思杰系統 (CTXS) 2005 Q2 法說會逐字稿

Good afternoon. My name is Linda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems second quarter earnings conference call. All lines have been placed on mute in order to prevent any background noise. After the speakers' remarks, there will be a question and answer period. [OPERATOR INSTRUCTIONS] I would now like to introduce Mr. Jeff Lilly, Manager of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you, Linda. Good afternoon, everyone, and thank you for joining us. In this call today, we will be discussing Citrix's second 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 the 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 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 revenue, products, their developments, 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. Officially 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, effective tax rate 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 website.

And now, I'd like to introduce David Henshall, Vice President and Chief Financial Officer of Citrix Systems.

Thank you, Jeff, and good afternoon. Today, I'm pleased to report another quarter of solid financial performance, strong execution and growth across the company. In my comments, I'd like to discuss our financial results for the second quarter and the current trends in our business. I'll also provide you with an outlook for the third quarter and full year 2005. Beginning with our financial results, I should note that certain numbers discussed are adjusted to exclude the effects of amortization of intangible assets, amortization of deferred stock based compensation and tax provisions related to the repatriation of certain foreign earnings under the American Jobs Creation Act. Please refer to the press release for a full reconciliation of adjusted figures to U.S. GAAP figures.

so, let's take a look at our Q2 performance. Total revenue was $211 million, an increase of 18% over last year. Our GAAP EPS this quarter included a net tax provision of approximately 16 million, equivalent to $0.09 of EPS, taken in anticipation of repatriating certain foreign earnings under the U.S. American Jobs Creation Act, AJCA, bringing GAAP EPS to $0.16. This compares EPS of $0.18 a year ago. Our adjusted EPS was $0.27, compared to $0.20 in the second quarter of 2004, an increase of 35%. Our adjusted operating margin was 26%, more than 200 basis points expansion, compared to the same period last year. Cash flow from operations was $65 million and deferred revenue increased sequentially by 13 million. So across the board, really a great 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 revenue mix, product license revenue was $92 million, up 5% year-over-year. This was the third consecutive quarter of license revenue growth in the business. This reflects customers adopting the full Access Suite, as well as our new Gateways products. In total, the Access Suite represented 10% of product license revenue during the Q2. In addition, the Gateways products contributed about $2 million of revenue, more than doubling the contribution from the first quarter. It's worth noting that we shipped several hundred non-revenue appliances in Q2 to partners around the world, while this modestly impacts cost of goods sold in the short-term it, helps to us address the strong demand for evaluation in demo units, which we expect to drive future revenue.

Our license update revenue was $80 million, up 20% year-over-year and up 4% sequentially. Consulting, education and support services revenue was 15 million, up 14% year-over-year. Looking at revenue by segments, the Americas region grew 10% over last year and accounted for $92 million, or 44% of total revenue. EMEA grew 14% over Q2 last year to 76 million and accounted for about 36% of revenue. The Pacific region grew 12% year-over-year, accounting for 9% of total revenue, and our online softwares and service products contributed an additional $24 million, or 11% of total revenue in the quarter. This represents 77% growth over Q2 of last year when normalizing for purchase accounting adjustments. For the top ten transactions in the second quarter, we had two deals greater than $1 million, with the remaining eight between about 500,000 and 1 million. By geography, four of those were in North America, three were in Latin America, two in EMEA and one in the Pacific region.

So now let's turn to expenses and operations. Adjusted operating expenses were 148 million, up approximately 14% year-over-year. This growth was primarily related to the addition of the Gateways Division, formerly known as Net 6, and some head count investments. In fact, during the period we added about 67 employees, primarily in the sales organization and the online product group. This brings total worldwide head count to 2793.

Our adjusted tax rate during the quarter was approximately 20.5%. This lower tax rate as compared to Q1 '05 contributed about 0.7 cents benefit to adjusted EPS. Looking forward, we expect the adjusted tax rate to be 21 and 23%. Please note, however, that the actual tax rate will conflict wait based on the actual geographic mix of income in any given quarter.

So looking at the balance sheet, deferred revenue, as I mentioned, grew sequentially by about $13 million in Q2, bringing total deferred revenue to 243 million. This is up $49 million, or about 25% from last year. The growth in the quarter was driven largely by increasing renewal rates in the sub Citrix advantage program, which moved up to the upper 70s in Q2. Total cash, restricted cash and investments was 685 million at the end of the quarter, up $80 million. DSOs were 42 day, down slightly from last year, and finally cash flow from operations was over 65 million in the second quarter. This brings trailing 12-month cash flow to over $280 million.

Also during the second quarter, we repurchased a half million shares at an average price of just over $20. Activity was a little lower than usual due to the pending acquisition of NetScaler. We currently have over $200 million remaining under our repurchase authorization and after the NetScaler transaction closes, we expect to become active again under the program. So finally, I'd like to discuss our outlook and expectations for the third quarter ending September 30 and our outlook for the full year 2005.

It should be note that we're about to make forward-looking statements and incorporate certain risks. Please refer to the Safe Harbor Statement noted in our press release and the rest that are stated in our SEC filings. With respect to the NetScaler acquisition, we still expect the transaction to close in the middle of the third quarter. Upon closing, we will be issuing approximately 6.7 million shares of stock and paying out approximately $140 million in cash. The following guidance includes the expected contribution from this acquisition.

For the third quarter, we expect total revenue in the range of 215 to $222 million. Within this number, we expect Citrix Online to contribute approximately 25 million in revenue. This number also includes approximately 5 to $6 million in revenue from the NetScaler acquisition. I would like to remind you that the Netscaler revenue will be approximately 80/20 split between-- license services. Gross margins expected to be 96% in the third quarter and it will continue to trend towards 95% range in the ensuing quarters as the gateways and application networking products begin to contribute more materiality to revenue. Total-- will increase 5 to 7% sequentially. Primarily reflecting the incremental expenses of the Netscaler acquisition.

We expect other income of approximately 3.5 to 4 million in Q3 due to the expenditure of cash for the acquisition and approximately 3.5 million in Q4, resulting for the full quarter impact. Weighted average shares outstanding is expected to be between 179 and 180 million shares in Q3, reflecting a partial quarter impact from the acquisition and then settling in around 182 to 183 million in Q4. In total, we expect earnings of $0.17 to $0.18 per share on a GAAP basis and adjusted EPS of $0.24 to $0.25. For the full year 2005, we expect total revenue in the range of 865 to $880 million of which we expect Citrix Online to contribute approximately 95 million. GAAP EPS of 78 to $0.81 and adjusted EPS of $1.02 to $1.05. At this time, I want to discuss a couple of other items that are in process.

In the second half of 2005, we plan to take advantage of the favorable repatriation provisions with the American Jobs Creation Act and repatriate approximately $500 million of foreign earnings. In order to maximize the repatriation opportunity under the AJCA later this year and to provide a bridge for the cash portion of the NetScaler acquisition, we'll be entering revolving credit facility in Q3. So as we continue into 2005, we're looking at positive trends throughout the business, strengthen our online software products and a growing impact from the gateways decision in anticipation of adding the NetScaler product line to our portfolio.

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

Thanks very much, David, and thanks for joining us today. our second quarter results are excellent, showing continued momentum in the business with 18% top line growth, 35% EPS growth, and another quarter of very solid cash flow. Product license and license update revenue continue to grow, and at the same time, we're building revenue streams from new sources, supporting our strategic moves into adjacent access markets. I'm particularly pleased with the growth in Q2 from three areas of the business.

First, the Access Suite. Our end to end access system for integral price customers had another strong performance, contributing about 10% of product license revenue for Q2, and now is poised for further growth with the recent release of 4.0. Secondly, our online products contributed 11% of revenue in Q2, or 24 million, up 77% over last year, continuing our acceleration in web-based realtime collaboration and access services. And, third, our gateways products. In only the second quarter of Citrix operations, contributed about 2 million of product revenue with an excellent early response from our customers and channel partners. So now looking at our geo sales groups, every geo turned in a solid-- EMEA team close add record sale of the access suite, over 8000 licenses for a major French bank. Overall, very solid 14% growth in EMEA, in spite of the difficult business environment they are facing, especially in Germany.

Latin America continues its rapid growth, accounting for three of our top ten deals in the quarter, including a $1 million project for a major oil and gas producer in the region. Our Asia-Pacific business continued to show strength. The Australian based travel allegation flight center was a top ten deal in Q2. They are using presentation server to help open more than one new branch every week around the Pacific Rim. North America had a great quarter, recording four of the top ten deals, including our largest, selling more access suite licenses than any other geography and executing a rapid access gateway ramp up with both channel partners and customers. I'm really pleased with the consistent results we're seeing from the North America team's work, to reinvigorate the channel, up lever our enterprise relationships, improve sales readiness and strengthen the leadership team.

Next I'd like to turn to our products. The Citrix access suite continues to be a major focus for us, driving four of our top ten deals in the second quarter. In Q2, we launched the access suite 4.0, the market's most complete end to end access solution. At partner and customers-- on a worldwide basis. We also released new versions of the suite's component products, including enterprise editions of presentation server, password manager, and access gateway with advanced access control.

Presentation server 4 is a must-have for virtualizing access to enterprise resources, with over 50 new features, unprecedented scale ability, break-through application compatibility, printing is four times faster, includes both Windows and Unix support in one package and offers an extremely compelling ROI story for both new and existing customers. Now with just a couple months of availability, it's already having an impact. For example, North America's largest deal with us driven by presentation server 4.0.

Next, I'd like to discuss our Gateways products. In Q1, we consolidated the secure access manager team into the gateways group, expanding the total team to 90 employees, with more engineering and product marketing muscle, the group delivered release 4.0 of both the access gateway and its advanced access control pack. These products bring to market significant technical innovations and end point analysis, in dynamic access control, in action rights control, in mobile device support and many Citrix Smart Access technologies that are all unique to the Citrix access platform. The Access Gateway is a hit with the first time SLBPN buyer, giving us a strong solution for smaller organizations, and smaller projects. It's also proving to be a very compelling solution for presentation server customers, helping us to drive the success of the suite.

The group's other product, the application Gateway, delivers voice and data applications to IT phones. It has some impressive customer wins in Q2, including another large Las Vegas hotel. Like our recent announcement with the Winn Las Vegas Resort, these hotels are using the IT screen phone, powered by the Citrix application gateway to serve up in-room applications to their guests, a great differentiater for them and a great service if you're a guest. With these products, we're well positioned to meet the need for full-time SSL secured access, across the entire network in every access scenario and the growing demand for convoi -- excuse me, converged voice and data applications delivered to small screen factor devices like IT phones.

Our online products now continue to enjoy tremendous popularity in growth. In Q2, the online group nearly doubled the number of Citrix Solution Advisors, selling its online subscription services to now more than 400, increasing our online services partners to about 1300 in total. Citrix GoToMyPC grew 60% over last year, winning four best in class awards in Q2 alone from PC World, PC Magazine, Mobile PC and the industry's prestigious CODI Award. In Q2, we unveiled a new co-branded service with British Telecom based on GoToMyPC, providing BT's broadband customers with secure remote access to their home or office PC's. The service, called BT Remote Access Pack, will enable millions of UK residents to take advantage of flexible working initiatives put in place by the UK government.

Citrix GoToAssist grew 70% over last year, with impressive wins at Amadeus, Cerner and Striker and expansions at Computer Associates and Sage to highlight just a few. These customers are able to offer the best on-demand assistance in the world, helping GoToAssist win the 2004 CRN Excellence Award. Citrix GoToMeeting launched a year ago has grown to almost 2 million in revenue in Q2, making it our most rapidly adopted online product in the first 12 months of availability.

In Q2, GoToMeeting added PC Magazine's Editor's Choice Award in web conferencing and the Frost and Sullivan Award for best new web conferencing service to its long list of honors. This quarter, we'll move the bar even higher with the release of GoToMeeting 2, with application-specific sharing, on-screen drawing tools, meeting recording, and better integration with presentation server. Administrators will appreciate the enhanced reporting and management features, and our development partners will now be able to integrate GoToMeeting with their applications using the developer's tool kit.

As you can see, our overall results now for the first half of 2005 are really exciting, showing we're gaining traction across the wide and diverse customer base that our access platform products address. In mid August, the access platform will become even more robust when we complete the NetScaler acquisition. This acquisition is a strategic move into the adjacent high growth application networking market and strengthens our ability to deliver the best access experience to any application. The integration team is preparing us for another successful addition to Citrix. To hit the ground running, and leverage our distribution and customer relationships as rapidly as possible. We're very confident in our choice of NetScaler, especially after hearing from literally hundreds of partners and customers worldwide since we announced the deal in June. We'll leverage NetScaler's superior vision, excellent talent, technical innovation, down to earth culture and market leadership to continue to drive their medioric growth.

Just like the virtualization value of Presentation Server, the NetScaler product line enhances the security, manageability, reliability and availability of enterprise applications over the network, especially web based applications, greatly improving the experience of users. This makes NetScaler a very strong fit to the Citrix value proposition and product line. We'll also be looking to strengthen NetScaler's number one position in the most demanding of all environments, accelerating the world's most popular websites, like Google, Yahoo and MSN to name a few. I'm looking forward to discussing this further with you in next quarter's call, after we close the transaction.

Next I'd like to briefly mention our newest product, announced in early July. Citrix Access Essentials. Built on our presence services platform, Access Essentials is tailored for small customers that need secure, remote access to their most important business applications. The product is packaged as a cost effective, easy to install, all-in-one solution. It even includes Windows Terminal Server Cal, so it's perfect for smaller customers, like smaller manufacturing, financial services, distribution, healthcare and public services groups. These are prime prospects for Access Essentials, which is available now through our partners that specialize in small business systems. So we're aggressively moving forward, making bold moves, determined to be number one or number two in every market segment we're in, and a run away number one when it comes to offering integrated access platforms.

Over the past couple of months, I've spent a lot of time in the field, travelling on a worldwide basis and seeing many of our field teams, partners, and customers. Consistently and across hundreds of conversations, they're telling me they're excited, excited about our expanded product portfolio, our enhanced partnering programs, and our access platform strategy. At an increasing pace, our partners and customers are seeing Citrix in a whole new way, seeing Citrix as a strategic vendor, bringing best in class access products to them, that are strategic to their business. So to wrap up, great quarter, great execution, and momentum on all product fronts, and great new opportunities with Access Essentials and the upcoming NetScaler products. Now I'd like to open it up for questions.

Ladies and gentlemen, at this time, I would like to remind you, if you would like to ask a question, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question is from Phil Winslow of CSFB.

Hi, good afternoon, guys. Great quarter.

Thank you.

Thanks, Phil.

Just got a couple of questions, first starting off with Access Essentials that you just mentioned. Obviously, you said that the Microsoft Cal, terminal services Cal was going to be baked into the Access Essentials suite. Obviously there's a change from how traditional presentation server is licensed right now. I mean what-- how did you see that move out of Microsoft? Because it seems like a pretty significant change, just from the outside looking in?

Phil, thanks for the question. Actually, we made this arrangement with Microsoft in December of last year as part of our new five-year agreement with them, which allows us to put Cals in any of the products that we offer, and our approach here is really simple, to just try to make it simpler for the customer to install the product and get it in one, you know, get it in one place, so we think it's a simple fix kind of move on our move, all to the benefit of the customer.

Great. Then also, just, you know, on the 4.0 side, I was wondering if you could comment just when you look at your pipeline going forward here, as far as what your expectations are of-- 4.0 Access Suite as a percentage of revenue for the back half?

Well, the Access Suite will continue to make up a larger and larger percentage of the mix as we look to, especially move our largest and most mature customers forward in sort of a more complex system approach and systems solution, and that's what the Access Suite is designed to do, so I think that mix will continue to increase very nicely. Secondly, Presentation Server 4.0 is helping the established pipeline solidify and obviously will bring in new opportunities as it's available and the messaging gets out there, which we're, you know, just very early in the process. So, you know, I've never seen a release of Presentation Server get more enthusiastic reception from-- I'm talking outward and verbal reception from customers and partners, and since we've made that announcement I -- in fact I think in the last eight weeks I've been here in the office one of those weeks and been travelling on a worldwide basis since we started launching the product. So think it will help us, you know, really in a big way going forward.

Great. Thanks, guys.

Thanks, Phil.

Thanks, Phil.

Next question is from Steve Ashley of Robert Baird.

Hi, guys. In terms of the Net6 product, the Access Gateway, do you know how many certified resellers you were able to add in the period?

Let's see, Steve. I'm not sure we have it right off the top of-- of the tip of our tongue, so we could try to get back to you on that. I know that as we-- I will tell you this, that, as we entered the launch process, we had approximately 300 certified in North America. Can't speak to the international numbers at this time. But very, very strong uptake with channel partners, which accounted for a lot of the no revenue units that were shipped as part of our you know, one to show one to go type program for partners. Because, one of the things that we've learned with channel partners, they sell what they use and so when you give them a unit to put in and use on their own, that's what their sales people will sell.

Great, and in terms of advisor awards, maybe you could just update us there. Does participation continue to grow in that program?

Continues to grow. The transactions are steadily growing and has become really a core value proposition for re-invigorating and even attracting new channel partners. And the great thing now with that program now in place for about a year and a half this quarter, we're able to now plug in the new products that we're bringing on online, like the NetScaler products, like the Citrix Gateways products and so partners are earning advisor awards on the full line of Citrix products that way.

Great. Nice job in the quarter.

Thanks, Steve.

Thank you.

Your next question is from Ed Maguire of Merrill Lynch.

Yes, good afternoon. Since you've announced the NetScaler deal, could you -- could you talk about some of the insights you may have learned in terms of, you know, how their business is tracking? I know a couple of competitors have actually cited them as a competitive force and some of the groundwork you're laying to introduce the product into your channel partners?

Well, Ed, you know, we still haven't closed the deal, so I really can't -- and they are a private company, so I really can't speak for them, but I can tell you that, you know, the anecdotal information I have is that you know, they're winning deals in very competitive situations, even in some cases at higher price points based upon the strength of the technology and frankly an incredible track record around customer support, which they've done a tremendous job in that area.

Certainly after the announcement, had a few sort of true blue Citrix customers tell me that the idea that they would become part of our organization is one of the factors that pushed them over the edge to actually buy their products, which is great because bringing more credibility to a tremendous innovative product line and tremendous management team will be a great synergy for us to exercise. So as the integration planning is going on today, we're planning this in a couple of stages.

Because as, I think everyone knows, when you do acquisitions, products don't come sort of pre-integrated with existing platforms. So the first phase of integration will be around just taking advantage of our distribution relationships, both at the distributor and at the system integration and bar level, and as well in all of our named accounts, providing opening those doors to the NetScaler organization as it exists today. Then we'll-- we've got a good plan as we've sort of been through this a couple of times now, to get close coordination of the field-based SCE and sales teams that are in the NetScaler organization, quite talented on a worldwide basis and get them coordinated with the field teams that we have out there.

And then the third piece will be then, a really strong product road map that will allow us to continue to drive the NetScaler products on the track they've been on, but then be able to tap into some of that technology platform for, to the benefit of some of our other products like our Access Gateway product. So we'll be talking about some of those road maps out probably in, late in Q3 and into Q4.

Okay, and could you provide an update in terms of status of end of life-ing support for some of your older products and how that may be driving some uptake of the Access Suite or the version 4.0 Presentation Server?

Sure. We did end of life as of the end of this year, some products, the MetaFrame 1.8. In fact, it's not-- it's end of life in sort of truest sense. It's end of support, which means any customer that's on 1.8 will no longer receive support or maintenance on the product and so there's good news and bad news there.

The good news is that the product is very stable and provides a great solution for a lot of customers. And many of those customers are on our subscription program, and our sub, subscription program is designed to let them migrate and upgrade on their schedule, not ours. So that's the good news and, and -- for customers. The bad news is that anyone that feels like they are forced to upgrade is either going to have to, you know, accelerate their plans and-- which we don't like seeing customers having to accelerate plans that they didn't have that don't provide a lot of value, and it means that-- or they'll have to just, you know, run the products without that kind of maintenance safety net.

So, I think that we'll see here over the next four quarters more and more of the 1.8 customers as we reach out to them, provide them some tools that we can potentially give them to evaluate and upgrade the migration program, both the economics and the technical aspects of it that we'll see some of that happen and that'll be good for both of us.

Okay. Thanks a lot.

The next question is from Kirk Materne of Banc of America Securities.

Thanks very much. Mark, can you talk a little bit about how, if you have seen any impact on say Access Suite sales due to the Access Gateway? Has that influenced any purchasing decisions in terms of people that may have not been interested in the full suite coming back to you all due to the functionality that brings?

Definitely, yes. You know, the strategy around the Access Suite as a really product bundle, going back to the very beginning, was to set a, set a price point that we believed we could establish great value for the customer, and then continue to improve all the products and the value that they would bring to more and more justify that price point in a very compelling way and I think with the release of Access Suite 4, that has the Access Gateway license in it and includes our very rich advanced Access Control option is making a difference in the perceived value of the entire suite and therefore accelerating the growth of the suite purchases.

Okay, and then my second question is really on the performance of the U.S.sort of sales channels been better over the last two or three quarters? Is there any specific area that's been improved in your view in terms of just the cha -- sort of maybe the lower end of the channel or from particular from some of the ERM's? I was just curious as to any area in particular that you've seen some, you know, marked improvement in? Thanks.

Kirk, I think actually it's in both areas. We've made some great improvements in the people, on the sort of ERM, the enterprise side of the business, that I think has made some -- made a real difference, and then on the channel side of the business between advisor awards and some of the work that we did about a year ago to really rebuild the very channel-focused team for developing and recruiting channel partners and incentivizing them, I think both of those things have had a real impact over the last three quarters.

Great. That's it for me. Thanks very much.

Thanks, Kirk.

Thanks, Kirk.

Your next question is from Brendan Barnicle of Pacific-Crest Securities.

Thank you. Guys, what's the percentage of the install base do you think now is over on subscription?

Well, I mean if you look at the, the customers in the install base are on 1.8, there's about 3.5 to 4 million licenses installed. About 2 million of those are not on subscription right now and that's the largest component. Of XP, there's between 6 and 7 million licenses that are active installed, and a couple of million of those aren't on subscription and basically anybody who has purchased 3.0 or 4.0 would still be on subscription, so net that out. You got about 4 million, 4 to 5 million as the active opportunity to go back and recapture with some of our newer programs around migrations and upgrades.

And I assume on the 1.8 customers there are a couple of promotions or something that are in place to help with those migration and move them to subscription as well?

Absolutely. There's been some that have been in place this quarter. We saw good success with our -- one of the programs called get current, which is essentially allowing customers to migrate from older versions by purchasing a new license at a discounted price, great uptake with 4.0 in anticipation of that have coming out, so solid program and we're going continue those for the next few quarters.

Great, and just a follow-up on the NetScaler question. Now that you've had more time to look at it competitively, what's your quick take on how it stacks up versus Cisco, Juniper and F5?

Well, Brendan, I think based upon the due diligence that we did and then including customer-based due diligence and then all of the -- the testing we've done during the due diligence and since then, plus all of the specific sort of customer wins that we've been made aware of, I think that we've got a product line here that's best in class that can hold its own against any product and has shown that it's able to beat any other product on the marketplace, and, you know, I think it's-- I think that's what the facts will show.

Great. Thank you very much.

Thank you.

Your next question is from Steve Freitas of Harris Nesbitt.

Hi, good afternoon. I'd like to follow up on Ed Maguire's question with a little different spin. I guess if you could talk about to what extent the Citrix channel is, you know,ready for the NetScaler solution so I guess it might be instructive to note what percentage of the, the channel already sells application networking solutions from, you know, either NetScaler, F5 or Cisco Arrow Point?

Okay. Steve, it differs by region in the world, so sort of let me tick it off here a little bit. In North America, we believe there's probably about 25 to 30% of our existing channel partners, those that have some level of certification with us, they're already selling products in this area from some of the brands that you named. So it's-- there's not a tremendous amount of overlap there. And in Europe, it's actually greater. It's about 50% overlap based upon what we've seen, again, and these are -- these are thumbnail surveys that we've done. In the Pacific, I think it's a little bit different. In Japan, I think there's lots of overlap, but elsewhere in the Pacific, I think these products have not really made much of an impact yet.

I just got back from a week in the Pacific last, you know, got home on Sunday, and talked to a lot of partners out there and asked them these questions specifically and very few of them have even heard of this, the market space, let alone are selling the products. When it comes to our distribution partners, our distributors, which we have somewhere around 100 in total around the world, I think that the overlap is probably somewhere between a third and a half that are carrying products from, let's say, you know, former Redline or Find Ground or some of these -- these firms and, again, great opportunities for us to bring our NetScaler line into all of these, you know, both of the tiers of distribution we have in place.

Okay, and a follow-up, you know, who do you think is going to be, as this market matures, who do you think is going to be the ultimate buyer of the solution? Is it going to be the networking side of the house or the application side of the house? And how does that, in terms of your channel and how it's positioned, is one better or worse?

Well, you know, I think, again, what -- we'll find out, but what I've seen so far in the discussions and just sort of taking it all in, I think the answer is both, and the reason is this. First of all, these are higher ticket items, so these aren't $15,000 transactions, all right. These are higher ticket items and usually are going to be on the radar screen of higher levels in the IT organization to begin with. Secondly, they tend to be collaborative kinds of decisions. Application, the application side of the house tends to be really plugged into the business and what the application is doing for the business, whether it's a media metrics-type customer or it's an enterprise-- and then obviously the networking side of the house is dealing with infrastructure, operations, et cetera. So it's a collaborative and joint decision.

So I think in the end our -- business relationships with customers that are more mature that, are larger scale are going to be really where we're going to be able to excel with this product line because we're already talking to the application and networking site of the house and that's been, you know, for years with our, with our partners, and then I think it's going to be a challenge, you know, in the newer areas with the smaller, you know, sort of mid-market types of companies that can benefit from these products, but I think the decision cycle is going to be a little bit different there and we'll have to see what it takes with that type of account.

Okay. Very good. Thank you, Mark.

Okay.

Your next question is from Jason Kraft of SIG.

Thanks. Two questions. One, what was the migration impact to core license revenue in 2Q?

The migration was a few million dollars, which is up-- I mean it's usually somewhere between 2 and $3 million. It was between about 4 and 5 million in Q2.

Okay, and then for Q3, if I-- just walking through the model, if I assume maintenance is up 5% sequentially, the Citrix Online with your guy's guidance at 25 million, services up a million or so, Q to Q and the Gateways Net6 and NetScaler probably roughly 9 million, it seems like core license is going come out to around 80 to 87 million for the third quarter. Is this what we should infer about core license revenue in Q3 from your guidance?

No, it's not. I mean the guidance is-- the guidance picks up a range of expectations. For the NetScaler contribution, we're talking about 5 to $6 million in total, which is about an 80/20 split between license and service. Service, as you mentioned, about flat from last quarter. Citrix Online will be growing like I -- like I said, 25 million. License updates between about 80 to 8-- excuse me, 81, 82 million, which would give you license, kind of license growth of between about 90 and 93 million total, which picks up the range of a number of different scenarios.

But if you exclude out the appliances, the core license, which would be presentation server should be about that range, depending on how you apply it? Because you pretty much said everything that I said, excluding, you know, the 5, 6 million on the NetScaler.

Yeah, I mean we're looking at total license, total product license in any aggregate these days and includes the Gateways and the Suite, stand-alone products, et cetera. And, you know, when we look at that, we expect license to grow both year-over-year and sequentially.

Okay, and then deferred revenue, change from Citrix Online as far as their contribution?

Couple million dollars on the quarter.

Thanks.

The next question is from Scott Kessler of Standard & Poor's Equity.

Thanks. Have I two timing-related questions. Can you just remind us as to when exactly you expect the NetScaler acquisition to close? I don't know if you have a greater sense that have now versus when you made the initial announcement. Also, when can we expect the repatriation of the half billion dollars to hit the balance sheet? Is it going to be for the third quarter and how is that going to impact some other line items in terms of taxes and the like? Is it going to go straight to the balance sheet? Could you just walk us through the specifics there?

Yeah, I'll start with the second question. Right now the timing of the repatriation is in the fourth quarter. You know, second -- second half, but likely fourth quarter, it's going to be invisible on the balance sheet. You'll see it. It's simply moving from, you know, cash to cash or investments to investments. The tax impact was recorded in the GAAP results this period. You saw the net, the net tax impact of about $16 million, so I mean, there shouldn't be any real material impacts going forward. As far as the timing of the acquisition, we're still looking at the middle of the quarter, so, you know, we've crossed pretty much all of the material hurdles. We just have a couple of things left and hope to get this wrapped up here in -- fairly shortly.

Okay. Thanks.

Thank you.

Next question is from Adam Holt of JP Morgan.

Hi, this is Aaron Schwartz for Adam Holt. Just a follow-up to the last -- another question that was asked a few questions ago, with core MetaFrame, it looks like it was down year-on-year in the June quarter, and given your guidance for 90 to 93 total in September, it looks like you're guiding to maybe down again in core MetaFrame. I'm just wondering the impact of 4.0 in terms of timing and stabilizing that base, what we should expect?

Think the one thing you're missing right now, when you talk about core MetaFrame, I mean the -- you're talking about stand alone Presentation Server sales. The way to think about the business, the way we're looking at it includes the full suite of products, which moved up to about 10% of the total. You know, a large portion of those suite sales would have been people that might have bought the individual point products separately, so you've got to really look at those together to get an understanding of how the business is performing. And that did grow, both sequentially and year-over-year.

Okay. Shifting to deferred revenue, you talked about an increase in renewal rates. Do you think that's sort of some pint-up demand or catch up due to 4.0 or do you think that improvement is sustainable going forward?

Well, I think we've seen a steady progression of improving renewal rates throughout the last, really throughout the last two years. I mean, each quarter we're seeing a little bit better performance around the world as the programs get more mature, as we add people in the right places and just better execution. So last quarter we saw-- excuse me, in Q1 we saw renewal rates around, you know, 75, 76%. This quarter they picked up to the upper 70s, approaching 80 and our long-term goal in the next couple of years is to get those up to 90%. So, while we won't accomplish that in a linear fashion it, definitely, you know, continued execution.

As far as deferred revenue growth, I mean that was one of the big drivers in deferred revenue growth this quarter. Last quarter I did talk about seasonality being, you know, is why Q1, you should expect that to be low last quarter and going forward. So, I mean, this, this -- this performance is right in line with your expectation.

Okay, and the last question I have is North America, again, turned in pretty good growth on a tough comp. Can you maybe update us on where you are in the progress with sort of the realignment there?

Well, Aaron, I think we're now in sort of, you know, just sort of the steady operating state, making incremental changes and improvements and adjustments as needed. So the, sort of the big changes are well behind us and we're, you know, as you've seen now for about three quarters, some really great performances and so all of those changes are now coming back to reward us and really the team is solidifying around just a whole bunch of great execution in terms of identifying pipeline, in relationships with partners, and certainly, you know, touching the enterprise customer much more effectively. So, you know, sort of hitting on all cylinders there.

Okay, great. Thanks for taking my question.

No problem.

You bet.

The next question is from Katherine Egbert of Jefferies & Company.

Hi, good afternoon. I was wondering if you could give us an update, Dave, on the near-term outlook for both the gross and the operating margin, say, over the next 18 months?

Let me talk about the operating margins first, and, you know, we've talked about our goals, our longer-term goals to be in the mid to upper 20% range. While we've given guidance throughout the next couple of quarters, including-- this is including the dilution from NetScaler we've talked about a lot, the midpoint of guidance range in Q3 will put you to about 24% operating margin in Q3 and about 26% or so in Q4, and obviously, you know, we'll look to, you know, move towards the upper part of that range as we, you know, work through some of the dilutive impact of the acquisition and into next year.

As far as gross margins, we're about 96.5 in the second quarter. As I stated in my remarks, looking for about 96% in the third quarter and then as we start seeing more material contribution from Gateways and the, the NetScaler acquisition, see a modest trend down. I think it will be between about 95 and 96 in Q4 and then depending on execution going forward.

Okay. Can you tell us what the license-- what it might be for the year?

I'm sorry. Can you repeat the question?

What the license contribution you're expecting for the year, not just September, but for the full year?

For?

For '05.

Let me exclude NetScaler for a moment. I mean, if you just take the midpoint of the range, it would point you to between about 375 and approximately $380 million of core product license, plus between about 12 and 16 million of license from NetScaler.

Okay. That's helpful. And then was there any currency head wind or tail wind this June quarter?

No, there wasn't any tail wind. There's a little bit on the expense side because we do have some expenses denominated in foreign currency, but if you look at the way our hedging programs work, you know, we hedge forward between about nine to twelve months so we haven't really picked up any benefit from the strengthening dollar. From a revenue standpoint, we do sell the majority of our products around the world in U.S. dollars and so we weren't having any penalty from that perspective or benefit, and it's just our subscription business that is local currency denominated. So, you know, no material impact either way this quarter.

Okay. And then if I may, just one last question. Where do you think-- you said the long-term, the renewal rates could go 90% or more. Can you break that out as to what the current renewal rates are in the U.S. versus Europe and then what you expect them to be longer-term in the U.S. and Europe?

Well, they are pretty close. They're a little bit higher in the U.S. right now, you know, 5% or so.

And, just because we've had a much more mature customer care organization and just frankly been doing it longer, so, you know, as we roll that out throughout the rest of the world, I think you'll see them come, you know, pretty much in line. As I said before, I think over the long-term, you know, renewal rates in the oh 90% range is our goal.

Okay. Thanks.

Thank you.

The next question is from Kevin Buttigieg at AG Edwards.

Thank you. David, operating expenses were up a little bit less than expected sequentially and sales and marketing was down quarter-over-quarter. Is there anything particular going on there?

Nothing at all. I mean we've-- like we've been talking about, we're focus on core leverage, or leverage in the core business, and that's really what we're trying to execute against. I mean, we're focus on productivity, trying to maximize the investments that we've been making over the last really 18 months or so. So, you know, nothing -- nothing specific that I'd want to call out.

Okay. So then for the third quarter, you guided to expenses, total operating expenses being up. Would we expect the sales and marketing line to sort of be flattish or perhaps be down a million or so?

Yes, I think it should be flattish to maybe even slightly up. Just -- you know, there is a variable cost component associated with our total bookings, which, you know, is -- obviously bookings will be higher in the third quarter and we are, you know, adding a-- adding a few people modestly throughout the sales and services organization.

Okay, and then on Germany, sounded like you did a number of large deals in Germany, which has been a particularly weak geography for a number of other software companies this period. Last quarter, if I'm not mistaken, Mark, you had a, that the environment that was a bit tougher. I think if I recall, you talking about some IT projects being suspended in Germany. Could you talk a little bit about what's happening there and then perhaps more broadly then in Europe?

Actually, Kevin, I'm sorry if that came through wrong in the prepared comments, but, no, actually we saw Q2 in Germany to be basically a continuation of Q1, not a lot of change, you know, on either side up or down. In spite of that, the full EMEA team still had a 14% grower in Q2. In fact, none of the top 10 deals were out of Germany. The two that were out of EMEA were out of our central Europe team in France.

Okay.

You know, one huge worldwide tire company and one, you know, very large bank. So I think the situation in Germany is probably not going to get better until we see the elections take place there, which are now I think scheduled for September, and until then, what we've been seeing is just a much more conservative German market and customer, some projects being delayed, but even more commonly, products being, being done, but at much smaller scales, you know, sometimes half the size of the -- the project's been cut in half, which should bode well for the future as customer comes back and try to fill in the projects to the size that they probably originally needed, but that's where we are right now and that's where we're expecting we'll continue for the next, probably, couple of quarters.

Okay. Then finally, on the IBM and Hewlett relationships that you talked about at the analyst day, was there any sort of payoff from that, or any of the large deals that involved IBM global services, any Hewlett-Packard sales of password manager, for example?

Yes, on both fronts, so we're really actually very pleased with what HP has done in a pretty short amount of time. Now, you know, first pipeline is excellent and then secondly, you know, the business they were able to turn in during the quarter. We're obviously not breaking out the deals and so forth, you know, where partners are involved in that way. And then with IBM, you know, just continued strength in that relationship where we're actually measuring business, revenue impact on both sides and improving every single quarter. Last quarter was no exception to that, and we're seeing that now spread on a worldwide basis.

As a matter of fact, in our I-forum customer conference in Sydney last week, we had Wayne Flags, who is IBM's Worldwide Head of Sales for the E server group do one of the keynotes and to about 1300 attendees, so that relationship continues to do well and add value to our growth. Okay.

Thank you very much.

You're welcome.

Your next question is from Brent Williams of Keybanc Capital Markets.

I just wanted to go back to a comment in response to an earlier question. I think it was Ed's, about, you know, integrating some of the pieces of technology, taking some stuff out and doing a little bit of a transplant into, you know, core software only thing. Should we look for that to be-- because you essentially have an operating system and all this this other stuff that goes down to the bare metal that you control, is that going to be a tougher job porting pieces like that from an appliance into a software-only product and just some software-only product that you license and would that have any impact on the timing of when you-- (inaudible).

Let's see, Brent. Okay. So couple things. Right now we don't have any plans to offer the current products that are appliances as software only.

Right. I was speaking about-- I thought you said something about, you know, pieces of.

Yes. So then, then secondly, the, you know, the way that our -- more and more our products are architectured is they're architectured against, you know, a technical platform that, you know, then you can reach into and use components to build specific products for specific targeted customers, so Access Essentials is a good example of that type of product move and strategy. So we'll be able to do that, those kinds of things on the technical platforms that are underneath the appliances and, you know, and that means building some other products. Whether they would be appliance-- delivered in the appliance form factor or as software is sort of a, you know, not a -- not a huge deal.

I mean it's not terribly difficult to do it either way since our technical platforms are independent from any hardware-specific kinds of implementations. They really run on commodity platforms so that we can benefit from things like faster internal bus dual core processors and faster memory and so sort and so on.

One minor question here, have you guys announced dual core pricing since that seems to be a topic on a few people's minds these days?

No, we have not.

Okay. Any timeframe for that?

No, not specifically. As you know, our products are really price order concurrent user and not on a server basis. So, you know, we're always looking at our packaging and pricing model, looking at better ways to give, give customers more options that really meet their needs. We've done several of these kinds of things over the years and so we'll be looking at that among other ideas as we go forward.

Okay. That's it for me. Thank you.

Okay, Brent.

Our final question comes from Israel Hernandez of Lehman Brothers.

Good afternoon. Good quarter. You haven't commented too much around the Citrix Online business. Can you talk about what's fueling some of the growth there in the various channels whether it's subscriber, more success in the SME channel and the impact of new products? And also, can you talk about the operating profitability of the business relative to the corporate average and what our expectations should be there going forward?

Let me take the second part and then I'll turn it over to Mark to talk about the individual products. As you know, they keep contributing better and better performance every quarter. I mean this this period, operating margin from the online products was about a little over 20% as compared to 17, 18 last quarter. Our goal obviously is to get them, you know, up into the range of the overall business and we'll do that over the next six, eight quarters. As far as the growth of the individual products, Mark?

Sure. With the-- in each product-- so GoToMyPC had a tremendous quarter on the basis of greater effectiveness of our eCommerce business model, so just better performance in both our online and off line demand stimulation, Israel, and resulting in 60% year-over-year growth. So, I think there was a little, you know, a little bit of an upside strength to GoToMyPC on that basis.

On GoToAssist, you know, GoToAssist is really benefiting from two things, continued great performance of our field team that, you know, talks to firms that run help desks, that outsource help desks, talks to companies that need this kind of on demand assistance to support their products like software companies, so great performance there, but then we're starting to put in place a tele-sales team and they had a tremendous quarter, and we've learned a lot about the metrics of what a tele-sales team can do-- even with GoToAssist, believe it or not, selling it to smaller companies and firms. Then in GoToMeeting, GoToMeeting is doing well on both the, over the web eCommerce basis where, you know, the individual or smaller company, we call them "prosumers" by right off of web-based promotion.

That's been very effective. And then our field teams have done a great job with, you know, medium to larger customers that are looking for a better on line meeting service with a, you know, more appropriate kind of pricing model in the all-you-can-meet model that we've implemented with GoToMeeting. So really, you know, each product in each of the areas showed great strength. We saw, as you heard in the prepared comments, more partners in this sort of classic Citrix channel join, about 200, join the, our online channel program during the quarter and, you know, that's, that's just a good sort of signal for the future as they have interest in adding these kinds of services to their product line. So, so making progress with the channel partners, but most of the growth was from eCommerce, tele-sales and the field team that's in place.

Okay. Thank you.

Okay, Israel. Well, that will be our last question, and I want to just thank everyone for joining us on the call today. Once again, we're really pleased with the performance of the entire team on a worldwide basis in Q2, and setting a great foundation for a great second half. So thanks again, and we'll see you in three months. Take care.

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