思杰系統 (CTXS) 2002 Q4 法說會逐字稿

Good evening my name is Denise and I'll be conference facilitator today. At this time I would like to welcome everyone to the fourth quarter 2002 earnings conference call. All lines have been placed on mute to prevent any background noise after the speakers' remarks thereby a question and answer session. If you would like to ask a question at this time simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Mr. Jeff Lilly, manager of investor relations. Mr. Lilly, you may begin your conference.

Good afternoon and thank you everyone for joining us with the fourth quarter fiscal 2002 earnings conference call. Participating in the call today are Mark Templeton president and chief executive officer and David Urbani acting chief financial officer and vice president of corporate controller for those with access to the insert this call is being broadcast with a slide presentation. It will be posted to the web site after the replay is completed.

It will be available through Wednesday January 29th. 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 provisions of section 21 E of the Securities and Exchange Commission act. Actual results may differ materially including statements made by the company their products, 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 S /EFPLT EC filings are available on the company's investor relations web site. I'd like to introduce Mark Templeton, president and chief executive officer of Citrix systems.

Thanks, Jeff. Thanks for joining the call this afternoon. As you can see from our results, Q4 was just great. A very strong finish to 2002. Our most challenging year since we went public in 1995. Today we're very pleased to report revenue of 149 million, adjusted operating income of 48 million and adjusted earnings per share of 23 cents, excluding motion of intangibles. This is significantly ahead of our expectations. These results reflect solid end customer demand that was significantly up over Q3. And finishes the year with total revenue of 527 million and adjusted earnings per share of 56 cents. So we had a very tough first half. Took some decisive actions at mid-year and positioned ourselves well for the second half and going into 2003. From a revenue perspective, Q4 was helped by a number of things. Unexpected availability of IT budget dollars. A strong government sector. Some deals that moved from Q3, improvement in subscription renewal rates, and record level sales of technical services. Of note, AMI was very strong.

In fact it's the first time that Europe outperformed the U.S.. our 1- tier sales model in AMIA is more mature. This drives greater ERM productivity and more leverage with major system integrators a model we're working to replicate in the U.S.. Additionally, electronic licensing accounted for almost half of end customer demand. This is a strong indicator of deeper penetration into our install base. These factors, along with solid subscription and services revenue, made Q4 the largest quarter for end customer demand in our history. We also executed well on the commitments we made during last October's call. So let's take a look at them now. On October 1st, the Easy Licensing program was introduced at North America and got traction around mid quarter. We got that done. It's really begun to catch on with our volume resellers in North America and we'll look to look at this program in AMIA in quo of this year. Next we focused on the productivity of our ERM teams. I'm happy with our progress here. Almost half of our end customer demand was from E licensing in Q4. A great job by our ERMs. Next, our annual high form customer events are a big part of driving customer demand. We held two of these. One in Orlando and one in Tokyo. Both were record events and customers were excited by what they saw. So we've got that done. Establishing early adopters with (inaudible) was the focus through the entire second half. We made further progress here but there's much more to do. We'll talk more about this a little later. Managing operating expenses and distribution inventories in line with current quarter demand continued to be a key priority. We've got that done. Q4 expenses are down from last year and our distributors continue to run with target inventory levels. I'm really proud of the way the co Citrix team delivered on the commitments we made in October. Today we also announced the appointment of two seasoned executives to our board of directors. They both bring a wealth of industry, financial, operating and corporate governance experience to co Citrix. You may actually already broadband familiar with Gary (inaudible) and Tom Bogan. Gary is chief vice president and chief financial officer of election mark. His long standing experience in finance makes him a great addition to the board and as chairman of our audit committee. Tom is president and chief operating officer of rational software. He has a broad enterprise software background and will help us as we scale up our operations.

These are top-notch people and we're really pleased that they've chosen to join Citrix. Takeaway is next. As you listen to the rest of the call, here are the takeaways. First, end customer demand in Q4 was very broad based. Helped by a number of positive factors during the quarter. This is good evidence of the great value customers continue to place in our products. Second, we're entering this year with good fundamentals, expenses well managed, strong recurring revenue flow from subscription and a great balance sheet. Third, in Q1, we're relaunching (inaudible), to position it as a core piece of a family of infrastructure products. Our plan is to better leverage our customer base and channel partnerships with this web based software for secure access. Next, throughout 2003, continuing to evolve our channel and business programs for partners will be an ongoing priority. Improved partnering will allow us to reach more customers faster. And overall, the product pipeline for '03 is really strong. We'll be enhancing existing products, introducing some new ones and leveraging web services with Microsoft's new window server 2003. David and I will try to address all these areas for you during our prepared comments today. Now I'll turn it over to Dave to discuss Q4 financials.

Thank you, and good afternoon. I'll discuss the performance for the fourth quarter and then the full year. I will discuss this effect on our income statement, balance sheet and cash flow statement. I should note that all the numbers discussed are adjusted to exclude the effect of motion intangible assets, and in the case of 2001, the numbers also exclude the effect of the write off for in process research and development. Total revenue for the quarter was 148.8 million, compared to 158 million last year and 118.9 million last quarter. License revenue was 136.7 million, compared to 138.2 million last year, and 18.four last quarter. This is a sequential improvement of 26 percent. This revenue which includes consulting support and education totaled 12.1 million, which was sequentially up 16 percent. On an in customer product demand basis, as Mark had mentioned, 47 percent resulted from electronic licenses which compares to 28 percent last year. In dollar terms, this equates to a 51 percent increase year-over-year. Package product sales were essentially flat to Q3 rates. Geographically, America's revenues was 47 percent, AMIA accounted for 47 percent and Asia Pacific accounted for nine percent. The 53 percent from overseas location is was a record. Last year the proportion of revenue from the regions was 55, 38 and seven percent respectively. Total operating expenses, excluding motion intangibles were 95.7 million dollars. These expenses were up one percent from last quarter and down five percent from last year. We did achieve cost reductions as we had planned but there were a number of unusual expenses such as significant charges for future lease obligations associated with vacant space and certain facilities worldwide and other expenses I will discuss by category. Research and development expenses were sequentially down 7.4 percent. Net reduced work force payroll costs, which were initiated in July, were fully realized this quarter. Compared to last year's reduction in R&D expenses amounted to 3.7 percent. These savings should not be viewed as a reduction in R&D effort. In fact, the purpose of the consolidation was to increase efficiencies and we have realized that goal. We continue to invest heavily in R&D for new products and improvement to our existing suite of products.

Sales marketing and services expenses were flat sequentially, reduced costs resulting from the work force reductions last quarter were offset by higher spending on demand generation programs, I form and preparations for upcoming product launches. General and administrative expenses were up approximately $2 million or 11 percent due to, among other items, increases in legal fees for litigation that occurs in the normal course of business and for responding to new regulatory requirements. The operating margin for the fourth quarter was 32.3 percent. This compares to 16.8 percent last quarter and 31.4 percent last year. Other income was 3.9 million for the quarter. This increase of $2 million from last quarter was due primarily to an acceleration of the recognition of gains generated in the rebalancing of the investment portfolio this quarter. The adjusted tax rate was 19 percent for the year, resulting in a fourth quarter adjusted tax rate of 21.8 percent. This rate increase over last quarter was primarily due to the increased level of profitability of all operating segments. Adjusted net income for the quarter was 40.6 million or 2003 cents a share. This calculation is based on a weighted average fully diluted common shares outstanding of 173 million. Actual shares outstanding as of 31 December were 168.1 million. Now for the full year. Total revenue for the year was 527 million, compared to 591.6 million last year, or 11 percent reduction. Without motion of the Microsoft revenue, this was a seven percent reduction. Total operating expenses, excluding motion of intangibles, were 393.3 million compared to 377 million dollars last year. This was an increase of four percent. Next year expenses are expected to increase modestly from this year. The reduction we accomplished in the past will be offset with cost increases primarily due to increased insurance costs and a weaker dollar which causes our foreign currency expenses to be translated at higher dollar levels. Operating income for the year was 115.2 million compared to 184.8 million last year, or a reduction of 38 percent. Operating margin decreased to 21.8 percent from 31.2 percent last year. Other income was down 52 percent year-over-year from 19.2 million to 9.3 million dollars. This reduction was primarily due to the lower interest rate environment. The adjusted tax rates for the year was 19 percent. This rate compares to 26 percent last year. The year-over-year decline is due principally to the lower level of profitability, especially in the U.S.. we expect our effective tax rate on adjusted basis for next year to be in the 22 to 25 percent range. The increase is due to higher expected profitability again primarily in the U.S.. Adjusted net income for the year was 100 point 8 m million, down 33 percent from last year's 151 million T the resulting EPS was 56 cents down 28 percent from last year. Fully diluted shares were 179 million and 194 million for 2002 and 2001, respectively. Now moving on to the balance sheet. Total cash in investments was 719 million at the end of the quarter. This was an increase of about 47 million dollars from Q3. The net accounts receivable balance was about 69.5 million, which yields a DSO calculation of 42 days. The slight increase in DSO from 39 last quarter was driven by a more normal profile of sales during the quarter when compared to Q3. The deferred product and services revenue increased $10 million sequentially to 104 million. This increase is due to increasing adoption of subscription advantage sales and renewals by our customers. These sales are deferred and typically recognized for 12 to 24 months after fulfillment of the sales.

Early in 2002 we assembled a team to help customers consolidate, migrate and renew their subscription advantage programs. This effort was extremely successful resulting in a doubling of renewals over 2001. Cash flow from operations for the quarter was very strong at approximately 63 million. This figure also includes a working capital addition of 8.7 million. In connection with our share repurchase program, during the fourth quarter we repurchased approximately 3.6 million shares, at an average price of 7.73 net of premiums received. For the year, those reduction of outstanding shares of 17 million, which amounts to 9.2 percent of the beginning balance of 185 million shares. The company also made commitments for restructured programs of, number one, an up front payment of 25 million for which we will receive either 2.2 million shares in March of '03 or a predetermined cash amount, depending on the closing market price for our stock at maturity of the program. Two, there are currently 950,000 put warrants outstanding, all of which mature before March 5th, 2003. It's our policy to restrict that to 90 days or less. The resulting potential cash obligation will be 9.9 million. In December, we entered into an agreement to buy up to 1.6 million shares at fixed prices between December 162002 and January 23rd of '03. There's currently approximately 70 million dollars remaining authority under the company's tier repurchase program. While the stated purpose of our share repurchase program is to manage anticipated dilution, we view our share repurchase activity as a way to add value for our shareholders. We intend to resume our repurchase activity when the trading window opens. And summing up the financial performance for the quarter, we've seen a significant improvement to closure rate of our products. The 140 percent increase in operating income sequentially is a manifestation of the extreme operating leverage in our business model. The revenue increase along with actions taken to reduce operating costs help to accomplish our goal of 30 percent operating margin. We use the strong Chloe to restore our cash balances and continue to reduce the share count. We did this with open market purchasing in addition top collecting shares with programs undertaken last quarter. Share holders now own almost 10 percent more of the company than they did last year. Now let me turn it back to Mark.

Thanks, Dave. Next we'd like to highlight some big Q4 customer wins, drill down on a few of the key takeaways and then wrap up with some comments about our business priorities and guidance going forward. It was a solid quarter for big deals. For the first time ever all of the top ten deals were greater than $500,000, including three over one million. Eight of the top ten were reorders, indicating that existing customers continue to choose our products as their standard for information access. The largest win was in North America with the U.S. department of health and human services. This is the kind of partnering I love to see. It included our federal systems team, Citrix ERM and system integrator nor (ph) man working together. They won a contract to build the XP solution that will expand access to Oracle financials, Microsoft office, exchange and custom applications for well over 10,000 government workers. Internationally the largest win was pretty much a tie between Deutsche telecom and Spanish bank, BANCO (inaudible), both sales were over one million. Deutsche telecom expanded their system by 7500 concurrent users for the deployment of their Microsoft office and SAT environments.

Bank co-worked with unsis (ph) (inaudible) to acquire 8,000 concurrent users to expand their Microsoft office and intranet based information systems. The investments we've made to help medium and large sized customers to standardize on our infrastructure are becoming more effective. These wins really demonstrate that. Next, I'd like to update on infuse Lee and talk about the current momentum and plans going forward. As you know this has been available for a little more than two quarters. Since its release the economic environment has a pretty tough one for new products to get tracks. We've also learned a lot from our early adapters. In Q4 that revenue increased over Q3 but most early adoptions are small. So revenue generation is still not significant. It has not ramped up as we had originally expected. Since last year's technology preview, we have almost 140 customers and about 50 deals were closed in Q4. Over the same period of time we also built a good pipeline of pilots and evaluations. We've learned a lot from these early adoptions. As a result, we're committed to relaunching the product this quarter with new positioning and a new go-to-market strategy. We'll save the details for the product launch itself. But let me hit the high points today. First, we'll position infuse Lee as infrastructure software that provides a secure web based way to access enterprise applications and information. It will save customers money and enhance user productivity. IT managers will be able to deliver and manage secure information access over the web without VPNs and without expensive software development projects. Users will get a single place to access all the enterprise information they need to do their jobs from anywhere. Next point. Today as we focus on portal buyers within their meta frame customer base. And we have utilized only a narrow slice of our worldwide CSM channel. Our relaunch strategy is to work with the broader CSM channel and target the meta frame buyer to better leverage our existing relationships. Additionally, we'll also move from main user to concurrent user licensing. This will allow an easier buying decision and closer alignment with meta frame XP system. And finally we have an aggressive product road map. This will reinforce our value add around secure, personalized web based access and includes search technology, improved administration tools, international and localization and improved scalability and SSL support for both ICA and HTTP traffic.

So instead of being positioned as a portal, sold to portal buyers and licensed like a portal, we'll position it as a last mile secure access manager, sell it to meta frame infrastructure buyers, license it like infrastructure, and build it out with additional capabilities for web based secure access. We'll brief our channel partners on the new direction for infuse Lee (ph) at our annual partnering event solutions summit, in February. Then we'll be gearing up for the launch later in the quarter. Let's talk a little bit about our channel. Our CSM program has been focused on part necessary that aggressively promote the adoption cycle of our products and our customers have matured. They've asked for new ways to acquire our products and new services for implementing them. As we exit 2002, we're in good shape. But with a broader (ph) -- of suites of properties in 2003 we'll need to further evolve our channel programs to accommodate market change, tap market opportunity and better align with our partners' business models. There are a few things you should look for here in 2003. First, more tuning of channel incentive programs to drive new product adoption and meta frame standardization in the install base. Second, we'll be continuing to prune and tune the channel to drop nonperforming partners. At the same time, we'll be adding new partners this who current currently sell into our top industry verticals. For example, we'll put an even stronger focus on the government sector in 2003. And third, we'll have enhancements and additional relationships with global and regional SIs, especially in North America. All designed to increase our bandwidth for serving large, multi national and highly dispersed customers. Our goals are to increase the total performance, size and relevance of our partner eco-system. To have partnering programs that meet the needs of the entire customer life cycle, to provide enhanced opportunities for partner profitability, and to upgrade our existing 2- tier and 1- tier relationships. Let's turn to talk about the property pipeline. Today our revenue is concentrated in only one product. Meta frame XP. We know that to break through the one billion dollar mark we need to be successful with multiple products. Over 10030,000 customers have licensed our win view, win frame and meta frame presentation servers. Thousands of business partners and customer advantage lists have really come to believe in IT cost efficiency and flex I can't through our products. The pipeline of new and events proceeded (ph) products for 2003 looks great. I won't steal the thunder from these announcements but at a very high level here's a few things to look for.

First, we'll simplify an enhanced meta frame XP making it easier to put more of its tremendous capabilities to work. Second, we'll have accessory products that make meta frame more useful for a larger number of enterprise customers and users. Third, we'll further enhance infuse Lee (ph) as we discussed earlier. Next we'll add capabilities that help IT teams with secure access management so they can feel safe when they put even more information on line. And finally, we'll leverage the Microsoft. Net platform as both a great operating system for our core products and also as a powerful engine to the efficiently build our new products. So look for a meta frame release at any concert with Microsoft's upcoming server launch. At being a high level being securely connected and highly productive are the customer realities that are driving our product pipeline. Stay tuned. We'll be sharing more about this with you throughout Q1 and the rest of '03. Next I'd like to talk a bit about guidance. So I'd like to look at our overall outlook and forecast for the first quarter. I need to remind you that these estimates (ph) involve risks around our assumptions about the future that may be as we indicated earlier, quarries was exceptional with better than expected larger deal closure rates. And excellent growth of our opportunity pipeline. Clearly the investments we've made to better penetrate our customer basis, to better incentivize our channel partners and build out our ERM team are paying off. On the other hand, overall IT spending trends and the economic environment have not materially changed. It's still difficult to predict when IT wireless will be open. So we still expect choppy closure rates going forward, driven by business confidence as it EPS and flows through the /K years. For the first quarter we expect our revenue pattern to reflect the typical seasonality of IT spending as we've indicated before. We expect our Easy Licensing program here in the U.S. to continue to ramp and for our ERMs to continue to gain productivity. And we expect subscription and technical services revenue to be roughly flat to Q4. Of course, changes in the external department could materially affected these trends. All together this brings us to a Q1 revenue forecast of 120 to 130 million. We'll keep adjusted operating expenses roughly flat to Q4 in the mid '90s. This will put our adjusted operating margin in the 20 percent range. As Dave mentioned we expected the adjusted tax rate to be between 22 and 25 percent. And earnings per share will be in the range of 11 to 13 cents, excluding motion of intangibles. So this is what we're seeing right now as market trends have not materially changed over the past three months up sides: We're are productive we have great products in the pipeline. There's great potential for tapping our install base. On the other side of the ledger, Q1 is historically the weakest quarter for IT spending and the overall environment is very -- around the macro issues we're all aware of. We're exceeding our expectations for 2002. Our opportunity is large scale and the goals for '03 are to focus on the top line to drive new product revenue and to maintain good expense management. And 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 and then the number one on your telephone key pad. We'll pause for just a moment to compile the Q&A roster. First question comes from Kirk Maturn (ph) from Bank of America.

Mark (inaudible) just a question on the customer pipeline as you look at it now versus as how you looked at it as we entered quarries. Q4. Are you seeing opportunities more at the high end of the market versus the low end where are some of the incremental buyers coming from. And as you stated last quarter, you built in a relatively great deal of conservatism into your models going forward. Are you getting better at judging which deals are going to fall into which quarters and has that been accounted for in your guidance.

First on the pipeline. I think that the growth in our pipeline in Q4 was probably the biggest growth we've seen in a single quarter in the history of the company. So our ERMs and our channel partners are identifying and reporting those opportunities at better rates than we've ever seen. It's the pipeline is broad based across all geographies, and actually across all customer types. I would point out that when a deal is below 20,000 dollars, we don't track it specifically. So to the degree that a deal is 20,000 or above we do track them. So we did see throughout the year sequential growth in the pipeline every single quarter. And so that's really, that's a great feeling for us. On the other hand, the timing issue and the question you asked about timing, continues to be a concerning one for us. And I think for many enterprise software companies. Because predicting when those deals will close is tougher than it's ever been. And our guidance really reflects that, if you want to call it conservative, that's fine. I'd like to think of it as prudent, because it's something that we looked at. In the first half of last year we had some experience with it that we just would rather not repeat.

Just one follow-up if I may. Just in terms of partnering with some more system integrators, should we be expecting anything on that front going forward? If so, are you talking more about some of the, I guess some of the hardware vendors or should we be expecting the pure play system integrator?

I think the answer is both, and I think that additionally the answer is both global and regional integrators. I think we have seen from our strong performance in AMIA, that a focus on both vertical and horizontal integrators, partnering basis, really brings in great results. And as I mentioned in the comments, that we're replicating this kind of model in the U.S., which means that we'll be working much more deeply with U.S. integrators on regional end global basis. A good example is the Northrop Grumman deal with the department of health, and as one example. There will be more of those as we move forward through the year.

Do you find more success in partnering with them in specific vertical markets or is it more of a broad based partnering relationship?

I think for the most part system integrators do best in particular verticals and they do best there because they have a deep understanding of customer businesses. And so especially in the government area, there's some great opportunity there, because there are quite a few integrators that focus on government. The same thing applies to the health care space. The same thing applies to finance and banking in certain markets in the world. And that's what we see in Europe and we expect that we'll be able to build a similar system here.

Your next question comes from Brent Williams of McDonald Investment.

Congratulations on the quarter. A couple of things here. First you mentioned in the the press release, you said the release of pent up demand related results in a quarter that exceeded our expectations. Qualitatively would that be from an ink crease in the kill rate of deals that were in the forecast, deals that just went ahead and closed? Was it deals that came into the pipeline that you had in the forecast that just ran through the sales process faster? Or were there a higher number of deals that had been on the forecast at a given amount at the beginning of the quarter that then came in at a higher amount?

I think the answer is yes, of all of those things happened in the quarter. When we talk about pent up demand, I think what we're talking about here is very simply a confluence of a lot of deals and relationships that were taking shape all year. Some of which we expected to close earlier in the year, frankly, that took much longer to close because of the kind of economic environment that we're seeing in IT spending. And so I think you ought to look at this as confluence of all of those things that happened in the second half of the year, with a particular focus on Q4. We did have about four to five million in revenue that moved from Q3 to Q4. So that's one piece of it, where we expected those deals to close in the third quarter. Which, frankly, made us conservative going into the fourth quarter around really worrying about when some of these larger deals, especially, would be able to close. I think we're all hoping that this is a sign that customers are seeing some stronger underlying strength in their own business and they're releasing dollars to IT budgets, but I think it's too early to make that call and that's why we'll stay behind the curve here.

You could sort of qualitatively think about it do you see a broad theme here that customers are maybe realizing if they're settling in for kind of a long grinding period of IT funding they may be realizing, hey, I'm going to have to start to spend money to save money and where there's an ROI story, is that something you see customers telling you as a buying sort of point, the way they're thinking about it?

You know, I think that not especially. I think that's a common theme sort of on a consistent basis. I think that we'll probably see the results of projects that have been on the docket for months and months and month's and we're just starting now to be released on an internal basis. And customers are getting their feet back in the water. But beyond that, I don't think there's any common theme.

And then lastly, within AMIA, were there geographies that were stronger than you had expected, particular countries in Europe, for instance?

Yeah, central Europe, which is basically our team based in Munich that handles Switzerland, Germany, Austria and eastern Europe had a spectacular quarter and far exceeded their expectations and their quotas. But statement, every region was strong. And so they were just particularly strong. And they had some incredible government sector results from central government buying throughout their regions.

Next question comes from Steve Jackson (ph) from Jarred Klauer Mattison (ph).

I was hoping you could talk about the product architecture going forward for infuse Lee and sounds like you're putting Citrix functionality into that. Are there two separate products going forward? I know that the two products that were bundled before, can you give us an idea what the new shape of that is going to be.

I think you'll have to wait for the details on that until March 18th, as I think the launch date. But clearly we have an opportunity to put more of our technologies together in packages that have definable, identifiable quantifiable value and present those to our large scale customer base through our partners. And so you're definitely on the right track.

Can you talk to us a little bit, I remember hearing in the I forum some of the functionality that would be incorporate into Citrix secured gateway and the next release. Can you discuss that at all?

Again, without taking thunder out of all of the work that's going on, it's not all complete yet, but we've, in talking to customers, this is sort of one of the key points and key take a ways on infusely (ph) the size of the customer base is really large enough and the type of customers in that customer base are such that we can get some really good data. And one of the common themes we hear is that that they don't like having VPNs in place for mobile users. The cost of deploying and maintaining a mobile VPN is pretty costly. And it has some real limitations at the same time. So in listening to that and in thinking about how we're able to really address any kind of device, work efficiently over any kind of network connectivity and thinking about the kinds of mobility that we've been able to enable for many, many thousands of customers, it's a logical place for us to focus, not only infusely (ph) but other parts of our go Ford architecture (ph).

It also occurred to me that your top line guidance for the first quarter is similar to what your guidance was for the fourth quarter. But in terms of the EPS range, a little bit of upside that you had put out there for the fourth quarter is not, it's not present in your current EPS guidance. Can you talk a little bit about the operating leverage and maybe why there isn't the EPS upside on a similar revenue base?

As we mentioned on the call, we do have some cost increases in the first quarter that aren't reflected in the Q4 numbers. And so that would be one reason. And obviously the large difference in the EPS guidance in Q4 and Q1 has to do with changes in the tax rate and this 15 percent currency differential. So we've got some moving parts there that in Q1 that we didn't have in Q4.

Do you think we can see close to 30 percent operating margins again sometime in 2003.

As we've always maintained, our goal is to run the company between 25 and 30 percent operating margins. It's part of having a leverage go to market engine in place. And there will be quarters when, as you'll saw here in the fourth quarter, where that leverage is clearly demonstrated with above 30 percent operating margins. Then there are quarters where we've got some seasonality and we're invest not guilty the foundation of the business where we'll be at the lower end of the range. But just when we think about this, we're taking a long view and we're building a foundation for a billion dollar plus enterprise software company and that's where our investments are going and those dollars are coming out of OP margin.

Great job this quarter.

Your next question comes from Jason Crest of AG Edwards.

Good quarter. Just want to confirm real quick. I apologize if I missed it. What was the EPX effect on the AMIA revenue of 65 million.

David Urbani there's no foreign currency impact on the AMIA because we sell in dollars our exposure is only on the cost side.

What was that again? Did you mention it?

David Urbani we didn't mention it because we had it hedged for the years so quarter over quarter you wouldn't notice any impact.

Mark, can you talk a little bit some of the ERM hiring plans in the U.S. and Europe going through 2003, are you guys going to shrink down the named accounts per ERMs trying to improve productivity or keep things static?

We have all year kept the head count in the ERM area pretty steady and stable. We do have plans in '03 to modestly add to it at this point, Jason. As the year unfolds and some additional predictability comes into the closure, timing of closures and ratios and so forth, we'll look to this area for additional incremental investment. , because I think we saw that whether we invested in this area in the second half of 2001, it made an enormous impact on our 2002 results. Much of that impact coming in the second half, but we actually felt it throughout the entire year.

Okay. On another note, with Microsoft, we've heard a lot about them ending support of N T4 X at the end of June. What's your thoughts on that do you see better selling environment because some enterprises are going to be forced or migrating to Windows 2000 and using the terminal services functionality there versus maybe getting on the bleeding edge and deploying dot net server, terminal services and also the price considerations, too given that there's new terminal server count pricing, (inaudible) server.

I think everyone in the industry is expecting, as we are, expecting a slower uptake of the new server. It's basically what happens every time there's a new release of the Microsoft server, very rarely do any large scale customers skip around and move to first generation new product. So I'm not sure that we'll see much that happening. I think we will see more Windows 2000 migrations and at this point, over the last four quarters, our Windows 2000 sales are -- the overwhelming majority of sales are of the meta frame product. So we're not doing a lot of NT business anymore.

Thanks.

Next question comes from Brendan Barnicle (ph) of Pacific Crest Securities.

Nice quarter. Joint ventures wondering if we could review the tax structure and how we get one why the rates are moving up and what we should be looking for in terms of gored how that's structured and the expense structure going forward. I know we'll have flat operating expenses do you expect you'll be investing in, on the operating side, that that will ramp through the year as presumably revenues ramp?

So let me ask you a question. You asked like one question about operating expenses. That's the only question we could get. So do you have.

The first question was about the tax rate and just if we could review what the structure is there that gets you to this kind of lower tax rate, what we should be thinking about as that goes up. I know some of it is going to be because of international structuring. Could you review that.

It op mirrors the operating structure. We've (inaudible) Switzerland. We've can ton for revenues and profits over there. As I explained in the past, the overall net operating tax rate in Europe would be about seven percent, while the U.S. rate is closer to 38.6 percent. So depending on where the props are being generated, we can see we can have big fluctuations in our tax rate. So I think based on that we would project sort of an even split going forward and that's why we gave guidance to the 22 to 25 percent rate.

Does that seven percent rate stay indefinitely or is that some sort of tax holiday or something.

There's no time on the (ph) horizon on the seven percent rate.

The second question is then just about operating expenses, that were basically we've got some additional costs that we're going to see in Q1 that we didn't see in Q4, do those costs continue through the remainder of the year and should we expect some additional costs as you're ramping up some of the new products and those things.

We're not providing full year guidance on the top line or operating expenses. But we did comment on one piece that you should pay attention to and that is we have seen some significant increases in the cost of insurance, D and O insurance, property and casualty insurance, as well as Dave mentioned there's some risks in a weak dollar. And that could be a material cost in terms of FX. So you should model those in. But at this point we're not providing full year operating expense guidance.

Lastly on share count should we work with the same sort of pattern that wife seen through the year?

We probably will not be as aggressive next year as we were there year but we'll continue to purchase shares as we have the Chloe and maintaining the strong balance sheet.

Great. Thanks.

Your next question comes from Don Young of UBS Warburg.

I'd like to come back, I apologize I didn't catch the entire call but I missed what you said about channel inventory. It would seem that your channel inventory would be down a bit with the mix going to electronic. Could you share with us the absorption of revenue that you faced doing that. And the other question, I don't know how quite to pose it, Mark, if you look at your top 100 or top 500 customers, can you give us a feel for home of them you're have migrated to the new license structure that you implemented with meta frame XP, is still minority the base move to the new licensing structure or has most of the base been there. And could you just give us a rough update where that is. One last question for David given what you did in (inaudible) can you give us an idea when you're going to hedge '03 if you haven't already. That's for the FX in Europe.

As Mark mentioned if you look at the currency rates, in currencies we do business, that index would have gone up by 15 percent to today but in fact we were busy in '02 starting to hedge '03. So in fact the currency impacts on the company would be on the order of eight percent. And so we have hedged quite a bit of that out of our system and we're comfortable that the hedging rate that we put in place will survive the year and therefore we're not going to be surprised by any currency movement, but we -- because we have to hedge it as time progresses, we did not get as good a good of a rate in 2003 as we did 2002.

So first on channel inventories. In the quarter we saw the distributors continuing to watch a (inaudible) on basically everything they've got. Our products were no exception there. We continued to really closely manage these vent levels inventory levels very much in line with the demand cycle that we looked at and saw in packaged products. I think one of the things to keep in mind here would be the introduction of Easy Licensing for our volume channel and the fact that our volume channel does not have access to packaged product. This is more and more becoming two market segments and independent of one another where you're not really seeing mixed shift as much as you're seeing packaged products really going toward the small customer, the first adopter, and going through a value oriented reseller that is very much focused on a full sale of hardware, software and services. Then obviously on the other side are all the electronic licensing mechanic setups (ph). Now with Easy Licensing customers can through these volume reseller buy licenses starting at five concurrent users and going right on up. It's not really a mix issues there. We're looking at it as two market segments that we're driving to the next channels.

Mark, I have to submit your sell in was less than your sell-out, when you look at the need to reduce channel rents, in the way your reported numbers were sell in the real demand was something higher. I want a magnitude for what kind of impact reduction of channel inventory would have had this quarter?

As we've always said, these things go up and down and we managed all the significant reductions that we needed to take as a result of lower run rates and packaged product as well as lower days on hand that distributors were looking for. We really got all that done. For the most part of Q3. Quo and Q3. So we're just managing around this target right now, as we have done for a long, long time it's just that right now the spirit leader have having a much lower target and we're trying to help them because in fact it makes our products more profitable for them because they turn faster when they work on leader inventories and now allows them to focus more on them because we can deliver more bottom line for them that way. So we're really -- we're going with that and working hard at it and our distributor teams around the world are all working, marching from the same drum and they've just done an enormously incredible job in this area of 2002. Turning to your other question about. I think you were asking about the top 500 customers and what mix of them have migrated to XP from better frame 1.8?

Yes.

We don't really track that. Here's why: Those customers tend to be almost 100 percent on our subscription program. And with subscription, we don't hold a gun to customer heads around migration. And in fact one of the key benefits is they can choose when they wish to migrate. So now as we look at new product sales and the things that we do track, the new product flow for the last four to five quarters has been above 95 percent Windows 2000 based. And so I would doubt that there would be a lot of these customers that are continuing to implement NT 4 based systems and that if they haven't migrated yet, Microsoft is giving them all the reason in the world to do so.

Actually, what I meant is I understood the pricing changed. You actually got rid of the MSOs and you packaged on a per user basis instead of a per server basis. I was trying to understand, of all your major accounts pretty much now buying your product or moved to it or were there accounts that have been quiet or (ph) manned who yet have to buy supply -- that's what I was getting at.

I'd say of the top 500, now I don't have empirical data in front of me, but I would say we would have already have moved to the model new model now.

Operator. Next question comes from Todd May. Next question comes from Todd May. One moment.

Can you talk about the dynamics that led to such a dramatic uptick in a European region.

Well, first of all, A MIA was strong as all geos were. So a rising tide raised all ships during the quarter. Notably in AMIA we have a more mature 1- tier go to market model that involves larger scale system great, like bull, like Siemens are a couple of examples, Unisys another example. And it also in Europe is true that our ERMs are more mature. They've been on the ground in territories for a longer period of time than in the U.S.. And we saw a lot of business come through at the end of the year through that part of our go-to market engine. Additionally in central Europe, we saw a surge in central European, central government buying. And we have with many central European governments buying agreements in place. And I think that they look to spend some money by the end of the calendar year and we're very aggressive in some of the buying that they did. And again it was pretty widespread in the government sector in central Europe.

How many ERMs do you have in AMIA?

We have approximately 30.

Okay. And the other question I have, with your plans to try to focus on some larger systems integrators in the Americas, how will you balance that with your existing platinum resellers?

Well, it's not about balancing, it's about meeting a broader amount of demand. And creating the right kinds of channels for customers where we're stimulating demand is absolutely essential. So we'll stimulate demand as we always have in areas where platinum, gold and silver resellers are the optimal reseller for reaching that type of customer. But statement, we have opportunities and we've seen them take shape in the last year to stimulate demand in customers that are best served by a system integration partner like Northup Grumman as an example. The message here is we have to do both.

Thank you.

We'll take one more question now Denise.

The final question comes from Kathryn Ekberg (ph) of Tobin (ph).

You mentioned several products but you only talked about one coming out in mid-March are we going to see a series of new products over the years beyond what maybe we'll see in March or is there going to be a big release of numerous products in Q1 and part two can you also talk about your strategy of building versus buying those products?

Kathryn, we have a pipeline, and you'll see that as a flow through the year. And as I mentioned, some of that pipeline has to do with enhancements to the products we've had today. Other parts of that pipeline involve new products. Some of which we're building and some of which we're acquiring technology. And I emphasize technology there. And so you'll see a flow. And basically our strategy around this is pretty straightforward. And that is in terms of we prefer to build. We have a bias toward building. All the greatest software companies in the world have been successful building their way to customer value. But we are looking at technology a acquisitions that we can bring in and put into our suite of products that really drives this whole notion of secure web-based, last mile management and access. Now, that's the sweet spot of our business today. And we think there's a lot more there for us to do by bringing a wider suite of products together.

Thank you, can you talk about the use of cash and potentially using that to pay dividends?

We constantly look at ways to improve shareholder value. And as I said in the speech, we've done quite a bit of that this year by increasing everyone's essential ownership of the company by 10 percent. We will look at the dividend question from time to time but have no plans at this point.

Final question, if I'm calculating right, the guidance for Q1 at the mid point of the range shows a 16 percent sequential decline in revenue. That's a little bit more than typical seasonality. Is this conservatism on your part?

I think there are a few things going on here, Kathryn, that we're looking at. But the first, obviously is just historical seasonality in Q1 around IT spending. There's a macro environment that we just have to be very prudent about as well. Those are external kinds of things. On the internal side, we still have Easy Licensing rolling out. And this will be the first quarter that it's available. And we're feeling pretty good about it, but we're still going to be conservative in our outlook around the potential impact of other pieces of our business until it's understood. Even though we introduced it on October 1st, it took about six weeks before the volume resellers were through all of their packaged product and were beginning to sell the Easy Licensing product. So we've got some concerns around that that we're just going to stay behind the curve on. So those are the few areas that we're thinking about right now, and as we work through the quarter we'll certainly be working hard to try to mitigate some of the risks.

Okay. Great job in quarries.

Thank you, Kathryn. So let's just wrap up. So again thanks for joining us. It was a great quarter given the environment we're all working in. I'm incredibly proud of the con Citrix team and remain confident in our business, confident how we're managing it in a challenge environment and very confident with the direction we're going. We'll talk with you next quarter. Thank you and have a good evening.

This concludes today's conference call. You may now disconnect.