思杰系統 (CTXS) 2003 Q4 法說會逐字稿

Good afternoon. My name is Debbie and I will be your conference facilitator. At this time, I would like to welcome everyone to the Citrix Systems fourth quarter fiscal year end 2003 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) I will now turn the call over to Mr. Jeff Lilly, manager of investor relations. Thank you, sir, you may begin your conference.

Thank you, Debbie. Good afternoon and thank you for joining us today on our fourth quarter and full year 2003 earnings conference call. Participating on the call today are mark Templeton, our President and Chief Executive Officer, and David Henshall, Vice President and Chief Financial Officer. This call is being webcast on the Citrix corporate website and a replay of this call and webcast will be available through Wednesday, January 28, 2004.

On this call we will discuss various non-GAAP financial measures as defined by SEC Regulation G including certain adjusted figures which include operating expenses, operating income, operating margin, net income, earnings per share, and tax rate. The most directly comparable GAAP financial measures and a reconciliation of the differences discussed on today's call can be found at the end of our press release dated today and the condensed consolidated 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 21e of the Securities 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 revenue growth, products, their development and distribution, product demand and pipeline, economic and competitive factors, the Company's key strategic relationships, and the acquisition and related integration risks.

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

Thanks, Jeff. Thanks for joining the call this afternoon, everyone. I'm really pleased to report our Q4 and full 2003 results today. We had a solid business plan for the year and we executed well, finishing the year with great momentum and a very solid Q4 performance. Revenue for the quarter was 158 million, up 6 percent over 2002 and the best topline performance in Citrix's history. Net income for the quarter was 38 million or 22 cents per share on an adjusted basis, exceeding our own expectations. And Q4 was another strong quarter for deferred revenue, growing by 21 million up about 14 percent for the year to about 165 million.

The strength in Q4 was the result of a number of things; continued growth in our flagship product, MetaFrame Presentation Server; traction for our new products, especially the MetaFrame Access Suite; an increase in subscription advantage renewals; and a tremendous performance from EMEA. In fact, EMEA outperformed North America in Q4 for the second time in Citrix's history. Once again, an excellent quarter that really punctuated a tremendous year with an exclamation point.

One year ago we shared our goals with you, to focus on topline growth, on good expense management, and on driving revenue from new products. So here's how we did. In total 2003 revenues were 589 million, up 12 percent over our 2002 performance of 527 million. Excluding royalties, 2003 was a record year for Citrix revenue. It was also a record year for bookings, driven by solid software license sales and renewals of subscription advantage, our software update licensing program.

Almost two-thirds of 2003 bookings were reorders where customers are extending and expanding their Citrix access infrastructure to meet strategic business goals. Bookings for new products, which include the new MetaFrame Access Suite, made steady progress throughout the year, increasing sequentially every quarter. The Access Suite, which was just introduced in October, made a strong contribution to our Q4 results. Net income for 2003 was 134 million or 78 cents a share on an adjusted basis, up 33 percent compared to 2002. And operating margins were solid at 28 percent on an adjusted basis up from 22 percent in 2002.

Not only was it a tremendous financial year, it was also a transformational year for Citrix. In March, we began repositioning the Company from the server based consumer market into the much larger access infrastructure market, a market we estimate will grow to 8 to 10 billion over the next three to four years. We also announced our strategy to offer a suite of products under the MetaFrame brand to extend our leadership in access. By September, we delivered, shipping upgrades to the MetaFrame Presentation Server for Windows and UNIX, and three new products, Secure Access Manager, Conferencing Manager and Password Manager.

Then in October we made it easy to buy the suite with three bundled pricing options, the suite edition for new customers, the step-up edition for existing customers, and the migration edition for MetaFrame 1.8 customers. And late in Q3 we launched our first ever multimillion dollar worldwide branding campaign featuring customer CIOs describing the value that Citrix brings to their business. The campaign highlights the strategic value of access and it's already increasing the visibility of our brand. So I'm very pleased with our performance for Q4 and for 2003.

But looking ahead to 2004 and beyond is what really gets me excited because we've laid the groundwork for growth in the large-scale long-term infrastructure market. With this in mind, we'll continue to take the long view and invest for growth. Our 2004 goals are the same as 2003, to focus on topline growth, growing new product revenue and solid expense management. Topline growth will be driven by investments in our sales and partnering machinery, improving the choreography of our customer facing teams, implementing incentives that motivate our partners to sell solutions, training our go to market forces to become trusted advisors for customers, further expanding our access infrastructure product portfolio and lots more.

But before we get into 2004, I'd like to turn the call over to David Henshall to discuss our Q4 financial and operational performances in greater detail. Then I'll be back to go over our strategy, plans and outlook going forward. David.

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

We continue to expect the pending acquisition of Expertcity to close in late Q1 or early in the second quarter. Since this acquisition is not yet closed I would like to remind you that the following results and projections do not include any impact from this transaction. In addition, our outstanding convertible debentures will become redeemable by the Company and the debenture holders in March, 2004. I'll discuss this a bit more later, but please note that the following results and projections do not include any impact from the possible redemption of the bond. Now let's turn to the quarter.

Total revenue in Q4 was approximately $158 million. This represents an increase of 6 percent over the same period last year and was up 9 percent on a sequential basis. Software license revenue, including Subscription Advantage, was 146 million compared to 133 million last quarter and $137 million last year. Services revenue for the quarter, which includes consulting, technical support, and education, was $12 million compared to 11 million last quarter and 12 million for the same period last year.

Looking at results by geographic region, the Americas generated approximately 46 percent of revenue, EMEA accounted for 46 percent, and the Pacific region contributed 8 percent. These figures reflect very strong performance from our European region this quarter. For the period, five of our top 10 deals were in the Americas region and five were in Europe. In total we closed four transactions greater than $1 million and we closed nine transactions greater than $500,000.

Operating expenses, excluding amortization of intangibles, were approximately 108 million for the quarter, an increase of about 12 million over last year and up $10 million sequentially. The change from the third quarter was primarily attributable to an increase in programs, corporate branding, headcount additions and compensation related items. Looking forward we expect total expenses to increase as we continue to invest in these areas of the business. In addition, a significant portion of our non US expenses are incurred in local currency, and while we do hedge these amounts, the continued weakness of the US dollar will impact our international expenses throughout 2004.

Looking at expenses by category, R&D increased sequentially by 11 percent mainly due to additional headcount and costs associated with hiring. Sales and marketing expenses were up 13 percent sequentially. This was driven by an increase in marketing programs, increases in headcount, and compensation related to higher bookings. These costs reflect the investments in our global brand awareness campaign and go-to-market initiatives. G&A expenses increased modestly from last quarter.

The adjusted operating margin for the third quarter was 29 percent as compared to 32 percent last year and 29 percent last quarter. The adjusted tax rate was 19.4 percent for the quarter bringing our adjusted tax rate for the full year to 22 percent. We expect the adjusted tax rate in Q1 and for the full year of 2004 to be around 22 percent. Adjusted net income in Q4 was 38 million as compared to 41 million last year and 33 million last quarter. Adjusted EPS for the fourth quarter was 22 cents.

The total number of employees at the end of the period was 1885, an addition of about 80 people over third quarter. The majority of the additions were in the product development and sales organizations. As we mentioned last quarter, we continue to hire and invest in the areas that we see strategic.

Looking at the balance sheet, cash and investments now total just under $900 million, an increase of 88 million from last quarter. This growth was driven by strong cash flow from operations which was $69 million in the quarter. Net AR balance was 87 million, modestly up on a sequential basis. This resulted in day sales outstanding of 50 days, down three days from last quarter.

The deferred revenue balance continued to show strong growth, up about 21 million for the quarter to a record $165 million. We're pleased to see this continuing growth as it highlights the acceptance of our subscription managed program as well as multi-year customer commitments. The renewal rate for Subscription Advantage was in the mid to upper 60 percent range. We will be investing throughout 2004 in programs and customer care teams around the world to continue to increase this renewal rate.

We continued the stock buyback program during the fourth quarter in which we purchased 700,000 shares at an average net price of $23.24 per share. For the full year, the Company repurchased 8.9 million shares at an average net price of $15.86 per share. We expect to continue our share repurchase program in 2004. Additionally, our outstanding convertible debentures, as I mentioned, could be put back to the Company or redeemed by the Company on or after March 22nd.

If either of these two events were to occur, the Company would expect to record a non-cash charge to earnings in the amount of approximately $7 million to account for unamortized debt issuance costs. Also, cash in investments would be reduced by approximately $350 million. Please note that the affect of this potential charge is not included in any of the forward-looking statements made on this call or in the press release.

Throughout fiscal 2003, Citrix has been very successful in migrating customers onto a subscription advantage program and increasing the annual renewal rates for this program. That success has been evident through the record growth in deferred revenue which has increased over 60 percent since last year. This is strategic to our business because it fosters long-term customer relationships. This allows customers to budget for future software updates, enabling them to upgrade when it's appropriate for their organization. At the same time, it gives us improved visibility and predictability due to the recurring nature of this revenue stream.

In order to provide greater visibility into the revenue component associated with Subscription Advantage, we expect to report this as a separate component of revenue on the income statement which will be labeled software license updates beginning with our 2003 full year results to be reported in our Form 10-K filing. In the first quarter of 2004, we will begin reporting this information on a quarterly basis including year-over-year comparisons.

The following numbers represent the annual revenue mix for the full year 2003 and comparisons to 2002. Software license revenue, excluding subscription, was 374 million for the year compared to 363 million in 2002, an increase of 3 percent. Software license update revenue, our Subscription Advantage program, was 169 million compared to 106 million in 2002, an increase of 60 percent. Services revenue was 45 million, up 4 percent over 2002.

The Company did not record any royalty revenue during 2003, however, royalties accounted for 14 million of revenue in 2002. In summary, the results for the quarter and for the full year reflect the health of our business, our strategy of driving topline results and operating leverage while reinvesting in our business to take advantage of opportunities present in the growing access infrastructure market. Now I'd like to turn it back over to Mark to discuss some of the customer and business highlights for Q4 and the business outlook for 2004.

Thanks, David. As I said earlier, our 2003 performance was excellent. But looking ahead is where the real excitement is. Our course is simple, to make every customer an on demand enterprise by helping them move from if then access tactics to a strategic approach to access.

If you think about it, there is an information access component for every business initiative, from M&A to regulatory compliance, from partner commerce to branch office expansion. And it's the CIO's job to support these initiatives by ensuring that employees, customers and partners have on demand access to the information they need in every one of these business critical areas.

Their challenge is to match these demands for information, which are more dynamic than ever, with the supply of information, which is more complex than ever. All of a sudden, access has become strategic to both business goals and to the IT organization. Our customers know that providing if then access for different use cases adds great complexity to an already complex IT environment.

Every business needs a single, well conceived holistic strategy for providing access. Simply put, an access strategy provides a consistent and systematic way to assure secure, easy and instant access to any enterprise information for anyone from anywhere, anytime using anybody that provides over any connection. This is what it means to be an on demand enterprise.

At our October iForum conference, Scotia Bank's CIO for branch banking talked about their business strategy to efficiently support the operations of branch offices. Their solution was to design an access strategy. Since then they've measurably improved customer service, employee productivity, and growth agility at 1000 branches across Canada by implementing Citrix Access infrastructure. It's a strategy that's also saving the Company $35 million over five years in IT costs.

Another example, and one of our top 10 deals in Q4, was the British Airport Authority; 10,000 BAA workers are spread across multiple airports, retail locations, even out on runways and in constant motion, yet needing constant access to 500 applications, applications that contain information about customers, luggage, airplane schedules, engine parts, you name it. BAA is building an access strategy around Citrix so all these on-site yet mobile workers can focus on customer needs and safety rather than on information technology.

A third example was featured at our Solution Summit just last week. First Group PLC, a huge international transportation company, has a business strategy to centralize its dispersed complex IT systems. Systems that had cost 35 million pounds a year to manage. First Group's access strategy is to implement one access network, delivering very significant cost savings. Taking it further, the CIO realized that an access strategy would also be a competitive advantage for franchise bids, because new franchises can now be operational in weeks rather than months at a known fixed cost.

So this is what an access strategy can mean for our customers and why we are acting so strongly to extend our leadership in the access infrastructure market. With this strategy in mind, we're taking the long view and investing in the business. One of those investments will allow us to provide secure access for the first time to the applications and information that live on the desktop PC.

In December, we announced a definitive agreement to acquire Expertcity, the market leader in Web based desktop access services. The acquisition will expand our access products to include Expertcity's market leading GoToMyPC service for secure browser based access to desktop PCs from anywhere over the Web. We'll also add Expertcity's innovative GoToAssist product; access infrastructure for call centers, allowing them to provide help desk, training and customer assistance over the Web. Soon, customers will have one source for both desktop and server based secure access and that's Citrix.

We'll enter a new access market, the market for Web based customer assistance solutions. And we'll get higher level competencies in using the online world for developing markets, driving sales leads and bringing more opportunity to our partners. We're looking forward to getting the deal closed and welcoming the Expertcity team to Citrix.

Clearly we've laid a lot of groundwork to continue our 2003 momentum into 2004 and beyond. So here's what to expect from Citrix this year. First, continued focus on topline growth, expense management and revenue from new products. This is the formula for delivering value to customers, employees, partners, and shareholders. Second, we'll advance our lead in the access infrastructure market with further expansion of the MetaFrame Access Suite and our product portfolio, enabling up selling and cross selling for comprehensive access infrastructure solutions.

Third, we'll introduce new revenue streams and a go to market model for Web based access services through successful integration of Expertcity. fourth, we'll better choreograph customer engagement between our channel partners and sales and services teams and reward them all for solution selling to really leverage our partner network and customer base. And fifth, we'll further invest in building a world-class brand around a single critical customer value, access.

We have a robust and exciting plan for the future and we're off to a great start already. Last week we held our first ever global summit week in Orlando. For the first time we brought together our channel partners and our global sales and service teams. The focus of the week for everyone was on comprehensive training, on our strategy, our new products, our sales methodology, and partner choreography. All these are essential for going deeper into our existing customer base, for motivating our partners, and for engaging with strategic decision makers.

Last week, we launched our next generation partnering strategy, the Citrix access partner network incorporating all our go to market relationships under one umbrella. Every member of our successful Citrix solutions network will have an opportunity to move to this upgraded program as a Citrix solution adviser. Solution advisers are elite, customer facing partners that deliver the consulting, technical and integration services around strategic enterprise access infrastructure solutions. In short, they're trusted advisers.

To energize the access partner network, we announced a new partner incentive program called Adviser Rewards. Our goal is to make Citrix the best business to be in for our partners. The new program allows them to make a profit from solution selling, no matter where the customer ultimately purchases the product license. In this program, partners are rewarded for registering projects, submitting forecasts early in the sales process, and providing value based solution selling around the MetaFrame Access Suite.

The summit week was a huge success, an inflection point, and a real jump start to the year. We planned for 1000 partners and more than 1200 came along with 850 of our own sales and services people. It will now be an annual event for all our customer facing teams.

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

As we indicated earlier, Q4 was exceptional in many ways including excellent growth of our opportunity pipeline. The investments we've been making got some real traction in 2003 and our Q4 momentum was solid. On the other hand, according to most surveys, overall IT spending trends continue to run in the 4 to 5 percent range. The economic environment feels better but it's still difficult to predict when IT wallets will be reopened. In the first quarter we'll also see the effects of seasonality as we've indicated and seen before. A larger portion of our business is driven by larger deals now which are driven by corporate budgeting cycles. So, we expect our revenue patterns to reflect the typical seasonality of IT spending.

With all this in mind, our guidance for Q1 is as follows -- revenue is expected to be in the $146 to $156 million range. We expect operating expenses to increase for new product development, additional sales and services personnel, and strategic marketing. GAAP EPS is expected to be in the range of 15 to 18 cents per share. And adjusted EPS is expected to range from 16 to 19 cents per share.

In summary, 2003 was a great year for us. A record year by the numbers and a transformational year as we planned and prepared for long-term growth. We have a suit of access infrastructure products and expanded market of strategic opportunity in the enterprise, a brand that's increasingly well-known at the C level. A channel being choreographed by our customer facing teams, and well placed investments for growth. We believe we're laying the groundwork for an exciting future. Thank you and now let's open it up for questions. Debbie, it's your turn.

(OPERATOR INSTRUCTIONS) Tom Ernst with Thomas Weisel Partners.

Thanks, guys. This is Bill Dauphin (ph) in for Tom Ernst. We're hearing a lot about increasing co marketing with Microsoft. Just wondering if you have any metrics to attract Microsoft influence leads? And what if any metrics -- what are the metrics telling you?

We do have some metrics and we have been doing much more with Microsoft, especially in the second half of the year and especially after we were awarded the global ISV (ph) of the year partner of the year award. Unfortunately, we don't reveal the metrics, they're internal measures and operational measures. But suffice it to say that we've been working with them on -- in the Windows server 2003 area, in the office 2003 rollout, and in the migration program, encouraging customers to migrate from Windows server 2000 to 2003. All of these are great opportunities for us to work with Microsoft, add value to their selling process, and do a great job for customers.

Great. Just one more quick follow-up. I don't know if you mentioned this, but the MetaFrame 3 release, have you released a GA date for that?

No, we have not. We've certainly been showing all kinds of technologies that may or may not get into the next release of MetaFrame Presentation Server. A lot of enthusiasm and excitement about those but we haven't talked about any release dates.

Okay. Thanks a lot, guys. Great quarter.

Ed Maguire with Merrill Lynch.

Good afternoon. Could you talk about how your progress has been in building out your customer care organization and how the uptake of Subscription Advantage is progressing within your installed base?

What I'll do is I'll talk about more of sort of the customer care team and the shape of that, and then I'll let David talk a little bit about the metrics around subscription renewal rates and so forth. So, on an operational basis, our team here in the US, that's focused on North America, has really matured over the course of the year and they're really about -- they're not much more than a-year-old as an organization with all the machinery that they have in place and systems in place to generate subscription renewals. And that team has come a long way in the year and I think that shows very much and very strongly in the numbers.

Outside the US we're way behind, and frankly it's one of the investments that we'll be making this year to catch the international teams in both EMEA and in the Pacific and then we'll just begin to service Latin America as well with very similar types of machinery to drive higher levels of subscription advantage renewals in the customer base. So, there's more opportunity for growth outside the US in that area, and we're making the investments to do it. The local team here has done extremely well throughout the year growing every quarter and making a huge impact. David, do you want to talk about the metrics a little?

Sure. As you know, over the last couple of years we have evolved the business model to a point where now every initial license sale includes a first-year subscription agreement. You've seen this change in the initial deferral rates going up as well as the renewal rates, which are those two components really driving the strong growth in deferred revenue. So, the renewal rates of those customers under subscription advantage has increased from below 50 percent last year to the mid to upper 60s range this year. As I mentioned earlier, we're certainly going to be investing in various programs and teams around the world to continue to drive this rate higher. We do see this very strategic to the business because it keeps us engaged with our customers and allows us to -- or allows really them to upgrade and update their infrastructure as they see fit, but provides us that visibility and recurring stream.

So, of the full installed base, the numbers are not precise, but it's probably 50 percent range that are active on subscription right now. Certainly every new license sale over the last year or so includes first-year subscription.

And a follow-up to one of Mark's prior points. Could you provide a little color around your headcount goals for this year? Whether by region or talking about the -- certainly what you're planning to do with the ERM program in North America?

Ed, I'd say that on the product development and the Geo front, we're going to see headcount growth because we think that there are more products to build and there are more geographies to cover. We have some specific projects funded for the year in product development. We'll increase our spending there and that will be obviously in headcount.

We have a significant project to grow EMEA across all of the customer facing titles, both partnering -- specific partnering type titles of people who work specifically and exclusively with partners pushing them as well as those that touch customers as well as sales engineers. We also have a set of projects in the Pacific, the Pacific region and market is a real fast grower and we think there's lots more opportunity there, not only in the markets we're already in, for example Japan. Japan had a great 2003, growing over 30 percent year-over-year. So, there's lots more we can do there, but also extending our capabilities into China and Korea and some other markets out there. So we'll put some more heads out in the Pacific region.

As far as ERM, on a worldwide basis we will see growth, and we will see some of that growth come in North America, especially as this year will really feature the whole idea of executing against a similar structure to what we see in EMEA, but that will be in place here in North America. It's pretty much in place right now. I think we've made all of the adjustments and now we'll be turning the crank for the year and executing.

Thanks very much.

Israel Hernandez with Lehman Brothers.

Good afternoon and congratulations, everyone. A couple quick questions here. With respect to linearity in the quarter, what did you see, was it typically linear? How does your, as you look into Q1, how does your backlog look like? Can you also comment on the strength that you're seeing in EMEA? Do you think EMEA is starting to open up in terms of spending or is it something that just comes down to plain block and tackling and execution? And also, were there any particular verticals that stood out during the quarter?

Let me answer the first part of that question and then turn it over to Mark. Linearity this period, we booked about 46-47 percent of our business in the third month of the quarter. Fairly typical for a fourth-quarter. A little bit more in the last month than we saw last period, but that's just due to the year-end nature as well as the fact that November was a very short month -- number of working days this period. A little bit more flowed into December. But fairly typical for a Q4.

Israel, as far as the pipeline and the outlook there, it's a great quarter in terms of building new pipeline, and so the new opportunity growth was very much in line with the kind of growth we've seen in prior quarters, so good there. Secondly, the coverage ratios continue to run on the stronger end of the spectrum that we typically see which is certainly good.

And then I think one of the real notable changes in the pipeline is that we really saw tremendous growth in the new product pipeline. I think that's a combination of two things. First of all, I think it's the first full quarter for password manager and there are some great opportunities for password manager out there. Secondly, I think we were a little surprised by the positive motion we see around the Access Suite, especially this early in the cycle. Usually when you announce something new it really takes time to get into a sales cycle and get into someone's mind, et cetera. That was half of the new product revenue in Q4. That's probably what we're going to see here going forward is that the Access Suite, customers really making a bigger, more robust commitment to the entire system is pretty exciting for us, and we saw the pipeline in that area really spike up. So, all positive.

EMEA? What you're seeing there?

EMEA is -- honestly EMEA tends to be a little bit more back-end loaded as a region in the world. And they always tend to have a really strong Q4. I think some of that has to do with recent economic cycles around just spending and driving some projects so they fall within the year. And other pieces of it are kind of how they implement products and systems in EMEA. So, is it growing? Yes. Is it breaking out? I don't think any more than any other region. They're a very steady machine they have it down to a science and really the investment that we'll make there in 2004 is about scaling that same machinery up and just making it bigger.

Then on the vertical front, anything there that's noteworthy?

Every time we look at the vertical -- the verticals aspect of the business the answer comes back the same. Definitely there are a few that are notable, but then when you look at those, financing banking, healthcare, government, education, and they're notable. But then when you compare them to percent of total IT spend, they're running in line. So we still have a very horizontal type of business when it comes to market segments.

Great. Thank you.

Gary Spivak of Kaufman Brothers.

Thank you and congratulations as well. I was just curious, Mark, if you could discuss the end application that people are requiring access to these days and if there has been any change from quarter-to-quarter?

Gary, I think the trend that's continued over the years honestly is one around suites of applications. So, we've seen more and more trend away from single aps and more and more around a suite of aps. And I gave some examples in the prepared comments. And BAA has 500 applications and they're going to put most of those on our infrastructure.

Clearly there are some sort of anchor and cornerstone applications that drive a lot of things in the enterprise whether it's ERP, we have a great partner in SAP. They're doing really well. So a lot of that business is driven by SAP, but it's opening doors and customers learn about sort of the general purpose access capabilities that our infrastructure provides and it goes from there and brings in other applications. And in other markets like in the healthcare market we have some great partnerships with Cerner, HBO, Kessin (ph), with Epic, and they're again great cornerstone applications, but when we actually do the implementation we'll find that there's a whole suite of applications circling around them. I think that as customers mature it goes more and more and more that way.

And then finally, if you can just discuss the pricing environment either within the concept of suites or in direct products? Thanks.

Well, our ASP has held very strong. No change to report in our average selling prices. Continuing to mean to us that the value in our software is recognized, understood and it can be calculated frankly. And that's around a Presentation Server in a classical sense. In the sense of the Access Suite, the way we have packaged and priced the suite, basically if you see value in a little over two products, you'll be very inclined to buy the suite and the economics work. With four products in the suite, and the roadmap we have to strengthen each one of those products over time, we think that the efficacy of this pricing strategy will only improve over time.

For example, we did show some technology last week to our partners that adds outlook support, synchronization support to our SSL secure gateway that is part of secure access manager. To the degree that that becomes an important capability, it is part of the suite and, therefore, has more value and we think that that will help us with suite sales. That is what we want. We want customers to buy our entire suite and our entire system.

Great, thanks.

Kathryn Egbert with C.E. Unterberg, Towbin.

Nice quarter, guys. What was the breakout if you could tell us in December of licenses versus update versus service?

We're really changing the way we're looking at the business on a prospective basis. In Q1, we are going to be providing the breakout of revenue with the three line items, as well as giving that historical perspective. But at this point, just providing the annual numbers because we expect to include them in the 10-K, it's just going to be a prospective way we look at the business.

Okay, so then you will offer any guidance around what that split might be say a couple years out?

At this point in time, we are not prepared to offer guidance on the split. We are just going to be offering topline guidance in the aggregate.

Then with respect to the Subscription Advantage renewal, what rate do you think you can get to longer-term?

Right now, we are running in the 60 to 65, 70 range, somewhere in there, quarter-to-quarter. I think that long-term, I would like to see it north of 80 percent, between 80 and 90 percent, and hope to achieve that as a goal over the next two or three years.

The new program that was announced last week, by my calculation that should have a positive effect going forward on license sales. Can you talk about that?

We do -- we built it for that reason to further engage our partner network, and so we do believe that it will have a positive impact. In fact, when we announced the program last week, we have an exhibit hall at these events, and right on the show floor we had some partners go to the new system we are providing to register projects, etc., and actually do that in real-time. I think that we probably are going to stay conservative on sort of when the impact starts to show up in our bookings, because you never know how long these things take to ramp.

Remember, last week we had a great turnout of 1200 partners, but that is a fraction of our partner network. So it would be -- the communication project has only begun to get the word out to 5000 in total to get them on this program and to train them and so forth. There is a process involved there.

Last question, the strength in EMEA, would you say that was mostly seasonal or is there something more fundamental there?

No, I think probably a combination of a couple of things. But as I said earlier, I think there are some buying patterns that are typical for EMEA. Secondly, as we have indicated, the team there tends to be a little bit more mature and experienced and a little bit more mature and a lot more mature in their process, their sales process. It is due to the way we built EMEA as an organization and when. The rest of it is just pure execution that we're very proud of.

Okay. Good job.

Brent Williams with McDonald Investments.

Within the product mix of the infrastructure suite, you mentioned that the total suite bundle was doing perhaps better then you thought. Within the atomic products, what surprised you about the mix? Where did the mix you saw in this quarter come relative to where you thought it would go?

The atomic look at that, while we don't talk about the specific numbers, actually met our expectations. What you do see in some of these things is a customer gets interested in one of the atomic products and then the sales organization more and more is being trained to sell the notion of an access strategy, sell the notion of the complete infrastructure, and move the customer to talking about a suite.

We saw some good early traction of password manager in the first quarter. This product, there's definitely a sales and evaluation cycle to it. In the quarter we established an RFP desk for the first time because there are established projects, single sign on and reduce sign on projects that have already been articulated by customers, and we're being asked to respond to them. So, we did a lot in that area around password manager and saw some very early and good progress there. The pipeline looks really good there.

Conference manager is more of an accessory product. Our expectations there are more around filling out the suite and helping drive Presentation Server. That went pretty well. And Secure Access Manager just keeps on sort of stepping up each quarter as it's better understood, partners are more capable working with it, and they begin to understand that implementing Secure Access Manager is really about a best practice. When you implement this product, you actually get more leverage around all the other products when you do implement it well. And I think more and more partners are understanding that, and once they understand it customers understand it.

Bouncing back a second, just to make sure I understood it right, you had talked about the outlook synchronization piece that you are adding to your SSL gateway. Did I hear you say that this would be part of the suite only and not as part of the atomic products like Secure Access Manager?

No, it actually becomes a part of Secure Access Manager.

And then lastly, I think this whole issue of Secure Access Manager becomes especially relevant in a wireless environment. And I may be showing my software focus and revealing my ignorance of hardware, but I've noticed that 80211.g, which seems to have some improved security inherent in it, has been coming up maybe a little bit faster on my radar scope than I thought about. Does the availability of this technology for about what 80211.b cost six months ago, does that help companies get into wireless and thereby appreciate the value of Secure Access Manager more? Is wireless totally a nonissue, people just want security wherever they are? Is there any (multiple speakers) over there?

I understand your question. I think that the way we see it and the way we experience it is that sort of the availability of connectivity, no matter where it goes, whether it's 80211.g or some of the 2.5 and 3-G wireless WAN type networks like Verizon's high band width 1XRTT, all of these things are positive to our overall business because they promote connectivity, and we really I think are clearly the market leaders in providing secure connected type access to applications and information.

So, in a general sense, yes, in a specific sense to Secure Access Manager, I don't think it has any particular positive impact on Secure Access Manager over and above what I just stated on the entire suite of products.

Okay. That'll do it for me. Thanks.

Damian Rinaldi with First Albany Capital.

Mark, could you give us some sense of the lag between the purchase of one of these ERP packages or other vertically oriented packages that customers may buy in their repurchase of Citrix technology before they deploy?

Damian, I don't have metrics, I have anecdotes. And I can talk about our strategy overall. So the first point is new purchases as in new customers buying ERP packages is pretty -- it's like finding hen's teeth --.

Right, but they're incremental purchases and modules.

It's like rolling out additional modules and licenses. So we tend to get involved historically more toward the back end of the projects. Once the project has been funded, approved by a higher level of management on a strategic basis, and really it's about executing and delivering. And that tends to be where many, many of our sales cycles begin. But the good thing about that is you have a pretty short sales cycle, it can be three to six months. The bad thing about it is you're only seeing a piece of the business and you're late to the game, and your ability to really influence the architecture and how they go about solving all the access problems is minimal.

So, our strategy here, and we see that -- and that's our historical model, Damian. More and more we're training our sales organization against a new methodology, we're supplying tools to our partners and doing a whole lot of things including the branding campaign to really pull up into the discussion before the modules are decided upon. Before a particular application is expanded. And where the CIO in the higher level IT organization is really formulating your overall initiatives and goals. That's really where our future lies is being involved earlier in the cycle. So the good news there is that, yes, the cycles take longer, but the deals are bigger and they're more strategic. And having a balance of both of those is important to our future business.

And you mentioned that the new products, particularly the Secure Access Manager, have had an impact on the quarter. I think at one point you said it represented half of new product sales. But can you quantify that in dollar terms?

New product sales, which by our own measure here, this is our own definition, includes the Access Suite. And it wasn't 5 percent but it was moving in that direction. Okay? And about half of that was coming from the Access Suite. So, that's why we're real positive on the suite and all the things that we're doing around the suite to drive the selling of it.

Thank you very much.

Curtis Shauger with CIBC World Markets.

Good afternoon everybody, congratulations on the solid quarter. Just to dice this access suite up another angle, could you give us a little more color on where you saw the uptake, whether it was with your existing user base or whether it was new product sales?

Curtis, we saw both. But the overall revenue numbers and license numbers and number of transactions were not statistically valid to give you any kind of a mix.

Okay.

So I can tell you we had a big one, a real sizable one that was basically new.

Okay.

From scratch. Then we had others which we liked a lot as much, because all revenue is good. Actually the anecdote was we have three bundles. One is a bundle we call the step up, which basically allows you to add the three new products to an existing Presentation Server implementation. Then, we have the suite bundle, which is all four products. So, we had several customers true up all of their existing Presentation Server licenses.

A particular one that I know about personally had 500 Presentation Server licenses and bought 500 step ups. That was good. But then they went for 400 more for the rest of their organization in the full suite. Okay? So we ended up with 900 suite licenses at that customer that was an existing account on Presentation Server. And that would be our hope to -- in terms of getting motion around that with lots of our customer base.

Excellent. I guess as we move along are we going to see that type of step up? It's mostly flowing -- is it mostly flowing into the subscription, is that how it's being --?

No, the MetaFrame Access Suite, any of those additions are actually SKUS that are product licensing SKUs that include the first year of subscription.

So there will be a deferred portion of all?

Absolutely.

Okay, great.

Not all deferred. That's not what you are asking?

No, I was just trying to get -- structurally I was going to layer in as we move along, but that's great to hear. Also, if I could just move along to another question, a quick question for you. We made an announcement with HP -- it was a blade serving environment for Beverly Enterprises. How important are these dense arrays on industry standard servers for you as far as scaling out your environments? If you could just enlighten us on that a little bit?

It's kind of a -- the answer is a parallel to the question that Brent asked about wireless and connectivity. Any sort of interesting innovation in the server world is great for Citrix. If there was more density, if they're a higher power, higher performance, more RAM capability, any of those things. Why? Because our servers really drive these servers in a huge way. We don't have servers laying around that are sort of running at 20 percent capacity like a database server and drive it where customers are looking to consolidate servers. These servers -- you put Citrix servers up and they are work horses, they're working hard.

So anytime there's an innovation in the server world it's really good for us because it opens up different possibilities. And then the second piece of this is -- that we find out there, is that customers have philosophies and some customers just don't want late servers. They're fascinated by them but they don't want them. They believe in a sort 1U (ph) sort of architecture, or they believe in the other end of the spectrum and that is a 32 way single box like a Unisys box. And the good news is we can service kind of all of those models and I think it opens up opportunities for us within the context of those different philosophies.

Kirk Materne with Bank of America Securities.

Good quarter, guys. I guess, Mark, I guess just the only offset to a strong quarter in EMEA was maybe -- were you surprised at all that Americas was down sequentially in the fourth quarter? I generally thought we'd see some sort of uptick just in terms of budgeting. Was there anything surprising in the Americas region this quarter that you can comment upon or was it just -- you guys are going through some more transitions in that area?

I think, Kirk, most people are aware that 2003 in North America, we did address some real structural change to make North America look structurally much more like EMEA, a model that has worked very well for us. It really went on the entire year, and we allowed our forecasts and our quotas to really reflect that. So, in fact, North America made their quota. It's just that as you work your way through change, you have to predict that change, how will impact you and act and work accordingly.

Also, there was some upside in North America that we're very positive about on some seven figure deals that moved out of Q4. So, they made their quota on moderate sized transactions and open licensing which is actually good news. So, we'll have some great upside coming from North America as we continue to gain momentum from all the good up leveling, up scaling we're doing. And then of course, North America is where we drive the majority of our Subscription Advantage revenue at this point which really drives a tremendous amount of the deferred revenue. And they had a spectacular quarter in customer care.

Steve Freitas with Harris Nesbitt Gerard.

Good afternoon and nicely done again this quarter. The first question would be if you could talk a little bit about your what I would call off-balance sheet deferred which may include unfilled, non-firm purchase commitments of flex licensing? And kind of how that's been trending, if the improvement is -- if there is improvement, if the improvement is accelerating and kind of the dynamics around that?

I think what you're asking about is when customers enter into large contractual arrangements we require them to buy about 20 percent of that up front. And then the rest they would take down over the course of a multi-year period. So, we certainly don't look at the business in terms of off-balance sheet back-log or off-balance sheet deferred revenue. It's simply a longer-term customer commitment that we have reasonable visibility into, and the short-term opportunities will show up in our product forecast and in our product pipeline. So, that's really the way that we tend to look at that.

Debbie, I think we have time for one more question.

Todd May with RPC Capital.

Thanks, but everything has been answered for me. Thank you.

Debbie, we'll wrap up now, okay?

Yes, Sir.

I just wanted to cap this off and say once again great quarter, great year, and really the prospects of even more and better in the future here. I'm really proud of this team, what we've accomplished in '03, and looking forward to executing on our strategy of making Citrix synonymous with access. Thanks for joining us today.

This concludes today's Citrix Systems fourth quarter fiscal year and 2003 conference call. You may now disconnect.