思杰系統 (CTXS) 2003 Q1 法說會逐字稿

Good afternoon, my name is Andrea, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Citrix Systems first quarter 2003 Earnings Conference Call. All lines have been placed 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, please press star then the number 1 on your telephone keypad. To withdraw your question, press the pound key. Thank you. Now I'd like to turn the call over to Jeff Lilly, Manager of Investor Relations. You may begin your conference, sir.

Thank you, Andrea. Good afternoon and thanks for joining us today on our first quarter 2003 Earnings Conference Call. Participating in the call today are Mark B. Templeton, our President and Chief Executive Officer, David J. Henshall, our new Chief Financial Officer and David Urbani, Vice President and Corporate Controller. For those of you with access to the Internet, this call is being webcast with a virtual slide presentation at www.Citrix.com/investors.

A replay of this call and webcast will be available through Wednesday, April 30, 2003. In this call, we will discuss various non-GAAP financial measures, as defined by SEC regulation G, including adjusted operating expenses, adjusted operating income, adjusted operating margin, adjusted net income, adjusted earnings per share and adjusted tax rate. The most directly comparable GAAP financial measures and a reconciliation of the differences between the GAAP financial measures and the non-GAAP financial measures discussed on today's call can be found at the end of our press release dated today, after the comments involving financial statements and on the Investor Relations page of the Citrix corporate website.

As we get started, please be reminded 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 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 provided in the slide presentation, earnings press release and in the company's filings with the SEC. Copies of the company's SEC filings are available from the SEC or from the investor relations section of the company's website. Now I'd like to introduce Mark B. Templeton, President and Chief Executive Officer of Citrix Systems.

Thanks, Jeff and thanks for joining us for the call this afternoon, everyone. As you can see from our results, the first quarter was a very solid beginning to 2003. We saw improvements to most metrics compared to last year's first quarter, and we even exceeded our own expectations. Revenue was $143.5 million, seasonally down from Q4 as expected, but up slightly compared to last year's $142.3 million. Our software license revenue was up 8.5%, and our technical services revenue was up 6% compared to last year.

About half of our orders came from existing customers expanding their use of Citrix software. In addition, we continued to see strength in renewal revenue from our subscription advantage software maintenance program. Net income was up, too. For Q1, $31.2 million or 18 cents per share, as compared to $26.7 million or 14 cents per share a year ago. Adjusted to exclude the affects of amortization, net income was $32.2 million or 19 cents a share, up almost 21% over last year. So, we had a solid quarter and I'm really pleased with our performance.

We also executed well on the commitments we made during our last conference call. We submitted to relaunch [INAUDIBLE] Elite. We got that done. On March 18, we reintroduced it as MetaFrame Secure Access Manager with concurrent user licensing and exciting new features, and as an integral part of the MetaFrame access suite. Next, we focused on the successful partner conference, Specific Solutions Summit.

We got that done. Nearly 1100 attendees joined us in February to discuss our access infrastructure strategy, go to market plans, and to begin training on our new products. Their feedback was extremely positive. We focused on developing our channel during the quarter. Both [INAUDIBLE] and [INAUDIBLE] signed on as Citrix Solutions Integrators. So, we got that done, and of course it continues as a focus. The government market has been an ongoing priority.

In Q1, we were awarded GSA schedule, helping us partner with government integrators on large projects. It also gives federal agencies a direct purchasing vehicle from us. We made really solid progress here. Management of operating expenses and distribution inventories is always key. We got that done. expenses are down from Q1 last year and our distributors continue to run with inventory levels in line with packaged product demand. We believe our results show we're executing well. As you listen to the rest of the call, there are five key points to take away.

Number one, end customer demand in Q1 was seasonally down but strong for medium-sized deals. Good evidence of customers expanding the Citrix implementations. Number two, the financials for the quarter across income statement, balance sheet, cash flow and analytics are excellent. The quarter was linear month-to-month, expenses were well-managed. It was strong recurring revenue flow from subscription, and distributor inventories are in really good shape.

By providing additional access infrastructure for the enterprise, we're expanding our total available market through leveraging our market leadership, our broad customer base and our extensive panel partnerships. Number four: We're excited about tomorrow's launch of Windows server 2003 and we're a platinum sponsor. Also this quarter, we'll be shipping an important feature release of MetaFrame's presentation service that embraces and extends this new Windows server.

And finally, key point number five: Our focus in Q2 is on product delivery and training. We're planning to deliver all four MetaFrame access suite products this quarter, more product releases in a single quarter than we have ever done before. We will also focus on training our sales organization, services teams and channel partners. These are big priorities for us. So, those are the five key points that we'll address today. Before I turn it over to David Urbani to discuss the financials, I want to introduce David J. Henshall.

David joined Citrix as Vice President and Chief Financial Officer about 10 days ago. As many of you know, he joined us from Rational Software, where he was Vice President, CFO, Treasurer and Secretary. We're very glad to have David on board, and I'd like to take this opportunity to welcome him to the team.

Thank you, Mark. I'm very glad to be here. I'm excited to be part of the Citrix team as we begin to execute against a new product strategy that was introduced last month. I believe the company is in a unique position to address the critical need that all organizations have to securely and seamlessly access and manage information throughout the enterprise. I would also like to say that while I've only been on board for a couple of weeks, during the financial close of this past quarter, I was very impressed with a finance staff, their professionalism, and the controls environment that's in place at Citrix.

Now I'd like to turn the call over to David Urbani, Vice President of Corporate FINANCE and Controller, who will drill down further on our financial performance.

Thank you, David and good afternoon. In my comments, I will discuss the financial performance for the first quarter of 2003. I will note its effects on our income statement, balance sheet and cash flow statements. I should note that all numbers discussed are adjusted to exclude the effects of amortization of intangible assets.

Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP. Total revenue for this quarter was $143.5 million, compared to $148.3 million last quarter and $142.3 last year. License revenue was $132.1 million, compared to 136.7 last quarter and 121.7 last year. This was a sequential decline of 3% and an annual improvement of about 8.5%. Technical service revenue, which includes consulting, technical support and education, totaled $11.4 million, which was a sequential decrease of 6.2%, due primarily to the large number of consulting projects in Q4 which were not repeated in the first quarter. The international business continues its higher growth rate this quarter.

By region, America's revenue is 47%. Amia accounted for 43%, and Asia Pacific accounted for 10% of total revenue. In the same quarter last year, the proportion of revenue from each of the regions was 56%, 36% and 8% respectively. Adjusted operating expenses, excluding amortization of intangibles were $97.9 million. These expenses were up 2.3% from last quarter and down 5.3% from last year.

As we mentioned last quarter, we did expect an increase in expenses resulting from higher foreign expenses, caused by a weakening dollar and higher insurance expenses. Research and development expenses were down almost 20% from last year and down sequentially almost 5%, due to the workforce reduction and consolidation of our R&D facilities last year. However, we expect these costs to increase over the remainder of the year as we continue to invest in R&D for new products and improvements to our existing suite of products.

Sales, marketing and support expenses were nearly flat from last year, but up sequentially 9%. The increase in spending was primarily due to generally higher spending on programs, product training and personnel costs. We also expect these costs to increase over the year as we launch and market new products in our access suite. G&A expenses were down from last year by approximately 9.5%, and last quarter by $2.3 million or 9.8%.

The sequential decline was due primarily to AR provisions made last quarter, which were not repeated in the current quarter. The adjusted operating margin for the first quarter was 28.5%, this compared to 24.1% last year. Other income was $1.5 million for the quarter. This decrease of $2.5 million from last quarter was due primely to an acceleration of recognized -- recognition of gains generated in the rebalancing of our investment portfolio last quarter. The adjusted tax rate was 24% for the quarter. We anticipate this to be the rate for the year. Adjusted net income for the quarter was $32.2 million or 19 cents per share.

This calculation is based weighted average, fully diluted common shares outstanding of $170 million. Total cash in investments was $722.6 million at the end of the quarter. This was an increase of about $3 million from the end of Q4. Net accounts receivable balances got flat to last quarter at $68.7 million, yielding a DSO calculation of 43 days. So, as you can see, the quarter's monthly profile was typical for us, approximately 30, 30, 40.

The convertible divesture, which has been carried as a long-term liability, has been reclassified to short-term since the holders can, at their option, require to us redeem the securities in March of '04. In addition, the investments used to head the interest rate risk of this instrument were also classified from long-term assets to current, because they will mature in March of '04. Deferred product and services revenue increased $6.7 million sequentially to $110.7 million. This growth is due to increasing adoption of subscription advantage sales and renewals by our customers.

These sales are deferred and typically recognized [INAUDIBLE] for 12 months after fulfillment of the sale. Some contractors sold for longer periods than 12 months and show on the balance sheet as long-term portion of deferred revenue. Cash flow from operations for the quarter was strong at approximately $59 million. Net income, along with adjustment for depreciation, amortization and changes in deferred revenue account for $47.2 million of the cash flow.

We used these strong cash flows to maintain our cash balance and continue to reduce the share count. We did it it with prepayments under structured programs in addition to collecting shares from pre-paid programs undertaken in previous quarters. The outstanding share count is now 165 million, which is actually lower than year-end 1997. In connection with our share repurchase program, during the first quarter, we repurchased approximately 4.2 million shares at an average price of $12.23, net of premiums received.

We currently have outstanding commitments of $40 million through structured buyback programs, all of which will settle by June 30. Additionally, there are 450,000 put options outstanding, which will mature by the end of May, 2003. The resulting potential cash obligation would be $5.7 million.

It is our policy to restrict the maturity of put contracts in 90 days or less, and current proposed accounting guidance may cause the company to re-evaluate its strategy of using such instruments to manage anticipated dilution in the future. There is currently approximately $22.6 million in remaining authority under the company's current share repurchase program after considerations of the commitments mentioned previously.

We intend to resume our repurchase activity when our trading windows open. In summing up our financial performance for the quarter, we've seen strength in ongoing business from existing customers. The increase in operating margin over last year is a manifestation of our commitment to manage expenses, combined with the strength in the continuing revenue. The resulting adjusted operating margin of 28.5% is solid performance for our first quarter. Now I turn it back to Mark.

Thanks, Dave. Dave, I'd like to personally and publicly thank you and your entire team for carrying the extra load during the CFO search. You did great. I'm proud of the quality of your team, your execution, and especially the results, and you should be, too.

Thank you, Mark.

We're grateful. Next, we'd like to highlight some Q1 customer wins, drill down on a few of the key takeaways and wrap up with some comments about our business priorities and guidance going forward. The first quarter is field distribution, was around medium-sized projects. Other than one deal over $1 million, all of the top 10 deals were tightly arranged in the 300 to $600,000 range.

And six of them were reorders. This shows that existing customers continue to standardize on our access infrastructure. Let's take a look at a few of these whims. Adventist Health, one of the largest healthcare delivery networks on the West Coast, will be using Citrix's access infrastructure to use the millennium suite of healthcare applications to over 2,000 concurrent users. The system will be an integral part of delivering patient information at the point of care, whether in a hospital room or for a patient at home. [INAUDIBLE], headquartered in Spain, is using MetaFrame presentation server to improve productivity and customer response time by giving employees easy access to more than a dozen applications.

Carhill, a long time Citrix customer, is expanding its use of MetaFrame by almost [INAUDIBLE] concurrent users for accessing Microsoft and JD Edwards applications in North and Central America. And finally, Target added an additional 5,000 users to connect employees across the U.S. to their SAP, retail management and call center applications. This brings their total to more than 40,000 licenses. So, next I'd like to turn to several other key topics important to our growth, including our product strategy, the Windows server loss and current trends.

Last quarter, we would -- we said we would deliver several new access infrastructure products this year, that we would continue to be aggressive about growth and that we would leverage our market leadership in access infrastructure to offer a more complete enterprise solution. We began delivering on all of this on March 18th at Citrix Product Strategy day in New York. On that day, we made a number of exciting announcements.

First, that our strategy is to consolidate more access infrastructure components and integrate our products into the MetaFrame access suite. Next, we announced the first four products of the suite, including our flagship product, the MetaFrame presentation server, as its foundation. In addition, MetaFrame's secure access manager to that of [INAUDIBLE], and two new products, MetaFrame, Password Manager and MetaFrame Conferencing Manager.

The strategy allows our products to be sold separately to solve particular access challenges for the enterprise and also to be sold together as a complete seamless system that powers the on-demand enterprise. And finally, we believe this expansion into adjacent software spaces will be synergyistic with our 120,000 customers and 7,000 channel and [INAUDIBLE] partners. So, it was a tremendous day for Citrix. For seeing the new Citrix in a larger context. For seeing the MetaFrame brand in a more strategic light.

And for seeing the definition and importance of access infrastructure in a new way. Access infrastructure requires a very robust operating system underneath it. An operating system that's scalable, secure and feature-rich. So, next, I'd like to talk about that operating system. The new Windows server 2003. Windows server 2003 is the first major Microsoft server in three years, and we believe the best platform Microsoft has ever released.

It gives us a more robust, more stable and more flexible platform for our entire product suite to run on. It provides new opportunities to partner with Microsoft, to leverage dot-net infrastructure, and to take advantage of web services in our new products. And the enhancement of windows terminal services will help feed and grow the primary market for presentation services, a market in which we hold the dominate share. We're very excited about the new Windows server launch tomorrow.

We're a big supporter of the launch as one of only seven ISVs who are platinum sponsors. Partnering with Microsoft has been a key part of our go to market programs and this launch extends that partnership. Together, we'll amplify the message that Citrix embraces and extends the value of the Windows server platform and will increase our visibility globally as the launch rolls out across over 25 countries.

I'm pleased to announce that Feature Release 3 of MetaFrame XP presentation server will be generally available next month, and as one of the first products certified to run on Windows server 2003. It embraces the new server as a core platform and extends terminal server with improved flexibility, manageability and security. With the release of FR 3, we're already incorporating Windows' powerful dot-net services within our product suites. The web features have been integrated as a web service.

This makes it even easier for customers to integrate MetaFrame presentation server into a fully web centric IT environment. And going forward, we'll leverage the full power of Windows server 2003 across our entire product suite. So, I think you can see why we're excited, why we're a big supporter of the launch and how we've just begun to take advantage of the new capabilities of the Microsoft platform across technical, market development, and partnering funds.

We believe the new Windows server creates new growth opportunities for us, in our current presentation services market as well as the larger access infrastructure market we are moving into. As with every new Windows server, enhancements to terminal services stimulate and feed the market for our enterprise-ready presentation services. In straight terms, if you have a good first experience with the simple usage of terminal services, you will want even more.

That's where MetaFrame presentation server provides proven value over and over. This is a win-win for both Microsoft and Citrix. And it's a huge win-win for our partners and customers. We estimate that of all the potential users of terminal server, with and without our value-add, less than 10% of the available market has been tapped. So, stimulating primary demand to grow the size of the pie, is a fantastic opportunity for us and for Microsoft.

To capitalize on this opportunity, we are, as I've explained, expanding into software spaces that are adjacent to presentation services, allowing to us gain a more strategic position with our customers as an access infrastructure standard for the enterprise. We believe that the access infrastructure market represents an estimated 8 to $10 billion opportunity for us in about four to five years. This is the essence of our product strategy. So, over the next few years, our business outlook is positive.

Key trends in Denver consolidation, data center systemmification, growth of browser-based applications, reliable wireless connectivity, more powerful commodity servers, interesting, new access devices and new web services, all favor our business and product strategies. Our ultimate vision is the on-demand enterprise, which means easy, secure and instant access to business applications and information from any location using any device over any connection.

Every Citrix employee around the world is aligned and focused on executing this strategy. Next, I'd like to turn to our overall outlook and forecast for the second quarter and remind you that these estimates constitute forward-looking statements and they involve risks related to our assumptions about the future. The first quarter of the year was exceptional. Year-over-year revenue growth, solid performance with medium-sized projects, good performances across geographies and excellent growth of our opportunity pipeline.

On the other hand, overall IT spending trends and the economic environment have not materially changed, really running flat in most geographies. It's still difficult to predict when specific projects will be funded. So, we still expect choppy closure rates going forward, driven by consumer and business confidence as the ebb and flow around the geopolitical and economic factors we're all aware of. At the same time, our market opportunity is large-scale and long-term.

So, we continue to invest widely in new products and new routes to market and in more ways to touch customers. Taking into consideration all these risks and opportunities, our guidance for Q2 is as follows: Revenues expected to be in the 135 to $140 million range. We expect operating expenses to increase by about 3 to $5 million for new product development, delivery and support. EPS is expected to be in the range of 13 to 16 cents per share.

Adjusted EPS is expected to range from 14 to 17 cents per share. Longer term, we're focusing on the top line, on new product revenue and good expense management, doing everything we can to continue to be an outstanding performer in a very tough environment. And a strategic player in the enterprise software business.

Let me clearly state our Q2 focus areas to you. First, we plan to deliver all four of the announced products of the Citrix MetaFrame access suite this quarter. Secondly, we'll focus on training ourselves and our partners to ensure that we leverage our strategic enterprise opportunities to their maximum potential. And third, we'll continue to stay focused on prudent financial management. In summary, it's been a great quarter, which, again, exceeded our own expectations. And which set the table, we believe, for continued growth and success. I'm really proud of the contributions of our employees and our channel partners for giving us a great start to 2003. And with that, I'd like to open it up to questions.

At this time, I'd like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from John Risetto from Credit Suisse First Boston.

Good afternoon, everyone. Very nice quarter, Mark.

Thanks, John.

I want to ask you the first question, I don't want to try to put words into your mouth here, for Q2 guidance, seasonally we're used to Q2 being stronger and, you know, our experience of recent years tells us to be cautious. Is your revenue guidance primarily a function of uncertainty, or are you seeing something in the end demand that -- that we should be aware of or cautious of?

Yeah, John, there aren't any specific issues impacting any of our demand drivers that we're aware of. At this point, and I think like many enterprise software companies, we're being prudent and cautious about our guidance because of the choppiness and the potential for unexpected activity in the current business environment. And I just think we need, you know, a quarter or two of stability in the external world before anyone, including Citrix; is going to be anymore aggressive than that.

Okay. Fair enough. And Mark, a little bit on the pricing or -- or -- or qualitatively, the positioning of the -- the access suite. The -- how does that work as far as -- I'm wondering a little bit about cannibalization; is the overall taking end fuse elite and turning it into secured Gateway really going take away what would have been an incremental opportunity -- how is that going to work?

I understand your question, John, and frankly until we officially announce and launch all products, it will be a little bit hard. So, let me -- let me give you a little bit of a picture. So, first, don't expect that this quarter will include announcement of a license that includes all of the products in the suite.

Okay.

So, this quarter, when we launch the products, they will all be priced separately. Okay?

Okay.

Now, within our volume licensing programs, we have ways for customers to add incremental products to their license agreements at additional charges, of course. And so, secure access manager does not cannibalize any of the other products in the suite, all of the products in the suite are synergistic and complementary to each other. Going forward, we are seriously considering a license that would be to the entire suite, and a customer would then be able to use all of the products together under one license and one price.

But I think that it will take us a quarter or two or more before we get to that point. In the meantime, we'll focus on selling the products, both individually and together as a system priced separately.

Okay. Another -- a question on -- oh, by the way, welcome aboard, David .

Thank you very much.

And David Urbani did a great job, as well, I thought. Anyway, on the expense side, Mark, you said about 3 to $5 billion, is that across-the-board or just in the sales and marketing line or... In it's actually sales, marketing and development.

Okay. And it accounts for, as you might imagine, all of the -- the launch activities, but then the ongoing support of the new products as we continue them down their path, their road maps. One of the things that we have done this quarter already, is we almost have all of them hired, we've hired product specialists in North America, we're trying this methodology to bring new products on to the market to get very specific focus on those products and let those specialists work across the enterprise team, as well as our channel centric teams to be specialists on individual new products, whether it's Password Manager or Secure Access Manager or Conferencing Manager.

So it would -- it would go to support those types of things.

Okay. One final question, it's hard for me to find, especially in your larger channel partners, anyone who isn't feeling really good about Citrix right now. What -- what is the program -- I know you've done a lot of paring of your channels, trying to reinvent them, how is your partnership and what changes can we expect in the channel right now?

Well, I think just more of what we've been doing. First of all, identifying performers and investing in them. And that investment is really across-the-board. I mean not at -- not investment in terms of capital, but investment in terms of tailored marketing programs that are focused their market, their competencies, their business, all the way through to things like frankly, I have been doing two to three seminars where, you know I'm talking to 100 to 200 customers a quarter in North America, working with our larger partners, helping them generate demand and -- and go deeper in their enterprise accounts. So, we're really -- so, that's the first thing, really investing in the performers.

The second is, obviously, the inverse of that is taking the nonperformers out of the -- out of the -- out of the mix. Third is incentive programs that are transaction-based so we incentivize them to drive their transaction rates up and those that do, especially when they're bringing on new customers, really benefit from additional incentives as they crank up the number of transactions they do quarter after quarter.

Okay.

So, I think they're feeling pretty good.

We're feeling pretty good about it, but, you know, we're really never satisfied, we want to continue to be the best channel partnering and channel central software company in the world and we're working hard to -- to scale that reputation up as we grow.

Thanks, good quarter again, folks.

Thanks, John.

Your next question comes from Kirk Maturn from Banc of America.

Thank you very much. Congratulations, guys. Great quarter. And welcome, David, as well. Mark, could you just give us: Over the past, I guess few quarters, you've broken out sort of what the ELA licenses have been as a proportion of, I guess product revenue.

I know you've changed have license programs, but do you have an idea, maybe of just the demand flow in the enterprise, maybe versus some of the packaged business right now?

Yes, Kirk, I'd be happy to talk about that. In fact, I'm going to take -- take your question as an opportunity to build some expectations here because as -- as Jeff mentioned in his opening comments, there are these new rules about reconciling non-GAAP financial metrics to GAAP.

Gotcha.

And frankly, sell-through demand-related statistics are -- are the kinds of statistics that we've been referring to around the mix of packaged product, electronic licensing, et cetera. But when we went to look at what it would take to reconcile those non-GAAP measures because they're sell-through measures to GAAP measures, we found we needed a slide rule, a [INAUDIBLE] and a [INAUDIBLE] computer working together to get there.

And so we decided that we had to do some new things here. We're not prepared this quarter to introduce some new ways of providing those metrics. So, I will just give you some qualitative answers and what then you should look for is probably by time we report on Q2, we'll be able to go through a little bit of a tutorial period around how we're going to report this kind of -- these kinds of measures and -- and give you some historics to compare to so you can see the trend.

Frankly, there isn't a big difference between the GAAP and non-GAAP measures, because the sell-in and sell-out numbers have been very, very tightly in the same range for several -- well, about four quarters now. And so what -- but outside of that, what we can say is this, that the shrink-wrapped products and equivalents around it, like easy licensing, running pretty steady. And -- and pretty flat as we've expected. And then also as expected, the -- the open inflex licensing, so, the electronic licensing that we normally would refer to, was as expected, down from Q4 because this is where, especially, the seasonality kicks in on the larger agreements and the larger projects.

So -- so, obviously if you take those two sort of factors you find that the mix of shrink wrap and easy licensing was higher in Q1 as a percent of licensing than it would have been in the fourth quarter, basically because of the seasonally-down quarter in the volume licenses around open and flex licensing.

Okay, that's fair.

Sorry for the long-winded answer, but, you know -- so, expect us to come back to this and do a good job of showing you the historics and having a way to report quarter-to-quarter. We know it's an important measure.

And another question on the ERMs. Over the past year, most of the guys in the U.S. have been in place about a year. As you look at their progress over the past year versus how the guys have been doing in Europe and obviously those, you know, the European numbers stand for themselves right now, do you have an idea of the progress being made in the U.S.? And how that's being compared to how the European team has done over the past year?

Fantastic progress is the answer. On -- on a couple of fronts, on -- on closures, first of all, and many of them have done an excellent job of mining these named accounts and finding ways to not only sign them up for an original license, but then to go back and drive reorder business on incremental projects. And they've done really well there and they're not quite on target at the India team yet, but they're ramping.

The second thing they've done an excellent job on is creating pipeline They've identified enormous amounts of business, especially over the past two quarters, and so we're really pleased with the progress they've made in in the U.S. market. So, I'd say they're coming on strong and we have about, in the entire world, about, 90. We -- and -- in a group like this, up have have puts and takes.

The European team has been more stable for a longer time and the North American team, we continue to prune and tune and so forth as we move forward. So, there are newer players in that group that it are still on their earlier vamp cycles and others have really hit the ball out of the park.

Okay, thanks, great, nice job.

All right, thanks.

Your next question comes from Brent Williams from McDonald Investments.

Okay. Congratulations, guys. One detailed question on the R&D expenses, as you indicated they were, you know, probably abnormally low, you know, this is the lowest they've been in the last couple of years, and you mentioned that they are going up, but what sort of thing in particular would cause, you know, this kind of ratchet down, I mean is this, you know, has there been a significant change in body count, outside contractors, did you just move Bob Krueger to a more advantageous cell phone plan or... [ Laughter ]

Actually, this is part of the consolidation of the whole R&D effort; When Bob came on board, we had several locations around the world, in fact, and we've done a lot of consolidation, identified the folks who, you know, should stay and help develop the new products and yes, we did get rid of a lot of folks who weren't on that picture and so we're now -- the reorganization is now complete and now we're looking for new bodies to fill the open spots that would help us grow.

Okay. What was the change in body count in R&D during the quarter?

During this quarter, practically none I'm aware of. It was mostly the year-to-year comparison where that's appropriate. This quarter there may have been just a few items on depreciation, other things with respect to the facilities they coupe that would cause it the downward thrust for this quarter.

Okay.

Brent, I'd also add on top of what Dave said that -- that when we made the tough decisions last year to consolidate, you know, Bob -- Bob had a game plan for increasing the productivity of the development organization and I'd say we're well on track with that and -- we have fewer developers today than we had one year ago, but we're getting much better productivity from that team, a team we're really, really proud of and a team that's working really hard right now, closing down four products and getting ready to release them to manufacturing.

Okay. Secondly, you know, one of the things I think is sort of intriguing is coming out of product day in March, was this whole notion of the on-demand enterprise. Can you talk about, you know, the continuing evolution of the plan to get that message out to the end users in terms of, you know, ways to take that message to people?

It's the kind of thing where you might not necessarily be totally clear on what an on-demand enterprise is when you hear the term in the abstract, but when you hear more about what it means, you know, it may start to sound pretty interesting. How will you get the word out to the business users here?

Well, put it this way, the first half of this year is -- is really in and around obviously making our numbers, getting off to a good start, getting some -- some foundational pieces in order.

But then the second piece is clear strategy, some new messaging, which is being worked on and the on-demand enterprise is part of that work, and then releasing the product suite so that we can actually deliver on what it is we're talking about. In the second half of the year, we will start to turn the volume up this messaging and -- and obviously have a larger and larger ability to deliver on it as we train up everyone internally and externally.

So, what you can look for is for really the first time in our history in the second half of the year, probably in the September -- starting in early September, you can look for our messaging to start appearing in places you've never seen us before and really doing poll-based demand stimulation-type marketing. And getting that message out. And the early -- message out.

And the early reactions we've had from our customer advisory council and our customer board is absolutely fantastic because they're saying it's just a small amount of this that will have a huge impact because our brand is so widely known, sort of just below the IT management layer in IT organizations and this is going to be the thing that sort of allows us to -- to move upward a lot more rapidly than before. So, we will get that done. In fact, we have $5 million allocated to -- on an incremental basis in the marketing budget, for the second half of the year around turning the volume up in a significant way.

Great. And welcome to David and thank you for having him have the same first name as Mr.Urbani so we don't have to reprogram our phones.

You're welcome! [ Laughter ]

Your next question comes from Damien Renaldi from First Albany Corporation.

Very nice job on the quarter and congratulations on David joining the firm. A couple of questions. Mark, you made a comment about how WTS helps you seed the market. I'm curious, does the MetaFrame access suite have capability that would allow it to ride on top of that WTS technology without MetaFrame? Or is it a requirement that MetaFrame be part of the infrastructure of the customer?

Okay, so, Damien, I'll probably need to restate what I think you're asking because when we think of MetaFrame now, it's the brand that carries all of the products in the suite. So, I think you're asking a question in and around the MetaFrame presentation server, which has been sort of the core foundation product. Is that correct?

Actually, I was asking about the new technology, the new products that you'll be releasing later this month.

Okay.

Part of the access suite.

Okay, I understand now. So, the answer is in the case of Password Manager and in the case of certain aspects of Secure Access Manager, you will be able to use that service without the MetaFrame presentation server.

Okay.

Okay. And so in the case of Conferencing Manager, it's really an accessory product to presentation server, so, presentation server and, of course, Windows server are prerequisites for Conferencing Manager.

Okay, so, in a sense, you have a chance to sell a WTS customer something while we kick tires on that and perhaps, you know, grow into a MetaFrame presentation server requirement.

Yes, that's -- that's absolutely correct and one of the points on the prepared comments is for everyone keep in mind, you know, the largest software companies in the world, you know have, a very clear, tight message for customers where we can buy a complete end to end solution from them. But at the time time, they provide products that can be disaggregated so they don't put customers in a position of buying all or nothing. And so our strategy is very much in line with that. So that as we introduce not only the products that we've already talked about, but incremental and new products, they'll all have the same characteristics.

They'll work well within the suite, nicely integrated within the suite, and at the same time, for the most part, be able to stand alone. Other than in the case of accessory-type products like conferencing manager.

Okay. I want to go back to the -- the topic of guidance.

During your prepared remarks and in your response to, I think it was John's question, about the outlook for Q2, you made reference to choppiness and deal closure. I'm just curious. Given the performance that you've had and particularly in the last quarter, what sort of choppiness were you seeing? How is it manifesting itself?

So, Damien, when we talk about choppiness, we're talking about predictability of which individual deals will close. And so we're, you know, we can knock on wood in that in the first quarter, the deals that were choppy and were scheduled to close, that didn't close, were replaced by others that we didn't think would close and did close. That's what we mean by choppy. And so, when you have that and you have, you know, some of these things canceling out, good things happen.

But just as easily, we could have had, you know, the other -- the opposite problem where not only they didn't -- we didn't get any replacement of those that went off the radar screen, you know, and got delayed. So, that's why we're being very cautious and we think it's the wise thing to do. As I did say to John, there is no underlying or specific demand driver that -- that we're looking at that -- that we're worried about. It is, in fact, you know, the pipeline is an -- at an all time high and the new pipe creation was actually the biggest quarter we've ever had. So, it's just about being smart about the current environment. That's all.

Okay. And the last question, I think last quarter you mentioned that the integrated partners you had in Europe were, you know, a particular factor or benefit to you in the performance that you saw there. Can you comment on their impact in Europe and then also on what, if any, impact Schlumberger and Northrup Grumman had in the current quarter. If they didn't have impact in the current quarter, when would you expect them to ramp-up?

Okay, so I'm not exactly sure what you are asking about Amia SIs.

Last quarter I think you said specifically that the Amia SIs were a big factor in the strong performance of the European part of your business.

Okay. Actually, no, so, so, let me clarify. In -- in Amia, our -- our -- our SIs are a big factor every quarter. Okay? In fact, we -- our relationship with SIs in Europe is way beyond in terms of maturity where we are in North America.

What we said, Damien, in -- in Q4 about Europe is that we had some very strong reorders from government agencies and especially in central Europe, which is -- which is docked, you know, Germany, Austria, Switzerland. So, just to be sure. So, that's what we said. I think that's what you're thinking of.

Yep.

So, in Europe, in the U.S. and talking about Schlumberger and Northrup Grumman. So, Northrup Grumman, if you remember from last quarter, they did a tremendous job in the largest deal that we did in the fourth quarter, and that's when the U.S. Department of Health and Services. And so they've been a partner and they're an ongoing partner and so the -- what we talked about here today is the -- the formality around signing a system integrator agreement with us.

And the case of Schlumberger, they're just getting started and we're real excited about having them on board. I personally met with senior team of Schlumberger during our Solutions Summit. They sent about five people to the event.

And we're -- we're planning some really interesting things with them, both in their integration business, and then they're going to use their smart card capability tied into our technology to differentiate what they can do in some interesting ways, we're going to certainly support them in those efforts, so, we're really excited about Schlumberger, so, they have not made real impact yet. You know, these things take time, as you know, with -- with large integrators like Schlumberger to ramp up. I would look toward some second half impact rom them.

Okay. Thank you very much.

You're welcome.

Your next question comes from Jason Crest from AG Edwards.

Okay. Thanks, nice quarter, guys. A couple of questions. The deal over $1 million, what vertical industry was that in?

In the high technology industry.

Okay. Good. And can I get some thoughts really on your Euro business regarding visibility and maybe, you know, rough inventory levels?

That's been a bright spot for you guys definitely in the last couple of quarters and peering into the June quarter outward, I mean do the pipelines still look good there? I know in the Norwegian kind of market penetration rates are high. Can you add color on that?

Okay, let's see, Jason, so as far as pipeline creation opportunity identification and sort of a tone of business, I think that we see, you know, some -- some regional differences, you know, we do have SARS issues in -- in the Northern Asia market and, you know, thank God we don't have a lot of business there, so the impact is small there. We're certainly worried about how that might translate over into, for example, the Canadian market where there's a lot of tie to Hong Kong, especially.

But -- and then we certainly in the second half of March, when the war -- as the war started, the North American marketplace showed a little bit of an impact, but other than those couple of things, really we -- we see even sort of even opportunity, even deal identification. Even performance across geographies. Now, our -- our European business is -- has been running strong for, for a number of quarters and -- and very, very stable. Good growth and the team there is executing extremely well.

So, there's no, you know, there's no anomaly there and we're not worried about market saturation or any of those things. If anything, you know, we're -- until we get some of these new products localized in some of the local languages, you know we'll have to be -- we'll have to sell English language editions over there, and so we'll probably look for some upside growth there as these localized languages come out, some of which start late this year and go into next year. As far as inventory levels, really across-the-board, inventories are in really good shape.

We have since Q2 of last year, when we talked about really doing a number of things to reduce the number of days on hand, to manage the SKU, the SKUs much more tightly through our distribution management network and the changes we made in our supply chain mechanics in terms of how we actually build and provide shrink wrap SKUs to distributors around the world, we've been able to keep those inventory levels, you know, declining and -- and -- and very, very tight. So, -- and that's a worldwide phenomenon.

Okay, great and I apologize if I missed this, but, can you kind of talk to the linearity of the quarter? I know you mentioned kind of choppy close rates, but did the last two weeks of March get really, really bad? And on the flip side, was there a lot of business flown in in January and February that was maybe uncommon?

No, matter of fact, as we mentioned during the comments, the linearity was exactly 30, 30, 40 this quarter.

And -- and when I mentioned the North American business in terms of the -- the volume licensing business in the second -- the last two weeks of March, it was up a minor impact, just a little bit harder than it should have been. And so we did see a little minor impact of the start of the war.

Thanks.

You're welcome.

Your next question comes from Todd May of RBC Capital Market.

Hi, thank you, nice quarter an welcome, David, and David, you've done a nice job for the last four quarters. My question regards what you guys expect for your new products this quarter, if there's any expectation that they'll contribute to the guidance that you gave?

Todd, we're not expecting any material revenue from any new products this quarter. If you tick down the list and -- and you look at each one of them, you know, there's going to be a sales cycle on the -- the new one secure access manager, conferencing manager and password manager. And then the presentation server, you know, so many of our customers are on -- are subscription advantage software maintenance program, that they'll be able to pick this product up, feature release 3.

You know, as they always are able to do at their own convenience and integrated in their systems at their convenience without additional, you know, fees to be paid. So, so this quarter we don't expect to see any material impact and we'll use this quarter to ship the products, get the training going in earnest and, you know, start some -- some -- some ramps. We've certainly done some preselling, that's part of announcing things earlier and training people at a Solutions Summit type event and then we'll look for some -- some contribution from the new products in the second half of the year.

Okay, great. And then could you discuss your initial go to market plan for those products?

Well, we're plugging those products into our standard distribution channels. Now, I would say that you have to keep in mind that we're -- we're not a one-trick pony when it comes to distribution channels. So, we have a two-tier channel that we're most sort of known for and we're very proud of.

But we also have some one-tier channels and certainly we've talked about this government business, the GSA agreement, Northrup Grumman as an example, Schlumberger, Unisys in Europe, Seimans and so forth, so, we have a number of SIs in the one-tier channel and we actually have a zero-tier channel which includes companies like HBOC where these -- these software ISVs that sell very, very vertical and very large scale systems actually deliver those products on our software. And so we'll -- we'll deliver the whole suite through that two-tier, one-tier and zero-tier route to market system and, of course, we're -- we're working on all three of those to make them more efficient and make them better-performing all the time.

Okay. And will there be any sell-in to the channel this quarter that's material?

No.

Okay. Great. And then one quick question regarding the tax rate. Do you expect that to be 24%; that correct?

That's correct. We expect that for the full year at this point in time.

Great. Thank you.

All right, I think we are probably out of time. So, we really appreciate your joining us this afternoon and despite an uncertain spending environment, I think you can all see that we really posted some solid financial results for the quarter. We put a lot of work into our strategy. We've put that in place to drive our long-term success, and now we're focused on execution. I'm really proud of this team.

Really excited about our opportunities and, of course, all -- always mindful of the many challenges that those opportunities will present us. I'm really confident that we'll continue to successfully meet those challenges, execute well and do a great job for you. So, thank you for joining us and have a great day. Thank you.

This concludes today's Citrix Systems first quarter 2003 Earnings Conference Call. You may now disconnect.