思杰系統 (CTXS) 2003 Q3 法說會逐字稿

Good afternoon, my name is Debra and I will be your confidence facilitator. At this time I would like to welcome everyone to the Citrix Systems third-quarter 2003 earnings 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. (OPERATOR INSTRUCTIONS) I would now like to turn call over to Jeff Lilly, Manager of Investor Relations. Thank you sir, you may begin your conference.

Good afternoon and thank you for joining us today on the third-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. The call is being Web cast with a virtual slide presentation at the investor section of the Citrix corporate website. A replay of this call and web cast will be available through Wednesday, October 29th.

And this call we will discuss various NON-GAAP financial measures as defined by 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 and reconciliation of differences discussed on today's call can be found in the press release dated today 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 and in pursuant to the Safe Harbor provisions of section 21 E of the Securities Exchange Act of 1934. These 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, product demand and pipeline, economic and competitive factors, and the Company's key strategic relationships.

Additional information concerning these factors is highlighted in the slide presentation, the earnings press release and the Company's filings with the SEC which are available from the SEC or the Company's investor relations website. Now I would like to introduce Mark Templeton, President and Chief Executive Officer of Citrix Systems.

Thanks, Jeff. And thanks for joining us today on the call. It was a fantastic Q3 as you can see from the press release. We saw significant improvements in most metrics compared to last year and we exceeded our expectations in some really key areas. Revenue was 144 million, sequentially flat as expected but up 21 percent compared to last year. Continued momentum in licensing and subscription resulted in a $16 million increase in deferred revenue. That's about a 13 percent increase for the quarter to approximately $145 million on the balance sheet. Net income was 31 million or 18 cents per share, up 89 percent over Q3 of last year. Adjusted to exclude the effects of amortization net income was 32.8 million or 19 cents per share, up 94 percent over last year.

We had a really solid quarter and are quite pleased with our performance. As you listen to the rest of the call, there are five points to take away. I will list them briefly now and provide more detail later. First, our Q3 financial results, top line, EPS, cash flow, deferred revenue and key metrics were in line or better than expected. And bookings, a direct indicator of customer demand continued strong in Q3.

Second, traction on medium and large-scale projects continues to grow. Our top eight deals were $700,000 or higher. And a record five of those deals were over $1 million. Clearly, we're becoming strategic infrastructure for medium and large customers.

Third, we are making good progress in developing and leveraging the customer influence of next generation partnerships with industry forces such as Microsoft, IBM, SAP and HP.

Fourth, specific Metaframe Access Suite is now available with a shipping of Password Manager and some newly announced licensing programs, we are making it easy to migrate and to step up to our product suite, giving customers lower access cost, greater information security and better control over the access experience.

And last, we are totally focused on growing the access infrastructure market by increasing our visibility with CIOs, by communicating the strategic value of our access infrastructure, by leveraging the strong royalty of our customer base, and by building our brand as the leader in the access infrastructure marketplace. We will drill down into these take a ways later, but now I will turn the call over to David Henshall to discuss the financials.

Thank you, Mark and good afternoon. In my comments I will discuss the financial performance for the third quarter of 2003. Please note that all members discussed are adjusted to exclude impact of amortization of tangible assets. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures. Total revenue this quarter was approximately $144 million. This represents an increase of 21 percent over the same period last year and was up modestly on a sequential basis. License revenue was 133 million compared to 132 million last quarter and 108 million last year. Services revenue, which includes consulting, technical support and education, was nearly $11 million which is basically flat or sequentially and on a year-over-year basis.

Looking at results by geographic region, the Americas generated 52 percent of revenue, EMEA accounted for 38 percent, and the Pacific region contributed 10 percent. These figures are roughly in line with the contribution from last quarter. For the quarter six of the top ten deals were in the Americas region. In total we completed a record five transactions greater than $1 million compared to three last quarter. And we completed eight transactions greater than $500,000.

The rate of bookings during the quarter continue to track with a consistent monthly profile. We booked approximately 33 percent of our business in the last month of the quarter similar to results we saw in the previous period. Operating expenses, excluding amortization of intangibles, were approximately 97 million for the quarter, an increase of about 3 million over last year and down 2 million dollars sequentially. The decrease from the second quarter was primarily related to a decline in outside services and certain facilities related expenses. These decreases were partially offset by personnel costs associated with increased headcount. However, a majority of these new hires were towards the end of the quarter so the full impact on expenses will be realized in the fourth period.

Total number of employees at the end of the quarter was approximately 1800 an increase of about 50 people over Q2. These additions were evenly divided between the R&D and sales functions. Research and development expenses decreased sequentially by approximately 4 percent mainly due to a decrease in facilities and related costs. However, R&D headcount increased 6 percent in the quarter. We expect R&D expenses to increase in Q4 as we continue to invest in the new products and improvements to our existing product suite, and the full quarter impact of additional headcount is realized.

Sales and marketing expenses were up 1 percent sequentially and 9 percent over the same period last year. This is primarily driven by an increase in marketing program costs and increase in headcount. We do expect sales, marketing and support costs to increase going forward as we continue to expand our global brand awareness campaign and invest in go to market activities. G&A expenses were down approximately $3 million from last quarter and slightly down on a year-over-year basis. Due to a combination of factors primarily decreases in consulting and outside services.

The adjusted operating margin for the quarter was 29 percent, this compares to 17 percent last year and 27 percent last quarter. The adjusted tax rate was 23 percent for the quarter, which we anticipate this rate to continue for the remainder of the year. Adjusted net income was 32.8 million, represents an increase of 88 percent year-over-year and an increase of about 6 percent sequentially. Adjusted EPS was 19 cents.

Looking at the balance sheet cash, investments now total 811 million an increase over $20 million from last quarter. This growth was driven by strong cash flow from operations which was $73 million in the period as compared to 54 million last quarter. Net AR balance was $86 million, flat on a sequential basis. This resulted in days sales outstanding at 53 days consistent with the results from Q2. Looking forward I would expect DSO's to be generally in this range.

Preferred revenue balance grew 16 million dollars or 13 percent for the quarter to 145 million. I am pleased to see this growth as it highlight the continued acceptance of the subscription advantage program and an increase in enterprise transactions. We continue the stock buyback program during the third quarter in which we received 1.9 million shares at an average net price of just under $20 per share. This brings shares issued and outstanding as of September 30, to 163.5 million. We are satisfied with the financial results for the quarter; they highlight our continuing focus on investing for growth while executing cooperational efficiencies.

Now let me turn it back over to Mark.

Thanks David. Next we will highlight some Q3 customer wins, discuss the key takeaways, and then we will wrap it up with the business outlook. (indiscernible) by highlighting a few of the customer wins. Kaiser Permanente, the nation's largest not-for-profit health-care organization was our top deal in Q2 and our second largest deal in Q3. Kaiser now provides secure access to their medical records system for 8.3 million patients to tens of thousands of physicians and caregivers with Citrix software. Our solution is helping with HIPA compliance, with health-care efficiency and with better patient care. A top 10 customer deal out of Latin America was ABN Amro, Royale, expanding our existing relationship into their Brazilian branches. This financial services company is using Presentation Server for secure access to Microsoft Office, Internet Explorer, Lotus Notes and other applications for thousands of bank workers.

We had a record quarter with government customers around the world. In the U.S. the naval sea systems command licensed Presentation Server to get thousands of Navy shipyard workers secure access to industrial applications. Our investments in the government market are really beginning to make an impact. Turner Corporation, the maker of the millennium health-care information system, brought us another top 10 deal. Turner is a Citrix embedded solution vendor or ESV, and has tremendous influence on many health-care customers. They embed their software in their customer solutions for automating medical, lab and clinical records. All of this indicates that customers continue to standardize on our access infrastructure.

In Q2, we shipped upgrades to MetaFrame Presentation Server for Windows and UNIX. And we also shipped two new products, MetaFrame Secure Access Manager and the MetaFrame Conferencing Manager. In Q3, we added an exciting new product to the MetaFrame Access Suite and that's MetaFrame Password Manager. Password Manager works seamlessly within the entire suite to provide single sign on access to Windows, Web, custom, and host-based applications running in the Metaframe environment. Or even on the desktop. Users log in once and Password Manager automatically logs into all password protected applications. Enforcing password policies and even automating password changes.

IC organizations get better system security and lower help desk costs. Savings up to $200 per user, per year. And users get faster access without the hassle of remembering and answering many different passwords. I am really excited about Password Manager. Unlike other single sign on products it requires no scripting or software development. So it's fast and easy to implement. It's built from Metaframe which means it's optimized for a heterogeneous application environment. It is centrally managed; it increases overall system security and its industrial strength on an enterprise scale. Plus it can be implemented on the server, on the desktop or on both. Making it the most versatile solution on the market.

About 50 customers joined our early adopted program, and within a week of the product's launch we had already closed our first large deal. With Password Manager, we delivered the suite of products that we announced at Product Strategy Day on March 18th. The next step in our access suite strategy is to make it really easy for customers to license the entire suite. So last week and for the first time we introduced bundled pricing. It comes in three options, the suite edition for new customers, the step up edition for existing Presentation Server customers, and the migration edition for Metaframe 1.8 and prior customers.

In Q3, we also turned the bottom (ph) up, way up on the Citrix brand. So we introduced a bigger and more Citrix strategic Citrix to the global marketplace. When you think Oracle, you think database; when you think Microsoft you think operating systems, when you think Intel you think microprocessor, when you think Citrix we want you to think access. Access is what we stand for. access is what we do. And we do it better than anyone. Why? Because we are the only software company in the world that is 100 percent focused on access. Access as easy as the touch of a button. It is a powerful visual image of what we stand for and customers absolutely love it. That is a really good thing because they are going to see a lot of it. They will see it at every Citrix office, at every Citrix event, on everything Citrix including the new redesigned Citrix.com. They will see it in the Wall Street Journal, in the Financial Times, in Computer Weekly, in CIO Magazine, in InformationWeek, in the Economist, in Handels Block (ph) in Lozeckos (ph), in Vitae (ph) Business, on BusinessWeek.com, on Tech Web, on Gov Exec.com, and in many other print and Web publications around the world. The will see it driving down the 101 in Silicon Valley. Taking a cab around Wall Street or changing planes in Atlanta or Dallas. And will go even further than that.

That's because on September 15, we kicked off our first ever worldwide advertising campaign. The $14 million campaign will extend throughout 2004. Featuring print, Web, Billboard and radio ads. We have amazing customer stories and we are using them to power our campaign. Customers like Curtis Robb, CIO of Delta Air Lines, like Joyce Winota (ph) CIO for Automation, like Dr. (indiscernible) CIO of the smart division of DaimlerChrysler. In other words, we are answering the CIOs of some of our most important customers to talk to prospective customers about the value of Citrix software. They are going on record to a worldwide audience with specific, quantifiable, documented business benefits they get from partnering with Citrix.

Customers were also the focus at last week's annual (indiscernible) conference in Orlando. By far it was our best ever. At a time when industry conference attendance has dropped an average of 15 percent each year, we had almost 15 percent more attendees this year than last. Over 2500 in total. This year we featured real customers with real solutions. In fact, 29 customers held breakout sessions over the two days. Presenting and explaining their success stories to the other attendees. In the general session, Scotia Bank's CIO for branch banking talked about how they improved their customer service infrastructure for 1000 branch banks, how they are saving $35 million over five years, how they are serving customers better in less time and how all of this is possible using Citrix Access infrastructure. I-Forum (ph) was also a record for partner support; we had key notes and major announcements from SAP, HP, IBM and Microsoft. With SAP we announced expanded development efforts to provide seamless integration between Presentation Server and the SAP enterprise portal. We announced the certification of Presentation Server for HP OpenView and the creation of the new tool to help IT organizations monitor end user experience. We announced a systems integration agreement with IBM who will resell the MetaFrame Access Suite. There were many announcements and you can get more details about them from our website.

One of the most exciting moments of the conference was when Steve Balmer (ph) addressed the audience via video to discuss the strength of our partnership. Rich Kaplan (ph) corporate vice president at Microsoft also reenforced the strength of the partnership in his key notes. And he presented us with Microsoft's first ever global ISV partner of the year award. Partnering with Microsoft to drive dot net, to drive Windows servers 2003 and to drive office 2003 continues to be a priority for us. Our key goal at I-Forum and going forward is to dramatically expand how customers think about access. To help us see that a holistic strategy for providing access is central to both their IT infrastructure and to realizing their business goals. Today, most enterprises have stitched together a series of access tactics that take the form of many if then (ph) statements. If you're at a certain location and need access to a specific application then do it one way, if you're using a specific device on a given network then access it yet another way, if then, if then, add in some items. Or worse yet, if you are on a nontrusted network on a nontrusted device, then you are completely out of luck. There is a better way and that is to start thinking about an overall access strategy. That addresses application heterogeneity and the increasing variety of access scenarios in a holistic way, not tactically, but strategically. And access strategy addresses the strategic challenge of how to connect two worlds of heterogeneity, the world of application infrastructure on one end, supplying information and the world of the user at the other end demanding information. Simply put an access strategy provides a consistent and systematic way to assure managed, secure access to any enterprise information for any entitled worker from anywhere, anytime, using any device over any connection. Developing such an access strategy is core to both IT and business strategies.

This method has been extremely well received already. It's a critical element of our growth strategy. That is for Citrix access infrastructure to be designed into IT architecture at the strategic level rather then added on as another if/then tactical solution. We built strong momentum throughout 2003 and now we are focused on laying the groundwork to continue this momentum into 2004 and beyond. As we position ourselves to lead the access infrastructure marketplace. Next, I'd like to turn it to our outlook and forecast for the fourth quarter. Remember that these estimates constitute forward-looking statements and they involve risks related to our assumptions about the future.

Though we are coming off a solid Q3, bookings were pretty much as expected, excellent traction with large size projects. A suite of access products, a global brand awareness campaign, lots of positives and excitement. The business environment actually seems to be improving but the pace of the recovery is definitely not certain. We're very excited about our repositioning efforts but it takes time for new products to gain traction and to build higher levels of brand awareness. Taking all of this into consideration our guidance for Q4 to 157 million dollar range, we expect operating expenses to increase by about 5 to 8 million for new product development, additional sales and services personnel and strategic marketing. EPS is expected to be in the range of 17 to 19 cents a share, adjusted EPS is expected to range from 18 to 20 cents per share.

In summary, the economy seems to be on the mend. The need for an access strategy is resonating with our customers very well. We believe that now is the right time to invest in expanding our product set, evolving our partners and building our brand. We have been executing well on these initiatives, and I believe that Citrix is the only vendor that's 100 percent committed to access, is strongly positioned for solid Q4 and an even better 2004. Thank you and now let's open it up for questions.

(OPERATOR INSTRUCTIONS) Tom Ernst with Thomas Weisel Partners.

Good afternoon, congratulations. Quick question for you on the -- we see the deferred revenues build really nicely here with the subscription advantage program. I think if my math is right we have doubled it as a percentage of revenue for the last three quarters to about 25 percent of revenue. What should we -- where do you think that's going to level out as the subscription advantage program goes through its full cycle in getting all the customers converted?

As you know it's only been about a year that we've been bundling subscriptions with every new product sale. I think it was May of last year. So our best estimate is that only about half of our installed base right now is currently on the subscription managed programs. We've got a huge opportunity in front of us right now to go and work on that. We've got focused efforts both in the sales organization and in the customer care organization on not only driving the renewals business but also helping those customers that are not on active subscriptions migrate over to that. So I think we've got certainly some headroom between now and future quarters for deferred revenue to continue to increase.

A couple more quarters of building deferred revenues to think about?

We are only giving guidance for the fourth quarter and we certainly expect deferred revenue to increase this period.

You need to think about three sort of variables that impact this. First of all, the renewal rate the percentage of the available customers that do renew, the second is we don't have complete global coverage on our customer care organization yet. In Europe as well as in the Pacific they don't have the same kind of processes in place yet and that's one of the areas where we are investing and certainly will be doing more in 2004. So there is a coverage thing. And the other piece is a huge population of customers that are non subscription advantage customers from before it was a mandatory piece of the product. The customer care organization actually part of their goal is to bring those customers over because they need subscription because they rely on our infrastructure for strategic benefits.

One more question. Next version of metaframe -- can you walks us through the process here in terms of the launch with the technology preview, maybe any target dates if you are willing to talk about that at this point yet?

We are really excited to preview a lot of technologies and the packaging of some of them at our user conference. But at this point we are not providing any information about when those things might become a product and available to customers.

Fair enough, congratulations again.

Todd May with RBC Capital Markets.

-- through the international markets and how you see progress especially within Europe?

We actually saw strength worldwide for the quarter and Europe actually did really well. August was a little bit tight in Europe because of the weather; actually I was over in Europe for two weeks in August myself on vacation and it was pretty oppressive and it actually did impact business. But despite that we had a solid quarter and we actually saw solid quarter on a worldwide basis. So no particular trends in any particular Geo that we hadn't seen before.

Could you just talk about the long-term deferred revenue on the balance sheet and what those consist of?

The long-term deferred on the balance sheet is primarily from multi customer contracts. While the majority of our subscription advantage is 12 months in duration, there is occasionally a customer who signs up for 24, 36 months. But that really is a minority.

Todd May. Thank you.

Steve Freitas with Gerard Klauer Mattison.

Good job on the quarter. Want to ask you about the low end of the market and in the past you talked a little bit about the mix between license or E license rather and Shrink Wrap. I was wondering if you can get an update on that. I know that on the low end shrink by itself may not be such a good metric maybe shrink plus easy which is the low end or smaller E license component. What are those two combined doing at the low end?

First, remember that we don't target customers of fewer than 500 employees. So we talk about a small customer we are talking about a customer that's between 500 and 1,000. Traditionally makes up about 20 percent of our business. And then above 1000 is the other 80 percent obviously. Our Shrink Wrap and easy licensing programs are really designed for the small customer or the small project that a medium and large size customer might want to do. We've seen actually continued strength actually in the Shrink Wrap and easy licensing if you add them together business, and actually we are pleased with that. And conserving as I said the small projects and the smaller customer. The problem that we have is because we can't map the license mix to GAAP measures, we are not able to talk about the mix between these anymore which is part of my problem in answering your question in a definitive way, the way we used to provide exact mixes between the two. But suffice it to say, this part of the marketplace has been holding steady and the strength in our business continues for yet another quarter to be in the medium and large scale project, and medium and large scale customer business.

(inaudible) How about of total product revenue, how much was flex, can you in terms of percentage, could you quantify that?

Fortunately, we have the same problem because it's a NON-GAAP kind of measure and we must be able to map it to a GAAP measure, we are not able to do it. I'm sorry.

Okay, how about I ask my obligatory quarterly question on MSAM and progress there and I will be a little different this time. I have heard some instances where enterprises are deploying Webster Portal or Share Point Portal and are using MSAM just for the gateway, not for any of the portal or personalization attributes which I would think in a sense dilutes some of the incremental value that MSAM has over the legacy and classic functionality with the exception of the HTTPS encryption. So, I was wondering if you could talk about that for one, and how do you maintain an incremental value add if some of the personalization aspects are diluted, would it be things like application level authentication which would then bring in the Password Manager functionality and seeing those two areas converge over time?

What you are referring to is actually the way we've actually built this suite, okay. The way to answer your question is that we built the suite so that customers can buy an integrated solution where they get all of the pieces from us, or they can integrate pieces such as the Web Sphere Portal into the suite and use maybe a subset of features of some of our products. Your example is a good example of that. We have many customers that are using a secure access manager for organizing and personalization capabilities, and that's really the direction for secure access manager. To be more and more that on-screen access guide when a user comes to that entry point into the enterprise. The capabilities in the SSL area, we've seen lots of interest in that and we see lots of customers using secure gateway capabilities, not only in secure access manager but of presentation server. So we are doing more work in that area because there's a lot of demand for it. I guess the way to sort of sum up the answers that it is a complex world of small, medium and large customers, they buy products, larger customer is more inclined to integrate pieces from various vendors, the small and medium-size customers would rather buy an integrated solution, and our job is to make sure we can provide all those capabilities so that we can serve the full array of customers from small to large.

If I can follow on Tom Ernst's question earlier and regarding growth and deferred, in a different way. Do you have a target in terms of maintenance renewals somewhere in the '70s now (indiscernible) renewal rates? You have a target renewal rate that you are working towards?

Given our business that longer-term renewal rates can be north of 80 percent. We are certainly not there yet. But we continue to focus on that and try to drive that over the next eight quarters or so.

Thanks.

Jason Kraft with AG Edwards.

Real quick on the deal metrics. How many government deals are in the top 10 this quarter along with the Navy shipyard?

Three.

(multiple speakers) U.S. and two European.

Out of the top ten deals, or at least the big deals in general how many did Dell influence for you?

I believe the answer is one.

For the accessory products, Password Manager, Conferencing Manager, MSAM, can you update us maybe your goals for 2004 as a percentage of license revenue? What you are shooting for? Planning? I know you are only giving guidance for the December quarter but it would be interesting to get an update on what you are thinking.

We are not going to provide specifics here but I think what we've said all along and we will stick to it, is that we would see 10 percent of product mix in new products, secure access manager, conferencing manager and password manager sort of exiting next year would be success. I think that would be a successful year with new products. And that we are not going to start to break these out until they achieve somewhere around the five percent contribution to overall revenue.

And then kind of (indiscernible) broad range of where you think product revenue and aggregate could be?

We are not going to provide annual guidance, certainly not at this point. We are hard at work on putting our 2004 operating and financial plan together. By the way in context of the three-year plan. So, I'm not prepared to answer that question for you right now.

Taking your increase in Op expenses for Q4 in the guidance and into next year, has there been any change in strategy as far as expansion of the ERMs in North America? Are you still looking to hire rapidly or are you pretty much say happy with what you have right now out there in the field?

We definitely are looking at especially going into '04 expanding the capacity of ERMs on a worldwide basis. This year we have been pretty cautious about that, trying to ramp up the productivity of the team, they have done extremely well. If you look at the last two quarters the contributions of the top 10 deals from North America was five of the top 10 in Q3 and it was 8 of the top 10 in Q2. So that team is really come on strong. We have about 50 ERMS in North America and there is more opportunity, lots more to expand capacity. In doing that, however, we are going to need to increase the support infrastructure that is around an ERM and their activities in coordinating partners and all the activities that a customer needs to scale out. That means SE's, Citrix Consulting, training and education people, technical services; so all of that kind of comes in a package as we increase our capacity to touch customers and coordinate the partnerships around making a customer successful.

Last question. The 1.8 customers and most of those on that are not on subscription advantage, is there any thought as you guys move in -- what do you know the roll out of (indiscernible) into end of life 1.8 at all, and if not, kind of go over where your support structure is at that?

We do have an end of life set of policies and that time will come for 1.8. Given what we do in the enterprise in terms of making all the heterogeneity kind of work together, some of that heterogeneity is caused by the end of lifing of application infrastructure or devices or networks. We tend to strategically want to lag behind others and that gives customers more time to move to newer platforms. So we are not going to announce the specifics around the 1.8 end of life, but I would mention that we do have programs to try more aggressively migrate to customers that are on 1.8 and prior platforms to the current MetaFrame Presentation Server because they really have to get the current presentation server to then be able to take advantage of the entire suite. And so as we introduced these programs the bundled pricing programs in the quarter, we actually had a migration program at $399 per CCU and that basically allows a customer that is on a prior version to move to the entire suite and get all of the products and migrate forward, and run on any platform they like, either the Windows 2000 or the Windows 2003 server platform.

Thanks.

Brent Williams with McDonald Investment.

Thanks, let's see, I think Jason grabbed my question about the number of deals from government. Going back to the question he asked about sales guidance, do you have particular geographies where you are really going to crank up the sales hiring over the short-term here? And if I had to get sort of a balance of the body count how many are going into direct sales? Or how many are going into sales support type positions. Can you give me a sense of where that is going to come out?

Growth, no particular geography over another. We have obviously different goals around the world based upon the maturity of the market for us and the size of the opportunity. So we -- so that's the way we look at it. I can't really break that down for you here. Secondly, in terms of the mix, it takes more than one body to support an ERM, okay. The ratio there is probably somewhere between two and four, depending full time equivalents, you have to take into consideration the technical services organization, and that includes a we call it technical relationship manager that typically gets involved in a larger customer. Certainly customer support people as these larger customers do buy support on an annual basis. And then of course all the more logical and direct people that are involved SE's, consulting people, partner managers, those that work with our CSN partners, they are all involved. So it really is sort of a multiheaded sort of monster all around the ERM.

Any changes based on a sort of returns in terms of lead flow, readership surveys, any of that, any changes in the timing of the ad campaign over the next couple of quarters? Either pulling it in or saying hey we've got enough interest level so maybe we can throttle back a little bit and go for more of a slow burn kind of thing?

No, we are early in the cycle, we have a game plan and all these pieces, are, it is a piece of an overall game plan, the ad campaign that is. Actually what people are seeing right now is only Phase I, Phase II starts in February of next year. Phase I has been focused on the United States, Europe and Japan. And as we go into Phase II, we will add Canada, we will add Australia, we will add some other smaller countries where there is good IT spending flow and good opportunities for the fulfillment and customer service capabilities we have in those countries. So as far as other metrics around surveys and what we see and hear, actually they are typically very positive around what we do. And I think as customers become more and more aware that yes, we save them a lot of money, but we increase the flexibility around so many areas that gives them the ability to expand their branch offices, that give them a business continuity solution sort of built in, that give them a telemarketing capability built in, that really supports their whole strategy around consolidating and centralizing IT, and other sorts of business initiatives support. I think that's part of what's fueling the positives around the business and the interest at higher levels in the IT organizations.

Bouncing to a couple of other or one last housekeeping question. At the office 2003 launch yesterday in New York there were probably a dozen partners with little stands set up and you guys were one of them. Is that a reflection of any changes that you see in the way that people are likely to deploy Office 2003 versus earlier versions that might create an opportunity for you, was your presence there an opportunity to gloat about the old partner of the year trophy again, the one that is on your mantelpiece or was this a routine sort of appearance?

Not routine, okay. And then not at the other end of the spectrum either around some sort of philosophical message around how to deploy Office 2003. We were there as sort of part of our overall Microsoft partnership and really trying to do two things, first, make sure that customers were reminded that they can use our tools, our products, our infrastructure to more rapidly give people access to Office 2003 and decouple the delivery of Office 2003 from the hard coded infrastructure that they have in place. So that's a classic message that we have. And secondly, for those customers who are already on our infrastructure to remind them that because they are on our infrastructure, they have an open door to go as fast as they want to go. Because by introducing Office 2003 into their metaframe access infrastructure they can give other users very rapid access to the entire application suite and take advantage of lots of the new things. I will tell you one of the things I like about Office 2003 is the built in span capability of the outlook client. When you're running that it has a lot of span capability built in. There are a lot of things that are in that suite that customers are going to want to get to and we can provide our customers with a much faster way of getting there. So that's what it was about, pretty traditional stuff.

Kirk Materne of Bank of America Security.

Congratulations guys. Just a quick question, obviously you've got to spend some time with a lot of your bigger customers last week and I-Forum, I guess you had the ERM program in place for about a year, a year and a half now in the U.S. Can you give us some idea of what the customer feedback is this far, how what they like, what you guys might need to work on and just maybe some color around, some tweaks you might have to make going forward perhaps?

Nothing is ever perfect. I would say that where we do it sort of perk our goals, it's been working extremely well. Customers always want more attention. We always like to give them more. And what we are trying to do is engage our integration partners in a way that allows them to be part of delivering that increased amount of attention. I would say the one think that we'd like to see is a little bit more consistency across especially the U.S. in how we engage. So we are working on that and so what you will see us do and it won't be too publicly visible, is we will do a lot more to standardize our customer engagement processes, and that will I think to the delight of our channel partners and get lots more leverage out of the ERM's that are already in place. Those are a couple of things, they always ask for a little bit more in the technical resource area, and I think we will have to scale up in the technical resource manager, and that's kind of an ERM with a technical hat on. And again the job is to be an ombudsman to interface with the customer, really know what their infrastructure is about, and then bring the right resources to bear when there is an issue or a question whether they are an external resources in the form of an integrator or they are internal resources in terms of training, education, etc.

That's helpful. Dave, maybe just give me some color around this, I know you are not given guidance forward but given what Mark just said obviously you are going to have to add some heads in certain areas of the business. If we assume that growth continues at a relatively modest to decent rate going forward, what are your goals internally in terms of operating margins, how fast can you continue to expand those? And as we look at perhaps a long-term target for this company what is reasonable to assume?

We will continue to expand and invest for growth in the coming year, and you are right, while we have not given any specific guidance around that, it will be focused primarily on the sales and services organization and expanding the R&D organization. How that translates to operating margins, we are going through a little bit more on the next call. I think that the 25 to 30 percent range we are operating in for this current year is a good baseline to start thinking about it and expect more color in the next quarter.

That's great. Thanks a lot.

Katherine Egbert with CE Unterberg, Towbin.

Thank you. Dave, I think you said in your comments that deferred revenues were up both because of subscription advantage but also because of some enterprise transactions. Can you talk about the enterprise part of that?

Enterprise transactions in some cases end up being multiyear commitments. That points to some of the long-term deferred revenue we talked about. Also in many cases the larger deals carry a higher product discount component, and therefore more of the revenue will end up being deferred. But primarily it's driven by subscription advantage.

Did MSAM contribute this quarter and if it did, how much?

All of the new products did not contribute materially, we haven't broken them out. On a sequential basis we did see solid growth between the second quarter and the third quarter both in revenue and new opportunities. In fact we are very excited about Password manager being the last product in the access suite to be released. As Mark described it came out about a week before the end of the quarter. In fact, we did our first large deal, a low six-figure deal with one of the government agencies. So overall we are pretty excited about the opportunity there but would not expect them to contribute materially in Q4 either, just good solid sequential progress.

Last on verticals, it sounds like the government was strong, were there any other verticals that were particularly strong?

The government looked good, up sequentially, other strength is coming from Healthcare, financial services and just general technology manufacturing.

Nice job.

Your last question comes from Brent Williams with McDonald Investments.

Just a quick follow-up in terms of government business outside the U.S. is it predominantly civilian or is it predominantly Defense/classified?

It's predominantly civilian. Local governments and federal governments, they are sort of their business operations tend to be the focus of it. Very little military outside the U.S. although there is some.

How would you characterize the procurement, cycle times for those agencies outside the U.S. versus the larger agencies within the U.S.?

I'm not sure I could.

Is it slow versus slower, or are they about the same?

In some ways we've been ahead outside the U.S. in this area in that, especially in Europe, because our team there got the idea that they could use our open and flex licensing structures to really put in place almost buying agreements for certain states like in Germany, (indiscernible) Denmark, as a country, places in the Netherlands, where we have big cities there, and so a lot of that is reorder business that aggregates and no particular transaction is huge, they just continue to reorder, expand their systems and all. So it's more incremental like that as opposed to big chunks.

Thanks.

At this time there are no questions. Do you have any closing remarks?

What can I say but thanks for being on the call today. A great quarter especially given the environment, I'm really, really proud of the Citrix team. There's an incredible buzz here in the Company and amongst our customers and partners. And we are going to ride that through Q4 and into 2004. So thanks for being with us and we will see you in about three months. Thanks and have a good day.

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