.C. Section 1350 Certification32.2
    
    18 U.S.C. Section 1350 Certification