思杰系統 (CTXS) 2004 Q1 法說會逐字稿

Good afternoon my name is Jesse and I will be your conference facilitator. At this time, I would like to welcome everyone to the Citrix Systems first quarter earnings call. [OPERATOR INSTRUCTIONS]. Thank you I would like to turn the call over to Jeff Lilly, Manager Investor Relations. Mr. Lilly you may begin your question. Thank you.

Thank you Jesse. Good afternoon and thank you for joining us today on our first quarter 2004 earnings conference call. Participating in the call today are Mark Templeton, President and Chief Executive Officer and David Henshall, Vice President and Chief Financial Officer. This call is being web cast on the Citrix corporate web site and a replay will be available through Wednesday, April 28.

In this call we will discuss various non-GAAP financial measures as defined by the 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 after the condensed consolidated financial statements and on the Investor Relations Web site.

As we get started, please be reminded that certain comments made during the call may be characterized as forward-looking statements made pursuant to the Safe Harbor provision of Section 21(e) of the Securities and Exchange Act of 1934. Those statements involve a number of factors that could cause actual results to differ materially including risks associated with the company's business involving the company's revenue growth, products, their development and distribution, product demand in the pipeline, economic and competitive factors, the company's key strategic relationships and acquisitions, related integration risks. Additional information concerning these factors are highlighted in the slide presentation, the earnings release and the company's filings with the SEC, which are available from the SEC or the company's Investor Relations web site. Now, I'd like to introduce Mark Templeton, President and Chief Executive Officer of Citrix Systems.

Thank you Jeff and thanks everyone for joining the call this afternoon. I'm really pleased to report very solid Q1 results today. Excellent across the board. After posting such a strong 2003, we have hit the ground running in 2004 really building in on that momentum. As you can see from our press release, revenue for the quarter was up about 12% over the first quarter of 2003, to 161 million. Really exceeding our own expectations. Adjusted net income for the quarter was 33 million or 19 cents per share. And Q1 was another strong quarter for deferred revenue growing by almost 19 million to 184 million in total.

These results show we're executing well and really driving on our strategy in the access infrastructure market. Today there are a few things you should take away from our earnings report.

First, our momentum from 2003 really continues. The improvements we made last year in our geographic coverage, product portfolio and partner programs continue to gain interaction.

Secondly key sales metrics in Q1 were solid. Pipeline creation in both existing and new products was up sharply indicating we're not constrained by market opportunities.

Third, the integration of Citrix Online is on track. We're only two months into the integration of Expertcity. Their Q1 business metrics were solid and we're seeing early progress in cross-selling trial programs.

Fourth, we are investing aggressively. We've launched a couple of initiatives already to increase our sales capacities, standardized subscription renewal processes and makes the Citrix brand even more visible.

And last, the outlook going forward is good. We're confident in the Citrix team, our business strategies on our ability to grow. Q1 was another record quarter and we're going into Q2 with new product announcements phase 2 of our branding initiatives and first full quarter with the Citrix Online team.

Before we discuss Q2 I'd like to turn the call over to Citrix Chief Financial Officer, David Henshall. He will discuss our Q1 financial and operational performance in greater detail. Then I'll be back to add more color to the take-away and discuss our outlook. David.

Thank you Mark and Good afternoon. In my comments I will discuss the financial performance for the first quarter of 2004. I should note that all numbers discussed are adjusted to exclude the effects of amortization of intangible assets, write-off and process R&D associated with the acquisition of Expertcity and the write-off of deferred debt issuance costs associated with reduction of the companies convertible notes. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures.

Looking at the results for Q, total net revenue this quarter was 161 million, compared to 158 last quarter and 143 million last year. A growth of 12% annually. By operating segments, America's revenue was 75 million, up 11% year-over-year and up 4% sequentially. EMEA was 70 million up 12% year over year and seasonally down 4%. Asia Pacific accounted for 14 million flat of year over year and sequentially and finally Citrix Online contributed approximately 2.8 million for the month of March. As I'll discuss later, we are continuing to invest in all of these business segments in order to drive long-term revenue growth.

Total product revenue which includes software licenses and software license updates was 146 million, flat sequentially and up 11% year-over-year. Last quarter, for the first time, we provided the breakdown of annual product revenue into two components. Software licenses and software license updates. In Q1, software license revenue was $87 million down 8% sequentially and 10% year-over-year. Revenue from software license updates, primarily the Subscription Advantage program was 59 million, a sequential increase of 16% and a 67% increase over last year. To increase clarity, we're providing this breakdown for all of 2003 on a quarterly basis. This is available in the slide presentation from this Web cast and on our web site.

Let me give you a little context regarding our evolving business model and its impact on license revenue. As you may already know, the year-over-year decline is attributable to higher deferral rates on transactions. This is duae to the bundling of Subscription Advantage with the initial purchase of all products as well as the trend towards large deals in the enterprise.

The impact has been extremely positive on our business for the following reasons. First, our deferred revenue has increased at an impressive pace up 73 million over Q1 last year. Next, we now have more and more visibility going into each quarter, but best of all, our customers are extremely satisfied with this offering as evidenced by the increasing renewal rates. Now approaching 70%.

And while we don't intend to provide line item guidance in the future, let me give you some color around expectations for software license growth in the next quarter. Based on our recent investments in new products, geographic coverage, field readiness and growth in our pipeline, we expect to see licensed revenue increase sequentially to a mid to upper single digit percentage.

Turning back to Q1, the third revenue component, services revenue, which includes Consulting, Technical Support, Education and Citrix Online totaled $15 million in Q1. This is up 26% from last quarter and 32% from last year. This increase is largely due to the inclusion of Citrix Online revenue. In total for the quarter, we closed five deals over $0.5 million and two deals over $1 million. Of the top 10 deals, five were in EMEA, four in North America and one in Latin America.

Focusing on expenses, adjusted operating expenses, excluding the write-off of in-process, R&D, and the amortization of intangibles, totaled 118 million for the quarter. This is compared to 108 million last quarter and 98 million last year. The major contributors to this increase were our continuing investments in head count growth, approximately $5 million from Citrix Online operating expenses and a $3 million impact from the weak dollar or foreign currency denominated expenses.

Breaking those expenses down by category. R&D costs were up 9% sequentially and up about 26% over last year, primarily due to the Citrix Online additions, as well as investments in our access infrastructure products. Specifically, we're investing in the MetaFrame Access Suite, building common infrastructure for the products and enhancing individual products to drive market leadership. These investments are the foundation of our long-term growth and we expect these costs to continue to increase over the year.

Sales, marketing and support costs were up 7% sequentially and up 20% from last year. In addition to costs from Citrix Online, we're investing in our sales teams across the globe in ways that are most effective for each market. We're building out our channel teams in North America and Latin America with the goal of revitalizing our channel partners there and we're investing in sales training for our field teams.

We expect these costs to increase over the year as we launch, market and sell the new products in our Access Suite. G&A expenses were up from last year and sequentially by about $4 million. The increase from last quarter was due primarily to Citrix Online, an increase in consulting fees and an increase in the provision for specific accounts receivable.

The total number of employees at the end of the quarter was 2177. This is an addition of 292 people over Q4. 222 of those come from Expertcity and the majority of the other 70 joining the product development and sales organizations.

The convertible debenture was redeemed as planned and as a result $7.2 million in deferred debt issuance costs were recognized in the quarter. On the balance sheet, cash and investments totaled 536 million at the end of the quarter. This is a decrease of about 362 million from the end of Q4 due to the redemption of our convertible notes, and the cash paid for the purchase of Expertcity.

Cash flow from operations for the quarter was very strong, coming in at approximately 78 million. Net accounts receivable balance declined nearly $20 million from last quarter. Yielding a D.S.O. calculation of 37 days down from 50 days in Q4. The main driver of this D.S.O. decline was some distributors purchasing product ahead of the February introduction of the advisory awards program. We do not expect this to have an impact in the June quarter and we look for D.S.O. return to previous levels.

Deferred revenue increased 19 million sequentially to $184 million, this growth is due to an increase in Subscription Advantage, enterprise transactions and the addition of Citrix Online. In connection with our share repurchase program, we retired about 700 thousand shares at an average price approaching $21 a share. Activity was light due to restrictions associated with the acquisition. We intend to resume our repurchase activity in the second quarter.

So in summing up the financial performance, we executed well in the first quarter and were looking forward to the rest of 2004. I'm pleased with the strength in our core business especially the continued increase in deferred revenue. This hass contributed to the improved visibility and predictability of our business.

In addition, the investments we've made in sales, marketing and product development are showing real traction as evidenced by a growing pipeline. We're now looking for sequential growth in new license revenue as well as opportunities to drive the further adoption of our Subscription Advantage program. New products also look good in the pipeline. While contributing less than 5% of product revenue in Q1, we expect to see sequential growth this period. And consistent with what we've said before, we will make sure success as new products contributing between 5% and 10% of product revenue by the end of the year.

Finally, the integration of Expertcity acquisition is progressing right on plan. The dilution to EPS in first quarter was about a penny we still expect to see 2 to 3 cents dilution in the second quarter. Once again we're pleased with these results and now let me turn it back over to Mark.

OK, very good. Thanks, David. So next let's talk more about the five take-aways I've mentioned earlier. First we're off to a fast start this year, really leveraging the foundation we put in place during 2003. Last March, we announced our Access Suite strategy. Six months later we delivered Secure Access Manager, Conferencing Manager Password Manager and new versions of presentation server.

This year our goal is to widen our market lead with further enhancements to the MetaFrame Access Suite and that's already begun. During Q1, we released version 2.2 of Secure Access Manager. This release features support from SSL based synchronization for Microsoft outlook and more choices in user interfaces making Secure Access Manager even more flexible and powerful when it comes to access control.

Next week, we're going even further. We have some exciting announcements about major enhancements to the suite. We're not only upgrading the component products, but also better integrating them through a common infrastructure across the suite. This allows customers to observe and manage their entire access environment efficiently and effectively. And is a set of capabilities exclusive to the suite. You will hear a lot more about this during Citrix strategy day next Tuesday, April 27.

The second take away are the Q1 sales metrics. David discussed the large deal mix for the quarter. I'd like to highlight one of those deals because it's the largest in Citrix history. In Q1 we sold over 35,000 Presentation Server licenses to Munich based IZB Soft, the IT service organization that supports Sparkasa (ph) a network of 81 regional savings banks with approximately 50,000 employees. If you traveled or lived in Germany, you will recognize the Sparkasa domain because you will see it on almost 8,000 branches throughout Germany.

Our software partnership with IZB will deliver a common platform for building, testing and accessing applications. It will support their goal to consolidate, centralized and simplify IT systems and enable their 900 person IT team to provide managed secure access to all 50,000 employees.

8,000 branches will gain access to core banking and productivity applications on Citrix access infrastructure. The solution includes over 350 applications, running on a farm of 1800 servers. IZB soft will reduce operational costs, optimize IT services and improve stock assets agility and flexibility making IT an enabler of growth.

The size and scope of this sale is what's possible when we engage with partners and decision makers up-front. When minds are open to strategic thinking about access, when a solid business case can be articulated and when the value of our in-place solutions can be applied on a much larger scale. This is how our selling model is evolving. We started an extensive training program on our sales process and messaging at our first global sales summit. Since then, we have trained 80% of our customer basing teams worldwide. The balance will be completed over the next three weeks.

Additionally, we've been on tour in North America to nine cities, training our partners on our new access partner program, on our account expansion model and on selling the Access Suite. So far, we're pleased with the results. Attendance at these events has been high, averaging 60 to 80 partners per city. Partner feedback is positive and this training will also be delivered in conjunction with our distribution partners in other geographies.

The third take away, is about Citrix Online. On March 1st, we closed the Expertcity acquisition and created the Citrix Online Division. Citrix Online had a solid quarter. The team has done well with business execution while bearing the additional weight of Citrix integration. Like meeting our governance standards, adopting our planning, forecasting and reporting processes and exploring ways to leverage our customers and partners.

I'm very pleased that the Citrix Online team inked a large sale of GoToAssist with a major teleco for enhancing their web based customer care services. This is a multi-year seven figure deal that made the Citrix top five list for the quarter.

The integration process is really proceeding on plan. We're focused on sales and marketing synergies this year especially on cross-selling. We're looking to generate sales leads form GoToMyPC corporate within the Citrix customer base and through Citrix partners. During the first week of April, we launched a trial program that leverages our Subscription Advantage renewal process. The very early lead generation results are promising.

The other synergy focus is on strategic partners. You may have seen our recent announcement with Sharp putting Citrix GoToMyPC on every Sharp Actius MM20 notebook computer. The Citrix Online business development team has begun to leverage our existent strategic partners to bring more of these market expanding deals to the table. In product development Citrix Online is building a next generation web service platform that will support both GoToMyPC and GoToAssist.

The new platform will increase system performance, enable the addition of future services and really improve user experiences. This new platform is also the foundation for Citrix GoToMeeting a new web-based meeting service announced in Q1. This amazing new product is the easy instant way to hold online meetings directly from Microsoft outlook, instant messaging products, from your browser or from your Windows desktop.

Because we are focused on intuitive setup and impromptu collaboration GoToMeeting is different from web conferencing tools like Webx and Live Meeting. I've been using it for a while now from all over the world and it's been really habit forming. Citrix GoTo Meeting has moved into beta testing and will be available for customer preview during Q2. I highly recommend that you register for the preview and try it for yourself. To sum up it's very early in the process but we're feeling good about the integration. We are excited to have a top-notch team join us under the brand that stands for access.

Our fourth key take away, we made some really aggressive investments in the business last year and we're staying aggressive this year. We have launched a number of initiatives already many of which we've already touched on. For example, we have increased investment and product development and you'll see some of those results next week.

Next, we're on to phase 2 of our worldwide branding campaign. We have three new customers CIOs for the campaign look for them in leading business publications around the world and moving to phase 2 in airports on the radio and on the web. We're growing our sales and services capacities worldwide we're growing sales and consulting in the pacific for growing our entire EMEA organization. We've increased our capacity in the US Federal marketplace. We are providing additional field bandwidth to service our U.S. and Latin American partners and we've made a big investment in worldwide sales training.

Another way we're investing in sales capacity is through our partners. At our global sales summit, we introduced an innovative program called Citrix Advisor Rewards. The new program gives our solution advisors an agency type payment for driving demand. No matter where the customer fulfills the licenses. Rewarding partners for selling the value of Citrix Access infrastructure,

In this program, solution advisors are rewarded for registering projects, submitting forecasts early in the sales process, and providing value-based solution selling around the MetaFrame Access Suite. Advisor Rewards have gotten off to a good start with over 2500 projects submitted. 800 have been validated and another 500 are being reviewed. Our goal is to make Citrix the best business to be in for our partners. Advisor Rewards is another great step toward that goal and we're pleased with the first eight weeks of the program.

Our final take away is that our outlook is solid. As we look to the future, we feel confident with our business strategy. Built around the expanding and strategic need for secure access to any enterprise information. Secure managed access is core to every business initiative from modernizing, centralizing and optimizing how we run business to mobilizing, simplifying and transforming the way we grow business. That's why many customers are now seeing secure access as a strategic imperative. Why we see an $8 to $10 billion access infrastructure market and why we're excited about our ability to grow.

Access is our strategy because access is strategic to our customers. We're confident in this differentiated and defensible strategy. A strategy will provide growth and Citrix leadership in access infrastructure.

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

Our guidance for Q2 is as follows: Revenue is expected to be in the $170 to $180 million range. As David mentioned, 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 14 to 16 cents per share and adjusted EPS is expected to range from 16 to 18 cents per share.

We're really encouraged by our Q1 results, and with continued disciplined execution, the outlook is good. The overall IT spending environment is feeling better in spite of a business climate that's still somewhat choppy. We'll continue to drive top line growth with further investments to expands our access portfolio, to unlock the full potential of Citrix Online, to continue to tighten our sales choreography, to fine-tune our world class partner program and to train all of our customer facing teams on how to become trusted advisors to customers.

In short, we're driving a new Citrix. We were server based computing, now we're access. We were a single product company, now we have multiple products and product lines. We were a tactical project for most of our customers. Now we're becoming a strategic solution. Thank you, and now let's open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from John Rizzuto of CSFB.

I'm trying to make sure I understand this. The license revenue is down, pretty significantly year-over-year. Subscription revenue is up is this the same as license and maintenance? Or what's the difference because I'm trying to figure out if that core business is rolling over and now it's just really a maintenance stream?

Yeah John, this is Mark. See it is not maintenance and that's why we call it license updates and it's because maintenance would normally include technical support and services. And as you -- as I know you know, that our technical support and services is really the role, primarily of our partners and they supply most of those services to our customers, allowing us to focus on software. And so we sell a perpetual license and then a subscription for license updates.

The one thing I'd like to add to that Mark, is John, about two years ago as you know, we started bundling subscription with every new license sale. And coming up on a year will be the last time that we had actually sold individual products without a required maintenance stream as you call it or product license update attached to it. So that makes the year-over-year comps fairly difficult. I think that going forward-looking at our investments in our pipeline, we do expect license revenue to grow sequentially as I mentioned in my remarks between the low and mid single digit -- or mid to upper single digit percentage or a mid operating percentage. Excuse me.

OK. So my question then is, under that scenario, I can be an original customer -- if I am buying software, from Citrix for the first time is it possible that actually get -- subscription revenue or always go into license if you are the first time buyer.

You are a first time buyer there will be a component of it that gets recognized as new license and roughly a quarter of that balance gets deferred onto the balance sheet as deferred revenue and recognized ratably over the term. One of the things that we are seeing in larger transactions is customers choosing to purchase two or three years of subscription. And in that case, a much, much larger percentage of the overall transaction will be deferred and recognized over time.

OK. And what about upgrades? One of the things that you announced middle of the quarter was that you are going to sunset MetaFrame 1.8, a pretty significant -- from our viewpoint, a pretty significant installed base running 1.8 now. Is that renewal, I mean is that going to come in under subscription renewal as they upgrade? Or will that come into license or does it depend?

John, it actually does depend. Some 1.8 customers are on Subscription Advantage and are current on their Subscription Advantage renewal process. And for those customers, they can move forward and migrate at will. That's one of the key benefits of our subscription program and really the primary reason we put it in place.

Secondly, for a long time, it was an optional feature and you could actually buy our software without Subscription Advantage. And so there is a population of 1.8 customers that do not have Subscription Advantage and will be able to then migrate through a migration program where they will get the new software, and they will also go on to subscription.

OK. So - all right.

OK.

All right, I have a --so this is my final thing on this point because it really is an important point. So, in other words, if I am looking at a typical software company, lets say a database company that gives me a new version of a database. If you are an existing customer, you want to buy that you go typically go out and buy the new license. So, does it mean that in Citrix world and the economics probably don't matter or they do, I don't know. In the Citrix world, if I buy this initial license once, I'm essentially going to cycle everything through the income statement as subscription revenue and I get future upgrades, future releases and the economics are similar, except I'm paying you at a subscription basis versus the license basis? In other words, will I ever need to buy, replace a license with another license purchase if I am on Subscription Advantage?

No, you do not.

OK, so upgrades are just like new license sales but they get booked as subscription?

That's exactly right and that's why we call it license upgrade revenue -- I'm sorry, license update revenue and as a segment.

OK, so there is no real way, because that Subscription Advantage is coming up the year-over-year declines or whatever it's not -- it's a tough thing to look at. That's what's bothering me. I want to try to look and that and that comparable seems to be tough because I guess now you are into required Subscription Advantage.

That's correct. It was actually in the second quarter of last year that we stopped selling any products or platforms or future releases without a required subscription.

OK, got it, great. And I'll let it go because I'm sure I have taken up enough time for the -

Thanks John and just one last point just to note that our deferral rates a year ago in Q1 were around 15% and as David pointed out they are close to 25% for Q1. So you can see, you know, quite a difference and that's why the comparables are pretty tough.

OK, thanks.

Your next question comes from Kirk Materne from Banc of America Securities.

Congratulations on the quarter, guys.

Thank you.

Quick question, I guess in terms of guidance, Dave or Mark, could you talk a little bit about in terms of the 170 to 180 what amount is coming from the Expertcity acquisition?

I think, included in the guidance is an assumption of recognized revenues in the Expertcity in a range of about $8 to $10 million and also -- let me follow up by saying also 2 to 3 cents dilution in the second quarter results.

Right. And in terms of -- I know you had a write-off from the deferred from Expertcity. If you added that on top of the 8 to 10 million, how much are you deferring this quarter that you would be normally be able to recognize?

They are bookings and as you know it's a subscription service. So just about everything is booked up-front and recognized over the period of the contract. So, the bookings will certainly be higher than the recognized revenue for the quarter. But when we concluded the acquisition, they had roughly $12 million of deferred revenue on the books. As normal with purchase accounting, we're only able to recognize a very small component of that. So we essentially are going to in a sense write-off about $8 million of that deferred revenue.

Thanks. That's helpful. In terms of obviously, you guys are making some additional investments in the core business on top of Expertcity. Can you maybe give me an idea given that I guess to what the Expertcity I guess in one, in terms of the additional expenses that you all are taking on, is that about in line with the revenue you are taking on? And in terms of the additional expenses you are making in the core Citrix business, how many of those are sort of head count related that are going to last for a while or is there anything discretionary that will die down in the back half of the year?

I think the majority of the investments in the core business are really about building out our geographic coverage, our field readiness, our channel readiness and our coordination amongst our selling effort as well as continuing to invest in product development around the suite, new products etc., We will continue our program spending around marketing and branding which has been very successful up to this point in time. So, a lot of these are fairly permanent costs looking to, you know, drive long-term growth in this business.

OK. And I guess just as I will think about the business model going further the back half of the year, given these, it looks like you are sort of implying an operating margin in the second quarter, sort in a low 20% range. Do you expect that to accelerate over the back half of the year?

Well, our core -- the core business certainly has an operating margin, you know, higher than that and within the range of, you know, our previously stated targets of mid to upper 20% range. And we, you know, expect that to continue. On a short-term basis, we will recognize some dilution associated with the acquisition of Expertcity. Over the long-term, you know, we're certainly expecting to continue to invest in the business, to grow the top line, etc. But we'll do that with, you know, maintaining, you know, operating margins, you know, near our historical levels of the mid 20's with top quartile operating profitability.

OK, so I don't want to beat a dead horse. But in terms of your guidance when you made the Expertcity acquisition, was it 3 to 4 cents diluted in the first half, which you guys are right on that target. In terms of the operating margins in the back half of the year I assume would go back or it's a mid high 20% range then?

Yeah, I guess, it's safe to say while we're really only giving guidance a quarter at time I would expect operating margins to increase in the back half of the year certainly.

That's great, thanks very much and congratulations.

Thanks Kirk.

Your next question comes from Brent Williams of KeyBanc Capital Markets.

That's the recently renamed McDonald's Investments by the way. Let's see. In terms of the Expertcity operating expenses that came in the quarter, how much of that is sort of, you know, do you guys have a lot of marketing programs that you are driving really aggressively to build momentum with the short-term with that, things like seminars, Web casts and so forth? Or is that really aggressive ramp and sort of body counts related type things, you know, getting feet on the ground and so forth?

Brent, this is Mark. There is some growth in the sales and marketing side to support some trials in off-line types of marketing vehicles. And the division is very adept at direct marketing and that requires sort of small trials measuring results, testing different variations and so forth. And that has been going on starting in March. And, you know, we're looking for places where we get a good return in the off-line marketing to try to expand, you know, the lead generation and penetration of the marketplace for GoToMyPC especially.

OK, great and then the other thing is, can you go through the comments you made on accounts receivable about some money set aside for specific accounts and give a little more color there, please?

Yeah. You know, as normal in a quarter we look at both the specific reserve and the overall reserve. And there were a couple of big things, one in Europe and one in EMEA for a total of about 1 million, 1.5 million that we reserved for this period.

OK, that's it for me. Thanks.

Your next question comes from Jason Kraft of AG Edwards.

Thanks. Just to clarify. Did you guys say you were breaking out the quarterly '03 license revenue numbers because I can't seem to find that on the Web site?

Yes we are, they were included in the slide presentation for the Web cast on this call. We will leave them posted and make sure they very visible.

OK the mix of these, you know looking at for a lot of us have try to back in historically to turn core license to make the Subscription Advantage and the maintenance is are pretty big. And I just want to get a feel of the recognition policy. How much is getting booked in quarter and given the Advisor Rewards program, how much was induce by that, that really -- beside than the maintenance -- is far greater, I think a lot of us were thinking in the quarter.

Well, I think the recognition of the Subscription Advantage contracts are done on a radable basis. One year contracts we'll recognize in the subsequent year. So it's stuff that was booked during the period. I mean, if we sell something at day one of the quarter, we will generally start recognizing that 30 days later.

Jason, this is Mark. So regarding the second piece of your question, which I have now forgotten -

It's Advisor Rewards.

Advisor rewards about Advisor Awards. Really Advisor Awards and subscription renewals and, you know, license updates are absolutely separate and pretty much unrelated. We saw in the Advisor Rewards program about $40 million worth of projects actually were validated during the quarter and we closed about 10 million of that 40 million and paid Advisor Rewards on those pieces of business. Each one of those projects, of course, have the deferred component that David talked about as well as the recognized piece, about 75% recognized, about on average 25% deferred.

OK. Given your comment on the distributors in the quarter, any kind of mix change with respect to shrink in electronic license?

Nothing substantive. Those metrics tend to run pretty consistent now and which we like to see because we like the diversity in the revenue streams.

OK. David, a question on the geographic mix. You know, you gave total revenue but with respect to the license revenue, what was kind of the mix there or may be the year-over-year growth in EMEA and North America.

It's about the same. I actually don't have the details in front of me. We'll have to get back to you on that one.

OK and than just one last thing. I know the prior question a couple of questions ago because was about kind of feeling out guidance for '04. I mean if you look at where everyone is I think where the street is right now on an adjusted EPS, is that pretty much -- is everyone thinking about the same, given the $0.3 to $0.4 cents kind of dilution the first half? Should we be thinking about $0.79, $0.80 cents for the year.

Looking externally the licenses are a mixed bag right now of people that have included the effect of the Expertcity acquisition and those that haven't. So I mean at this point, you know we really haven't given any guidance beyond this current quarter and that's the consistency we need to stick with at this point.

OK and I forgot another one. Yearend head counts, just it's been a quarter since we got an update there for ending Q4 and Q1.

We've had in North America year-over-year about 20% growth, in EMEA about 10% year-over-year and in the Pacific about 50%. So we have grown the head count on a year-over-year basis and increased the net heads on the ERM front.

Thanks.

Your next question comes from Ed Maguire from Merrill Lynch.

Yes. A couple of things. Going back to the question around the proportion of your sales that included Subscription Advantage. Is there any way to quantify what proportion in this quarter, a year ago, did not include Subscription Advantage?

No, Ed. Actually I really don't have that data. But, you know, I can tell you in the aggregate as Mark mentioned, looking at new product sales, at that point in time we had deferred about, you know, 15% -- roughly 15% onto the balance sheet. You know, currently we defer close to 25%. So that's probably the best way to look at it on a historical basis.

And the other piece, Ed, to point out is that what makes up this deferral rate is actually about 3 or 4 variables that actually come together, which is what makes it difficult to quantify here for you. So it's definitely the mix of enterprise deals. It's definitely the notion of requiring subscription on all products. It's definitely the fact that the larger the deal, obviously, the larger the discount is and the higher the deferral rate. So there are these factors that all play into this. And as we, you know, pointed out earlier, that we do believe that we are well-positioned here for sequential growth and we're actually looking for that to continue.

And once we get into the second quarter, we should be -- we should have real apples to apples comparisons?

I think that's fair, yes.

OK on to Expertcity. How would you presented this to the channel and what are your plans for including your channel partners in the Citrix Online revenues?

OK, let's see on how we present it to them. Well we certainly exposed the partners to Citrix Online during our January sales summit. And just to let them get familiar with GoToMyPC and GoToAssist. We didn't put any programs in place. In fact, we avoided putting anything in place for Q1 to avoid possible distraction from the core mission and that was to deliver on our Q1 goals.

As the quarter began, we then started to have some web designers really starting to train and educate our channel partners as to the channel programs available, a little bit more in depth on the products and really introducing the Citrix Online sales team both inside and outside sales teams to our teams in the field and our partners in the field.

We've also then began a couple of trial programs to try to stimulate demand within our customer base. One is basically linked up with Subscription Advantage renewal and that process and with internal sales team, talking about GoToMyPC corporate and then generating leads that then go over to Citrix Online.

There is a second program that's around field-based referrals. In all of these cases, we're looking to integrate and include partners in that process. And so partners are a core part of our GotToMarket model and Citrix Online when it comes to the corporate type products. At this point, GoToMyPC corporate and GoToAssist, they are very much part of the formula.

OK finally just a quick update on the IBM relationship.

Let's see. We're actually in execution mode. We made some announcements. You know, in all of the great strategic stuff and now we're executing training their field people. That's going well. Lots of cross communications within our sales force and theirs. I've made a video to go into all of their sales kits, their sales meetings, conferences, etc., talking about Citrix and how they can partner with us and they have done the same. And so we're really down to the stuff that then stimulates projects and demand. And I'm pleased with the progress we've made there.

OK. Thank you.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS]. Mr. Templeton your next question comes from Curtis Shauger from CIBC.

Yes good afternoon gentleman. Congratulations on a good quarter. If I could just go over this notion of the attach rate to the deferred bookings. It seems as though you have mentioned 25% or 15% -- or 25% up from 15%. It seems like the effective rate is much higher given the deferred revenue amortization that you are reporting. Can you give us a little more color on what's driving that number?

Yeah, Chris. Let me take that one. I think that if you look back over the last couple of years, you know, as we stated, we've moved up to 100% of every new license transaction is included with the subscription contract. So from that basis, our customers, generally over the last year or so, 100% have been on subscription. The attach rate, which we talk, is more about looking about our entire installed base and how many customers in that installed base are active on subscription. And our best estimates right now are somewhat around 50%. The renewal rate is based on those coming up for renewal on subscription. And that's what we've been up from below 50% a year or so ago, now up to about 70% and climbing.

As we look to model this going forward on your -- there may not be a very clear relationship then on your actual perpetual license number in driving the deferred subscription line. Is that a fair statement as they may not have real clear 25% relationship there?

No, I think it's certainly the largest contributor and the renewals from existing subscription contracts. We obviously have some programs in place to trial and recapture those customers that have let their subscription lapse or never owned it in the first place. So there is going to be some of that in every quarter.

OK also just real quick. Just to clarify, Group Deutsche Post that's the holding company for DHL, correct? Is that correct?

That's correct.

Now, there has been a lot of I guess, discussion in the marketplace about exactly how big some of these contracts that you mentioned -- I mean these are obviously just the first phase type of implementations and I guess this one in particular, there is discussion that it could lead to a much higher long-term type of deal as some of these other ones could. Can you kind of give us a sense of like how much of that is factoring into your guidance going forward?

Yeah, in particular, what we do when we talk about deals is we really talk about what's actually delivered and not what's sort of promised or prospective. The DHL deal is an exciting one, they are an exciting customer. And there is great prospective potential there.

Like most of these larger deals, they start with proof of concepts that are smaller and then they go to a medium-size to really test the scalability of the project and then they go on to our forecasts and our pipeline with an estimate of not only what they can ultimately produce but, you know, when and where we see the next sort of phase kicking in.

And so, you know, it happens to be one of the, you know, very significant and interesting transactions that are out there for us and certainly does factor into our guidance. But like most enterprise software companies, we do assign probabilities to each phase of a sales process and all this comes and mixes together into our outlook. And a key part of that now as we look forward is the pipeline growth has been fantastic but the coverage ratio has remained strong and this actually been increasing, which is, you know, all good stuff when you are looking into the future and you are trying to guide.

OK. Great. Thank you, gentlemen.

Well, thank you.

Your next question comes from Damian Rinaldi of First Albany Capital.

Two quick questions. You talked about the overall head count and your plans to continue investment in sales and marketing and R&D. Can you give us a rough sense of the incremental head count that you planned to add over the course of the next quarter and to the extent that you are comfortable for the full year. And then secondly, the top five GoToMyPC deal that you referred to, was that a deal that had been in progress before the acquisition? Or did the core Citrix operation somehow contribute to that transaction's close?

Damian, let me take the first part and I'll turn it over to Mark to talk about Citrix Online. Looking at total head count, as I mentioned, you know, we ended the quarter at about 2177. And of that increase, you know, 70 of those were from the core business joining predominantly product development and the sales organizations. You know, I think if you look back over the last several quarters, you know, our ability to really retain and hire, you know, many more people than that hasn't really been there. So, 70 to 100 people is about the most that we can practically add in a quarter. I think that going forward, we'd look to add somewhere in that range to product development and sales and marketing.

OK.

Damian, with respect to the large GoToAssist deal that Citrix Online inked in the first quarter, this type and size deal takes many months to put together. And so that deal was well in the process and part of their forecast and their pipeline before actually joining us. So, we're excited by that because it shows the potential there. And I think what helps these deals of this size and scope close is when the customer of that sort of scale can have the confidence on the credibility of the Citrix brand behind it. And so we're looking to be able to do of that kind of business going forward and there is more in the pipeline and I think, you know, we're -- we should be able to see some more out in the future.

Good. Thank you.

All right, one more question if there are any other queued up.

Yes, sir your final question comes from Gary Spivak of Kaufman Brothers.

Thank you. David, just I know you gave us some information to get here. But if you did not have to write down the deferred from the Expertcity, what would be the impact to EPS next quarter?

Well, I actually haven't broken out that detail. But the overall write-down of deferred revenue was around $8 million-- 89 million, and that was spread out over the next 12 months. So it's not purely linear.

Right.

But, you know, the impact on Q2 would be, you know, somewhere in the $2 million range-- 2 to $3 million range.

And then, final question, if you guys can comment on where you stand relative to having an SSL of EPN solution? Is that something you still coexist with? Or is that becoming more an area where you want to be a direct competitor?

I'm sorry, Gary. The phone blanked out for a second.

Just thoughts on the SSL EPN and how you want to address that market?

Well, first of all, it's very important for us because I don't think you can have a complete access infrastructure solution without it. The great news is that we are a key player in that marketplace, probably the dominant player today on the software side. In fact, I know it's been in the last month Gartner updated their magic quadrant in this SSL EPN space and we moved up in that overall environment, which pleases us and part of that is certainly reflected in the addition of additional SSL capabilities to Secure Access Manager and stay tuned. We have some more good things coming.

OK. Thanks.

OK. Mr. Templeton, that was the last question. Do you have any closing remarks?

All right. Well, very good. And just in final comment is just thanks for joining us today. And we've had a great start to the year and really strong prospects for more ahead. So thanks and we'll see you soon.