思杰系統 (CTXS) 2004 Q3 法說會逐字稿

Good afternoon. My name is Dawn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Citrix Systems third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to introduce Mr. Jeff Lilly, Manager of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you, Dawn. Good afternoon, everyone, and thank you for joining us. In this call today we will be discussing Citrix's third-quarter fiscal 2004 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer, and David Henshall, Vice President and Chief Financial Officer.

Before we get started, I want to emphasize that some of the information discussed in this call may be characterized as forward-looking statements made pursuant to the Safe Harbor provisions of section 21E of the Securities Exchange Act of 1934. Those statements involve a number of factors that could cause actual results to differ materially, including risks associated with the Company's business involving the Company's revenue growth and recognition of products; products and their development and distribution; product demand in the pipeline; economic and competitive factors; the Company's key strategic relationships, as well as 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 contained in our most recent 10-Q filing available from the SEC or the Company's Investor Relations website.

Additionally during this call, we will discuss various non-GAAP financial measures as defined by SEC Regulation G, including certain adjusted figures which include operating expenses, operating income, operating margin, net income, 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 and on the Investor Relations page of the Citrix Corporate 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. Today I am pleased to report on another quarter of solid financial metrics and strong execution across all geographies. In my commentary, I would like to discuss our financial results for the third quarter, the current trends in our business and drill down into the performance of the Citrix Online division. I will also provide you with an outlook for the fourth quarter and full fiscal year ending December 31st.

Beginning with our financial results, I should note that certain numbers discussed are adjusted to exclude the effects of amortization of intangible assets and other onetime adjustments. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures.

So looking at a snapshot of our performance for Q3, net revenue was $188 million, an increase of 30 percent over last year. GAAP EPS was 22 cents compared to 18 cents a year ago. Adjusted EPS was 24 cents compared to 19 cents last year, an increase of 28 percent. Adjusted operating margin was 28 percent compared to 29 last year and up from 24 in Q2. And cash flow from operations was $62 million. So across the board really an excellent quarter.

Looking at the largest transactions in Q3, our enterprise business continues to be strong. During the quarter, we closed three deals greater than $1 million, and five of our top 10 deals were greater than $500,000. We're seeing success across many diverse industries. In fact, of our top 10 transactions, there were seven different verticals, including the U.S. and international governments, financial services, healthcare, telecommunications, retail, manufacturing and the education sector.

By geography five were in EMEA, four in North America, and one in Latin America, so a very balanced distribution. Additionally just missing the top 10 was a six-figure deal that closed in greater China, the first of its kind in the region and really highlighting the early success of the investments we have been making in that area.

To review the results in more detail, I would like to discuss our revenue by geography and product mix, as well as our operating performance. So turning to revenue by segment, North America generated $83 million, a 13 percent increase from last year. Latin America generated 4.2 million, a 51 percent increase. EMEA was 68 million, up 25 percent. The Pacific region grew to 10 percent of total revenue or $18 million, up 31 percent from last year. And finally Citrix Online, which is not included in these geographic segments, contributed over 14 million.

Focusing on the revenue mix, license revenue was 88.5 million, down 2 percent year-over-year and up 1 percent on a sequential basis. For the first time, new products represented slightly more than 5 percent of this number. Licensed update revenue was $70 million, up 62 percent year-over-year and up 5 percent sequentially, driven by increasing renewal rates of our subscription advantage program.

Citrix Online, as I mentioned before, contributed over $14 million in Q3, representing 35 percent sequential growth. When taken in combination with the license updates, these two subscription services accounted for 45 percent of quarterly revenue, adding to the predictability and visibility in our business.

And finally, our consulting, education and support services were 15 million, up 35 percent year-over-year.

So looking at expenses and operations, adjusted OpEx was 131 million, up 34 percent year-over-year but flat sequentially. The main reasons for the year-over-year increase are run-rate expenses from the Citrix Online acquisition and increased headcount across the sales and product development groups. So total headcount at the end of the quarter now stands at 2477 employees, up 134 from Q2. As mentioned, adjusted operating margin was strong at 28 percent. So even with these additional headcount investments, we were able to show leverage and return margins to our targeted range of mid to upper 20 percent.

So let's turn to the balance sheet. Deferred revenue grew to over 202 million. This was driven largely by the strength in our subscription businesses, the subscription Advantage program and Citrix Online. Cash and investments is now 541 million, up about $20 million sequentially, and DSO was 43 days, down from 44 in Q2 and down from 53 days last year. Cash flow from operations was 62 million in the third quarter. The Company continues to generate strong cash flow. In fact, over the past four quarters, we have generated over $250 million.

During the quarter, we repurchased 3 million shares at an average net price of about 1775. Currently we have over $20 million in share repurchase commitments outstanding for Q4 and over $80 million remaining under the current repurchase authorization.

So next before I provide guidance for Q4, I would like to give you some additional context into the status of the Expertcity acquisition, now known as Citrix Online. As you recall, the deal closed in February of this year and it was our largest acquisition to date. So the integration of Citrix Online continues to go very very well.

As I said, the division generated over 14 million in reported revenue during last quarter, demonstrating strong execution across all product lines. We are encouraged by the performance of the two core products. GoToMyPC grew over 55 percent year-over-year, and GoToAssist, our Web-based customer support solution, grew 100 percent year-over-year.

We also have great expectations for the third product line, GoToMeeting. Launched in June of this year, initial uptake has been strong. In fact, we are now serving over 250 corporate accounts.

Please note that during the quarter we capitalized just over $1 million in software development costs at Citrix Online related to the development and launch of this product. We do not anticipate any material capitalization of development costs in the fourth quarter. So during the third period, even before this adjustment that I just referenced, the financial contribution of Citrix Online was neutral to our adjusted EPS and profitable on a cash flow basis.

Beginning in Q4 we expect the division to be accretive to our adjusted results. Overall we're very pleased with the acquisition of Expertcity and the subsequent performance of Citrix Online. We look forward to continued success from this division.

Finally, I would like to discuss our outlook and expectations for the fourth quarter ending December 31, 2004. It should 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 the risks that are stated in our SEC filings.

For our fourth quarter, we expect the following. Total revenue in the range of $195 to $205 million. On a GAAP basis, earnings per share of 23 to 25 cents, and on an adjusted basis, earnings per share in the range of 25 to 27 cents. For the full fiscal year of 2004, we expect total revenue in the range of $722 to $732 million, GAAP earnings per share of 69 to 71 cents, and adjusted earnings per share in the range of 89 to 91 cents.

So in closing I am very satisfied with the solid financial results and execution in the third quarter. In particular, we saw great balance and diversity in many aspects of our business -- geographic revenue mix, vertical industry breadth, new and recurring revenue streams and new and existing products. So now I would like to turn it over to Mark Templeton to give you additional details on the quarter's performance and to discuss our ongoing business.

Thanks, David. I'm really pleased with our Q3 performance. Three months ago we committed to you to focus in five areas in Q3. The first, growth. Top and bottom line. The numbers here really speak for themselves. Record revenue of 188 million, up 30 percent over last year, and adjusted EPS of 24 cents, up 28 percent over a year ago. A really solid financial quarter.

Our second focal point was to stimulate adoption. We're seeing early traction from new promotions and programs introduced in Q3 showing up in pipeline growth and helping solidify our shrinkwrap licensing during the quarter. We got that done, and there is more to do.

The third focus was to grow our license update and technical service revenues. These business areas grew 62 percent and 35 percent respectively in Q3. We will continue to grow them.

Fourth was a focus on cross-selling of Citrix Online products. Citrix Online revenues were up 35 percent over Q2, partially due to the co-selling with established channels and Citrix ERMs. Great progress here and there is upside ahead.

And our fifth focus was to announce an exciting enhancement to Secure Access Manager. We got that done during our iForum conference as part of our exciting SmartAccess technology preview. We will talk a little bit more about that later.

So strong quarterly performance, continuing the excellent momentum we built. We are executing well to a multiyear plan.

Next I would like to highlight some customer wins. The top five sales were spread among our North America, EMEA and Latin America geographies. In fact, the mix of large sales was particularly dispersed this quarter as David said across seven verticals. The government vertical was really solid both international and federal. Our largest win was with the U.S. Army for more than 20,000 Presentation Server licenses.

They also purchased Secure Access Manager and Password Manager, along with a multiyear subscription to license updates. The Army will be using our products to connect personnel across a complex global network with key applications, including supply chain, human resource and ERP systems. The Army's goal is to use Citrix to improve its information processing and access capabilities and to get more operationally efficient by lowering IT costs.

Also notable was our largest sale to date in China. Our Pacific team closed a significant sale with Huawei Technologies, a prestigious $4 billion telco systems provider with over 22,000 employees in over 50 countries worldwide. Citrix software will give Huawei employees secure anytime anywhere access to Oracle, SAP and 30 other important enterprise applications.

Citrix Online posted some big wins, too, with six-figure GoToAssist sales to Computer Associates and France Telecom's ISP Wanadoo. Citrix Online is performing well, now in its second for quarter of operations. Citrix GoToMyPC, our industry-leading remote access service, now has over 150,000 subscribers and over 250,000 PCs enrolled.

Citrix GoToAssist, the industry's number one on-demand assistance system, has averaged 100 percent customer growth each year since it was launched four years ago. This year GoToAssist has already doubled its customer base and now has over 2400 customers and provides more than 360,000 remote assistance sessions each month.

The next version of GoToAssist, Version 6.0, was launched in Q3. Version 6.0 features real-time remote diagnostics, international language support, and enhanced APIs for tighter application integration. These are the innovations that make GoToAssist number one.

And our newest product, Citrix GoToMeeting, the easiest to use by far instant meeting service, now has over 250 corporate accounts and 1300 personal subscribers. GoToMeeting is off to a really fast start. So the Citrix Online team is really executing quite well.

Two weeks ago we held our global customer conference, iForum, and it was our best ever with over 2300 IT professionals, up 5 percent over last year, which is actually pretty amazing considering we faced four hurricanes just before the conference. Our customers heard keynotes from Deutsche Bank, a customer that uses Citrix as the foundation for its global access strategy, and IBM, one of our strongest alliance partners and one of our biggest customers.

A record 34 customers presented at iForum, sharing their success stories, talking about operational, financial and productivity metrics, and explained the value of Citrix access infrastructure in real terms. For me iForum was super exciting. It showed in a big way that our strategy is really coming together after a year and half of focused execution. The response we had and the buzz was phenomenal.

Our message this year was about the strategic power of access and how access infrastructure is becoming a core business system, a system that both reduces operating cost while at the same time increases growth opportunities. Our message and approach resonated extremely well. I heard it from every customer, partner and journalist that I talked to that week.

They told me our approach highlights the business critical nature of access. It repositions IT from a tactical obstacle to a strategic enabler of business. Our customers are really starting to see access infrastructure more like a mission critical business system, a system that anticipates technical and business evolution and meets a very broad range of access needs.

So when the CEO comes to you and says open a branch office in London by the end of the week, or make sure we comply with Sarb-Ox or HIPAA, or set up a virtual call center, our customers can look them in the eye and confidently say, no problem. We anticipated that. We are running Citrix access infrastructure. This is what continues to make Citrix a thought leader, a marketmaker and a technology innovator when it comes to access.

We are celebrating our 15th birthday as we speak, and for a 15-year-old, our innovations have had a profound impact. Not only on the way people access information, but on the way companies run their business. Our first wave of innovation in the early '90s delivered the basic paradigm of virtualizing the Windows desktop.

Our second even bigger wave of innovation came in the late '90s when our MetaFrame technologies really made large-scale applications centralization a reality. Centralization drives simplicity, and simplicity means lower costs. Lower costs bring value to customers and growth to Citrix.

Now we are in our third wave of innovation, leveraging the power of ubiquitous connectivity into unlimited secure access. This is a wave that started several years ago and we began delivering this year in a significant way with the new release of MetaFrame access suite and establishing Citrix Online.

Two weeks ago at iForum we revealed what is next in product innovations and future technologies that will offer a powerful set of access capabilities. Let me give you just a few highlights. In Q2 we delivered Smooth Roaming as part of Access Suite 3.0. Smooth Roaming is the ability to login once and literally have your workspace follow you between devices, locations and networks without interruption.

One of our healthcare customers told me if each doctor can see one more patient a day because of Smooth Roaming, it will have a tremendous impact on our bottom-line. At iForum we took it even further, demonstrating proximity printing, a new technology from Citrix that intelligently sends documents to the closest printer as you roam.

There was also a lot of excitement about an innovation we introduced at iForum, SmartAccess. SmartAccess means the infrastructure, the system itself, can sense the device location and connection and dynamically configure itself for an optimal and secure access experience. We demonstrated this for the first time at the conference. You know configuring for every access scenario ahead of time is impossible. SmartAccess offers much easier administration, more access flexibility and increased productivity for users. Watch this space as we bring this exciting capability to reality.

We also talked about instant collaboration, like making collaboration like the conference call button on your phone. Just press the button and you are there. We deliver this with GoToMeeting. We talked about on-demand assistance and how we are delivering that capability with GoToAssist.

We also talked and demonstrated the other core capabilities of Citrix access infrastructure in the areas of security, identity management, access provisioning, observability and system robustness and how the entire product portfolio available from Citrix really allows our customers to gain these capabilities. So it is this set of core capabilities is how we are defining access infrastructure, what our product portfolio is delivering today and the innovation agenda we have established for tomorrow. Clearly Citrix has a great tradition for innovation.

As important, however, is our strong track record for execution and delivering these innovations to the market. Our results, especially over the last nine quarters, really speak to this. I am extremely proud of this Citrix team, focused, growing and staying aggressive. We are having a strong year.

Revenue is up 22 percent over 2003 so far. Our thriving subscription businesses are giving us good forward visibility and are really strong evidence of great customer relationships. We are driving revenue from new products. We are already within the 5 to 10 percent run-rate we committed to early this year.

As Citrix Online is showing, we're doing well handling the complexities and opportunities of our largest acquisition ever.

In addition to focus on enterprise business, we are taking definitive action to drive product adoption, and we are continuing to take the long view making investments that build out our access franchise. So we are investing in our brand, investing in our customer value, all directed at aggressively leading a fast-growing market for access infrastructure.

So now I would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Kirk Materne. Banc of America Securities.

A quick question, Dave. I know in guidance you did not give any mention in terms of where licensees may be going next quarter. Anything qualitatively you can maybe give us, if not quantitative?

If I look out across the opportunity pool right now and what is going on with our product pipeline, new product pipeline and growth, certainly expect them to be up. There is some seasonality in our business. We will see more big deals in Q4, so new licenses will be up in the fourth quarter both sequentially and year-over-year.

Mark mentioned a little bit about your shrinkwrap business, sort of solidified a little bit in the third quarter. Can you give us some idea in terms of guidance going forward? It seems to me talking to some people that I (inaudible) at least that perhaps in EMEA that was not quite as strong as you maybe had expected. Is that bouncing back a little bit in the fourth quarter? I guess reflecting some of your bullish guidance?

Well, the package product business continues to be stable. I think we have certainly deemphasized that business over the last couple of years as evidenced by the rapid decline in inventory over the last many quarters. We are shipping more and more product on an electronic basis. That is what customers want. It's more efficient for us and them.

So, in fact, Suite 3.0 and the new products in the U.S. are only available on a build to order or electronic basis, so we are not actually building any inventory or -- excuse me, any package product for that. So we are deemphasizing that business and thinking about it more in terms of transaction business instead of package product, and that grew in the third quarter and we expect it to grow in the fourth quarter.

Fair enough. Last one. Mark, in terms of getting some of your bigger partners more active with you in the field, can you just talk about some of the programs you have in place? I know you guys extended your relationship with IBM and iForum. Can you just give us some idea how long it might take us to see these high-level relationships really make their way down to the field level?

Well, Kirk, they have all already made their way down to the field level. As you know, when you do one of these agreements with some of the bigger partners like IBM, they are not a monolithic enterprise where everyone like a soldier marches in the same direction and looks the same.

So basically the mission for us has been to basically get them trained, make them aware of our solutions, get them trained, show them how this works with the IBM message and the IBM infrastructure, and then you were at the conference and you saw Susan Whitney actually highlight some of the reference models that we have put together and so forth, and those are in place and people are being trained as we speak. So we are seeing the benefits of those relationships right now. It is just that you will never see this in sort of one big monolithic movement.

Right. And just as a follow-on, any of the top 10 deals that you signed were any of them with IBM during this quarter?

Yes, but not in the top five.

Okay. That's great. Thanks very much.

Curtis Shauger. CIBC World Markets.

Good afternoon, everybody. Quick question on verticals. I know you mentioned diversity in the call, but I am curious to see if there was any one that stuck out in particular where you had exceptionally good results from?

I think that was one of the great things about the quarter, is that it was so balanced across verticals and geographies. So I mentioned seven different verticals that we saw strength in. It made up the top 10. Mark did reference a couple of U.S. and international government deals that were very material, but we saw it across many verticals. We are very happy with that performance this quarter.

Excellent. To kind of dig a little bit into the technology side, I know there has been a lot of development regarding server transitions to blade environments, etc., but it also seems like there is a lot of interesting stuff going in dual core processors and things like that. It would seem to benefit you guys in the sense that it extends your scalability. Can you give us some color on that? It seems like there are some very interesting things going on that may play to your favor.

Well, Curtis, we have always benefited from an increasing amount of power at the server. And going back 10 years now we have ridden the server wave in a huge way, and our infrastructure has been a huge driver of servers and server horsepower because we utilize all of it, unlike database servers, file servers, print servers. They will be spiking in how they actually utilize the resources of the server. So we really take advantage of the power.

So the dual core processors and lots of other innovations that will go into the server environment, both 32-bit and 64-bit, are hugely helpful to us, because customers end up with fewer physical boxes and they can increase the density of number of users when it comes to Presentation Server on a per box basis.

The other piece here obviously is we need the operating system to really nicely support that hardware, those hardware improvements -- and that is why you will see us move and support the 64-bit environment in Windows server 2003 and obviously take advantage of the improvements coming in a Longhorn timeframe as well.

Excellent. One last question for you, Dave. Could you give us a sense of what the preferred contributions from Citrix Online was this quarter?

Yes, Citrix Online made up a couple a million of the changes in deferred.

Ed Maguire. Merrill Lynch.

Good afternoon. Could you talk about some of the progress you have made with your initiatives to lower the bar for advisor awards and the smaller suite bundles?

Sure, Ed. So we did successfully launch several programs, including the lower bar for advisor awards, the lower entry point for the Access Suite and saw that actually begin to have an impact. We also launched in Q3 a promotion around what we call the step-up license. Basically it is a license that we sell to existing Presentation Server customers that adds the other three products to their infrastructure. And we saw improvements in both the pipeline and the sell-through on all three of those -- in all three of those areas during the quarter. So it is a little bit early because we just launched the program basically in August -- all three of those programs -- but we are seeing the good early results and we will see more of that in Q4.

Moving on to some geographic color, I guess by my calculation it looks like the Americas was down slightly on a sequential basis. Could you contrast the environment in the Americas with some of the progress you are making in the different international geographies?

Sure. You know as we talked about all year, the North America team is actually in their sort of second year of progress toward making some organizational and go-to-market changes, and I think this quarter we started to really see the benefits of those. Productivity was way up during the quarter for North American, and relative to a GO like EMEA, which is much more mature in terms of the longevity of the teams and the business model there has been very stable for a number of years. There are just some of those fundamental market differences and go-to-market differences.

So we are really pleased with the progress we've made in North America, and we are looking for a slamming fourth quarter out of it.

Just one final question. Could you comment on Citrix Advantage renewal rates? How are those tracking?

Yes, they have actually continued the strong trend that they have had. Last quarter we were operating in that lower to mid 70s range. This quarter we are above 75 percent, so we continue to execute, and they are coming up around the world. I expect that trend to continue.

Todd May. Deutsche Bank.

Thanks for taking my call. I was wondering if you could just run through your expectation for Citrix Online. It clearly had a great quarter this quarter, and if you are going to give any guidance for that for the next quarter?

Well, we had not planned on giving specific breakout guidance for that. However, it does continue to execute very well. You know they grew materially on a sequential basis. We would expect them to continue to grow in the fourth quarter, probably safe to say a couple of million dollars sequential increase is reasonable, and we will look for ways to drive go-to-market synergies and try to accelerate that.

Great. Did they outperform expectations this quarter?

I think they did have a great quarter. Overall I would say the acquisition as I stated before is just right in line with our original plan and just hitting on all cylinders.

Last question is on deferred revenues. Citrix Online contributed a few million to the increase in deferred revenues this quarter. It seems that deferred revenue is slowing somewhat over its externally strong rates over the last couple of years. Are there any trends there you care to talk about?

No, I think a lot of it is just around seasonality. You will see the growth rates go up and go down a bit based on when the customers are coming up for renewal for their programs, how effective we are at increasing renewal rates, anything specific with large deals that might have driven deferrals. So it is going to move around from quarter to quarter. I would expect deferred revenue to continue to grow in the fourth quarter.

Okay. Great.

The other thing, Todd, is some of the quarters you are thinking of, we were moving the renewal rate by huge margins relative to the prior quarter, and you know how it goes. That last 15 percent of renewal rate is at the margin tougher and tougher to get. So that is what you will see.

Brent Williams. KeyBanc Capital Markets.

Okay, sort of going back to the Citrix Online stuff in more detail, what is the driver of the kind of growth that you saw this quarter in Citrix Online? Would it be the number of individual subscribers going up, the number of corporate customers, the number of seats per corporate deal, pull-through from MetaFrame and the software products? Where is most of this coming from?

Well, the answer is actually yes across all those things, but I would highlight a couple of things. First of all, the cross-selling with the go-to-assist deal team is I think going real well. That is where we actually have Citrix channel partners that are not only reselling the software, the service, they are actually using it in their business to support their customers. We have seen over the years that when our resellers actually use our software, they get hooked and that is what they sell. So we are seeing -- we saw that, and that is where some of this cross-selling and synergy is coming from in that GoToAssist area.

We also saw across all the corporate sort of businesses within Citrix Online, the deal sizes are getting larger. So when you look at the top 50 deals, they are on average larger than they were in prior quarters. So we are seeing more sort of seats and slots per deal. Some of that is coming from just better execution. Some of it is coming from more credibility by carrying the Citrix brand I believe. And so those will be the two sort of key things that I would highlight.

Okay. A couple of other things on this. One is, as the subscriber counts grow, do you see a high degree of leverage on the cost of developing and running the server forum that look more like a software license business, or is it more moderate like a classical hosting sort of business?

Yes, the marginal costs of a subscriber are extremely low, and it is more in line with gross margins of software.

And then lastly, on last quarter's call you had characterized the number of GoToMeeting sessions that you had hosted. I think it was in the month of June. Can you give some character on how that is evolving this quarter?

I do not have the count in my head. The growth in GoToMeeting has been excellent compared to -- just to calibrate, the Company has launched several online services over the course of its history, and GoToMeeting is off to by far a faster start than any of the prior products in the same first four-month period of time. So we have lots of upside in GoToMeeting, and that is all ahead of us.

Dion Cornett, Decatur Jones.

Congratulations on a nice quarter. Can you maybe help me with what were some factors that helped drive down your operating expense despite the headcount additions the last couple of quarters? Probably down sequentially?

It was basically flat on a sequential basis. We are focused on not only bringing on people around the world to build out our service and support capacity and product development efforts, but also in just driving leverage from those. So there is some programmatic costs in every quarter, and those tend to move around from period to period. But in general we are just focused on leverage right now, on trying to identify all these investments that we have made over the last four or five, six quarters really and start to see the return.

Steve, the last few quarters you have grown your license update revenue $8 million or more sequentially. This quarter it was up less than 3.5 million. While the modeling is a little complicated to go through on a conference call, it seems a little counterintuitive that it would drop-off from over 8 million to less than 3.5 in a single quarter given that you're still converting older seats of Subscription Advantage and given the increasing in maintenance renewals you talked about. Can you explain maybe why that did fall off this quarter?

Well, similar to my prior comments talking about deferred revenue, there is going to be some seasonality based on when things come back in. This line might also include other large perpetual license transactions that had deferral components that are coming back. So there is a lot of moving parts there. I think that the rate of growth we have seen over last year certainly has moderated because if you recall, that was the period where we were really evolving the business model. So a lot of what had previously been product license revenue was being deferred into product license updates over the past year and a half or so.

So I would expect that line to continue to grow. There is going to be some seasonality in it, as well as our ability to continue to add to the base and increase renewal rates.

Finally, a quickie. For your Citrix Online customers, what percent pay a year in advance versus those that may pay quarterly or some other deferred payment program?

I do not have the split in front of me. I would assume it's approximately 50-50.

All right. That is helpful. Thank you.

Jason Kraft. SIG.

A question or actually just on the last question. On GoToAssist, what is the revenue recognition for that given that there were two big deals there and there was not much contribution to the increase in deferred? Is that monthly? Is it booked upfront? How is that recognized?

It's all recognized on a daily basis. It's a pure subscription service. And also just to follow up on the prior question, you know I was handed new information, and the majority of the customers do pay on a month-to-month basis.

And then as far as Citrix Online as we get out into Q1, given that it's a subscription business, should it be up from Q4 to Q1, or should there be a little bit of seasonality there?

Yes. It should continue to grow month after month. Each month is higher than the last.

On the consulting services line, much better than I think everyone thought. And it's been kind over the last several quarters in the 11, 12 million range. What is the driver there? Is there geography that pushed that over the edge, and should we assume that that is going to tick back down, or are we at kind of a new run-rate here?

Jason, actually when you see that line it is technical services. It actually consists of three pieces -- consulting, training and education, and technical support agreements. And so actually what has kept this line item from growing is sort of the post-9/11 trend around placed based training. So we have been investing actually to move our training to much more of an online model, and between that initiative, as well as an uptick in overall training, this line item is now starting to grow again, and we expect that that will go into 2005. So the real uptick there is where the education business is actually strengthening.

The consulting businesses have been running very well and very consistently, and it will be I think up again this quarter very nicely, and we continue to add to it incrementally. But pointing out that most of the services business, whether it is technical support or consulting, we really work hard to drive that business to our partners.

Okay. How is the large U.S. Army deal being recognized? What are the terms of it?

We have not disclosed all the terms, but I will say it was including three years of subscription. So the vast majority of the recognition will be on a ratable basis.

Okay, so including license, or was the license component of that deal all recognized here in Q3?

The way we have to do the accounting is really on a bundled basis. So we did recognize some of the license in the third quarter, but if you look at the total contract value, the majority of it is spread over a three-year period of time.

Okay. Any commentary about 2005 given we are right around the corner?

Well, let me take a crack at that, and then I will turn it over to Mark. I think that in general we plan on continuing our practice of providing guidance really one quarter at a time.

But if you think about 2005, we have been investing aggressively throughout 2004, as I mentioned, to bring to market really a comprehensive set of products and enhance our geographic coverage. In '05 we are going to be focusing on driving continued leverage from these investments, while selectively investing in opportunities to provide revenue growth and market share gains across our access infrastructure space. We will do this while maintaining our target for adjusted operating margins in the mid to upper 20 percent range. So we are going to be very thoughtful, but at the same time looking to continue to drive increasing leadership in that space.

A question for Mark real quick. What's really driving just the strength in the German market? You know we keep hearing about how that economy is not doing well, but quarter after quarter you guys continue to churn out big deals there. Is it rapid app deployment, or what is it that is really driving it? Is it just better sales guys? What is really happening over there?

You know there is no one reason, but I would tick off a couple of things. First of all, we have a tremendous team there. I mean I cannot understate that that has built tremendous relationships with partners in the marketplace ranging from SAP to Microsoft, and those partnerships really extend to go-to-market and also extend to our value-added distributors. They are a real model for how we work with value-added distribution there, which gives them lots and lots of leverage on the horsepower of the team.

And then the team -- and then the market itself is highly interested in technologies that actually drive cost savings and that actually have future proofing kinds of characteristics. And I think we have successfully shown in that marketplace how a single investment in the type of access infrastructure we are talking about actually yields both results. Alright? It reduces cost and actually increases the sort of flexibility factor that these customers are looking for as they are thinking about opening up more branches or as they are thinking about being part of an M&A transaction, either acquired or an acquirer and so forth. So I think all of those things are contributing.

Great. Last question. Do you guys think you're on the right track as far as turning around North America as far as for new product sales?

Absolutely. We are absolutely on the right track. You can see it in -- it is starting to show in the external results, but you see it in the pipeline growth in a dramatic way. You see it in the spring in the step of the sales organization themselves. You see it in the comments we get, that I get unsolicited from long-standing channel partners in North America. You see it in a lot of places. So I know we are on the right track there.

Steven Freitas, Harris Nesbitt.

Good afternoon, gentlemen. I was hoping you could, Mark or David, speak to the trends in (inaudible) pipeline from the larger flex licensing deals? It is not like we are giving the specific numbers. Could you just talk about or give us a sense as to whether there was net growth in that number this quarter and how it has been trending over the last couple?

So, Steve, we won't break down the pipeline that way, but I will characterize it in a few ways. So, first of all, another tremendous quarter for net pipeline growth on a sequential basis and year-over-year basis. So very impressive process of identifying new opportunities.

Secondly, the coverage ratios have been trending up for the last four to five quarters. So we are now going into quarters with almost a 2X coverage ratio on our licensing, which means that we are getting more visibility into opportunities, and we are getting better visibility around whether they will close or not. So those are all the kind of indicators that we look at.

And then the last piece is, if you take the piece of the pipeline that is coming in relative to new products -- so Password Manager, Secure Access Manager, Conferencing Manager, and the Access Suite -- that pipeline growth has been tremendous. I think we identified last quarter over $50 million in business for the new products just last quarter.

Okay, Mark, and to build on that last comment, it was obviously good to hear that new products now account for more than 5 percent in revenue. Could you give us a sense as to which one is the largest contributor? Is it MSAM or Password Manager?

Actually it is the Access Suite, which is exactly what we want. Okay?

You don't differentiate between the individual --?

Well, we do. We do but yes -- it occupies its own line item as a new product and we don't allocate it out to the product in the suite themselves. And actually it is the most important factor because the whole notion that we are driving here is we are trying to deliver a suite of products that actually have a higher amount of value and relevancy to more users in a particular customer's enterprise. And then at the same time have a higher price point on a per user basis.

So if we go from 10 percent -- relevancy from 10 percent of the users to 20 percent and we are able to go from the $400, let's say, price point to the $600 price point on a suggested list price basis, you can see how you put those two numbers together and you get sort of some exponential growth from them. That is really the strategy, and that is why growth in the suite, as far as new products, is essential.

I'm sure it helps pull through more Presentation Server licenses than new products do, which is good also.

Yes.

With respect to your large deals, one’s over 500,000, how many represent maintenance renewals or platform migration deals as opposed to new business for instance?

None of them are maintenance. You remember because our customers buy subscription to license updates (multiple speakers) we don't really have a big sort of maintenance and sort of license upgrade business.

I see. Well what I meant to say was, how much -- are there any of those large deals that are just a subscription advantage renewal or a platform migration upgrade?

No. Well, wait a minute. I'm getting some -- so one of them was -- okay, so it is complicated because these deals will tend to have multiple components in them. In one of the top 10 deals, we actually had a significant component that was the subscription renewal. But it will also include sometimes a customer that will bring licenses back onto subscriptions that they allowed to lapse from subscription.

Which is good news, too.

Absolutely. It is all good. So, yes, one of the top 10 actually had significant revenue in it from those two items.

Andy Hargraves (ph), Pacific Crest Securities.

I was just wondering with you said the top deals getting bigger, is that accompanied with the frequency of the deals getting smaller, or are you still seeing the same frequency in the pipeline?

I think we really have not seen any trends there. You know this quarter -- some quarters we will talk about how many deals over a million and relate that to prior quarters. We had three that were a million or more this quarter. We’ve had quarters, even third quarters, where we had more than three. The dispersion factor in terms of the value of top 10 deals this quarter probably reached a little bit lower. Last quarter you had to be over 500,000 to be in the top 10. This quarter it is 400,000.

So you know, it will vary back and forth. We don't really measure our overall success by how many deals we get over a certain size actually.

Okay. And then with the target for new products, is that supposed to go up through the next year and a half or something like that? Right now you've got the target a little over 5 percent this quarter.

We have stated that, you know, earlier this year we thought the success for the new products would be to have a run-rate of between 5 and 10 percent of product license revenue. Last quarter we were just below the range. This quarter we were safely in it. We expect that to continue in the fourth quarter I think over next year.

As Mark said, the real focus is about selling the Access Suite and selling a broader product set for multiple reasons. So we certainly expect that to continue to expand.

The only thing I would add, Andy, is that there is a sales cycle for the suite that is different from an individual product, and now with -- this quarter actually is the one-year anniversary for the Access Suite and its availability. So I would say that next year we're going to benefit from being into sort of a second year of sales cycles related to not only some of the newer products like Password Manager, but especially the Access Suite itself. And then if sort of you add to that some of the things that we will do next year in 2005 to strengthen and enhance it, the Access Suite itself in terms of capabilities and features and technologies, we should be set for nice increases in new product mix.

Brad Lehl(ph), Jefferies & Co.

Good quarter. Just a question on operating margins. You guys obviously saw a nice bump up this quarter. And I think, David, you mentioned that the future target there is still in that mid to high 20 percent range. I guess I am just wondering why we can't think about that at a higher level and what the thought is there?

I think we have proven that we can execute at a higher level, but right now our focus is looking at this $15 to $20 billion space in front of us for access infrastructure and thoughtfully investing on the best way to expand our market share and attack that. So throughout this year we've been investing for revenue growth, as well as integrating the Expertcity business.

So we're still in the upper part of the range that we identified. We're still operating in the top quartile of our peer group in a place where we think is a pretty darn good place to fight from. At this point in time, I would say we see too many more opportunities to help further growth instead of looking for short-term expansion of margins.

Okay, great. And then any color on the 1.8 migration, just where that stands and how many customers have flipped to the new version and so forth? Just any qualitative color on that?

No, I think it's basically steady flow that is driven by a few things. More and more customers going to active directory. More and more customers seeing the benefits of our more advanced products and including the entire suite. And then there is a push factor around sort of the age of the terminal server, terminal server on NT4 and Windows 2000 server sort of platform that is causing customers to sort of look at their infrastructure and say it is time to move forward. So it is pretty much a steady flow.

And then just one final question. Just in the competitive environment, any changes there? What are you guys seeing? Is it still pretty much Microsoft or just any changes in the competitive landscape?

No, no changes there. And as you know Microsoft is a tremendous partner of ours, and we are executing really well especially out in the field in customer facing situations, so there's really not a competitive posture there.

So I think we have time for one more question.

Rajesh Raju. Robert Baird.

Good afternoon, gentlemen. I have a question regarding the Advisor Rewards performance. In the past you gave us some metrics around the number of projects or deeds that the resellers have submitted. Could you give us some color on how the pipeline is fairing in terms of the number of (indiscernible) by the resellers?

This is Mark. I don't have it at top of mind. Honestly we were highlighting those numbers the first couple of quarters the program was active just to report out on the early progress made. I would say that we are very pleased with the results we're getting from Advisor Awards.

I will say this, however, that I think our channel partners are still not taking full advantage of Advisor Awards. So part of what we will do at our Global Summit Week in January, when we will have many of them come for our annual meeting, we will help them understand what they need to do to take advantage of Advisor Awards. Because we do know that when they take the Advisor Awards, it increases their profitability, and when they have increased profitability, they focus more on Citrix business, and when they focus more on Citrix business, we benefit and grow. So that is the color I would give you around it and I can talk about right now.

And one question regarding the upgrade activity to 3.0. If you could comment on when the migration packs are sold, does that count toward your new licenses or Subscription Advantage

Yes so -- so okay. So customers in -- an overwhelming percent of our customers are on our licensed subscription -- update subscriptions. Okay? So they get 3.0 just as part of their subscription service. And when a customer is not on subscription and they want to migrate to 3.0, let's say, then there is -- it's like buying a new license. It is at a different rate. Okay, license rate. Then what we will do is we will recognize that. Like a first license, part of it goes into a perpetual license bucket and part of it goes into subscription.

And could you comment on what kind of contribution you saw in the third quarter from the migration pack sales to 3.0?

Well, just to further that question, if you look at overall shipments of 3.0 versus prior versions of the Presentation Server suite, it contributed roughly a quarter was the brand-new product. We don't have that broken out as to how much was simply migration license because as Mark mentioned the majority of customers, current customers, are under a subscription program. So they will receive that as part of their subscription.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to management for their closing remarks.

Thanks very much. Not anymore to add. The numbers speak for themselves. Tremendous, tremendous quarter. Congratulations to the Citrix team worldwide. Thanks for your commitment to Citrix, and we will see you on the next call. Thanks very much.

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