思杰系統 (CTXS) 2004 Q2 法說會逐字稿

July 21, 2004. Today's conference is scheduled to begin momentarily. Thank you for your patience. Good afternoon. My name is Jamie, and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Citrix Systems 2nd quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

At this time, I would like to turn the call over to Jeff Lilly, Manager of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you, Jamie. Good afternoon, everyone and thank you for joining us. In this call today we will be discussing Citrix' 2nd quarter fiscal 2004 financial results.

Participating in the call are Mark Templeton, President and Chief Executive Officer and David Henshall, Vice President and Chief Financial Officer.

As we get started, please be reminded that during the 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 and earnings per share. 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 financial statements and on the Investor Relations page of the Citrix corporate Web site.

Additionally, certain comments made during the call may be characterized as forward-looking statements made pursuant to the safe harbor provisions of the section 21E of the Securities Exchange Act of 1934. And these statements involve a number of factors that could cause actual results to differ materially, including risks associated with the company's business, involving the company's revenue growth, products, their development and distribution, product demand and pipeline, economic and competitive factors, the company's key strategic relationships and acquisition and related integration risks. Additional information concerning these factors is highlighted in the earnings press release and in the company's filings with the SEC , including the Safe Harbor Disclosure in our most recent 10-Q filing available from the SEC or the company's Investor Relations Web site.

Now I would like to introduce David Henshall, Vice President and Chief Financial Officer of Citrix Systems.

Thank you, Jeff. And good afternoon to everyone. Clearly it has been a long and trying past few weeks for tech investors. Today I'm pleased to discuss our solid financial metrics for the 2nd quarter which shows our continued strong execution. In my comments, I will review the financial performance for the 2nd quarter of 2004 and I will also provide you with our outlook for the 3rd quarter ending September 30th. I should note that all numbers discussed are adjusted to exclude the effects of amortization of intangible assets. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures.

Looking at a snapshot of our results for Q2, net revenue was $178 million. An increase of 25% over last year. GAAP EPS was 18 cents, compared to 17 cents a year ago. Adjusted EPS was 20 cents. Even with two cents of dilution from the Expertcity acquisition, this is an annual increase of 11%. Cash flow from operations was 45 million for the quarter, compared to 54 million last year. The enterprise business continues to be strong.

During the quarter, we closed five deals, greater than $1 million. Matching a record, set in Q3 of 2003. Three of these transactions were in North America, one was in EMEA and one in the Pacific region. In fact, all of our top ten deals were greater than 500K for the first time in our history. These transactions represented customers in the telecommunications, financial services and government verticals.

To review our results in more detail, I'd like to discuss our revenue by reporting segment and product mix, and our operating performance. Looking first at revenue by segment, the Americas, which accounted for 47% of revenue, generated $84 million, an 11% increase from last year. EMEA was 38 percent of revenue or 67 million, up 21%. The Pacific region represented 9% of revenue, or 17 million, up 43%. And Citrix Online, which is not included in these geographic segments, contributed more than $10 million to this quarter, about 6% of total revenue.

Please note that this is the first full quarter of results for the Citrix Online business. The online team continues to execute very well, growing revenue at a rate of over 50% annually. I would also like to remind you that we currently sell in US dollars around the world. Therefore, there is no currency translation benefit reflected in these revenue numbers.

Now let's turn to the revenue mix in more detail. License revenue was $88 million. Down 5% from last year. And flat on a sequential basis.

This result was below our internal plan for two reasons: First, we experienced some softness in our shrink wrap business. And, second, a choppy close environment caused a few anticipated deals to move out of the quarter.

Overall, however, our product pipeline continued to increase. This, along with some new programs which Mark will discuss later gives us confidence that license revenue will resume growth in the 3rd quarter. License update revenue, primarily our subscription advantage program, was $67 million, up 69% annually and 14% sequentially. This continued strong performance was driven by subscription renewal rates approaching 75%, well ahead of our internal expectations, and a proof point that our focus investments in this area are starting to pay off.

Our services revenue, including Citrix Online was $24 million, up 109% from last year. Excluding the contribution from Citrix Online, services grew 16% year-over-year and 8% sequentially.

Turning to expenses and operations, our adjusted operating expenses for the quarter was $131 million, up 31% year-over-year and up 11% sequentially. The main reasons for this increase are additional run rate expenses from the Citrix Online acquisition, branding and field marketing programs, Sarbanes-Oxley compliance, and increased head count across the sales and product development organizations. Total head count at the end of the quarter was just under 2350, up 150 people from Q1.

As we've stated previously, 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 driving productivity, and with a new suite of products to sell we're investing in field readiness. We plan to moderate these incremental investment levels over the back half of the year, as we begin to leverage these resources and programs. In the products organization, we have continued to invest in the MetaFrame Access Suite and our next-generation products to drive market leadership. These investments, which Mark will discuss later in more detail, are the foundation of our long-term growth. GAAP operating margin for the quarter was 21%, compared to 25% last year.

Our adjusted operating margin was 24%, compared to 27% last year. This result was slightly better than expected, due to the strength in our subscription program, and the Citrix Online results. Our goal is to continue to deliver adjusted operating margins in the mid-twenties or better. Weighted shares outstanding increased to 176 million shares, reflecting the dilution from the Expertcity acquisition.

Turning to the balance sheet, deferred revenue was 194 million, up over 50% from last year, driven largely by our subscription advantage program and Citrix Online. Cash and investments stood at 522 million, down from 536 last quarter. Decline is mainly due to share repurchase commitments and cash paid for the purchase and licensing of certain technology assets.

Our net accounts receivables stood at $86 million, yielding a DSO calculation of 44 days, compared to 37 days last quarter and 53 days last year. Cash flow from operations was 45 million in the 2nd quarter as compared to 54 million last year and 78 million in Q1. The decline from last quarter was due to changes in working capital accounts, and purchase accounting adjustments related to the Expertcity acquisition.

Over the past four quarters, the company has generated over $260 million of free cash flow from operations. During the quarter, we repurchased 350,000 shares at an average price of $19.84 a share. We remain committed to our ongoing stock repurchase program.

In fact, we have approximately $36 million in share repurchase commitments outstanding for the third quarter, and a total of 120 million remaining under the current share repurchase authorization.

Finally, I'd like to discuss our outlook and expectations for the 3rd quarter, ending September 30, 2004. It should be noted that our outlook assumes no significant change in the current economic or competitive climates for the next quarter. It should also be noted that we are about to make forward-looking statements that incorporate certain risks. Please refer to the Safe Harbor statement noted in our press release and risks that are stated in our SEC filings.

For the 3rd quarter, we expect the following. Total revenue in the range of $175 million to $185 million. On a GAAP basis, earnings per share of 17-19 cents. And on a adjusted basis, earnings per share in the range of 19 to 21 cents. Deferred revenue is expected to be up modestly on a sequential basis, and weighted average shares outstanding in the range of 176 to 177 million shares.

Now I'd like to turn it over to Mark Templeton to give you additional details on the quarter's performance and to discuss our ongoing business.

Okay. Thanks, David. Q2 was another record quarter for Citrix. With impressive sequential and annual growth. We also delivered record revenue performance for the first half of the year, growing 18% over the first half of 2003. Overall, I'm pleased with our performance, top and bottom line, and the course we're on. Our momentum is coming from several areas.

Enterprise customers are continuing to standardize on Citrix access infrastructure with great uptake of the MetaFrame Presentation Server and the MetaFrame Access Suite. Large system license business was robust during the quarter. Renewal rates of our license update program, Subscription Advantage, continued to improve. As David said, renewal rates approach 75%. Clearly customers are counting on continued value from their Citrix investment.

Citrix technical services posted a strong quarter, up 8% sequentially across education, technical support and consulting services. This is really critical for making customers successful with our products through our partners. And Citrix Online, in its first full quarter under the Citrix brand continued its double-digit growth, bringing new products and new customer segments to our business. So the investments we've made in our geographic coverage, our access infrastructure products, our partner programs and our branding are really having a positive impact. We delivered a great first half, and our repositioning, strategy, plans and execution going forward will bring further momentum.

As we've discussed in the past, our strength has been an extremely broad customer base. Lots of presence. But we have tremendous opportunity to further penetrate these customers, helping them get more value from our products. We've been executing to a strategy to do this, and we're doing it very well. David discussed the shape of our larger sales agreements during the quarter. Let me give you a couple of examples.

Our top deal in the quarter was for more than 9,000 concurrent users at Cingular Wireless, with future plans to expand even further. Another significant sale for the quarter was with long time strategic client France Telecom. France Telecom now has over 30,000 users of Presentation Server. These examples show that, as our customers experience the ROI and flexibility we deliver, they're coming back for additional enterprise solutions, because Citrix delivers strategic value by reducing the cost of IT, and increasing productivity and agility. We're becoming, over time, an enterprise standard for these customers. A few words now about the government sector.

Overall, government is our fastest-growing sector. Our investments here, particularly in the U.S. federal sector, are bearing fruit. One of our top ten Q2 sales was with the U.S. Air Force, for both Presentation Server and the largest sale of Password Manager to date. We also have momentum in state, local and international governments. Other top ten sales were with the Georgia Department of Human Resources, the new south Wales Department of Health and the London borough of Harringgate.

As David mentioned, product license revenue was flat to Q1 while medium and large client business continues to be robust, we're disappointed with our license sales among first adopters and smaller customers, which are fulfilled by our shrink wrap and easy license programs. We believe a part of the solution is our advisor rewards program. It was first targeted toward open and flex license sales, making larger systems more profitable for our channel partners. And it's been very successful. During Q3, we'll extend advisor rewards to include our Easy License program, in order to incent a larger base of partners for smaller system and smaller customer sales.

Additionally we'll introduce a lower entry point for the Access Suite and we'll launch a sales promotion to upgrade Presentation Server customers to the full product suite. In April, we launched version 3.0 of the MetaFrame Access Suite along with the next generation of our flag ship product, MetaFrame Presentation Server and updates of Conferencing Manager, Secure Access Manager and Password Manager. This version of the suite is the most complete solution for secure access available today.

And for the first time, introduces Citrix Smooth Roaming. Imagine this. You get up from your jet -- your desk, you grab your hand-held and access to these applications and documents automatically leaps from the desktop to the hand-held, reformatting the presentation for the new device, without another login and maintained even across wireless dead zones. That is Smooth Roaming. Smooth Roaming is a set of technologies that enable persistent access and consistent user experience across devices, locations and networks. It's a major advance in secure access for the end user. And Smooth Roaming is available exclusively from Citrix. Smooth Roaming requires significant back end infrastructure that simplifies the deployment, monitoring, measurement and management of IT services and assures the security of enterprise information during its access, interactive use and transmission over the network. So we also introduce another major capability in release 3.0.

We call it Common Management Infrastructure. CMI is designed to work across the entire suite, and give IT admins far greater visibility into and control over who's accessing what, where, when, why and how. So all this really allows Citrix clients to move more rapidly to a service-oriented adaptive computing model where access is on-demand and where business is more agile.

This quarter, we'll move even further as we introduce some exciting enhancements to Secure Access Manager, introducing the ability to provide SSL-based secure access to file servers, to monitor and control document access, to sandbox e-mail attachments to dynamically enabled mail and file access on small form factor devices and more.

With these capabilities, Citrix software becomes even more strategic to business, increasing our momentum in the access information market. Clearly we're executing on our mission, to make every business an on demand enterprise, where information is securely, easily and instantly accessible from everywhere. This is the core of our suite strategy and why we're now providing web-based access services through Citrix Online.

Citrix Online delivered a solid Q2, as we've already discussed. And also did well with phase 1 of the integration process. In phase 1, we focused on generating sales leads for GoToMyPC corporate and for GoToAssist, within the Citrix partner and customer base. In fact, almost 300 Citrix access partners joined the Citrix Online program and had some early successes. Phase 1 also involved cross pollinating our business development relationships.

During the quarter, we landed market development deals with Sharp, with Verizon, with AT&T, with Dell and with BT. In Q2, we also successfully launched Citrix GoToMeeting, with a free preview program. This amazing new product is the easy, instant way to hold online meetings. In fact, GoToMeeting hosted over 10,000 meetings in the last month alone. The corporate addition of GoToMeeting was available for purchase in June and has already garnered over 100 corporate accounts. And the personal edition will go on sale July 29th, so register for the free preview now and try it for yourself.

The Citrix Online team has accomplished all of this under the leadership of Andreas von Blottnitz, serving as President and CEO of Expertcity before the acquisition, and now as president of Citrix Online. Andreas has provided tremendous leadership for the past five years. During the last six months, he's led the team in Santa Barbara through a smooth, phase 1 integration and we're now moving to phase 2 of integration, this phase calls for greater leverage of the Citrix brand and much closer coordination with Citrix channel partners and customers worldwide. Andreas has decided this is a good juncture to hand over the leadership of the division and focus on some personal endeavors he has in mind. He'll be leaving the company on October 1st, and will provide consulting support during the handoff. All of us at Citrix would like to thank Andreas for his inspiration and leadership and we wish him well.

Brett Cane, senior Vice President for sales for Citrix Online will assume the role of president on August 1st. Since joining the company a year ago, Brett has established himself as a trusted and capable executive leader that delivers. He has a solid management background in the technology industry, and is a great choice to lead Citrix Online. Brett will report to John Burris, Citrix's Senior Vice President of worldwide sales and services. Citrix Online has lots of continues to evolve, investing in growth, streamlining ourselves, extending our leadership in access infrastructure and structuring ourselves for the future. This is what drove the organizational changes I recently announced.

These changes will allow us to refine the strategies, priorities and structure of our products organization, create one point of contact for partners and customers, throughout their entire relationship with us, better integrate our information systems and give us improved visibility into key business metrics and gain a sharper focus on human asset management and make further strides in how we attract and retain great Citrix people. The result of these changes is that Jean Marino, our CIO and SVP of corporate services and Bob Kruger, our Sr. Vice President of Product Development and CTO will be leaving the company. They've made a great contribution to Citrix and we extend our best wishes to them. They're working with us as needed through the 3rd quarter to allow for a smooth transition.

As we look into the 3rd quarter, we have a few focal points. First, meeting our commitments to deliver further growth in revenue and profit. In spite of the choppy software market we seem to be in, we must continue to capitalize on our broad customer base. Second, energizing first adoptions, small projects and small customers across our entire product portfolio. Third, growing our license update and technical services business worldwide. There is a lot more opportunity here.

Fourth, driving cross selling synergies with Citrix Online as we focus on a lot more coordination of partner and customer engagements and, fifth, introducing an exciting enhancement to Secure Access Manager, so stay tuned for this one.

So now wrapping up, our opportunities in the access infrastructure market, according to IDC research, this market is growing at 12% annually, about twice the rate of the overall software market. I firmly believe we are best positioned to provide an integrated system for secure application-based access. A complete and secure suite of access infrastructure from a proven, trusted business partner like Citrix is what customers want.

Citrix is the only infrastructure software company 100% focused on access. This is what differentiates us as a thought leader and a market leader. Over 2300 Citrix professionals, and 6,000 access partners are taking exciting capabilities like Smooth Roaming to market to continue to drive our growth momentum, our strong financial performance, and our vision, making it easy for people to access information on demand. So now, with that, let's open it up for questions.

And at this time, I would like to remind everyone, if you would like to ask a question, press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q and A roster. Your first question comes from Steve Ashley with Robert Baird.

Congratulations on the quarter. I guess I was just wondering if you had started to see any activity of your 1.8 customers beginning to upgrade to the 3.0 platform or to have plans and start to give consideration to that.

Steve, thanks for the question and for the -- the kind comments. We -- we actually have continued to see migrations of 1.8 customers to the new platform on a gradual basis, especially those that are on subscription.

And I think, as most people know, that most of these migrations take place when customers are moving to a new Microsoft platform, where they're moving to Active Directory, Windows server 2003 and with Microsoft we've actually had some programs in place to really encourage them to do that. So we are seeing that process. But as -- as you also know, we don't provide that broken down within our numbers.

Great. And in terms of advisor rewards, you were kind enough at the analyst day to give us some metrics around that, how many projects had been submitted and validated and the value. I was wondering if you would consider updating those metrics.

Yes, Steve. So one of the things that we did in the -- when we reported last on strategy day, is we just wanted to give everyone a sense for the scale and how those were going. And we don't intend to have, sort of quarterly reports but the pipeline in the quarter of access -- of advisor rewards increased dramatically, close to 90 -- it's about 90 million about, right now. And about 1200 or so deals that have been validated in the system, with about 3,000 that are in the queue and going through the process of registration.

Great. And then lastly, a housekeeping question. In -- do you -- in the 1st quarter, I believe the percentage of your license revenue that ended up being deferred under the balance sheet was about 24%. David, might you have a comparable number for that in the 2nd quarter?

Yeah. For about the last year, it's remained at roughly 24% per quarter of every new -- new license transaction is deferred. We'll book that as our initial first-year subscription.

And that was consistent here in the 2nd quarter as well?

Yes, it was. It is generally between 24 and 25%.

Great. Thanks so much.

Thanks, Steve.

Your next question comes from the line of Edwardo Liatis (ph) with Lehman Brothers.

This is -- this is Israel Hernandez from Lehman Brothers. Pardon if you answered this question in your prepared remarks, I just jumped on midway through.

Given the softness that we saw in software, can you provide a little color as to what you guys saw during the month of June, it was pretty obvious that there was a slowdown there.

Were there any particular geographies that were weaker than others, and what are you seeing now in July? If there was any business that was pushed out, have you seen any of this business return?

Israel, yes, we did cover this in the comments but not really in the granularity of the month. Actually, in our business, we didn't see what a lot of other reporting companies have said around the enterprise business, as a matter of fact.

And so worldwide, our enterprise business was robust right on through June.

We did have a couple of deals at the end, it -- it was -- you know, there are a couple -- there was a little bit of choppiness in a couple of -- sort of regions at the end but nothing, you know, in a pattern, and we did have a couple of significant deals actually push out as David did say in his comments. The big -- the big thing that we saw was just weakness in the smaller project and smaller customer area of the business.

Do you have any -- any guesses as to why that may be happening? Are you seeing some encroachment or some creep from Microsoft terminal services at this point, or is this something -- something else?

Well, I'm thinking -- there are always three factors that we deal with at this end of the market place.

First of all are economics, and because our software and this kind of system does require a capital investment, and smaller customers first adopters typically are more sensitive to that.

Secondly, we do see that the economics for our channel partners aren't as robust, and especially in a quarter where they were going gangbusters on advisor rewards, which really reward them and incentivize them to do medium and larger scale systems. And then the third area is really sort of the natural ebb and flow of competitive products and alternatives at that entry level. But also pointing out that during the quarter there wasn't any new activity with terminal services or other kinds of things that might impact that part of the business.

So, you know, and we're talking about pretty small numbers overall. So in the prepared comments, we talked about really how we're going to focus on this area in the 3rd quarter, so we'll be introducing three things that will help to energize and reinvigorate this smaller partner and first adopter.

First we're going to move Access Advisor rewards to the Easy Licensing program which really allows -- it is an electronic licensing program that allows smaller projects to get the advantage of an advisor reward, so that's an incentive for our partners.

Secondly, we're going to lower the entry point for the MetaFrame access suite. We've had quite a few requests for an entry point that's -- that moves down to 50 concurrent users. Right now it's over 200 and only available in our up -- the upper end of our licensing programs. So we're going to do that.

And then the third thing is we're -- we're going to run the -- start a promotion on what we call our step-up license, which really allows Presentation Server customers to step up to the entire suite off of their Presentation Server license. So we're proactively working this end of the business, and expect to start to see some results this quarter.

And when you are implementing these changes? Can we expect to see them early in the quarter or is it going to be, you know, towards the end?

Yeah. It will be sort of mid-quarter.

Okay. Thank you.

Thank you.

Your next question comes from John Rizzuto with CSFB.

Good afternoon, everyone. Mark, it -- it seems we've been looking at the small business, which has been a little bit unpredictable for you as far as that getting the revenue goal. This seems that you're telling us right now that all of the license shortfall was strictly small business. Is that right?

Actually, not, John. You know, it was -- you know, again, it is a small number overall if you look at -- you know, the kind of growth --

Um-hum.

-- that we thought we'd have in -- in license. So, you know, 50-50. I mean, we don't really --

Um-hum.

-- you know, expose the kind of mix. But about equal.

So a little bit. So small business on a relative size was weaker but on the overall impact it -- it was about 50-50 between enterprise and small business.

Yeah.

Okay.

Because we did have a couple of -- of significant deals slip out, past the end of the quarter. And that -- that was the only sort of choppiness that we saw during the quarter in the enterprise business.

Okay. And Klaus is still with Citrix Online. I know he was in the press release. So I imagine for the time being he is. Any plans?

Oh, absolutely. Klaus is, you know, sort of the lead founder of Citrix Online and very enthusiastic and active in the business, and is quite a strong spiritual leader of the group there. So -- and he's quoted in the release because he's onboard, and he's committed to Citrix Online.

Great. Mark, you -- you had told us historically, you know, goals for new products by the end of the year. I guess we're halfway through the year now. Password Manager has been out there for a while. That seems to be doing relatively okay, Secure Access Manager is doing all right. Where do you think -- where would you expect new products to shake out, as far as a percent of revenue for the end of the year? Just a ballpark, if you would.

Well, there were -- I'll maybe let David handle a piece of this. But first, John, we're -- we're attacking sort of the new product revenue momentum around two things.

First of all, the -- the suite, the access suite and all of the work we're doing about really elevating the message and our marketing around really buying our entire vision, and the way you buy our entire vision is through buying the suite, which includes all the products.

And then the second piece is that with -- within the suite, as we promote these products, we're promoting them against, you know, particular markets and market segments that are -- are attractive for them.

So, for example, the single sign on market place and project for single sign on, we've been promoting Password Manager there and we've seen the pipeline for new products really explode in the last two quarters, so we saw a great increase in Q1 and another great increase in Q2 there.

Yeah. Just to add on top of that, John. You know, specific to our -- our goals, we've stated for the last couple of quarters that we would expect the run rates for new products to contribute between 5 and 10% of total product revenue by the end of the year.

Um-hum.

In Q2 the absolute contribution in -- in dollar terms was up substantially on a sequential basis and on a percentage basis and now stands just at the -- just under the bottom end of that range. We're happy with the growth, as Mark mentioned and certainly the pipeline is increasing much faster than that.

Okay.

So we think 5 to 10% is still a good goal.

And just to be clear, that does exclude Citrix Online, right?

That's correct.

Okay. A couple of just quick bookkeeping questions with you, David. You said deferred revenue up modestly. You know, that -- and we always get nervous when we hear words like that. What does that exactly mean?

Deferred revenue is up about $10 million this quarter to just under $200 million. I would exact a similar increase this quarter.

Okay.

It's always hard to predict the exact timing of subscription renewals and what not, but still expect that business to continue to execute very, very well.

I was just wondering if we were looking 10 million versus 1 million. Okay. Perfect.

Then, finally, last quarter you did give us specific guidance on what you expected license to be. Are you in a position to do that this quarter?

Well, I think that given the environment right now has made it a little bit more difficult to predict the absolute mix of the business. So at this point in time, you know, I'd just like to say that, you know, between our current product pipeline which, again, grew last quarter, our forecast and some of the programs that Mark described, we certainly think it's going to grow on a sequential basis but I'd rather say it's going to grow, you know, modestly.

Okay. All right. Perfect, thanks a lot. Thanks.

Your next question comes from Brent Williams with Key Banc Capital Markets.

Okay. You know, looking back at the statistics here on the rewards program, you mentioned you had 3,000 deals in the queue. Excuse me. How long does it take to validate a deal?

Brent, it will -- it will vary, because sometimes they'll -- they'll be in the queue because they're waiting on a meeting, a conversation that can take place in the field with -- between partners, between -- not partners, across partners, but with us and -- and our partners, with us and the customer, to really understand who has done the value selling and where they are in the cycle, so that 3,000 in the queue includes those that are in the queue, that are going through the normal process, and those that will be sort of rejected. The -- the rejection rates are varying by region. And people are learning sort of still, you know, what -- what's qualified and what validates out. So -- so that -- that gives you a full mix of time frames that -- that they're sitting in the queue.

Okay. And then, you know, the renewal rate increased, you know, to what is it? 75% from 70 last quarter. Over time, where do you think this floats to? Something like what we've seen in, you know, sort of traditional software, you know, businesses?

Yeah. I think that over the long term goals over the next couple of years would be to have the renewal rate north of 85%.

Okay. Okay. Then finally you mentioned that one of your top-ten deals, I think it was, last quarter was a Citrix Online deal. Any -- any comparable deals this quarter in the top-ten list?

Yeah. Actually, no. In Q1, that was true, okay? And in Q -- in Q2, in terms of bookings, we did not book a top-ten deal, which would have -- which would have had to have been over $500,000 to make the top ten for Q2.

So -- okay.

They had -- they -- yeah. There -- there's some good things in the pipe.

Have you talked about what sort of the average-size, you know, booking is for a corporate deal in the past?

No.

Would you contemplate doing that now?

Not -- not at this time. I mean, you know, Brent, the -- the issues here are we have a -- a wide range of customer types, and then the way our licensing and our sales process works is that we don't really have a process that jams shelfware onto customers, so as I've tried to point out in the prepared comments, that what we do is we tend to work with customers.

They see the whole picture, and then pick off projects that make sense for them, where they can get -- get validated value, and then add to that over time.

So we're still seeing almost 2/3rds of the business come from reorders from -- from customers that already have existing and standing functional systems.

Overall, if you -- you know, you can -- you can kind of get the sense from our top ten comments here, from quarter-to-quarter, we tend -- we'll -- we'll try to explain, you know, the skew of business. Five of a million or more, and the smallest deal was 500,000. So you can tell from that that the overall deal size is trending up, but we haven't been providing and -- and are not going to provide the details metrics.

Okay. Well, please don't me -- hold it against me for asking. Thanks.

No, there's no problem.

Thanks.

Your next question comes from the line of Curtis Shauger with CIBC World Markets.

Good afternoon, gentlemen.

Hi, Curtis.

Hi, Curtis.

A couple of quick ones. A lot of them were asked and answered, so I appreciate that. First, what was the contribution of deferred from Citrix Online?

Citrix Online was about 4 million of the 10 million increase.

And can we expect to see a similar trajectory throughout the year? I think that was kind of in line with what you've mentioned before.

Well, you know, as you know, Citrix Online sells all their products as, you know, software as a subscription.

So everything is generally billed on monthly or annual contracts, and then -- that are recognized, you know, daily over the -- the period of the -- of the contract. So I would expect that over time their -- their contribution will -- will certainly increase in dollar terms to deferred.

Okay, great. Also, you -- you talked about the low end of the business being a little bit unpredictable, generally smaller deal sizes.

Does at some point in time Citrix Online, I know it's a bit different technology but does it start to, I think, help -- you know, is there -- is there a plan to kind of -- for those deals that are small and don't necessarily need the capital investment of the Citrix platform to migrate those folks to that product line? Is that something that might help that turbulence in that market segment?

Curtis, the answer is yes. And, you know, we're -- we're looking now in the phase 2 of Citrix Online integration to actually do some things that bring the GoToMyPC corporate service and the GoToMeeting corporate service really into the access suite, and then allow customers at that sort of end of the marketplace, you know, sort of -- the Soho market, the very small business sort of market and sort of the -- the first adoption market, allow us to do some of that with their products. So it's definitely in -- in our strategy.

Great. Thank you.

Thank you.

Your next question comes from the line of Ed Maguire with Merrill Lynch.

Yes. Good afternoon. Just to go back to the -- the issue of the -- the choppiness in the -- or the -- I guess softness in the kind of the small -- small deals, are there any substitute technologies that you're starting to see more often as, you know, as customers evaluate alternatives? In particular, I'm thinking of SSL VPN.

Ed, so there are alternate -- alternative technologies that can impact a first-adoption business. So first adoptions can -- are -- are more susceptible to these kinds of things, where sort of smaller projects and smaller customers are less susceptible because of the whole capital investment issue. And all these things require a capital investment.

So you know, our products include some great SSL VPN capabilities, both in Secure Access Manager, as well as in Presentation Server. And -- and so customers at that end of the market, that are first adopters have access to these kinds of products. And I think we're pretty competitive in a first adoption sort of format. If you look at where our products there stand in the whole Gartner world of the magic quadrant, we've done extremely well in terms of our status there.

And then, you know, also the SSL VPN market, the growth has slowed somewhat from last year's pace. It was really super hot. And so I think at the lower end of the marketplace, it's not -- that's not where the market for SSL VPNs are contemplated so, you know, overall we really didn't see any sort of significant changes in alternative technologies, and competitive environments during the quarter.

So that's why we really believe that most of the impact at that end of the market had to do with the overall economic environment for smaller customers. Some of our own incentive programs that really rewarded medium and larger scale system sales. And then, as I mentioned before, you know, some of the -- some of the other factors that all software companies are seeing out there.

Going back to sort of the -- size of bookings question, I mean, it -- it sounds -- your –- you’re characterizing the enterprise as hanging in relatively well. Did you see, you know, what we would characterize as, you know, a larger average size of deals for your enterprise bookings? I'm just trying to get a sense of the trend at least.

No, it's okay. Because Brent was asking the same question. And so -- so the answer is yes, okay? But without specific metrics.

Yeah.

And again reminding you that when we talk about our top-ten deals, we do try to talk about how many were a million or, you know, in the seven figures, over a million. And then -- and what sort of -- what it took to get to the top ten chart this quarter. So this is the 1st quarter it took a -- it took 500,000 minimum to make the top ten. The prior record was a -- I think a 450,000.

Okay.

And that was about two quarters ago.

All right. And just looking at -- at EMEA, by my calculations it looked like EMEA was down a bit sequentially. Did you -- there was a bit of chatter about potential softness there. Did you feel anything unusual in Europe this quarter?

No. EMEA ran very much to their plan. And -- and doing fine. So nothing remarkably, you know, different in EMEA from what we expected.

And -- and just one final question, just an update on your relationship with IBM.

Let's see. So going fine. Continuing to -- to work aggressively with them. Doing some -- doing a lot of work in the field with them. And, you know, nothing -- you know, it's sort of business as usual with IBM.

We have at our big customer conference coming up in a few months, Susan Whitney, who's GM over the X Server organization, will be one of the keynote speakers. So, you know, our relationship there is continuing to do well.

Okay. Thank you.

Um-hum.

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

Thanks, very much. Guys can you talk a little bit -- I won't beat a dead horse here but on the shrink wrap side was there any dispersement across geos or is that pretty consistent across all geos.

Pretty consistent, Kirk, across all geos, a little bit skewed toward North America because we've had a significant shrink wrap business in North America but other than that, pretty dispersed.

Okay, thanks. And Dave, in terms of the penetration of customers or outstanding Citrix customers already sort of on maintenance, I guess sort of where do we stand with that?

The renewal rates jumped up a lot and sounds like it is going to continue to go higher but in terms of just absolute penetration of customers that are on support, can you give us just some sort of qualitative idea of around where that might be.

Sure. Best guess is that it is about 50%. You know, we were successful last quarter in, you know, recapturing many, many customers that had lapsed subscriptions, you know, we do have focused investments in that area now.

We're ramping up teams to go and address that base, because our best estimate there is probably 4 to 5 million licenses out there that were sold without subscription attached to them or have lapsed subscription for one reason or another, so we look at it as a really -- really big opportunity and one that we're certainly pursuing actively.

And just a question, Mark, when you're talking about Step-Up licenses for, say, small customers that are going up to the Access Suite or Dave you can answer this, either way, how are you going to book that? Will that end up being a license update for that customer or does that end up being a new license sale.

The Step-Up Suite is a new license sale. That is a product that they do not currently -- currently own. We'll book that, you know, consistent with the way we book all licenses, probably 75% will flow to, you know, new product license and 25% or so will be deferred to the balance sheet.

So just --

But Kirk, just to -- to add to that, when we run a promotion, okay, which will be, you know, a -- an incentive program, it -- it could actually skew the deferral percentage because, you know, all of the discounting and the price incentive comes off of the license and -- because the subscription revenue remains fixed.

All right. Given that I -- I would imagine that, I guess it's best to think that as you have a lot of these customers coming on to Access Suite that the license number could remain somewhat choppy for you guys to predict.

Well, on that -- on the Step-Up Program, yes.

Okay.

I mean, the Step-Up Program is all -- is all about being able to go back and touch existing customers again and -- and get them -- give them more value on -- on the platform, on the Presentation Server platform by moving them to the entire suite. So that's the real goal. It's really a customer goal and, you know, the revenue will flow as -- as the revarec (ph) rules, you know, provide for.

Okay. Okay, thanks. And just lastly on the -- you know, the committed buy back for this quarter, Dave, was 36 million, and I guess when does the window open up for that?

The window opens up in two days.

And I guess you have discretion to raise that in the quarter, if you want.

Yes, we do.

Okay. Thank you very much.

Your next question comes from the line of Todd May with Deutsche Banc.

Hi, just a few questions. And this -- some of these are concerning the -- the low-end weakness again, so in the 1st quarter, correct me if I'm wrong, you had a bit of an additional sell-in to the channel ahead of a -- ahead of a price increase. Is that correct?

Yes, that's correct.

Okay. So -- so could some of the weakness this quarter be attributed to those resellers already holding a little additional inventory, or is that -- is that not a factor here?

Yes, Todd. We don't think it's a factor. There's -- first of all, there's no incentive for resellers to -- to pick up much -- much -- much stock unless it's just sort of their run rate business. And -- so we don't really think that that made really any significant impact here.

Okay.

In fact, you know, we saw a lot of the -- the -- the buy ahead that distributors did bleed through within Q1. And so, you know, almost all of it got out of there.

Okay. And then secondly, just looking at deferred revenues for next quarter, do you guys have a -- do you guys have a ballpark figure or could you share one with what impact Citrix Online will have in the 3rd quarter on deferred revenues?

Well, like I said to answer one of the prior questions, you know Citrix Online contributed about $4 million to the increase in deferred revenue. I would expect that contribution to -- to grow modestly in future quarters. Their business is -- is growing in a very linear way right now.

Okay. Great, that's everything. Thanks.

Thanks, Todd.

Your next question comes from the line of Dion Cornett with Decatur Jones.

Hi, guys. Congrats on some decent growth. Just some quick questions here. To give us a better idea for how deferred is going to grow in the future, could we get one of three metrics to help us to model things out, either ASPs, so the effective total yield price on new seats sold or the number of new seats sold or the installed base that's on maintenance?

Okay. Let me take that question. We -- you know, we haven't historically given out, you know, total number of units sold or ASPs sold. You know, we do tens of thousands of transactions during the quarter. So when we start talking about average deal size and metrics like that, they're -- they're not that relevant.

When we talk about number of customers that are on active subscription right now, and that number is, you know, roughly five million and we've got, you know, roughly five million of our installed base that's not on subscription, so we've talked about it in terms of, you know, half and half.

And we're actively investing in programs and in teams to go and recapture that -- that half that has left for one reason or another.

Okay. I'm just suggesting it is important to get those numbers because increasingly as you're on a subscription-based model we'll have less visibility into what the quarters will look like because of the deferral of revenues and it is important to figure out what drove the deferred revenues. Can you talk a little bit about the linearity of Expertcity?

Looks like there's about $2 million quarterly increase in the run rate for Expertcity, just taking the March 1st close and the 2.8 million last quarter. Of that 2 million quarterly increase, how much of that is attributable to new subscriptions you sold during the June quarter and how much of that would you attribute to prior subscriptions that ramped up or that you fully recognized in the June quarter?

Well, I mean, their business is growing in a very linear fashion month other month and in fact it's accelerated just, you know, slightly since the acquisition. We recognize most of these contracts, either over the period of a month or the period of a year.

So I -- I can say that their bookings rates are actually significantly higher than their recognized revenue rates or just a combination of the -- the accounting, as well as purchase accounting adjustments that are -- that are rolling off. Does that answer your question?

Well, I'll follow up with you afterwards. And then finally, you know, IBM has mentioned that they were using Citrix as an integral portion of solutions for customers looking to move to Open Source and Linux. Have you formalized anything or had discussions to formalize anything with IBM along those lines?

No.

All right. Thank you very much.

Okay. Let's take one more question.

Your next question comes from the line of Katherine Egbert with Jefferies.

-- of the quarter into September.

I'm sorry, Katherine. The -- the first part of your question was cut off.

Oh, okay. The dollar value of the deals that were pushed out of the end of the June into the September quarter.

They were approximately two to three million.

Okay. And then with respect to guidance, you said licenses will be up modestly quarter-to-quarter. Will they also be up year-over-year?

Well, at this point I'd rather just guide on a sequential basis for the reasons I stated earlier. It's just -- it's hard to predict at this point in time exactly what the mix is going to look like at the end of the period.

Okay. That's fair. And I notice that the cash flow number is significantly weaker than it was from last quarter and it is also down from last year. Can you walk us through that?

Well, the cash flow from quarter-to-quarter was driven largely in Q1 by the purchase accounting adjustments relating to the acquisition of Expertcity, as well as a -- a sharp decline in accounts receivable.

That's the phenomenon we talked about with customers buying their -- ahead of the price increase, buying in January and selling through through the rest of the quarter. So that returned to normal levels in the 2nd quarter, I mean, those two -- those two issues account for the majority of the decline.

Okay. And then can you offer us an expectation for Q3 for the Citrix Online revenue?

Citrix Online, as we mentioned, recognized about 10.5 million of revenue. I would expect that, in Q3, the number to be somewhere between 10 and 12 million dollars.

Okay. Thanks a lot, guys.

Thanks, Katherine. And with -- and with that, that will be our last question.

Once again, thank you for joining the call today. A fantastic first half for 2004. And tremendous prospects for an even better second half. So thanks for joining us. And have a good day.

And this concludes today's Citrix conference call. You may now disconnect.