思杰系統 (CTXS) 2002 Q3 法說會逐字稿

Good afternoon. My name is Cody and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Third Quarter Earnings Conference Call. All lines have been placed on "Mute" to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press "star" then the number "1" on your telephone keypad. If you would like to withdraw your question, press the "#" key. Thank you. I would now like to introduce Mr. Jeff Lilly, Manager of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you, Cody. Good afternoon, and thank you to everyone for joining us for our Third Quarter 2002 Earnings Conference Call. Participating in the call today are Mark Templeton, our President and Chief Executive Officer, and David Urbani, Acting Chief Financial Officer and Vice President, Corporate Controller. For those of you with access to the Internet, this call is being webcast with a virtual slide presentation at citrix.com/investors. Some of you may have connected to the webcast early and picked up a link to the prior webcast. Please make sure that the title reads "Q3 2002 Citrix Earnings Call." If not, please reselect the link at citrix.com/investors and it will bring up the appropriate URL for the webcast. The slide presentation itself will be posted to our website shortly after the call is completed. A replay of the call and webcast will be available through Tuesday, October 29.

As we get started, please note that certain comments made during the call may be characterized as forward-looking statements made pursuant to the Safe Harbor provision of Section 21(e) of the Securities and Exchange Act of 1934. Those statements involve a number of factors that could cause actual results to differ materially, including risks associated with the company's business involving the company's products, their development and distribution, economic and competitive factors, and the company's key strategic relationships. Additional information concerning these factors is highlighted in the slide presentation, earnings press release, and the company's filings with the SEC. Copies of the company's SEC filings are available from the SEC or the company's investor relations website.

Now, I'd like to introduce Mark Templeton, President and Chief Executive Officer of Citrix Systems.

Thanks, Jeff. And thanks everyone for joining the call this afternoon. Our overall results for Q3 exceeded our expectations and we achieved all the goals we set out for the quarter. So we are pleased with $119 million in revenue, which is above the top end of the guidance we gave in July. Our revenue reflects end customer demand that was roughly flat to Q2, as well as the further inventory reductions by our distributors, which we expected.

During Q3, we took significant actions to reduce expenses. With these changes behind us we are reporting a better than expected EPS of 10 cents. Sequentially, this is good improvement in reported licensing revenue, lower operating expenses, higher operating income, and better EPS performance. The year-over-year comparables, on the other hand, are pretty tough. This is mostly due to last year's strong growth after the launch of the MetaFrame XP family, the recent expiration of the amortization of Microsoft royalties, and the weaker packaged product business through the first half of this year.

In July, we committed to three initiatives to improve our performance. First, we announced go-to-market changes to our channel partners. We got that done. Channel pruning, tuning, incentives, and licensing programs are now in place. Second, we said we would continue to bring the server inventories down. We got that done. With worldwide inventories now slightly below 30 days on-hand allowing us to further extend our Easy Licensing programs to better meet customer needs. And third, we committed to operating expenses more in line with end customer sales. We got that done, with actual expenses down 5 percent from Q2 on an adjusted basis. So it was a good quarter for getting things done, and our financial and operating results clearly show it.

As you listen to the rest of the call, there are five points we hope you'll take away. First, packaged product, 64 percent of our licensing revenue, reversed its three-quarter downward trend. Second, we improved our financial performance over Q2 across a wide array of metrics. Third, go-to-market changes are in place and significant inventory adjustments are complete. Fourth, NFuse Elite revenue, having just completed its first full quarter of sales, is taking longer to ramp. But the metrics around piloting and early adoption look promising. And fifth, we are entering Q4 with good fundamentals in product, channel, and financial areas that should help us achieve our near term objectives.

Dave and I will try to address all of these areas for you during our prepared comments today. Before getting to the financials, I would like to mention that Marv Adams has decided to leave the Citrix Board as a result of increased responsibility at Ford Motor Company. As CIO of Ford, Marv has made a great contribution since joining us as part of the Sequoia acquisition. He's helped us better understand large account selling, detail trends, and IT spending, and he helped guide us through the introduction of NFuse Elite. Marv takes all of his commitments quite seriously, inside and outside of Ford. So we fully understand the issues of balancing his expanded CIO role and the increasing time commitment required by all directors of public firms. Marv, thanks for your energy, honesty, and wisdom. We wish you the very, very best.

Next, our acting CFO, Dave Urbani, will discuss our financial results, and then I'll be back to further discuss Q3 and the outlook. After that, we'll be available for some Q&A. Dave?

Thank you, Mark, and good afternoon. In my comments, I will discuss the performance of the third quarter and discuss its effects on the income statement, balance sheet, and cash flow statement. I should note that all numbers discussed are adjusted to exclude the effects of amortization of intangible assets. Total net revenue for this quarter was $118.9 million compared to $153.5 last year, and $117.5 last quarter. Geographically, the Americas region, which includes the U.S., Canada, and Latin America, accounted for 51 percent of our third quarter revenues, while EMEA accounted for 40 percent, and Asia Pacific accounted for 9 percent.

Product revenue was $108.4 million compared to $132.5 million last year, and $102 million last quarter. This is a sequential improvement of 6 percent. Services revenue was $10.5 million for the quarter. Total operating expenses, excluding amortization of intangibles, were $94.5 million. These expenses were down 5 percent from last quarter and down 4 percent from last year. We did not report a separate restructuring charge for the quarter, so charges and related savings associated with the work force reduction are reflected in the operating expenses as reported.

I'll now go through the individual items of expenses. Research and development expenses were sequentially flat. The net reduced payroll costs were partially offset by approximately $2 million of one-time charges related to the Columbia, Maryland R&D facility. Sales, marketing, and service expenses were down $5 million sequentially, primarily due to the reduction in spending for marketing programs. Again, payroll savings were offset by severance costs associated with the reduction in force. P&A expenses were sequentially flat. This includes the gain of the dead buyback activities which was offset by accounts receivable provisions.

Our operating margin for the third quarter was 16.8 percent. We expect further operating expenses reduction in the fourth quarter due to the non-recurring severance charges mentioned previously. This will help us continue to improve operating margins. Longer term, we believe our operating models can support close to the 30 percent operating margin that we would like to target.

Other income was $1.9 million. This increased from last quarter due to the reduction in translation currency losses and investment layoffs when compared to the second quarter. Higher interest income, despite lower average cash balances, were observed as well as lower interest costs due to reduction in debt.

Taxes for the quarter were approximately $4.5 million reflecting a 21 percent adjusted tax rate for the third quarter. Year-to-date, our tax expense is roughly $12.3 million, which equates to a 17 percent rate for the same period. We expect our effective tax rate on an adjusted basis for the full year to remain at 17 percent.

Adjusted net income was $17.4 million, or 10 cents a share. This calculation is based on a weighted average fully diluted common shares outstanding of $175.9 million. Actual shares outstanding as of September 30 were $171.6 million.

Moving on to the balance sheet. Total cash investments were $672.5 million at the end of the quarter. This is a decline of about $47 million, which was the result of our repurchasing activities of shares and convertible bonds. We'll address this in more detail later. Net accounts receivable balance was about $51.9 million, which yields a DSO calculation of 39 days. This decrease in DSO's was driven by a relatively even sales profile for the quarter and improved receivable collections.

Deferred product revenue and service revenue increased $6 million sequentially to $93.8 million. This increase is due to increasing adoption of subscription vantage sales and renewals by our customers. These sales are deferred and typically recognized ratably for 12 months after fulfillment of the sale.

Cash flow from operations for the quarter was strong at $64 million, exceeding that of last quarter, which was $33 million. The principal difference was the tax benefit mentioned in the release and the net reduction of certain working capital accounts. This tax benefit resulted from the new tax law passed by Congress that, among other provisions, permits corporate taxpayers to carry losses back from 2001 and 2002 an additional three years. The tax losses Citrix incurred in 2001 resulted in some employee stock option exercises.

In connection with our share repurchase program, during the third quarter we repurchased approximately 7 million shares with an average price of $5.56. The company also made commitments to its structured programs of $25 million to purchase up to 4.5 million shares by February of '03, $25 million to purchase 4.8 million shares by December of '02, and there are currently 600,000 put warrants outstanding resulting in a potential cash obligation of $3.6 million. Additionally, the company repurchased $59 million of face value of the convertible debentures spending approximately $22.7 million. The company recognized a $1.6 million gain associated with this transaction and, as mentioned previously, this gain is reflected as a reduction in G&A expenses on the income statement.

There is currently approximately 100 million in remaining authority under the company's current repurchase program. While the stated purpose for our share repurchase program is to manage dilution, at the average price exhibited during this past quarter we view our share repurchase activity as a way to add value to shareholders. We intend to resume our repurchase activity when our trading window reopens.

In summing up the financial performance for the quarter, we have taken a two-step approach to deliver improving the bottom line. We responded to the challenging environment by significantly reducing operating costs, which will be more evident next quarter. The actions we took will not impede our growth in the future. We used our cash balances and strong cash flows during the quarter to be opportunistic in reducing share count so that the increasing net income in the future will be leveraged into yet higher EPS. We feel we are in good shape to weather the current downturn and will be able to respond to improving conditions when they occur.

Now let me turn it back to Mark.

Thank you, Dave. Next, I would like to highlight three areas of our Q3 business results. Product trends and revenue mix, go-to-market and licensing programs, and an update on the NFuse Elite access portal. Our end customer revenue mix for the quarter between licensing and services ran similar to the last few quarters: 93 percent licensing and 7 percent services. Within product licensing, packaged product sell-through increased sequentially approximately 4 percent as first adoption and small mid-size customer business strengthened for the first time in several quarters. Our larger customer, larger deal business held steady to last quarter's good performance. Subscription renewals and technical services were also on par with Q2 performance. Taken together, this end customer demand mix gave us slightly better reported revenue in Q3 than in Q2.

As we've seen in Q1 and Q2, the economic environment has impacted our packaged product business, especially with smaller customers and first adopters of MetaFrame. So we were pleased to see some growth in packaged product licenses as we had originally expected lower sell-through rates. We believe that a combination of some early quarter business confidence and more total deals on the radar screen, resulted in the better sell-through that we saw. Electronic licensing was flat to last quarter's performance and was approximately 36 percent of end customer licensing. Year-over-year, e-licensing was up approximately 10 percent. Within the e-licensing business we saw a change in reorder mix from prior quarters. During Q3, reorders increased 30 percent sequentially making reorders two-thirds of the electronic licensing revenue. This is a function of the continued adoption of the e-licensing model as there are now over 1,500 organizations with active agreements due to our successful programs to penetrate our install base.

Now let's take a look at a few of the larger deals that we did at Q3. The largest win was with the Swiss Railway System, an agreement that will support the running of their entire information access infrastructure. Every employee of the Swiss Railway, over 15,000, is licensed for MetaFrame access to off the shelf and many custom applications used to manage SBB transportation operations. Another large license agreement was with DAK, the German insurance firm. They purchased 10,000 licenses to provide access to a wide array of applications including host apps, line of business insurance systems, Microsoft Office, and internally developed custom apps. In the domestic market, Apria Health Care purchased a corporate license for their 2,500 JD Edwards One World users. Conseco added 2,000 licenses to their system for deployment of a custom applications suite, and ABN AMRO took the first step in a large project to support application services for custom banking, Lotus Notes, and Microsoft Office applications with 2,000 licenses.

So this gives you a flavor for the kind of middle market and large firms that are moving forward even in this economy to improve information access while reducing their operating costs for IT. In Q3, we introduced improvements to our go-to-market program. We made changes designed to help us better meet customer needs, improve selling incentives and open up new market opportunities. I'd like to quickly recap these three initiatives.

First, we changed the ceiling and status for our CFN partners, rewarding them for delivering solutions to new customers and for extending their reach within existing customers to new departments. Their reward is for additional unique transactions this way. This really builds a stronger incentive to develop new opportunities as well as servicing the install base. The second improvement is directed at increasing our support of partners that provide value-based sales and services. In Q3, we eliminated relationships with approximately 20 percent of our North American channel that were not actively promoting our products. We now have approximately 2,400 North American partners. This channel pruning allows us to better focus on those who build a business around our products and provide Citrix-based selling services, integration services, and consulting services.

On October 1, we began the roll out of a new program called "Citrix Easy Licensing." This is the third component of our Q3 go-to-market improvements. Historically, only shrink-wrap was available for projects up to about 500 concurrent users. With the introduction of Easy, these projects can be implemented with electronic licenses, which are easier to acquire, install and manage. So, we're just at the front end of the world-wide roll out of these programs with North America now behind us. We'll continue to make enhancements designed to more directly address the needs of our three customer segments, the small and medium customer, the middle market and large-scale customer, and government and education customers. We discussed all of this with you in July, and I'm proud of the speed and quality of our execution in this area.

In North America, we now have four types of product licenses available: shrink-wrap, Easy Licensing, Open Licensing, and Flex Licensing. Each type of license has been designed to serve the needs of a specific type of customer and where they are in the implementation cycle. As you can see in this chart, we've made some terminology changes. CLP becomes Citrix Open Licensing, and ELA becomes Citrix Flex Licensing. The new and renamed programs are a first step toward licensing simplification, something our customers and partners have asked for. These improvements to our licenses now bring us in line with other programs in the industry, and at the same time, make it easier for customers and partners to do business with Citrix.

Next I'd like to update you on NFuse Elite. First, it's key to remember that NFuse Elite was released in mid-June and has been available for a little more than one quarter. This is important because we are expecting average sales cycles to be about 180 days based upon normal ramp up times of new products and a very tough environment for anything that's new. Net-net, NFuse Elite revenue is taking longer to ramp up than originally expected. Perhaps not too surprising given the market climate in which budgets are flowing to ongoing initiatives over new ones. In spite of this, we closed approximately 50 customers during the quarter, all in first adoption mode. Additionally, pilot and evaluation rates do look very promising and are supporting good growth in the sales pipeline, currently tracking over 200 identified opportunities.

So, who's buying NFuse Elite? Most of the traction we are seeing is with MetaFrame customers using NFuse Classic. The NFuse Classic, or a home-grown portal customer, is looking for a step-up to really improve the way they could use MetaFrame XP to deliver and access IT services. This customer gets a more powerful, more flexible way to publish MetaFrame applications and a more personalized way to present a wider variety of business information including web applications, HTML documents, and external web media all in one place. This is the essence of an access portal. Infrastructure to help you find and get to the information you want from any device. NFuse Elite is unique in the marketplace because it focuses on doing a few things extremely well. Secure, personalized information access. Great XML web parts and web forms extensibility. Solution partnerships that include eRoom, Documentum, Stellent, ScreamingMedia, and Bantu, and an industry-leading price point. This story is just being understood by our business partners and by our customers. It's early and we're still looking to understand sales cycles to establish best practices for piloting and to forecast based upon predictable close ratios.

In the meantime, we are continuing to move the product along an aggressive road map. You may have noticed that we licensed autonomies search technology to include in a future release of NFuse Elite. We'll also be adding exciting new access security features. The ability to aggregate across multiple server farms, and to delegate portal administration. And we'll be making NFuse Elite available in multiple languages. Customers like Alstom, Boston Medical Center, and many others, appreciate the value that NFuse Elite brings.

So, all in all, financials, operations, and go-to-market, a solid quarter on track against the goals we set, and improvement in our fundamentals, both of which will better position us in this very uncertain business climate.

I'd like to turn to our overall outlook and forecast for the fourth quarter, and remind everyone that these estimates constitute forward-looking statements, which involve risks related to our assumptions about the future.

Our business environment continues to be sweet and sour. Lots of identified projects, a new product, and pipeline growth, and at the same time, choppiness in closure rates. This makes forecasting quite difficult as business confidence comes and goes. This really impacts spending decisions on IT infrastructure. But going forward, we expect some growth in electronic licensing based upon a good pipeline for larger accounts and projects as well as a mix shift driven by the introduction of Easy Licensing. Our packaged product business is likely to run flat or even slightly down reflecting the potential mix shift to the new Easy Licensing program.

For inventories, we are expecting nominal changes in distributor inventories, all dependent upon the magnitude of the mix shift from shrink-wrap to Easy Licensing. Additionally, we expect subscription renewal and technical services revenue to continue at the Q3 run weight. So, our expectation for revenue in the fourth quarter is $115 million to $120 million. Operating expenses are expected to decline 3 to 5 percent sequentially resulting in an operating margin of 18 to 21 percent for Q4. With a projected tax rate of 17 percent, earnings per share will be in the range of 11 to 13 cents. This excludes amortization of intangibles and translates to full year expectations of $493 million to $498 million in revenue. Operating margin at 17 to 19 percent, and EPS at 44 to 46 cents, all on an adjusted basis.

This is consistent with the guidance we provided last quarter as market trends have not materially changed over the last three months. There is some upside since inventory adjustments are largely complete. The pipeline looks solid and there is potential for accelerating contribution from NFuse Elite. On the other side of the ledger, we are not expecting a Q4 budget flush. There is potential for budget evaporation during the quarter in fact. And the overall environment is very fragile around the macro issues we are all aware of.

So let me summarize now before we get to the Q&A. It is important to remember that we continue to be the leader in our market despite the IT spending climate with over 90 percent market share. We are continuing to be aggressive on the new product and go-to-market areas of business. This will be seen in the excitement during our November customer conference, I-Forum, and continue right on through February when we do our business partner conference, Solution Summit 2003. So thanks again for joining us today, and now we'll open it up for questions.

At this time, I would like to remind everyone, in order to ask a question please press "star" then the number "1" on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Don Young of UBS Warburg.

Yes, thank you. Good evening. Mark, I'm wondering if you look at your performance against the goals you set it looks pretty good. But if you look at the year-over-year position, you are down quite significantly, over 20 percent. And in the recent report that Microsoft made they talked about Windows server revenues or Window server units actually being up double-digits. There is sort of a disconnect between what you are seeing at least year-over-year and Microsoft. And I was wondering if you could help us understand what's going on there and maybe if some of the revenue recognition that you are realizing less revenue than maybe you were a year ago with some of these new licensing programs. Could you take us through that?

Sure, Don. So, the way to get a better comparable for the year-over-year comparison is to keep in mind that, first of all, this past Q3 we did not recognize $10 million in revenue that we did recognize in Q3 of '01. And secondly, in this quarter Q3 we had inventory adjustments which definitely affect in a material way our top line reported revenue that we did not have in Q3 of last year. So if you take those two into consideration, we are running off of our last year revenue rate in the range of about 8 to 11 percent, depending upon some other assumptions you make. So that's how to look at this year compared to last year.

Now, with respect to Microsoft, their--I would point out that Windows 2000 server is a horizontal general purpose operating system for the data center. And it's used for a tremendous number of purposes, including file serving, print serving, web serving, database servers, and now more and more middle tier servers as they attack the middle tier in the data center. And so they get penetration with their servers in that environment that really do not--does not affect our business. In fact, our business--we drive our business and we drive the usage of Microsoft operating systems in the data center in and around this server-based computing model. So that's the way to think about this in context of the Microsoft report.

Mark, the 8 to 11 percent, let's call it apples-to-apples type of revenue comparison with all those adjustments. Is that a similar trend for units, or, you know, from your perspective are the number of licensed units on a different trend than the 8 to 11 decline?

Well, actually our units will be stronger than that because we are doing more larger deals. And obviously, as the larger deal size the lower the average yield rate is on a seat. So, as an example, we are doing more of what we call in the--in the new Flex Licensing program, now formally known as ELA's. There is an option for what we call a desktop license. So with the Swiss Railway System we actually did a desktop license, and that's a license for every single employee in the company. We've done more and more of those over the last six months, as a matter of fact, which really allows customers to use our products in a standardized way across every single desktop without having to count every single quarter and add those numbers. So, it gives them a lot of flexibility. So, in terms of units we are doing actually better. But as those volumes have gone up, obviously, the yield rate on a per unit has gone down.

Okay. Thank you, Mark.

Okay, Don. Thank you.

Your next question comes from Mr. Chris Galvin of J.P. Morgan.

Hi, guys. This is Dan Brown in for Chris. I wanted to ask about March 2003, hopefully, getting at least some qualitative comments on what you think might be the swing factors and directionally whether you think it could be up, flat or down from the Q4 levels. Thanks.

Dan, you know, we're no different from anyone else looking out at '03. No one has a crystal ball. So we're not providing any formal guidance today. But we've looked, you know, we're in our '03 operating planning cycle right now and so we've looked at all the data, talked to customers. We've looked at IBC data, Dataquest, and research board, our own customer surveys. It comes in all over the map. Slightly up compared to this year, slightly down compared to this year. I think it kind of all averages out flat. So we'll be challenged in that kind of environment to grow the business. We do have some things working for us and certainly the penetration rates with large existing customers and our enterprise relationship managers and what they are doing as well as a new product in NFuse Elite could potentially give us a little bit of upside there. But at this point it's pretty tough to call them so we are not doing it in any formal way today.

Okay. Thanks.

Your next question comes from Sarah Mattson of RBC Capital Markets.

A couple of questions. First, if you could talk about the competitive market for NFuse, I'm curious to know who you typically see in the market. And the follow-up to that, what percentage or number of NFuse customers that you now have were driven by reseller partners and which were driven by your own direct sales force?

Sure, Sarah. So first, all the customer deals we did with NFuse Elite have been done with and through our channel partners. So that's the good news. Now certainly, we have done--spent a lot of time training them and working with them. People in the field, our SE's, have spent a lot of time working with them to try to begin to get traction with the product. So that part we are very pleased with.

Secondly, who we're facing as competition, really no one on a direct basis. Certainly, these customers have looked at the competitive landscape and their--and their options for a product of similar characteristic. And really, NFuse Elite is unique in its class in terms of the factors that I outlined in the prepared comments. And so, when you look at the price point you look at it's a packaged product. It does a few things really well. These are the things that they are actually looking for. And it has a reasonably good extensibility story. They are--they're picking the product. And so, we are gonna focus on trying to really take the product to our install base and working with the infrastructure guys, and let them go to other parts of their organizations and show how quickly they can get up an access portal that can aggregate and personalize information at a single point, and use MetaFrame XP as kind of a universal adapter to really be able to connect in any kind of information that's in the data center, whether it happens to be very legacy-oriented, client server or even, you know, a full force web-based application.

So, I mean--as a related question. Do you see NFuse Elite as perhaps being more of a departmental or portal play or customers actually implementing a company-wide portal initiative?

Well, from a scalability and capability perspective, there is nothing departmental about NFuse Elite. We have some incredibly good numbers in this area in terms of its scalability. In the--in how we are attacking the marketplace is probably really the way to answer your question. And that is, we are attacking the marketplace from the bottom up, or I like to think of from the middle up where we have a Citrix champion already in place based upon our MetaFrame relationship. Where other types of portals, in fact, pretty much all other portal players are attacking the marketplace from a top down perspective. So they are really pitching sort of enterprise-wide types of deployments and long services cycles to make the products deliver value. Where our channel partners go in, look for opportunities where they can just solve a problem in a very short amount of time and grow from that smaller implementation.

Okay. Then, just one final question and I'll let somebody get on. Could you expand on the decision you mentioned to reduce the number of channel partners with whom you work in North America? I'm curious to know what changed I guess over the past year relative to their partnership with Citrix. So will there be a similar pruning in Europe?

First, we don't expect to do any pruning in Europe. Secondly, what we've learned in the pruning process was quite interesting. And that is, a number of the channel partners that we--that we terminated in the CSN program were actually services-based businesses and really not very interested in selling software licenses anymore. And they had changed their business strategy since they had joined our program. So we--so we actually got this prospected, which is going to be one of the things that we address in the first quarter when we roll out some new programs. We will actually be introducing a program for them where they can participate in what we call an influence-type program, because really what they are interested in is the technology and building a business around it but not reselling licenses as much as really helping customers on the front end in terms of architecture and strategy, and then on the back end in terms of ongoing support and services to make sure their systems are well-managed. So we did learn that. And we've still got the relationships. We've still got all the names. They're just not--their org ID's aren't plugged into the distributor's network allowing them to resell product.

Okay. And how many total resells do you now have and how many of those are platinum level?

Let's see, we have about--in the world, about 6,000 world-wide. And platinum level, we have somewhere around--worldwide, somewhere in the 80 to 100 range.

Thank you very much.

Your next question comes from Mr. John Rizzuto of CSSB.

Hi. Mark, I wonder if you could help me understand how I would work through this. Quarter-over-quarter you are expecting the revenues to remain middle of the range, looks relatively flattish, and you came in from--the inventory write-down this past quarter, above and beyond the inventory--not write-down, excuse me, the inventory adjustment, from 45 days to 30 days. So it seems either it's pricing or unit decline that would really affect why you would be flat quarter-over-quarter. I just want to know how you are thinking about that.

John, in fact, the way we are thinking about this doesn't have a whole lot to do with the internals of the business. It's really about how we are seeing the next ten weeks and what could possibly happen in the macro environment, and just not get out ahead of the headlights here. And it's pretty much that simple.

In other words, it's the uncertainty that keeps you conservative it is fair to say? I don't want to put words in your mouth.

Absolutely. It's the--it's just the macro environment. And that's why at the end of the prepared comments I did try to give the balance here that we're looking at and calling it, if you will, sweet and sour, because there are some very sweet things. As a matter of fact, all through the year we've seen pipeline growth, which is all about our channel partners and our--and our ERN's identifying specific business opportunities and that has continued to grow each quarter this year. A new product with NFuse Elite. Some excitement coming at our customer conference. So, a lot of these sort of sweet things--and at the same time we've got a really fragile environment that we're looking at and closure rates and closure processes are a little bit choppy. And so, you know, we are just concerned that we could see at the end of the year no budget flushes. And, as a matter of act, we could see budget evaporation. If companies are trying to make numbers, the first thing they are gonna do is address, you know, IT spending, especially some of the smaller projects that, you know, they are expensing right away. So, we're just looking at that macro environment and thinking there is no need to kind of get out in front of our headlights here.

Okay. Fine. Good. Did you--can you quantify a little bit better? Are you 10 percent, 20 percent, 30 percent, a quarter behind in what you expected to see at NFuse Elite pickup at this point?

Well, I think the--behind is referring to revenue for sure, okay? An infinite rate so that the 50 customers and the 200 that are in the pipeline, and that pipeline continues to grow everyday, is actually promising and looking good. So, I don't know. I really can't say, you know, a quarter behind and so forth. I think we probably underestimated the time it would take for people to start to ramp up, evaluate the product, see its value, and certainly we underestimated the impact of the overall macro environment on new things. And even though we pointed that out certainly on our radar screen, I think we didn't really fully consider that how serious the impact might be. But with all of that, we think there is --we've still got a great product. As I mentioned, we are investing in it. We've got some pretty neat things coming along, you know, in the not too distant future, that will help it establish its value even in this kind of environment. Because really this product is going to be one of the key components of our strategy for really bringing more and more products to market that allow customers to manage information access.

Okay. The ERM program. Any type of way you can quantify or qualify how that is working or come along in the past quarter?

It continues to come along. And what we saw, and the metrics would have looked better, frankly, for the group because they did have a sequentially flat quarter to Q2. It would have looked better if we hadn't seen a few of their larger deals get pushed at the end of the quarter. And so their metrics would have looked much better and they would have seen some, you know, healthy growth in the quarter had that happened. So, these are the kind of things that we are concerned about happening again in December. And so, we just want to make sure that we don't overbuild expectations because of that.

Okay. You can't tell us if those deals, large deals, that got pushed were closed yet this quarter?

We are not commenting about what we've done already for this quarter. But none of the budgets got eliminated, but the deals got pushed waiting for budget dollars to accumulate, hopefully this quarter.

Okay. Good job considering the environment.

Thank you.

Your next question comes from Robert Simpson of Bank of America.

Thanks. Hi. It's Kirk Maturn for Bob Simpson. Big quarter, guys. Just a couple of questions, Mark. In terms of Europe, that has historically been a pretty strong vertical or geography for you all, and I guess guys saw some seasonality in that geography again this quarter. Could you just talk about the pipeline in Europe for next quarter and what's your thinking? Are there any areas of strength and/or weakness over there in terms of some of the specific countries over in Europe?

Well actually, if you take the entire world, Europe had the strongest--Arevia organization had the strongest quarter of all three. Our Pacific group had the weakest quarter, mainly because of Japan. And it's no secret what's going on in Japan. Very up and down. And the Americas organization, including North America and the Latin America organizations, really were on par for the quarter. So that's how it looked comparatively across the regions.

Inside of Europe, unlike prior quarters, our Central European team had a tremendous quarter. In fact, of the five largest--of the 10 largest deals we did in the quarter, the top five all came from our Central European team, which basically handles Germany, Switzerland, Austria, and Eastern Europe. And so, certainly we're quite proud of that team and what they've been able to do because that market has been somewhat depressed for a few quarters and back since 9/11 last year.

And in terms of NFuse Elite, in terms of the verticals that you are selling into, is there any strength in any particular vertical, i.e., government sector, financial services sector? I guess when you look at your pipeline are there any areas of opportunity in particular you see in the verticals?

Yeah, actually, health care is turning out to be one of the most interesting verticals for the product. And some combination of what they're going through to be able to aggregate heterogeneous patient system-based information to one sort of access point that's highly secure. And you probably know about the HIPAA regulations. And so our teams on the product side, and working in conjunction with some of our channel partners that are very focused in the health care market, are doing some really exciting things there. And I think you probably saw the announcement we made around one of the early users of NFuse Elite along with MetaFrame XP is Centura Health. So, there is a lot of momentum in the health care area.

Okay. And just a last question. Could you just comment upon the CFO search and how that's progressing, and if we should expect to hear anything in that regard over the next quarter?

It's progressing nicely. We've seen quite a few candidates. No one that really rung our bell yet. And in the meantime, this finance team is doing a tremendous job and really stepping up large. So we're proud of what the team is doing, but we are still actively engaged in the search.

Okay. Thanks. Nice execution.

Thank you.

Your next question comes from Steve Fradus of Gerard Klauer Mattison & Co.

Hi, Mark. Most of my questions have been answered, but one thing I would like delve down a little deeper into is packaged product. And, you know, the sense I was getting from the channel was that it had stabilized this quarter. But really, the results, to me anyway, are a little more positive than I was--than I was expecting. And you know, with a lot of headwind, with an inventory correction and, you know, a mix shift that was steadily moving towards e-license, and I guess, you know, competition at the lower end of the market. Could you talk about the mix of things that may have contributed to it being stronger than I, for instance, was looking for? Was it pent-up demand, for instance? Was it more incentives for shrink-wrap? Or, you know, was the magnitude of the inventory correction--did more of that happen last quarter versus this quarter for instance?

Steve, I think in the prepared comments we tried to point to a couple of things, but just as when we saw the sequential quarterly decline, we went out and did the surveys and they came back sort of economic environment. You know, we've got the same phenomenon here now that they've increased sequentially 4 percent from Q2. So when--anecdotally I can tell you this, that early in the quarter I did a lot of traveling, saw a lot of customers and partners. And they all reported better business confidence especially impacting the small to mid-size company where they had been planning projects and reached in and decided to do some projects for the back half of the year. So that's what we saw early in the quarter. That continued through the quarter pretty consistently, and that's the main, that's really the main phenomenon we saw around packaged product.

I think the other piece of it, and you're sort of getting at it with pent-up demand, is that the couple of quarters that we saw sequential declines we also saw a pipeline that continued to strengthen and to move right along. And so, to some degree, there were more and more deals on the radar screen and they had a larger universe of deals to choose from to try to close. So if that's called pent-up demand, then so be it. But I think, you know, so we're feeling pretty good about that.

And in the comments that we made, the concern we had is that we had introduced Easy Licensing. It really is for the same type of size implementation that people have used the packaged product for. And so, we will see some shift from packaged product to the Easy Licensing program. We don't know how much. We've done a few models. We think we're pretty--we pretty much have it under control, but we're also taking a cautious view there.

And on your new e-license programs, is there any minimum seat license or can you break up? For instance, is Flex above 500 seats and the other ones kind of where the thresholds are?

Yes. Flex is 5,000 and above and has a couple of flavors depending upon the customer and what they are trying to do. Okay? The Open Licensing program actually has four tiers within it and your--the suggested pricing within that program is based upon a point system. So you--basically, we have a configurator. The configurator based upon what you want to buy and need to buy gives you certain points. The points then apply to a tier and that tier gives you a discount from list, which is the suggested price. And then the reseller works off of--off of that to then give you, you know, a good deal and provide the services.

Okay. That's all. Nice results.

All right. Thank you.

Your next question comes from Jason Kraft of A.G. Edwards.

Hi, guys. Nice quarter.

Thank you.

Thank you.

I wanted just to confirm real quick on the effective date of October 1 regarding the volume players. Now none of those guys are doing shrink-wrap anymore, correct?

Yes, by agreement. And what we did do is allow them a couple extra weeks to make changes in their information systems because there are a number of SKU's that have to be changed. So by the end of this month, all of that should be complete and the volume players will no longer have access to package, you know, shrink-wrap licensing.

Do you know kind of what you are looking for? I mean, could that potentially reinvigorate the low end for what comes out there?

Yeah. Obviously, this is one of the reasons we've put this program in. You know, there's the push and the pull. One is because a larger--feeding to a large size customer just wants to buy electronic licensing right from the get-go. They don't wanna deal with shrink-wrap at all. And on the other end, we're able to create a space for our mass channel to do first adoptions and to do small to mid-size business systems where really the customer wants one--kind of one neck to choke. They want to buy the whole system from one skilled integrator whether they are buying hardware or software services, etc., consulting from one player. And this really returns margin back to our channel partners. We've certainly done that through some of the incentives that we improved. And at the same time, it encourages them to identify new opportunities. So, it has sort of both effects: good for the customer, good for the channel partners.

Comment on the government pipeline. You know, how is that panning out this quarter and how much of a focus are you guys spending on that at the moment?

We have a significant initiative in all government around the world, federal and local government. We actually did some good business in the government space in both Europe and the U.S. in the quarter getting some buying agreements in place. We are just going on the GSA on a direct basis for the larger-scale kinds of deals we do with the U.S. Federal Government. And then we have supported a number of our channel partners that are federal and local government specialists in their GSA agreements and strengthened them as well. So, we've got a lot of focus. We think it's a great opportunity for us and stay tuned there.

Great. Thanks.

Your next question comes from Brent Williams of McDonald Investments.

Hi, guys. On an earlier question they were talking about what happened as you slide from Q4 into Q1. And just sort of from a more general perspective, would the comp plans for the relationship managers look like a standard sales guy comp plan with an accelerated commission rate when they achieve quota and that sort of thing?

Yes. All of our sales people are on quotas and accelerators above quota.

Okay. And then, secondly, sort of a theoretical question. Just our friends in Redmond, Washington started to talk about a product called Xdocs, or really sort of an extension to Word, a couple of weeks ago. This was really XML-related, almost a forms editor that generates XML as output if you give it a DTD, and it generates some nice screens. Is this something that you're looking at either integrating with, have customers starting asking you about it, you know, have you thought about this at all?

Well, you know, Bob Kruger's product team, technical team, certainly are looking at all of the activity at Redmond. And, you know, our relationship there has been great across all fronts. Specifically, we haven't had any customers talking up that initiative at this point and certainly our plan would be to integrate all Microsoft technologies and add value to those. So I don't think there would be any difference in our strategy there because, obviously, we are doing a whole lot on their platform already. And we're big supporters of dot net web services.

Sure. No, I was just--you know, obviously, you've made that very clear in the past. And I wanted to just see if there was any specific mention early on here.

No. None.

Okay. Thank you.

We'll take one last question and then wrap it up.

Your final question comes from Brendan Barnicle of Pacific-Crest.

Hi, guys. I wanted to just ask the Microsoft question sort of another way. You know, a lot of customers will look at buying from Citrix after they've done a major Microsoft purchase and yet a lot of people with licensing changes do that at the end of July. On the outside, a lot of small and medium-size companies are impacted by that licensing that had to delay out of purchasing, essentially Citrix purchased during that time. Did--have you seen any of that sort of pent-up demand related to the Microsoft licensing change at the end of July?

Brendan, you know, we actually went out looking for some of that to try to understand that. And I think we came back with no specific examples, even anecdotal examples, where our team said, you know, I didn't get a piece of business because the customer was busy spending their budget on the Microsoft licensing program. So, I don't think it has created any kind of impact on our business at this point. And certainly, the more committed customers are to the Microsoft platform, both on the operating systems side as well as the applications side, you know, the better that is for our opportunity because we--our core product virtualizes Microsoft applications and runs on their operating system. So, we haven't seen anything there.

Okay. Great. And just a little more clarity on the guidance on the operating expenses. Any--do you expect any kind of shift in percentage of revenue represented by each one of the different line items you guys break out?

I'm not, let's see, you talk about revenue and expenses--.

--I'm sorry. On the operating expense side, any change in the percentage of revenue that each of those would be previously? And are you like 14, so the market is 47 percent, and G&A is at 18 percent this quarter. Any change there in terms of the--how you are gonna, when you are doing the cost reductions, where those will come from?

Let me let Dave Urbani take that.

We don't see any difference in the percentage of sales or any of the cost items because all of them had the one-time charges this period. We expect them all to be reduced next quarter.

Okay. So it will be equal?

Yes.

Great. Thanks, guys.

Thank you, Brendan. Okay, so we'll wrap it up now. Thank you for all of your questions and attentiveness. So, a great quarter given the environment we're all in. I'm really proud of the Citrix team, and we remain quite confident in the business. Confident in how we are managing in a very challenging environment and confident in the direction we're going. Thanks a lot for joining us today. We'll see you next quarter. Thank you.