思杰系統 (CTXS) 2005 Q1 法說會逐字稿

Good afternoon. My name is Amy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems First 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, please press "star" then the number "one" on your telephone keypad. To withdraw your question, press "star" then the number "two".

Thank you. I would now like to introduce Mr. Jeff Lilly, Manager of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you, Amy. Good afternoon everyone, and thank you for joining us. In this call today, we will be discussing Citrix's first quarter 2005 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Vice President and Chief Financial Officer. This call is being webcast with slides on the Citrix investor relations website, and a slide presentation associated with the webcast will be posted immediately following the call.

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 21-E of the Securities Exchange Act of 1934. Those statements involve 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; recognition of revenue; products, their development and distribution; product demand and pipeline; economic and competitive factors; the company's key strategic relationships as well as acquisitions 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-K filing available from the SEC or the company's investor's 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 expense, operating income, operating margin, net income and earnings per share. The most directly comparable GAAP financial measures and the 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's relations page of the Citrix corporate website. Now, I'd like to introduce David Henshall, Vice President and Chief Financial Officer of Citrix.

Thank you, Jeff, and good afternoon. Today, I am pleased to report on another quarter of solid financial performance, strong execution and growth across the company. In my commentary, I would like to discuss our financial results for the first quarter and the current trends in our business, specifically around revenue growth, products revenue mix, including the Citrix Online performance and our revenue by geography. I will also provide you with our outlook for the second quarter and full-year of 2005.

Beginning with our financial results, I should note that certain numbers discussed are adjusted to exclude the effects of amortization of intangible assets and amortization of deferred stock-based compensation. Please refer to the press release for a full reconciliation of adjusted figures to US GAAP figures.

So let's take a look at our Q1 performance. Net revenue was $202 million, an increase of 25% over last year. Excluding the contribution from all acquisitions, our organic growth rate was approximately 14%. Our GAAP EPS was 22 cents per share, compared to 5 cents a year ago. Adjusted EPS was 24 cents, compared to 19 cents last year, an increase of 26%. Adjusted operating margin was 24% in line with Q1 of last year, and cash flow from operations was over $73 million. So, across the board, really, a solid quarter.

Now to review the results in more detail, I'll discuss our revenue by product mix and geography, as well as our operating performance. Turning to the mix, license revenue was $90 million, up 3% year-over-year. This result shows a continuation of license growth for the business, demonstrating that the investments we have been making over the past year are having a positive impact. We expect to grow product license each quarter this year.

New products represented 8% of license revenue during the quarter. This includes about $850,000 of revenue from the Citrix Gateways products. We're pleased with the progress we're making in this area, and we'll continue to invest aggressively to address the opportunity in this early stage market. Mark is going to be giving you some additional details during his comments.

Our license update revenue was $77 million, up 31% year-over-year and up 3% sequentially. This was driven by consistent renewal rates of our Subscription Advantage program. Consulting, education and support services revenue was 14 million, up 17% year-over-year. And finally, Citrix Online contributed $20 million, representing the first time these products were 10% of revenue in a quarter. On a normalized basis, this represents approximately 74% growth over Q1 of last year. Our online products continue to post impressive growth. In fact, in the first three quarters of availability our GoToMeeting offering already accounts for over 5% of Citrix Online reported revenue, and has ramped at a faster pace from launch than either GoToMyPC or GoToAssist. It has also won awards from Laptop magazines, Forrester Research and PC magazine.

Turning to revenue by segments. The America's region put up a strong performance in the first quarter. This region increased over 15% from last year and accounted for $86 million or 43% of total revenue. We're especially pleased with this as it indicates that the actions we've taken over the past 12 months in up leveling our sales teams, implementing channel programs, and training and educating the channel resources are beginning to drive results. The EMEA region grew 11% over Q1 last year to 77 million and accounted for about 38% of total revenue. We did experience pockets of strength throughout Europe notably in the UK, offsetting a few specific areas of weakness in Central Europe, mostly centered around the government vertical.

The Pacific region posted an impressive growth rate of 27% year-over-year. Those results were highlighted by strength in Japan, China and India. In total, the Pacific region accounted for 9% of total revenue. So, overall transaction size was very balanced in Q1. In fact, nine of the top ten deals were between $400,000 and $800,000 and one was greaten than 1 million. Looking at the top end by geography, five were in North America, four were in the EMEA and one in Latin America. In addition to these transactions, our online division generated two deals over a 100,000.

Turning to expenses and operations. Adjusted operating expenses were 147 million, up 25% year-over-year. This growth was primarily related to the addition of Citrix Online, headcount investments and the new Citrix Gateways division, formally known as Net6. Operating expenses declined 3% sequentially, mainly due to a decrease in marketing programs and variable compensation.

During the quarter, we added 70 employees, half of which were additions to our Online division bringing total worldwide headcount at the end of the quarter, to about 27, 25, a sequential increase of about 3%. This headcount growth rate is down significantly, over the investment levels of 2004. So we'll continue to focus on driving leverage in the business model throughout the year, while growing headcount at a moderate pace. So looking at the balance sheet, deferred revenue grew sequentially by approximately 5 million. Now a total amount stands at $230 million. This is up 46 million or 25% over last year.

Total cash restricted cash and investments a little over $600 million up 40million from Q4. DSO declined at 38 days and cash flow from operations was over 73 million for the first quarter continuing a very strong trend. In fact, over the last 12 months, the Company has generated over $260 million in cash flow from operations. Our primary use of cash during Q1 was for stock repurchase. During the quarter, we bought back 2.6 million shares, at an average price of $22.74 each. We have about $200 million remaining, under the current authorization and expect to be active in the second quarter.

So, finally, I like to discuss our outlook and expectations for the second quarter ending June 30th and our outlook for the full year 2005. It should be noted that we are about to make forward-looking statements that incorporates 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 second quarter, we expect total revenue in the range of $203 million to $210 million. Within this number, we expect Online Division revenue of 21 to 22 million. We expect total operating expenses to increase between 2 and 4% sequentially; other income of approximately $4 million; a tax rate consistent with Q1; weighted average shares outstanding is expected to be between 175 and 177 million shares; and earnings of 22 to 23 cents on a GAAP basis, and 24 to 25 cents on an adjusted basis.

For the full-year of 2005, we expect the following: total revenue in the range of 840 to 855 million; GAAP EPS of 94 to 99 cents; and adjusted EPS of $1.02 to $1.07. So as we continue into 2005, we're looking at positive trends in our core business, strength in our online products, and a growing impact from our Gateways Division. 2005 is all about growth and leverage. Our plans are focused on increasing productivity throughout the company and with our partners, focused on integrating and enhancing our product solutions and leveraging our huge customer base.

So now, I'd like to turn it over to Mark Templeton to give you additional details on this quarter's performance, and to discuss our ongoing business as we move through 2005.

Thanks David. And thanks for joining us today. As you can see, 2005 is off to a very solid start; 25% revenue growth and record first quarter revenue; EPS up 26%; cash flow for the quarter over 73 million. These are excellent first quarter results.

Looking at our core business, Presentation Server, license updates and services as a whole, we continue to grow at a double-digit rate. Looking at new revenue sources, I'm especially delighted with the growth we're seeing in three key areas. First, our real-time collaboration and desktop access services were up 74% year-over-year. It's the fastest growth rate we've seen in five quarters. Second, Citrix Gateway is also very promising. We're looking to build on its contribution in Q1 with a really exciting product launch next week that I'll talk about a little bit more in a minute. And third, Q1 revenue from the Access Suite, Secure Access Manager, Gateways and Password Manager represented 8% of licensed revenue for the quarter. So we are doing well in our objective to increase revenues from new sources and getting growth in the core business.

As you know, a key revenue component, product licenses, continues to be a real focus for us. While up 3% over last year, we're still bolstering this area of the business. Specifically, we're launching new must have releases of our software products beginning next week. We are engaging our partners with enhancements to our Solution Advisor program, and we're leveraging the largest growth we've seen in the new product opportunity pipeline.

Now, looking at the geos, every geo turned in a solid performance in Q1. We saw 11% growth in EMEA in spite of a tougher IT spending environment and the government sector, especially in Germany. Asia Pacific grew 27%, with Japan posting a record quarter. And the Americas grew 15%, with another excellent quarter from the Latin America team and a solid performance from the North America team.

For well over six quarters, we put a lot of focus on reengineering North America, and the hard work is showing in the results. In North America, revenue grew 14% over last year and produced 5 of our top 10 deals, including Home Depot, Banc of America, TD Waterhouse and Union Pacific Railroad. The North America management team has done a great job, especially in up-leveling the capabilities of the sales team.

Go to market metrics and leading indicators are positive. Both total product and new product opportunities are up significantly. I'm very pleased. This is great execution on many fronts. One year after the launch of Citrix Online, our software at service business, we're are seeing acceleration in the topline and operating profit. These subscription-based access services play an important role in the growth of new revenue sources.

In Q1, GoToMyPC, the industry standard for remote desktop access grew 13% sequentially; GoToAssist, the best on-demand support infrastructure grew 10% sequentially; and GoToMeeting, our exciting real-time collaboration product grew 106% sequentially. In January, we combined Citrix's Online Partner program with Access Partner program. It's already made it easier for existing Citrix partners to profit from value selling our entire access platform with consistent reward training, co-op and support programs. Citrix Online now has over 1,000 GoToMarket partners. Over 200 are also Citrix solution advisors and 10 distributors are now signed up to promote and develop this business. As a result our field based sales coordination is gaining traction.

In Q1, two of the top five GoToAssist deals were done by Citrix channel partners, and overall, partners accounted for almost $2 million of new customer subscriptions. I am very pleased with this team's performance, how they amplify our brand and how well the integration has gone over the last 12 months. We'll continue to expand Citrix Online in concert with the tremendous opportunity for online access services that the Internet provides.

Next, I'd like to talk about next week's product launch. We really have some exciting announcements next week to share with you. This is an important event to Citrix and will have a positive impact on the business over the next six quarters in three important areas. First, existing customers will build larger scale, better performing, more cost-effective systems, breaking down standardization barriers and increasing our enterprise penetration and deal sizes. Second, migrating customer, especially those on Presentation Server 1.8 will see compelling economic and functional advantages to move to the newest version. New customers, third, will see more compelling TCO, compliance and security capabilities, opening new doors for Citrix product adoption.

Next, I'd like to give you a preview of next week's 4.0 launch. Let's start with the Citrix Access Gateway, which we added last December as part of the next acquisition. Simply put, it's the best SSL VPN on the market. If you are a mobile user, the always on feature let's you smoothly roam from office to home to hot spot to hotel without ever losing a secure connection to enterprise resources. The experience is just amazing and it's only available with the Citrix Access Gateway.

For IT professionals, it provides a single secure point of entry to the enterprise that automatically scans and builds the secure access point that easily supports all enterprise applications. That supports enterprise authentication and that's virtually unmatched in its support for low voice over IP and video. Access gateway 4.0 is the only SSL VPN that's tightly integrated with the Citrix presentation server, making it even easier to provide enterprise information access, which is a huge win for our customers and a great opportunity for our partners.

Next I'd like to talk about secure access manager. Over the past two years, we've greatly enhanced secure access manager. With this version, we are repositioning it to provide advanced access control features for the Access Gateway. These new features include advanced scanning, securing and sensing of end-points and powerful administrative control over how information resources are used based on user role, device, location, and connectivity policies, providing an unsurpassed degree of access control for IT organizations.

Access gateway gives us a competitive offering for first time SSL VPN buyers and at very compelling solution for presentation server customers. And with the advanced access control option, we get a highly differentiated offering for markets that require extreme security. Like investment firms, hospitals, government agencies and others that manage highly sensitive information. With this release, both Access Gateway and the Advanced Access Control option become part of the Suite, giving customers greater value and more compelling reasons to purchase a full system.

We will talk next about presentation server. For the past 10 years, Citrix presentation server has defined the presentation services market. Version 4.0 is an inflection point for this product. Over 50 new features make it an IT must have. 4.0 delivers unprecedented scalability, higher user density per server and more servers perform, in fact, it will support over 1,000 servers in a single form. 4.0 delivers breakthrough application compatibility with new technologies that allow incompatible applications to run on the same server. 4.0 also introduces proximity printing.

A printing solution that intelligently selects and auto configures your nearest printer. We've also redesigned our print engine from the ground up. Printing is now up to four times faster. And we even unified windows and Unix application in desktop support into one package. Presentation server 4.0 significantly improves our ROI proposition and dramatically speeds and simplifies deployment. It is a really exciting release of presentation server.

Next, let's talk about password manager. Next week we'll be announcing Citrix's password manager 4.0. It has major advancements and user friendliness and administrative simplicity in a whole new improved look and feel. There better security and auditing options. Built in self service password reset and much more. This release is more scalable, secure, and more tightly integrated into the access platform. Password manager 4.0 increases application access security and improves compliance management and gives users the best single sign on experience available anywhere.

Next, the Access Suite. The Citrix Access Suite combines these three product lines into a high performance system that's managed from end-to-end. The Suite and all of these products will be available this quarter. You'll hear a lot more about all this next Tuesday during Citrix strategy day. Please plan to attend live in New York or via the Webcast. We're strengthening the access platform with that customers need, making it more and more compelling to step-up from presentation server to a systems solution. And we're creating the world's most extensive portfolio of access products and services that our channel partners can grow with profitably, based upon sustainable relationships with highly satisfied customers.

Everything we are doing for customers is focused on driving a best access experience, best for users, best for IT professionals and best for Business. Best access experience is when complexity of access is invisible when access is ubiquitous, secure and managed and when the flexibility in cost of access is a business enabler. To the wrap up, excellent execution, great quarter, strong leverage of our investments. We are looking forward to an exciting 4.0 launch next week and we'll help to drive continued growth. Now we will open it up for questions.

Ladies and gentlemen, at this time I would like to remind you if you would like to ask questions, please press "star" and the number "one" on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from Ed Maguire with Merrill Lynch.

Yes. Good afternoon. It's the first time you guys have guided a full year outlook in a while. Could you speak about some of the factors that are leading you to change your quarter at a time forecast?

This is David. You know, primarily it's we've had a lot of questions from investors just looking for further clarity on the business model, more guidance going forward. So, in our never-ending quest to be providing more information and transparency, we are just starting to provide annual guidance for this point going forward.

I mean, if you can -- can we infer any changes in your confidence in the -- in your pipeline visibility?

I wouldn't read too much into it. We've talked very openly about continued strength in our pipeline, great traction with the new products and continued execution across the investments that we have been making in the last 18 months. So, we're just focused on execution at this point in time.

Okay. And you've been pretty active with promotions around the Access Suite so far, the last few months. Do you plan to continue some of your promotions there?

Ed, this is Mark. Yes, we'll continue to promote to the install base all of our products, including the Access Suite. And you will see us do that here in Q2 as we launch the 4.0 product line.

Great. Thanks so much.

Thank you.

Your next question comes from the line of Adam Holt with JP Morgan.

Good afternoon. First, a question on the upcoming 4.0 release. Could you talk about how you think of the revenue opportunity for the presentation server and on the back at the product cycle, what you think the growth rate could be for that product this year?

Adam, this is mark. Basically our presentation server in the install base, the movement in the install base from 3.0 to 4.0 is covered by subscription. We do, however, believe that we will begin now probably a two to three quarter cycle, sales cycle where our customers will see that both the economic and the capability -- the functional capabilities in PS 4.0 and will be able to plan larger and incremental deployments leading to a greater penetration and more standardization. So, we're just on the front-end of that. In January when we had our sort of our top partner who come to our global summit when we had them together, they were extremely excited about 4.0 and we were able to actually work with it a little bit at that time and get some awareness around it. But we will now start a sale cycle that will stimulate customers to expand.

Adam, I would add on to that that as you know we have several million licenses from previous customers, they are not currently on subscription. So, this is just another great opportunity to go back and talk about install base and really drive that component of the business.

Terrific. And then quickly a question on the cost side. You mentioned that your pace of headcount ads decelerated from a year ago period. The sales and marketing number was actually up on a year-on-year basis in terms of a percentage of revenue. Is that because of the recent acquisitions and how should we think about your headcount ads that's we're heading into the second quarter. Thanks.

Yes. All of the -- in most of the headcount growth as I mentioned in the prepared comments was related to the inclusion of the Citrix Online group as well as just the headcount investments we made throughout 2004 and early 2005. If you look at the 70 people that we added in the first quarter, nearly half of those were at Citrix Online. And we're certainly going to -- could be continuing to invest in that business as we are driving 74% year-over-year growth rates at this point in time. So I have looked for your moderate headcount growth, as you know we've added a lot of people in the last 18 months and we really focused on leverage at this point to be able to make sure that everyone is effectively trained in productive.

Terrific. Thank you.

Your next question comes from the line of Raj Raju with Robert Baird.

Good afternoon. David, if you could give us a little bit more color on your deferred revenue growth in the quarter. Obviously, it slowed a little bit compared to the last few quarters. Could you give us color on that?

Sure, Raj. As we've been talking for a while there is seasonality in our deferred revenue growth. If you look at the growth in Q1, about half of it came from Citrix Online and half of it came from just our subscription advantage programs. Renewal rates and subscription advantage were constant at about 75% and, obviously, as we continue to ramp that up as well as just get into the more seasonal pattern that you'll see in the back half of the year. I would expect deferred revenue to be growing a little bit faster at that point of time.

Okay. And the expenses that you were talking about for the remainder of the year. In 1Q, the R&D expense line increased sequentially, is that from Citrix Online expense or the online headcount that you just mentioned?

Yes. It's that as well as limited headcount growth in the core business headcount as well.

Okay. Could you also share if not quantitative but at least qualitative number on that go to assist and the Citrix Online products from outside the US in the quarter?

Raj, this is mark. Outside the US for Citrix Online presently across all the products we will account for under 20% of the business. The most mature one from a revenue perspective is GoToMyPC, which has been available in Southern Hemisphere of Australia and New Zealand, as well as sort of Northern Europe with a specific focus on the UK for sometime. GoToAssist is just starting to be rolled out, as well as GoToMeeting in EMEA primarily focused on EMEA at this point.

Okay. One last question. David was there any currency effect on expenses this quarter?

Yes. On a year-over-year basis, as you know, we sell primarily US dollars around the world so do not going to benefit on the top line, due to the currently week dollar. But on a year-over-year basis, since, a large compound of our expenses is our local currency base. We did have some impact -- negative impact to expenses as we have seen from the last few quarters.

Was that significant or?

Yes. I mean, it's material if you look back four and eight quarters. Several million dollars.

Okay. Thank you.

Your next question comes from the line of Brendan Barnicle with Pacific Crest.

Thank you, David. You had mentioned that you'll see -- expect to see license growth continuing in Q2 and the rest of the quarters. Can you give us any sense? We were at 3% this quarter. Do you think that accelerate as we go through the year?

Well, let me kind of quantify yet on a -- on that granular basis. I mean we are providing full year guidance as Maguire mentioned for the first time now. And we are looking to grow it both sequentially and on a year-over-year basis each quarter. And we will just be giving more granularity as we move through the year.

Okay.

Brendan, this is Mark. I think the key thing to keep an eye on here is sort of incremental uptake on the new products -- the product we launch next week, which as I mentioned earlier will take a couple of quarters to show incremental revenue outside of you know, the subscription area and then obviously revenue generated by the Access Gateway as a standalone product. And then, of course, the Citrix Online has a new revenue source as well.

Great. And then on the 4.0 release, for customers that are on 1.8, so presumably went beyond some sort of subscription, will you have any sort of promotional programs in the first quarter or two to help us those transition over so they're not -- so the expense is not so dramatic?

We will. And the one thing I would emphasize is that -- when a customer decides to migrate from 1.8, it will usually be along with a decision to migrate off of an early version of Windows Server, either NT4 or Windows 2000 Server. So that will tend to gate the actually purchase period when the customer actually will sign a license agreement. So that is a factor in the uptick, but we should be able to see 1.8 customers take advantage of a few programs we have to move forward because we want to bring everyone forward that is continuing to yield value from the presentation server platform to the newest release and economically it makes a lot of sense for them.

Just following up on that, Mark, have you seen any uptick related to people moving to a newer version of Windows with Service Pack 1 release of Sever 2003?

Yes. I'd like to say we track -- and we can track it on that closely, just anecdotally, I don't think we have seen any material string of anecdotes that suggests making a big impact in terms of customers moving forward. I think the biggest impact of Windows Server 2003 growth is it's you know, just continuing to mature on one hand and customers trust the maturity of Windows Server. And on the other hand as the platforms and Servers age, they are looking to upgrade hardware to better performing on platforms and that's the time they want to move off of NT4 or 2000, on to 2003.

Great. Thank you.

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

Kirk?

Kirk, your line is open.

Can you hear me?

We can now.

Okay. Sorry about that. Just Mark, the question was on the Gateway product you had some early success this quarter. Can you give us color maybe around some of the initial purchases of that? Was it existing Citrix customers or you're seeing some expectance from some people you haven't worked with before?

Kirk, the focus of the first quarter for Citrix Gateway really was to move from an end-user perspective, which is where they had been to focusing on the channels. Both distribution partners -- value added distribution partners, as well as channel partners. During our January Global Summit, we certainly got on the radar screen of a couple thousand individuals that represented some of our best partners in the world, and actually certified almost 100 of them to resell the product. We also ran an introductory offer, one to show, one to go offer, which really was designed to have them install an Access Gateway in their own business and use it. What we found traditionally is that when our partners use our products that's when they get hooked on them. And the Access Gateway is -- has that kind of characteristic in terms of being very addictive in the way it works. So, that was really the focus and anecdotally the good news is we are seeing more and more of the partners that is have been certified in those that are newly coming in actually focus on our SSL VPN in a way from competitive SSL VPN they have been carrying in their product line. It's kind of early to tell on all of that. This is -- this will take a couple of quarters to start to get some real momentum, but we are really pleased with the performance in Q1.

Okay. Great. And just with the release of the Access Suite 4.0 will that -- will there be any changes to sales comp plans to get you know, some people that might have been on older versions of MetaFrame up? Any -- I guess any incremental changes versus what you set out at the beginning of the year?

No material changes to sales comp plans. Of course, we will have special programs and internal initiatives around upgrade migration.

Okay. And then final question, just in terms of the average deal size in the pipeline and the US, is it you know, you up -- sort of up leveled your sales force in the US are you seeing some benefit in the size of the deals in the US pipeline as well?

Yes. We are, Kirk. It's impressive what the North American team has done and it's reflected in not only larger pipeline, but larger deals making up the pipeline.

Great. Thanks very much.

Thank you.

Once again, ladies and gentlemen, if you would like to ask a question, please press "star" then the number "one" on your telephone keypad. Once again, that's "star" then the number "one".

Your next question comes from Vick Churamani with Lehman Brothers.

Hi. Vick Churamani for Israel Hernandez. Mark, David could you talk about your expectations for Net6 for 2005. Are we still thinking about the same sort of guidance, which we had earlier at the time of the acquisition is current 5 million to 8 million?

Yes. We are not updating guidance at this point in time. Obviously, we saw a lot of great activity in the first early results and lots of movement within the channel of the pipeline. So and we feel good about the numbers and obviously look to execute to the top end of that.

And any color on Citrix Online given the performance you saw this quarter or 2005?

Well, Citrix Online and all the online products continue to do very, very well. We talked about the sequential and year-over-year growth rates. So, we expect that the business will continue to grow. For the full year, I would expect somewhere north of 80, 85 million for that division.

Okay. Great. Thanks.

Your next question comes from the line of Jason Kraft with SIG.

A question again on the Citrix Gateway Net6 stuff. The 850,000 was a part of the license number this quarter, correct?

That's correct.

And just to circle back on the 2005 expectation. So given the result for this quarter and a lot of talk on SSL VPNs and you guys talk next week. So 5 to 8 million, wouldn't you consider that probably a little bit conservative given the market momentum out there and the opportunity you guys talk a lot about?

Well, Jason this is Mark. I think we are looking at really a standing start on this product on for our channel and our customer network. So, we are going to look at it very carefully and up the guidance we have provided because there is a sales cycle and ramp time around identifying appropriate partners, training them, getting on -- getting their mind share and getting them into a sales cycle. It does take a process. And that's what we got an early start and the year on. And we believe that with the 4.0 launch and some of the enhancement that have gone into the Access Gateway to make it more integrate and friendly to Presentation Server, as well as some other things we've done to enhance it for both the enterprise customer and the smaller customer. We will actually get a sales cycles going in -- at the later part of the quarter. So, we are starting from a pretty low base.

On Europe, you guys have done very well there historically and really the first -- and we heard about the other software companies having some trouble in Europe. And you guys been quite frankly and be normally for several quarters. Can you maybe talk in more detail on what you seen over there, what kind of went down in Germany and maybe any other some of the emerging markets? More detail on Latin America and maybe Southern Europe stuff like that? Thanks.

Okay. Generally, as I said in the prepared comments, we have grown 11% year-over-year with a really good and solid performance. What we did see in EMEA is overall the government sector was weak, weaker than usual. And we actually have a pretty strong government business in EMEA overall. It was really accentuated in terms of weakness in Germany. The central government in Germany froze many, many IT expenditures during the quarter making it tough for that team to reported 11% growth rate. We believe that we may see some of the same this quarter. The freeze is not listed yet in Germany, so we still -- we probably see some of that and of course in Q2 in the June quarter, we always see some a little larger deals some of which that may not have closed in the 1st quarter. They will come to the surface before going into the second half of the year. Latin America is having a great second sequential year, I would say, in terms of how they have gotten off the ground growing about a 56% growth rate in Q1. And that's off of a darn good year last year. And that team is executing well and again it's a smaller geography, but executing well and we see good things ahead in Latin America. In Japan, had a as I mentioned in the call, a record quarter of all time. Japan is a very, very large IT marketplace. We have a new leader in places, the President of Citrix, KK, who is formerly great executive with IBM and has done well to get that team together and move it to the next level already. And then generally in the Asia marketplace, we're really in a state of having distributor that's help us with opportunistic business especially in two-bite countries like Korea and China. And those Geos will tend to be strong in the first part of the year, have a little bit of a dip in the middle of the year and come back later in the year. So there is -- each one of these regions has it own characteristics.

Okay. Last question, it looks like deferred revenue slowed noticeably this quarter. And since much of the update business is from the deferred revenue line, how do we think about the updates revenue going forward?

Like it's somewhat the earlier question that I answered, it's similar, as there is going to be some seasonality in the renewals just because that's when we originally sold the licenses. And you've seen the success of just looking back at some of the actuals. I expect going into Q2 that the license update business is going to be flat to modestly up, and then growing a little bit more materially towards the back half of the year. So, as we've been talking about for in the last couple of years as we migrated the business model, we saw a lot of early uptake moving through that migration. And, now it's going to begin to slowly start tracking in line with the growth and overall new software licenses as well as our ability to continue to increase renewal rates of the base throughout the next several quarters.

Is that flat to modestly up Q-to-Q or year-over-year?

Just Q-to-Q, just sequentially.

Okay. Thank you.

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

Hi, just a couple of quick ones on product things. I'm not sure, I understood your comment, Mark, about hosting incompatible application on the same scheme under 4.0 or is that some sort of virtualization scheme (inaudible) does?

Yeah. Well, yeah virtualizing various pieces of the OS that allow application that was normally conflict with each other trends at the registry level and at the DLL level, and at the IP stack level to allow them to coexist on the same server. Historically, either they wouldn't run in a presentation server/terminal server environmental at all. Or they would have to be segregated on separate machines. So by offering this capability, it provides a simpler architecture for customers, secondly, they can put more of their application base on the servers and gain all of those advantages. Often times what we see is these incompatible acts will tend to be either internally developed or they will be application that have very unusual characteristics and sometimes in the area of document imaging and work flow. So this is some fan boxing technology that we've developed internally, have filed on quite a few patents on it, and bodes well for some other things that we can do, with it going forward.

Great. And then if I look at the performance and scalability that you're talking about at 4.0, the products getting more mature so not like early days of a product where you just round up engineering in the afternoon, bring in some pizza, hook up the code profiler and you find one or two big bottlenecks and take some performance takes off, right I mean. Where is the secret sauce coming from?

Well. Okay. So a key part of what we've done here is, we've actually licensed and acquired some technologies from some of our third party ecosystem partners that has helped us on this area. And basically, it's in the area of sort of handling poorly behaving DLLs that do some odd things in memory space. And, so, that's a big piece of it. And as well, what all this results in is higher performance results and more users per server. Going forward, there other areas to optimize, there're always places to optimize. So we will continue to do that and then, we are working on a 64-bit platform and that is coming and that will -- our early research shows that we may get up to 50% more capacity out of a single, let's say, one-use server running on a 64-bit platform. So there's lots more ahead in scalability, we'll talk some about that next week.

Not to go too far down the technical rat hole, but when you're talking about these kind of numbers on 64-bit, is that a function of just changes to the product and that our processors on 64-bit or is it just really function the (inaudible)?

Yes, it's all of the above. It's an operating system that addresses a much larger memory space. It's the optimizations that we are doing with our presentation server and it's a new processor from Intel and AMD especially from the dual-core and beyond kind of things that we're seeing. So and having a core product that really relies on the power of a server, this is all exciting and these are exciting developments we can embrace and extend also for the benefit of our customers. So it's a really good stuff for us.

That's it for me. Thanks.

All right. Thanks.

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

Hi David. I was hoping you might be able to clarify with that more of your revenue recognition related to the license updates. The $2 million roughly increase this quarter seems little bit light given the full quarter of effect you have enjoyed from the strong sales of licenses in Q4, the up tick and the license updates you would have had last year that you stated renewed in a relatively constant rate plus the incremental revenue you picked up this quarter from accrual of license sales during March '05. What other factors may have gone into that not growing faster than it did?

Well Dion, you hit on a lot of moving parts certainly in that line. They got up embraced of 31% year-over-year. Some of the other things that happened there, when we sell our subscription advantage contracts, we'll do that on a 12, 24, or 36-month just depending on what customer are really requiring. And we will recognize the revenue for that ratably over the contract term.

Right.

So, I mean, you'll see a higher renewals or higher renewal pool coming available in the second, third, and fourth quarter because that's simply how we renewed in the past. So there's going to be a bit more seasonality to that. The other thing that moves, we actually recognize revenue in the period is just the timing of the renewal. For example, if someone had lapsed a subscription for a short period of time, there is a little bit of current period revenue that's going to move that in a one way versus the other. So there's a few moving parts there. But like I said earlier, I expect to grow modestly in the second quarter and throughout the year.

Were last subscriptions more of an issue that quarter than they had been in prior quarters?

It really moves around. There's a lot of opportunity out there all the time just based on timing for people that lapsed for a short period of time as well as a large opportunity to go and recapture people of lapsed more than a year.

Okay. They will may then deal more specific and make sure I understand it. If we look at the December quarter, you had $106 million in license updates. Let's say 100 million of that was related to your core pike. You are still using 25% deferral, correct?

Well, on a blended basis, if I talk about deferral, I mean, that's one of the aggregate of deferral rate for the entire pool of transactions.

But that would have been a good number, 25%?

For the 4th quarter?

Yes, roughly 25.

It's 25 million a year, that's $2 million a month. If you had, we are talking about the four-quarter that for Q4, you have gotten three months worth of recognition in March versus only maybe a month in December. That's $4 million incremental, which we should see added to that line. Again, I just -- I know, there are other moving pieces, but if we look at that moving piece in particular, why then we not see that $4 million reflected from the full quarter effect of the strong December sales?

Well, you did, but there is likely said, there's a lot of moving parts in a number that's that large.

Did you have any change in average see yield that? Again, working through the math knowledge of moving parts if I get like that one, it's still tough to come up with a $2 million increase. I'm not trying to get there, I'm just trying to understand what may be broken in our model and then that were faster.

From an average yield proceeds, it remains very, very consistent. And we are talking about a base of several million licenses. It's hard to really move that.

Right.

But like I said, it's a lot of moving parts. At our strategy day, I will put up my agenda to get little bit more granularity to the various components to make up this number, so that all investors can have a chance to really see the moving parts there.

That would be helpful. Thanks a lot.

Your next question comes from Gary Spivey with Stanford Group Company.

Thanks. Most of my questions have been answered, but I did want to ask if you noticed any impact at all from the Oracle-PeopleSoft merger and if the prospects or relationship with SAP has changed or looks to change at all.

Gary, this is Mark. No, we haven't seen any impact either way on the Oracle-PeopleSoft merger. It will typically see our sales and with respect to those products, later in the deployment cycle. And so we will be later, just later in the project and we haven't seen anything at this point and at this point we don't expect to. On the SAP front, we'll talk a little bit more about that next week, but our SAP relationship is doing extremely well across the two dimensions that we work towards with them. First is in the enterprise license upgrade cycle that they are on where their field organization is recommending Citrix infrastructure for the upgrade cycle to make it easier at lower cost and faster time to value. And then, we're starting to see a little bit of traction with the business one initiative that we announced last year. We are actually identifying SAP resellers in the middle market space and having them under SAP's guidance little early recommend architect, etcetera, the delivery of business one on Citrix infrastructure. So it's really going well with them.

Great. Thank you.

Ladies and gentlemen, your final question is a follow-up question from Adam Holt with JP Morgan.

Hi. Sorry I didn't ask this earlier, but could you comment on interest income in the quarter. It was a little bit ahead of where I had been looking for and why it would be down sequentially into the second quarter for your guidance?

The interest component is roughly $4 million. I mean, that line is made up of a multiple GL accounts, one of the largest of which being revaluation of foreign currency denominated balance sheet accounts that gets effected on a quarter-to-quarter basis. So, when we look at a forward guidance, we simply look at on an interest income basis. That's the only we can predict with any certainty. So I think, $4 million is a good number to use on Q2 and forward.

Great. Thank you.

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

Well, once again, thank you for joining us on the call today and listening to the great quarter we had to report. And we're looking forward to Q2 and continued execution and growth and especially to next week's strategy day and an exciting launch of our 4.0 products. Thanks again.

Thank you for participating in today's Citrix conference call. You may now disconnect.