思杰系統 (CTXS) 2003 Q2 法說會逐字稿

Please standby for real-time transcript. The Citrix Systems conference call will begin momentarily. Good afternoon. My name is Heather, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems second-quarter, 2003, conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, then the number one 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 our Investor Relations.

Thank you, Heather. Good afternoon, and thank you to everyone for joining us today on our second-quarter, 2003, earnings conference call. Participating in the call today are Mark Templeton, President and Chief Executive Officer, and David Henshall, Vice President and Chief Financial Officer. This call is being webcast for the virtual slide presentation at the investor section of the Citrix Corporate web site. A replay of this call and webcast will be available through Wednesday, July 30.

In this call, we will discuss various non-GAAP financial measures as defined by the SEC regulation G, including certain adjusted figures including operating expenses, operating income, operating margin, net income, earnings per share, and tax rate. The most directly comparable GAAP financial measures in a reconciliation of the differences discussed on today's call can be found at the end of our press release, dated today, after the consolidated financial statements and on the investor relations page of the Citrix Corporate web site. 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 risk 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, product demand in the pipeline, 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 in the company's filings with the SEC, available from the company's web site or the SEC itself. Now 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, Q2 was a very solid quarter, capping off the best first-half performance in Citrix history both top line and bottom line. Revenue was $143 million, sequentially flat, as expected, but up 22 percent compared to last year.

Bookings, reported revenue, plus the change in deferred revenue, was up over last quarter and last year significantly ahead of our expectations. Momentum is clearly coming from the customer penetration investments we've made. Really driving the growth in our enterprise licensing and subscription advantage programs. Resulting in a strong $17.5 million increase in deferred revenue. Net income was $29.3 million or $.17 cents per share. Adjusted to exclude the effects of amortization, net income was $31.1 million or $.18 cent per share. Up almost 144 percent over last year. We're pleased with our results. In fact, excluding royalties, it's our best Q2 ever. As you listen to the rest of the call, there are five points to take away. First, bookings. A direct indicator of customer demand, were strong in Q2. We're getting good traction with enterprise customers in product licensing and subscription advantage renewals. Second, our Q2 financial results were on target. Top line, EPS, cash flow, and key metrics were in line or better than expected. Third, we delivered four product releases.

Upgrades of both Windows and Unix additions of MetaFrame presentation servers. The new MetaFrame Conferencing Manager and MetaFrame Secure Access Manager. All allowing us to better leverage our customer base and channel partnerships. Fourth, this quarter we'll release MetaFrame Password Manager, another new product that further enhances our access infrastructure product sweep. And last, our sales pipeline group, again. The product suite is helping our partners identify more opportunities than ever for both existing and new products. Now I'll turn it over to David to discuss the financials.

Thank you, Mark, and good afternoon. In my comments, I will discuss the financial performance for the second quarter of 2003. Please note that all numbers discussed are adjusted to exclude the effect of amortization of intangible assets. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures.

Total net revenue this quarter was approximately $143 million. This represents an increase of 22 percent over the same period last year and was flat on a sequential basis. License revenue was $132 million compared to $132 million last quarter and $102 million last year. Services revenue, which includes consulting, technical support, and education, totaled $11.3 million, which is flat sequentially and on a year-over-year comparison. Looking at results by geographic region, the Americas generated 53 percent of revenue, up from 47 percent in the first quarter, representing solid execution and continued enterprise penetration. EMEA accounted for 39 percent of revenue, compared with 43 percent in the first quarter, and the Pacific region contributed eight percent, compared to ten percent in Q1.

For the quarter, even the top 10 deals were in the Americas region. In total, we completed three transactions greater than $1 million, compared to one last quarter. And we completed eight transactions greater than $500,000 compared to two in the previous quarter. Operating expenses excluding amortization of intangibles were approximately $100 million for the quarter, up $2 million sequentially, and flat year-over-year. The increase from last quarter was primarily related to hiring increases. The total number of employees at the end of the period was 1,750, an addition of 70 people over Q1. Research and development expenses increased sequentially by approximately seven percent, mainly due to an increase in the number of employees.

We expect these costs to gradually increase over the remainder of the year as we continue to invest in new products and improvements to our existing product family. Sales and marketing expenses were down one percent compared to last year, down two percent sequentially. Increases in the number of employees were offset by a decrease in marketing program costs. We do expect sales, marketing, and support costs to increase over the balance of the year as we launch and market the new products in our access suite. G & A expenses were up $2 million from last quarter and on a year-over-year basis, primarily due to an increase in consulting projects. The adjusted operating margin for the first quarter was 27 percent. This compares to 11 percent last year and 29 percent last quarter. The adjusted tax rate was approximately 22 percent for the quarter, which gives us a year-to-date rate of 23 percent. We anticipate the 23 percent rate to continue for the remainder of the year. Adjusted net income for the quarter was $31.1 million. This represents an increase of 131 percent year- over-year and a decline of about four percent sequentially. Adjusted EPS was $.18 cents for the period.

Looking at the balance sheet, cash and investments at the end of the quarter totaled $789 million, an increase of $67 million from last quarter. This growth was primarily driven by cash flow from operations, which was $54 million for the period. Net accounts receivable balance increased to $84 million, up from $69 million last quarter, resulting in day sales outstanding of 53 days. This is consistent with Q2 of last year and a 10-day increase on the sequential basis. Looking forward, I would expect DSO's to generally be in this range. Deferred revenue grew $17.5 million or 16 percent sequentially to a record $128 million. We're pleased to see this growth as it highlights the continued acceptance of our subscription advantage program and an increase in enterprise transactions. With the growth in enterprise and multi-year customer commitments, the greater portion of revenue is being deferred.

We expect the trend in deferred revenue to continue as more customers choose to standardize on our MetaFrame Access Suite and as we continue to increase the renewal rates of the subscription advantage program. We continue the stock buyback program during the second quarter in which we repurchased approximately 2.1 million shares at an average net price of $17.10 per share. Also during the quarter, the board of directors authorized an additional $200 million for the stock repurchase program. At this time, I would also like to introduce a new member of the team, Mike Kritinziana. Mike has joined us as the Vice President of M and A and Investor Relations. Prior to Citrix, Mike was an investment banker and software research analyst with Gerard, Clower, Madison. Mike has been following Citrix since the mid 1990s and brings a valuable skill set to the team. Scott Heron, who was previously in this role, has accepted the position of Vice President of Operations for our European businesses.

Going forward, we expect the overall economic environment to remain challenging, and are planning our business accordingly. However, we are encouraged by the results in progress achieved this quarter and will continue to invest strategically in new products and opportunities. Now let me turn it back over to Mark.

Thanks, David. Next we'll highlight some Q2 customer wins, discuss a few of the take-aways, then wrap up with the business outlook. We'll start with the biggest sale in Q2. We signed an agreement with Kaiser Permanente, the nation's largest not-for-profit healthcare organization, to extend its use of MetaFrame Presentation Server. Our solution will help caregivers access and update patient information on Epic, the company's automated medical records data base.

Kaiser Permanente has been a long-standing Citrix customer. We're happy to be extending our relationship with them as a strategic technology partner. Another win was at Beverly Enterprises. Beverly is one of the leading providers of health care services to the elderly in the U.S. with nearly 500 facilities in 32 states. They're using MetaFrame's Secure Access Manager and Presentation Server to provide 7,000 employees with access to clinical applications. Helping to ensure the highest level of service and care for patients and their families. In EMEA, bank Populare recently expanded its MetaFrame Presentation Server to nearly 3,000 users at 300 branches throughout France. Citrix access infrastructure gives the bank's employees on-demand access to ensure consistent customer service throughout the organization. The distribution of our top ten deals resemble the fourth quarter more than at Q2. All ten were greater than $450,000. Three were over $1 million. Eight of ten were in North America.

And impressively, half were reorders. All this indicates existing customers continue to standardize on our access infrastructure. Small customer, small project, and first adopter sales were sequentially down. These customers continue to be highly sensitive to overall business confidence making small and new IT projects more susceptible to elimination or delay. On the other hand, our medium and large-project business drove a double-digit sequential increase in open and flex license revenue. The North American team posted its best performance in open and flex licensing ever. The one-tier channel model in North America is maturing as ERM productivity improves and integration partners become more services focused.

This is the channel model we've successfully built in EMEA. The second quarter included a very successful partnering program with Microsoft. The Windows server 2003 launch. As one of only seven platinum ISV sponsors, we participated in 51 launch events in 25 countries across North America, Europe, and Asia Pacific that targeted around 300,000 attendees. In conjunction with the launch, we released an upgrade to MetaFrame Presentation Server and we were one of the very first products to carry the Certified for Windows Server 2003 logo. Windows server 2003 is the first major Microsoft server released in three years. It gives us a more robust, more stable, and more flexible platform for our entire product suite to run on. And the enhancement of Windows Terminal Services will help feed and grow the primary market for Presentation Services, a market in which we are the clear leader. We're a big supporter of Windows Server 2003.

Our Q2 goal was to release all the announced components of the MetaFrame access suite, Presentation Server, Conferencing Manager, Secure Access Manager, and Password Manager. As already mentioned, we shipped upgrades to both the Windows and UNIX additions of MetaFrame Presentation Server with significant new features. In addition, we delivered MetaFrame Conferencing Manager, and we're already seeing some good, early implementations. This accessory product for Presentation Server was awarded Best of the Show by Windows and "Dot-net" magazine during Microsoft's recent Tech-ed 2003 Conference. We also shipped MetaFrame's Secure Access Frame Manager in Q2, giving customers a secure way to find and access any information resource over the web. The new release includes support for secure SSL connections and a powerful search feature, and is positioned as an integral part of the MetaFrame Suite with concurrent licensing, just like our Presentation Server. While still not a significant revenue contributor, we are encouraged. Q2 revenue was up sequentially. There were many new pilots. The pipeline grew approximately 300 percent during the quarter, and we closed our first large deal with Beverly Enterprises. Finally, we made the tough decision to delay the release of MetaFrame Password Manager.

Password Manager provides improved security and single sign-on access to applications running in the MetaFrame environment. Last March, we released a technology preview of this product to our channel partners and many customers. We learned a lot from these customers, and in June, determined that password manager, a key addition to the Access Suite, just wasn't ready. So we decided to target a September general release date. We presently have about 50 customers actively engaged in an early adopter program. Our field based SE's and product specialists are working closely with them and the excitement around the product continues to build. And for good reason. Research shows password calls to the help desk cost about $200 per year per user for a typical company. Password Manager will fix that when it's released in September. Q2 was a success financially and operationally. Our goal is to build through Q3, the second half of 2003, and into 2004. This will require us to focus on several areas during the third and fourth quarters. First, we'll deliver Password Manager with the quality, performance, and completeness for which we are well-known. Then we'll begin the next phase of repositioning Citrix.

This process really started on March 18th at our Product Strategy Day, when we revealed our plans to integrate existing and new products into the MetaFrame Access Suite, a complete, seamless solution that powers the on-demand enterprise. Since then, we've planned a series of worldwide brand-building programs that begin in September. The goal is to help customers and business partners see a new Citrix in a larger context. To see the MetaFrame brand in a more strategic light. And to see the business value of true, on-demand access in a whole new way. In September, we'll launch our first worldwide, multimillion dollar advertising campaign. Designed to reach senior IT executives in the North American, European, and Japanese markets. The emphasis will be on business-focused print ads, supplemented by other media, including radio, airport, and billboard exposure, running through the end of 2004. Another brand building milestone ahead is our sixth annual I-forum conference. This year we expect more than 2,000 attendees, and HP, SAT, and Microsoft speakers will be keynoting.

It's bound to be the best ever, and I'd like to extend an invitation to all of you to come. You'll find registration details on our web site. With a broader suite of products, increased IT awareness, and continued market leadership, we're also focusing on further evolution of our channel programs. To leverage our installed base and to expand our strategic value to customers. We're still pruning nonperforming partners, and pruning incentive programs to drive the sale of our entire Access Suite. We'll continue targeting new partners who sell into our top industry verticals, especially those with the focus on pre and post-sale services. Our goals are to increase the total performance, size, and relevance of our partner, Ecosystem. 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 two-tier and one-tier relationships. These are the focal points for Q3. And of course, we'll continue to look for opportunities to further invest in our growth. The timing is right. IP organizations are actively looking for lower cost ways to run, grow, and transform IT services. We can help them as the only vendor that's 100 percent committed to access infrastructure for the on-demand enterprise. Next, I'd like to turn to our overall outlook and forecast for the third quarter. Remember that these estimates constitute forward-looking statements, and they involve risks related to our assumptions about the future. Our outlook is based upon what we saw in Q2, along with our view of the overall business environment.

We're coming off a solid quarter and a record first half. Growth in bookings, great year-over-year revenue growth, excellent traction with large-size projects, new products shipped, and the largest pipeline we've seen. So there are lots of positives. On the other hand, the business environment's the same. Overall IT spending trends and economies have not materially changed. It's still difficult to predict when specific projects will be funded. The market for small projects remains weak, and the environment isn't the most conducive to new product introductions. Because of these factors, we still expect unpredictable closure rates going forward. Taking all this into consideration, our guidance for Q3 is as follows -- Revenue is expected to be in the $135 million to $145 million range.

We expect operating expense to increase by $3 million to $5 million for new product development, additional services people, and strategic marketing. EPS is expected to be in the range of $.14 cents to $.16 cents per share. Adjusted EPS is expected to range from $.15 cents to $.17 cents per share. This is what we're seeing right now. There are some upsides. However, Q3 is always a variable quarter for IT spending. And the IT environment is still fragile. Despite this market climate, we're making the necessary investments to expand our market leadership, brand equity, and customer solutions. Longer term, we're focused on the top line. On new product revenue and prudent 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. So now I'd like to open it up for questions. Thank you for joining us. Operator? You'd like to run the question and answer?

If you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Steve Freitas with Gerard, Clouder, Madison and Company. Sir, please go ahead with your question.

Good afternoon, everyone.

Hey, Steve.

Two questions today. The first, I was wondering if you could delve a little bit more into the description advantage and what sort of dynamics are at work there. And specifically -- specifically, what's been your maintenance renewal rate, and how has that trended over the last couple of quarters?

Let me -- I'm going to frame it out a little bit, and then pass it to David, Steve. I think as you might remember about six quarters ago, we put a customer care team in place here in the U.S. and we have begun to model that team around the world with the specific goal of increasing the renewal rates on Subscription Advantage. And that team and that program has been very successful.

So Subscription Advantage has been growing due to two factors since the first quarter of last year. The first factor is having a much larger pool of renewals to actually work on. And secondly, having a team that's actually having a direct impact on the renewal rates. And so with both of those, we've seen a dramatic increase in Subscription Advantage over the last six quarters, as a matter of fact. And that's obviously having a huge impact on our deferred revenue. Let me let David add additional color to that.

Yes, Steve. We've actually been moving up on the last few quarters from the low to mid 60s on renewal rate, up to approximately 70 percent in Q2.

Okay. And now terms of the spike in deferred this quarter, is there any -- any changes in the way that you are -- are licensing products? So for instance, does every new sale, new license sale -- is it mandatory that maintenance is included or is it maintenance included where it may not have been in the past or in all, you know, only on shrink or only on E license but not on shrink? Has there been dynamics at work there that might account for the increase in deferred?

Yes, actually. As a business continues to evolve, the overall deferral rate on all new bookings have steadily increased. And that's for a few reasons. For example, as you mentioned, first-year subscription is now bundled with all new product sales. Also, an increasing portion of the company's revenue is being generated from our volume license programs. Finally, we've seen an increase in the number of multiyear deals.

Okay. And is there any instances where license would be amortized over more than one -- more than one quarter?

Yes. There's always certain circumstances related to, you know, various revenue recognition criteria, where we may end up recognizing revenue -- license revenue ratably over the contract period.

Did that happen this quarter?

There were at least a couple of contracts I'm aware of where license revenue was recognized part in this quarter and part in future periods.

Okay. And one more question. Regarding NQ's Classic, I'm wondering if there's any -- anything happening there regarding restricting access to the product so as to encourage purchase to Secure Access Manager -- there could be instances where, you know, people may opt to use Classic and that would deter potential Secure Access Manager sales?

Steve, I understand your question. The couple -- the brand is gone, and what you think about it the NQ's Classic, we call that the web interface for our Presentation server. So with respect to your specific question, we really don't do business that way. We try to sell incremental products based on their value that they deliver to customers. And MetaFrame Presentation Server frankly needs a web interface as part of the core product. It's sort of a core feature.

Imagine -- imagine a product -- especially a Presentation Server product that was not available through a browser, useful through a browser by default as a core feature. That's the way we look at that. And so the real -- the real issue here is driving the value of Secure Access Manager in the proper way. And so with the repositioning of the product, renaming, new licensing model, and the new feature set, the SSL capability so that you can actually connect over the net without using a VPN and the new search capabilities, some of the other things, you know, this is what is getting traction in the pilot stages, in the opportunity pipeline, that will turn into real revenue. So we're very encouraged, as I mentioned in my prepared comments.

Okay. That's it. Thank you.

Okay, Steve.

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

Thanks. Pretty good quarter, guys. Had a quick question. Can you hear me okay?

Yes. We can, Jason.

Okay. Good. Okay. Wondering if I could get maybe a detail on just how -- how license revenue has been done direct versus indirect this quarter compared last year. License percentage revenue direct versus indirect, if I could get a comment on that?

Not materially different. And frankly, that means that we continue to have about, you know, somewhere between 96 percent and 98 percent of our recognized revenue is through indirect channels.

Okay.

And as our channel partners have always known that, we'll do some percentage of our business direct if a customer absolutely requires it. We try to show customers that they're actually better off doing business with us through a partner. And as I said, about 96 percent to 98 percent of the time, they do that.

Okay. Real quick comment on -- the question on Europe. What's your guys feel for Europe going into the September quarter, and how are the metrics on the deal side in Europe this quarter?

Let's see, okay, so I actually spent a week in Germany in June. Actually, it was about 100 degrees the entire week. And their air conditioning can't handle it. It was a memorable week. I saw about 15 customers in Munich, Studgard, and Frankfurt.

Some of our larger once like the Deutch Bank, the German -- ones like the Deutsche Bank, the German banks, the national savings bank, Porsche, one of my favorite German customers. And clearly, that market is having its economic challenges and is affecting a lot of companies in some really serious ways. Especially municipalities. We're actually doing pretty well in that marketplace because we're very, very focused on cost of ownership and driving costs out of the -- out of computing infrastructure. If you look at the rest of Europe and how it did in the quarter, actually was -- it did real well. Had a great quarter.

Government business was strong during the quarter. And each geography did well. The tone of business going into Q3 is confident. We always are concerned with the European business in the third quarter because of the way business ebbs and flows due to vacations and so forth in the third quarter. But that's -- that's part of the reason we're very cautious on guidance as we go into Q3. Very frankly, is even though the confidence is there, we always worry about it.

Okay. Then this last question. Given the cash on the balance sheet, you guys are building a pretty good horde here, if you exclude the convert. Any M & A plans or strategies, something to look forward to, what your guys' strategy is beyond remote connectivity? Taking it beyond the firewall, anything you can kind of clue us in off of?

Right. So, obviously, we can't make any specific comments here, and with the kind of currency and resources we have and the market opportunity that we have in the Access infrastructure space, we think there are some opportunities out there, but we don't have any specific plans at this time. So that's one of those where, you know, the right thing happens at the right time for the right reasons.

Thanks.

Uh-huh.

I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from Todd May with RBC.

Hi, thanks for taking my call. I was wondering if you could discuss how you guys look at next year -- and if you see any potential driver from customers moving off of NT server, would that have any impact on your business over the next year or two?

Todd, as we look, obviously, we're not going to get into any kind of a forecast for '04. I think '04 will depend a lot on sort of the overall business climb, of course. But I think we're feeling pretty good about '04 because by the time we get to '04, we're going to have a couple of quarters of new product in -- in distribution, and we'll have some -- some run rate as we go into '04 with new products, which is very key to our growth and our goal to break through $1 billion in revenue.

So obviously the climate will -- will be highly dependent on what happens. In terms of people leaving NT, we drive the adoption of NT and Windows Server. We don't believe that's an issue. As a matter of fact, we think it's a strength. And we think that the uptake on Windows Server 2003 is going to be actually very strong. So I hope I'm answering your question. But that's our view.

Yeah. I guess I was trying to drive a little more -- do many of your customers currently run MetaFrame on Windows Server NT at this point, and could the potential move up to Windows Server 2003 for those clients? Drive additional business for you guys or do you see that as a driver?

Oh, I'm sorry. Okay. Now I understand your question. I think that most customers are taking a good look at Windows Server 2003 and have longer range goals to migrate to the platform. And we'll benefit from that migration, and we're ready to go because we have already released a certified product for the Windows Server 2003 platform.

But I'd remind you that as customers move, it really doesn't affect our revenue because of our Subscription Advantage Program.

And it really is the key part of the strategy that we set in place when we invented Subscription Advantage several years ago, because what customers told us that on an infrastructure product like the MetaFrame Presentation Server, they want to upgrade at their own pace, and they didn't want to be hit -- sort of have a lumpy cost of doing that. So that's why we put Subscription Advantage, why the renewal rate and the uptick rate has been so strong. And looking into the future, they can move whenever they want to, just like customers have moved very naturally and smoothly from NT 4 to Windows 2000 on the MetaFrame platform.

Okay. Great. One other thing I was wondering about is a lot of the deals, a lot of the larger deals that you're doing now are -- are multiyear deals, I believe. And does that mean that there is some -- I call it off balance sheet, deferred revenues or maintenance revenues that will roll onto the balance sheet next year when all of the customers renew?

It really depends on the -- on the type of arrangement, Todd. There is several that would simply just lock in the pricing for future years. And others that have, you know, prepaid, one, two, or, you know, maybe three years of future subscription advantage. It's really a mix.

Okay. Great. That's everything, thank you.

Your next question comes from Lucy with McDonald Investors.

Hi. Can you hear me?

Yes, we can.

Hi, I'm calling for Brent Williams. I have a question regarding your guidance. Does a reduction in earnings come solely from negative leverage due to the lowered revenue guidance, or is there incremental spending, like the x-1 project that is a new change in the expense run rate?

Mark did mention in his prepared remarks that we would expect operating expenses to increase between $2 million and $5 million sequentially, as we, you know, continue to bring these new products to market, invest in growth, and in some of the strategic marketing initiatives.

Okay. Thank you.

Your next question comes from John Rizzuto with CSFB.

Hi, everyone. A solid quarter.

Thanks, John.

Mark, I want to talk about the strategies which I think is really -- has helped you hit this inflection point that you're clearly enjoying. A lot of that's on the channel. I know Ross is in for a while now, your new marketing strategy. How that's paying off for you, what you see the incremental payoff from these strategies, particularly with your channel relationships, and specifically with the channel relationships with your services business starting to grow, and any contention there between yourselves and your channel partners?

That's -- that's a big question, John. Let's see if I can -- I can answer it sort of big, then you can do a follow-up. So -- you know, I was thinking earlier today what we -- what we were doing exactly 12 months ago, and 12 months ago we were talking about flat customer demand, we were talking about work force reductions, we were talking about -- about big channel changes in the channel. We had gaps in the management team. We didn't have a real clear multiproduct strategy. And, you know, we were -- we were working pretty hard in a pretty tough overall environment.

And I think what's happened since then sort of at the higher level, strategic level is, we've sort of addressed every single one of those issues, filling in the gaps in the team, those that you pointed out and some -- in the team, those that you pointed out and some others. We've clearly articulated a multiproduct strategy in a marketplace that is much larger than the market we're serving today, very credible for the company to go after because it -- it's a market that leverages the -- the buyers that know us, the channel partners that know us, and their -- these products and technologies are in adjacent spaces. And then we've made a lot of the operational sort of moves that we needed to make to drive the enterprise business, to drive the subscription business, and we're doing our best at the sort of bottom end of the marketplace, which is -- which is tough for everyone. And so the way I think about this is in the last 12 months, we've prepared ourselves well for the future. And we still have another product to deliver, as I mentioned. We still have plenty to do. But I think that, you know, the only thing that gives us cause to be cautious and prudent is the overall environment that we face.

And so we're going to stay the course on our plan. It's working. And -- and I think that we're well positioned. I hope, again, I've answered your question. It's a pretty big one.

Yeah, you did. The one thing is -- specifically if you can comment on the relationship between yourselves and the channel, particularly your VARS where they perform services on Citrix products, you're starting to did that little bit more. The ERM's has been from my evidence successful with your partners, they seem to like that.

I'm concerned about the feeling of -- how you are managing the concept that you might be taking away potential business from them.

Well, John, while we don't break out Citrix consulting revenues, so I got to be careful on all of these rules around, that are in place here. I can tell you that the Citrix consulting team as a whole has grown ever so slightly. Where it's grown is outside the U.S.

Okay.

And so -- and this team since we acquired the company and ramped up has been running at capacity for, you know, six to eight quarters. So actually, the services revenue from consulting has not grown materially. And what has grown is the way that we're engaging Citrix consulting with our channel partners and really upleveling them through training programs, through -- we have a new certification that we're just launching, the Citrix Certified -- see, the Certified Architect. And these kinds of things, which is really the stated purpose of Citrix consulting. Really not to drive Citrix revenue, services revenue but to drive our channels services revenue. And we believe it's working extremely well.

As a matter of fact, I will go out on a limb and say our European team really didn't want to have a Citrix consulting practice in Europe, and when they -- they witnessed quarter after quarter the kinds of impact that the U.S. team had on our product licensing and our subscription renewals, they decided it would be a good idea and are now putting those people in place. And part of our expense growth really is in context of putting a Pacific and a European consulting team in place so they can yield the same kinds of benefits.

Okay. All right. Thank you very much, Mark.

Okay, John.

Your next question comes from Kirk Materne with Bank of America.

Thank you very much. Solid quarter, guys.

Thank you.

Real quick, I just want to ask you a question on some of the closure rates, Mark. When you talk about inconsistent closure rates, you know, can you give us a little more color regarding that? Is that, I guess, customers extending the decision cycle, or is there, you know, as you guys have built up a larger base of big deals, are there things you need to put in place within Citrix to help expedite the process of closing these big deals?

Yeah. I think -- I think the issue here is just predictability, and it's sort of -- gets down to - you look at the list at the beginning of the quarter. Then when you look at the actual list at the end of the quarter, it looks quite different. And especially if you look at the entire first half as a whole, okay? So honestly, Q2 is better than Q1. But the first half as a whole was -- was very inconsistent and unpredictable.

So I'm not sure how much more color I can -- I can provide around it. And it's just that, you know, customers tend on the larger pieces of business make decisions later and really make those decisions based upon their own business. And you have some come in and buy sooner than you expected, and others wait to buy. And so without that kind of predictability that we normally have seen in the past just causes us to make sure that we're prudent about how we got it.

Maybe just to read through the question quickly. I guess how many customers have come up to the plate and said they're going to buy and then it gets delayed through negotiations around the contract, versus, you know, are their infrastructure -- there r there other pieces of infrastructure you all need to put in place in terms of the finance department, the legal department, to try to spite the process now that, you know, if you did a couple million dollar deals a you're ago, that was a big deal. You're now saying, you know, multiple come through the pipeline.

Right.

I guess when you look at the investments going forward, does that have to be in the back of your mind?

Yes. Actually, no. I -- I mean, you know, some minor things. Just the normal scaleability. But we have all the mechanisms in place to do this and do it efficiently and make sure we have the right control systems, management systems around doing, you know, the medium and larger sized dealings dealings.

The open licensing -- deals. The open licensing program runs smoothly, very web based. It takes very little human interaction. The flex licensing program, obviously the larger ones, and they do take more interaction. But if we've ever had a bottleneck in any system, any area that we need to incrementally invest to open a bottleneck there.

Great. And a follow-up question, real quick. On the larger deals, were any of those done with the larger things -- at the partnership level, and anything to look forward to coming down the line?

Yes, I don't have the list in front of me. But yes, I think of the top-10 deals, eight of the top- 10 deals done through partners and two were done directly.

Okay. Great. Thank you very much.

Okay.

Your last question comes from Katherine Egbert with C.E. Enterberg Tobin.

What was the channel of inventory -- the inventory in the channel at the end of the quarter?

Katherine, as you know, we don't -- we don't provide inventory statistics, but we managed the inventory very much in line with the demand. And inventory stayed -- actually it was slightly down. Flat to slightly down.

Okay. That's what I was looking for. Directionally. And what was the bad debt expense at the end of the quarter?

There was a very limited amount of bad debt expense during the quarter. Nonmaterial amount.

Okay. So a limited increase then?

It was essentially flat.

Okay. Thanks. Nice quarter.

Thanks, Katherine. Well, I think that -- that concludes the Q&A period. And we are pleased that you took the time to join us. And it was a great quarter, great first half. And now it's time to get after the second half and score again. So thanks for joining us today. And have a good evening.

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