思杰系統 (CTXS) 2006 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Citrix Systems third quarter earnings conference call. [OPERATOR INSTRUCTIONS] Thank you. I would now like to introduce Mr. Jeff Lilly, Director of Investor Relations. Mr. Lilly, you may begin your conference.

Thank you. Good afternoon, everyone, and thank you for joining us. In this call today we will be discussing Citrix's third quarter 2006 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Senior Vice President and Chief Financial Officer. This call is being webcast with a slide presentation 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 pursuant to the Safe Harbor provisions of section 21E of the Securities Exchange Act of 1934. Those statements involve a number of factors that could cause actual results to differ materially, including risks associated with the Company's businesses, involving the Company's revenue growth, products, their development, and distribution, product demand in the pipeline, economic and competitive factors, the Company's strategic key relationships, the effect of new accounting pronouncements on revenue and expense recognition including the effects of FAS 123R on certain of the Company's GAAP financial measures and acquisition and related integration risks. Additional information concerning these factors is highlighted in the earnings press release and in the Company's filings with the SEC including the Safe Harbor disclosure contained in our most recent 10-K filing available from the SEC or the Company's Investor Relations website.

Additionally during this call we will discuss various non-GAAP financial measures as defined by SEC Regulation G of certain adjusted figures which include operating expenses, operating margin, operating and net income, and earnings per share. The most directly comparable GAAP financial measures and a reconciliation to 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. Now I would like to introduce David Henshall, Senior Vice President and Chief Financial Officer of Citrix Systems.

Thank you, Jeff, and good afternoon. In addition to providing you with some commentary on the third quarter results, I'll discuss the current trends in our business and provide you with our outlook for the fourth quarter and full year 2006. I will also provide you with some preliminary thoughts on the operating model for 2007.

Beginning with our financial results, I should note that certain numbers discussed are adjusted figures. Please refer to the press release and our Investor Relations website for a full reconciliation of adjusted figures to US GAAP figures. So let's take a look at the Q3 highlights.

Total revenue was $278 million, an increase of 22% over last year. Our GAAP EPS was $0.25, compared to $0.23 a year ago. Our adjusted EPS was $0.34, compared to $0.29 last year. An increase of 17%. Adjusted operating margin was 26%, and cash flow from operations was $70 million during the quarter. So overall, a balanced quarter of performance.

Now I'd like to discuss our revenue by product mix and geography as well as a few operating metrics. In the third quarter, product license revenue was $113 million, representing a 17% year-over-year increase. This growth demonstrates the continued strong adoption of our application networking solutions, coupled with flat year-over-year growth in the App virtualization products which I'll discuss more in a moment.

Our online services grew to over $39 million in Q3 an increase of 49% over last year. The strength in this business was driven by the steady adoption of our GoTo products, especially GoToMeeting which grew approximately 200% year-over-year. Product license update revenue was nearly 103 million, up 22%, and technical services, which consist of consulting, education, support, was approximately 23 million in Q3, up 19%.

As I mentioned earlier we continue to see momentum in the application networking group. On a normalized basis, this business doubled year-over-year and contributed almost $30 million in total revenue, of which over 24 million was product license revenue. This strength continues to be driven by our NetScaler app delivery products as well as our SSL Access Gateway. While a large part of this business is coming from Internet-centric customers, we continue to invest in building out our GoToMarket engine for the enterprise. In fact, exiting the period we have increased the number of authorized partners in this space to over 300. Separately, our App virtualization products which have experienced solid growth over the past few quarters were flat year-over-year. For the first three quarters of 2006, we're up about 4%.

Let me talk a little bit about some of the dynamics that we saw during the quarter. The release of Presentation Server version 4 continues to do really well. In fact, PS4 has been our most rapidly adopted platform to date. This success has contributed to our growth in previous quarters and has helped build further and deeper penetration in the existing customer base. That said, as you know, Q4 of 2005 and Q1 of this year is when we implemented the end of sale for MetaFrame XP and the end of life of MetaFrame 1.8. This process has had a couple effects of the business.

First, we believe this accelerated some purchases into the earlier periods, impacting the revenue skew seen in the last several quarters. Second, since we're no longer offering these products for sale, many of our XP customers are now in the process of working through their migration plans to newer versions of the Presentation Server, requiring an upgrade to their server operating system which, frankly, takes time. We'd not be surprised to see this trend continue into the fourth quarter and early next year. For the year, this product line should reflect overall growth in the low to mid-single digit range, consistent with our expectations.

Turning to revenue by geographic segment, the Americas region grew 22% year-over-year to $125 million. EMEA was up 17% over Q3 last year to 91 million, the Pacific region grew 13% and online software services which are not included in any of these geo segments grew 49% as I mentioned earlier.

Next, let me talk briefly about expenses and operations. Adjusted operating expenses in Q3 were 186 million, up about 20% year-over-year and 2% sequentially. The annual increase was driven by several factors, including the OpEx associated with recent acquisitions, ongoing headcount growth in marketing programs. During the quarter, we added approximately 180 employees to the Company, bringing worldwide headcount to 3,630. The majority of the increase was driven by additions to our Citrix online team, the sales and services group, and growth in ANG as a result of the Orbital Data acquisition. Adjusted operating margins came in at 26% for the quarter, down from 27% last year.

Going forward, we're going to continue to target our standing goal of operating the business in the mid to upper 20% range. The big drivers in this area will be investments targeted at growing our on-line business into international markets, building out the GoToMarket engine for our newer businesses, bringing to market new products in the virtualization space, as well as infrastructure and systems work to position the Company for sustainable growth.

On the balance sheet, deferred revenue grew $4 million, bringing the total to $314 million. This total is up 23% from last year, driven mainly by our subscription advantage offering which saw renewal rates around 80%. Total cash, restricted cash, and investments is now $800 million, down 100 million from last period, primarily related to the funds used in our stock buyback program and cash paid for the acquisition of Orbital Data. Specific to the stock buyback program, the Company repurchased 4 million shares at an average cost of about 32.5 during the quarter. Finally, cash flow from operations in Q3 was over $70 million, bringing trailing 12 month cash flow to over 305 million.

In summary, these results demonstrate the continuing progress the Company has made in executing against our strategy, to build a complete platform, to solve multiple access delivery problems for our customers and at the same time, diversify the product revenue streams. We've managed this while still focusing on operational discipline and maintaining solid profitability.

Now I'd like to discuss our outlook and expectations for the fourth quarter and full year-ending December 31, 2006. It should be noted that we're about to make forward-looking statements that incorporate certain risks. Please refer to the Safe Harbor statement noted in our press release and the risks that are stated in our SEC filings. As reminder, in the first quarter we began recognizing stock based compensation under FAS 123R. While this number will be included in our GAAP results, it will be excluded from our adjusted results. For the fourth quarter, we expect total revenue in the range of 307 to $315 million. Of which we expect our online services to contribute 41 to 42 million in revenue. Adjusted gross margin in the range of 92 to 93%, interest income of approximately 11 million, weighted average shares between 189 and 191 million, and finally, we expect earnings of $0.27 to $0.28 on a GAAP basis and adjusted EPS of $0.37 to $0.38. For the full year 2006, we expect total revenue in the range of 1.12 billion to $1.128 billion. Adjusted gross margin of about 93%, GAAP EPS to be in the range of $1 to $1.01. And adjusted EPS to be within a range of $1.37 to $1.38.

Looking ahead, I wanted to provide some early thoughts on our 2007 operating model. We're looking for fast growth in the application networking products. Which include web acceleration, WAN optimization and SSL Gateway. As a result we expect overall company adjusted gross margin to trend downward by up to 200 basis points. With more profitability coming from these businesses, and other U.S. sources, we expect the 2007 tax rate may increase by up to 200 basis points when compared to 2006 and with balanced growth of investments to drive revenue we'll continue to target adjusted operating margin in the mid to upper 20% range.

So as these results show, we built a very solid foundation to work from. Throughout the remainder of 2006, and entering 2007, we plan to build on our revenue momentum and make long-term investments in the business to grow the product platform and drive the continued adoption of the new and acquired products. Now I'd like to turn it over to Mark to give you additional details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks, David, and welcome, everyone. Our Q3 financial results were solid, delivering on top line growth 22%, and a strong adjusted operating margin of 26% for the quarter. Overall product license growth was excellent, up 17% over last year. And we had great performances in our application networking products, and online software services. As David mentioned, we expected a better licensing result from Presentation Server than we delivered. Driven by a change in the skew of Presentation Server sales, but in my view no change in any of the fundamentals. This was evident in the growth of our license update and technical services businesses, both are leading indicators of the underlying value and customer confidence in our Presentation Server products. Additionally, as I've looked at the analytics it's very clear that our market fundamentals, the business and technical drivers of App delivery remain strong.

I spent a significant amount of time with customers in Q3 in both North America and EMEA. I continue to be impressed where their use of Presentation Server and the increasing relevance of our infrastructure to their business. The need for best of breed products that deliver applications over the network has never been stronger. Given the confidence in our strategy to provide on-demand application access powered by Citrix Application delivery infrastructure.

Next I'd like to talk about some Q3 highlights in key products and markets and add some color about our go forward game plan. Centralizing the user tier through application virtualization is a proven, powerful way to control the security, performance, and cost of App delivery. That means the value proposition of Presentation Server will continue to increase. A view that is supported by continued strength in TS4 uptake, X64 growth, growth in license update renewals and continued growth in the opportunity pipeline. Customers are moving more quickly than we anticipated to the 64 bit addition of Presentation Server, gaining greater scalability and performance while driving down cost on a per user basis.

Recently we completed an X64 benchmark test in partnership with IBM. The test demonstrated 500 users of the SAT [GOOEY] a very CPU intensive act. On just one of IBM's System X3950 servers. This is the kind of scalability that we believe drives deeper and broader use of our App virtualization products. Looking ahead, the Ohio release of Presentation Server will include the first rollout of our Constellation technologies. For example, we're incorporating high performance graphics acceleration for 2D as well as medical applications. Either application provisioning with new server to server streaming and isolation technology and greatly improved monitoring capabilities for better end user reliability and performance. The Ohio release is targeted at enabling our customers to virtualize more applications, more reliably, with fewer resources.

Next, let's look at our Application Networking business. We just completed our first full year in App Networking, one of the most exciting growth areas in our portfolio. In Q3 these products were up sharply on both a sequential and annual basis with more and more applications going to the web, products like NetScaler for web application delivery, WAN scaler for WAN optimization, and Access Gateway for FS all access play a critical role in our infrastructure.

First up is the NetScaler product line which had an another excellent quarter of growth up 100% year-over-year. We continue to be the first choice for delivering external facing web applications, especially with e-commerce and Internet set -- certain customers. In Q3 we added new customers such as YouTube, MySpace, SpaceBook, match.com, Netflix, Real Networks, Tickle, and slide.com. These great web brands are following in the steps of long time NetScaler customers like Google, eBay, E*Trade and Amazon. Customers that rely on the performance and scalability of NetScaler as a core component of their dot-come businesses. Increases in search, clicks, and e-commerce means NetScaler growth.

We're also seeing continued growth in the broader enterprise web App Delivery segments with significant NetScaler wins at customers like American Express, MGM Mirage, Thomson Financial, Dow Jones, and Estee Lauder, to name a few. We're making good progress with NetScaler in our application oriented distribution and integration partners. Today we've authorized over 300 NetScaler partners. Our enterprise installed based relationships are also producing lots of opportunities and also producing the need for deeper technical training and selling skills. In response, we're growing our field based product specialist team. Systematically training partners and we'll do the same thing in EMEA during 2007. All designed to seize this market opportunity.

At the same time, we're driving innovation in web app delivery. NetScaler's 7.0 release in Q3 added more than 150 new capabilities. Especially for enterprise customers. In addition to raising the bar on application layer performance, version 7.0 has more powerful policy management, improved health monitoring, enhanced security, easier configuration, and support for new app types like VoIP and IM. All of which make Citrix NetScaler the first choice for web app based delivery.

Next up our SSL Access Gateway. Just six quarters after entering the SSL/VPN market our Access Gateway continues to gain market share, up 10 percentage points over the last four quarters. Access Gateway has outperformed its nearest SSL competitor by more than 5X and now ranks second only to Juniper in share of market. This was amplified in Q3 when we received Frost & Sullivan's best product line strategy award for our Access Gateway products. Our application centric market approach is differentiating us from network oriented competitors. When customers choose Citrix for application delivery either through presentation server or NetScaler we make it easy to extend secure access to those same applications with Access Gateway. This unique strategy has given our sales team and channel partners a highly effective entry point that's not possible for traditional SSL/VPN players.

Next I'd like to discuss our newest App networking product WANScaler. On August 18, we closed the acquisition of Orbital Data, entering Citrix into the fast growing WAN optimization market. The Orbital product line being rebranded at Citrix WANScaler adds a strategic building block to our end-to-end application delivery infrastructure, giving us a powerful new product line that optimizes application delivery for the branch user where an estimated 55% of workers access their applications. We believe WANScaler will have great synergy with both our NetScaler and Presentation Server product lines. And will become an important part of our product mix. We're getting WANScaler ready for launch in January 2007.

In Q3 we also announced a new strategic partnership with Microsoft, building on the potential of WANScaler technologies. The partnership includes a significant multi-year investment from both companies. Corroborating with Microsoft on an entirely new multi-function branch of clients that is easy to remotely administer, that combines advanced WAN optimization with consolidated Microsoft Windows based branch office services. This combination scheduled for a late 2007 release addresses unsolved application performance and management problems in the branch. We're excited about extending our partnership with Microsoft and we believe that together we're uniquely able to address this market need.

Next I'd like to discuss the integration of the Reflectent team and the launch of EdgeSight. Net/net the integration is running ahead of plan with phase one and two completed ahead of schedule. Early customer demand is excellent. IT organizations need the real time visibility into actual end user experience which is exactly what EdgeSight provides. The early results are superb, closing 21 transactions during Q3. Four were over $100,000. The leading indicators are very encouraging with over 60 pilots now underway which is six times greater than before the acquisition and that's without a significant channel launch yet.

Last week we announced the availability of EdgeSight for Dot 2. This begins the final integration phase that positions us for 2007 and a strong product launch in January during Citrix Summit where we'll also introduce further product enhancements. Next year we'll add support for the Ohio release of Presentation Server, add synthetic monitoring and load testing features and we'll introduce more in depth application performance monitoring for both NetScaler and WANScaler. I expect EdgeSight to be a huge hit based upon what I've heard from customers and partners so far. I'm delighted by their interest in EdgeSight and even more delighted by the smooth integration process bringing the Reflectent team on board. Now known as our management systems group and now completely focused on providing powerful management tools for application delivery.

Next, I'd like to highlight another excellent performance from our online division, our software as a service business which contributed over 39 million of revenue in the quarter, up 49%. Citrix GoToMyPC grew over 30%, in fact, we hosted more than 15 million remote access sessions in Q3. I'm pleased to announce that version 6 of GoToMyPC just went to beta testers with support for audio, improved printing, file synching, and additional corporate security controls. Our on-demand user app assistance products, GoToAssist was up 27%, continuing to add marquee brands to the customer list. During Q3 more than 3 million people received world class support from help desks that solved application access problems using GoToAssist.

The web's fastest growing on-line collaboration tool, Citrix GoToMeeting grew almost 200% in the quarter. During Q3 we hosted over 1 million meetings which means over a quarter million people attended GoToMeetings. If you do the math, that's nearly 100,000 meetings per week. Research shows that attending webinars over the Internet is up 125% this year. Enter the new Centrix GoToWebinar. Centrix GoToWebinar is the first and only product built for the do it yourself webinar. We've priced it for unlimited use and we've included it as an enhancement to the GoToMeeting corporate edition. The early results are excellent with over 100,000 people attending GoToWebinars in the short time since availability. We're really bullish on real time online collaborations.

So that's some color from our Q3 performance and now I'd like to turn to looking forward. My take away from recent time with customers is that IT organizations are stuck. Caught between the realities of slow growing IT budgets and fast changing business needs. At this point, I hear agreement that IT systems are too static, too complex, and costing too much to maintain. I've never seen more pain. I've also never seen more holistic thinking about delivering applications over the network. I'm hearing IT ask for a better way, a better way to provide users access on demand from their office, from their family room at home, from a branch office, from an off-shore facility or even from a safe location during a disaster. This is exactly what we're offering. Application delivery infrastructure, powered by our App delivery, App security, and App visibility products.

Next week in Orlando we'll host our annual global iForum event. Attendees will hear and see that only Citrix offers a complete application delivery infrastructure for our dynamic world. They'll get a firsthand look at our exciting product pipeline including EdgeSight and WANScaler demonstrated for the very first time under the Citrix brand. You'll see the Ohio release of Presentation Server and the Delaware release built for the Longhorn server platform. Project PickTour for delivering open GL graphical applications. Project Tarpon for streaming applications to desktops and servers. Project 10 for protecting the safety and productivity of employees during disruption. And we'll have at least one or two surprises up our sleeve as well.

An exciting product pipeline, innovating, at a rapid pace, offering the kind of flexibility, security, and efficiencies that businesses need from IT, now and in the future. This is a strategy we've been aggressively executing for several years now, through intelligently building, buying, and acquiring new products, through investing in a more diverse set of GoToMarket models and by focusing on top line growth at solid operating margins. This is the operational formula behind our financial model. Driven by the introduction of acquired products to existing channels and customers. Driven by building new channels to reach the network infrastructure buyer and driven by the development of the largest pipeline of products in the history of Citrix. As we continue to execute we're skating fast to where the puck is going to be. I'm more confident in our game plan than ever and Citrix is better and more determined than ever. Thank you and now we'll open it up for questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Steve Ashley with Baird Securities.

Mark, are you taking any steps to try to augment demand for the core CPS product with channel partners or going to do anything different in the fourth quarter to try to spur that demand?

Steve, sales cycles are such that we probably at this point can't do anything to change the fourth quarter demand profile. Honestly, we're not really given to doing anything unusual when it comes to this kind of question. What we are doing, however, is we're taking lots of steps toward streamlining the product line, positioning it better for where customers are from a messaging perspective, which helps with demand generation in the field overall.

Secondly, we're skewing the rewards program, the way we compensate our channel partners, more and more toward those that participate in value-based selling and creating demand with existing customers. So we're focused on that which is the push side of the formula. And then obviously by introducing new products that are derivatives on top of the Presentation Server based technical platform that's helping us get more leverage off the technology that we have. Examples there are Access Essentials, some improvements and additions we'll make to that product line next year, our Project PickTour, Project Tarpon has some derivatives in that area. So we're doing a lot of things in that area to leverage the technology.

And can you say when the XP version will be end of lifed?

Our plan for end of life for XP is, I believe it's the second quarter of next year. Which really gets down to sort of the end of support which does create an additional event and pressure for customers to move forward and I think that we've been very consistent in our policies around how we do this. Trying to differentiate ourselves and being a customer partner that helps them move core infrastructure on a time frame that really works best for them and building our policies around that.

Great. And lastly, David, just to confirm this, are you assuming in the core Presentation Server business flattish year-over-year license revenue in the fourth quarter?

Yes.

Thank you.

Your next question comes from the line of Phil Winslow with Credit Suisse.

Hi, guys. Just a couple questions back on the core license side. You mentioned potentially having pulled forward some business into the first half of this year and people are doing the implementations now. Do you think that is the only driver here or do you believe -- you mentioned a lot of new products. Is there any sort of distraction in the sales force or the channel focused on selling these new products, maybe not so much just the core business and if that is the case, sort of how are you managing all these product releases, putting them into the current sales force, but also into the channel?

First of all, on the XP sort of dynamic there, I think David really stated exactly what the analytics show and that is basically an acceleration of purchases and now they're being absorbed by customers and partners, by the way. Because remember, a partner who takes $100,000 order for our App virtualization technology, they're happy, just as happy to take an XP order in the first quarter of this year as they were to take a PS4 order and the implementation services that go with them are pretty much the same. So we do think that that's the driving factor in the skew of Presentation Server revenue.

Secondly, there's no doubt that we have introduced a lot of new products into not only our field teams, into our channel partners, our VADs, et cetera and we're pushing hard. And so within particular product spaces I think we are getting a little bit of distraction and that's why when you step back from a specific product line and look at product license growth of 17% on an overall basis, that is what really matters here in the grander scheme of things. It's not to say that we can't do a better job of ramping up our field teams and our partners and making them more competent, increasing their capacity and capability. But along the way as we introduce these products we obviously have to get ourselves in the kind of strategic position we know is important for the future.

Great. And then also just if you could comment just on deal size if there was any sort of different face on larger deals and how were large deals this quarter? What does the pipeline look like versus the smaller, more smaller, ratable transactions.

Sure, Phil, this is David. Let me take that question. There were -- if you look at large deals, there were about three individual transactions that were in the seven figure range and there were another half a dozen customers that aggregated up to $1 million during the quarter. So nothing terribly significant versus the last couple of quarters. Continue to think that the fourth quarter -- really the third and fourth quarter is where we tend to see a little higher concentration of large deals. So I would expect it to be in this range, maybe a few more for the fourth period.

Great. Thanks, guys.

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

Thanks very much. Sorry to beat a dead horse on the license number on the core business, but can you guys give us understanding that the comps in the fourth quarter and the first quarter due to some of the pull forward are going to skew the overall growth rate. Can you give us some idea of just what you think that business can grow at? Longer term is this a business we should be expecting to be in the low single digits? At least until we get a better sense on some of the new add-on features you're planning for?

Sure, Kirk, this is David. Yes, I think that consistent with what we've said many, many times in the past, and we continue to think that the Presentation Server business is a low to mid-single digit growth business. And obviously the incremental investments we're making there to broaden the applicability of the solution which will enhance penetration down the road to increase ROI and to bring forward new solutions around some of the dimensions that mark referred to in his comments that we think those are the things that are going to allow us to continue to grow this business and possibly even grow it faster into the future.

Kirk, I'd just like to add that this low to mid-single digit number is about new license growth and that as an overall business Presentation Server and the App virtualization products that it supports in our portfolio is a mid teens kind of growth business, which I think is a tremendous, in terms of size and in terms of velocity kind of result. And at the same time, we do understand that because of the XP acceleration and purchases that we saw in some prior periods here, that the comps will be pretty tough in the first two quarters of next year and even in Q4 because in Q4 of '05, the EMEA team began to implement the end of sales process.

So that's why we're going to need to keep our eye on the ball here around overall product license growth and make sure that we're doing all the right things to stimulate demand and also position the App virtualization products in the market properly, because if you, again step back and you say looking forward if I look at the value proposition of app virtualization which is around security, security of apps and security of the data that they manage, the performance of applications over networks and the level of access control and the cost profile of actually delivering them, that value proposition gets more valuable going forward in a world that's trying to globalize and virtualize and blah, blah, blah. It just gets more valuable. And so we have to do the right things there in the product line even though the comps are going to be a little bit tough.

Then just one follow-up question on NetScaler. Could you talk a little bit about the success you're seeing there? Is that in more the smaller ratable deals in the channel or at the high end and can you juxtapose maybe the success you're having in U.S. versus what you're seeing in EMEA? Thanks.

Well, we continue to see lots of velocity in the e-Commerce and media metrics markets as we mentioned. And all the top size deals are going to come from that segment and there's nothing new there about that. And that will account for about half of the business. The other half of the business is in the enterprise web app delivery business and that is going to range in terms of size from the bottom end of the product series, customers can get into the product for in the, let's say $30,000 type range, all the way up to transactions that are going to be 100,000. And so you see a lot more of those in terms of frequency in that part of the business.

In terms of geographic mix, about somewhere around 85% of the business is North America and about 15% in EMEA with just a small amount starting up in Asia as we have taken on a couple of distributors and hired a couple of key people there. So the theme here for 2007, especially within our application networking business, will be to not only strengthen the U.S. field team and partners, but to begin to roll out the same kind of training, education, and demand generation programs in EMEA and the Pacific that we've focused on in North America this year.

Thank you.

Your next question comes from Sarah Friar with Goldman Sachs.

Good afternoon, guys. Just going back to PS4 and that penetration of the install base, can you give us a sense of how far along PS4 is in terms of penetration right now?

Sarah, that's one of the toughest questions in the world to answer because it's all based upon your view on what the total available market is. So what we've done is stayed consistent around how we look at this, the analysis on this. So first piece is we assume that the total available market within any customer does not exceed 50% of the PC's they have in the Corporation. Okay? So if we get 50% of the PC's that's 100% penetration by our estimates.

Yes.

Secondly, then what we do is we have sort of an index here that we look at, a broad range of customers types and try to monitor them on an annual basis. So if you take those two -- it's a statistical model. If you take those two assumptions and processes and put them together you get somewhere between 12 and 15% penetration.

Okay. So there should still be some tail winds from that upgrade.

Absolutely. Absolutely. We've got a few cards up our sleeves here that we're excited about exposing next week.

Okay and then kind of part of that, you continue to show great growth on the license update side and I know some of that was due to people getting current if they wanted to make that shift to PS4. What was the impact from get current in the quarter and again, do you think we can continue to see 20% type growth on the license update side?

Sure. I think if you look at getCurrent during the quarter and for those of you who aren't really familiar, getCurrent is a program name that allows our customers that are not on current subscription to either renew their old subscription by paying a certain penalty or essentially buy what is an upgrade license equivalent. So we had equivalent, probably equivalent benefit in Q3 that we saw in the second quarter from the overall getCurrent programs, but I think the real opportunity is if you look at the overall installed base of product, and especially those customers that are on the 1.8 or XP platforms, the broadest number is probably 7 to 8 million of those customers that are not current on subscription right now. And that's the real opportunity pool to go and -- to really go and attack with these programs, especially now that the products are end of life. So I think there's still a lot of legs in it going forward.

One very quick one for you. You made the comment as you talked about your '07 model of fast growth for application networking and I think in the past maybe you've talked about a 40% year-over-year growth number. Now that you're adding in the WANScaler product into that, can you give us any sense of what you deem fast growth given that it's growing at 100% plus at the moment?

Not yet, Sarah. Honestly, we're in the process of finalizing our 2007 internal plans as we speak. Going through those models rights now. As normal, we'll provide a lot more commentary after Q4 for the 2007 outlook. Right now, as as you have seen in the numbers certainly this quarter and the prior quarters, that business and that team continues to execute really well and we're very happy with the -- certainly the traction and the market share they're taking there.

Okay. Terrific. Thanks a lot.

Thanks, Sarah.

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

Good afternoon. I also had a couple of questions about the guidance for the fourth quarter and the preliminary outlook for '07. First, on Q4, given your commentary about the license revenue number in Q3, actually looks like you took up the yearly number in aggregate revenue and guided ahead of consensus for the fourth quarter. Presuming that Presentation Server is going to be flattish, is that delta a bigger contribution from Orbital, an acceleration in application networking and how do you get comfortable that coverage ratios, et cetera, are better for the fourth quarter than they were for the third quarter?

Let me take that first part of that question. I'll ask Mark to add some commentary. Overall, like I said previously, I think right now the expectation is for the App virtualization business to be flat, flattish on a year-over-year basis, albeit up pretty material on a sequential basis. I think that we certainly expect to see continued traction in the application networking side of the house, it won't continue to grow at the 100% rate but certainly continue to grow faster than the overall markets. We do a lot of work around pipeline, pipeline management deal, channel, et cetera and some of that work is what we have been discussing when we're authorizing new partners and putting them through training and everything we need to continue to execute this business and build the pipe. So we feel pretty good about that going into the fourth quarter, we think it's a huge opportunity for us and it's really just an execution statement at this point in time. Specific to Orbital, consistent with our prior comments, we would expect that to contribute about 1.5 million or so for WAN optimization in the fourth quarter.

Adam, the only thing that I would add is that we had a fantastic Q4 last year and it was helped by some of the end of sale business in EMEA on XP. When we look at the opportunity pipeline both in new opportunity creation and in the coverage ratio that we're looking at for the quarter, it's a strong as it's ever been and so these are the things that we look at to form our own opinions in around the visibility of the business and the confidence that we have in doing some -- even some of the spending that we do in Q4 that benefits future quarters. So as I mentioned in some of my comments that we're -- we don't see anything in what we've seen in the XP cycle here that causes us to question anything in the fundamentals of the business, the demand profile in the marketplace and feel very comfortable about our ability to execute.

And if I could turn for a minute to the out year, it sounds like you're not prepared to give detailed level revenue growth targets around particular product areas but the two things that you called out in terms of the gross margin and potentially the tax rate look like they put negative pressure on earnings. I was hoping maybe you could talk about what some of the offsets are, if you're prepared to give us a general range around revenue growth for next year, and at the margin, should we expect to see operating margins up next year versus this year?

Adam, we'd like to talk more about '07. but we still require all sharp objects and guns to be checked outside the conference rooms while we're meeting on the '07 plan right now. That's kind of where we are on it. And so I think that David kind of gave you the parameters. No change on our financial model and what we're doing there in terms of driving top line growth in this mid to upper 20% range in operating margins, which we think is exactly the right thing to do for the near and medium term health of the business and to get ourselves further positioned to be benefiting from the kind of business change and that are all positives for our business over the next five years. That's kind of the way we're looking at it.

Just a last question on the out year. You've said historically that given the WANScaler ramp into the channel beginning in the first quarter of next year and people continuing to come on line around NetScaler, that as much as 30% of the A&G network of that business could come from your distribution network next year. Is that still the right target that we should be thinking about?

Yes. I think that's in the right range, Adam. We're -- obviously we're feeling good about where we are in the App networking business. I think we've gone from pretty much zero to about $100 million business there in about 12 months and that's compared to others that are pure app networking players. That's I think pretty darn good result for being in the business a little over 12 months now, maybe 15 months.

Terrific. Thank you.

Your next question comes from Todd Raker with Deutsche Bank.

One question for David then one for Mark. David, just on the FX can you quantify any impact on the revenue or bottom line for foreign exchange.

Nothing material really on either line. I think when we sell primarily in U.S. dollars around the world and so any movement in currency is really not going to affect us on that side. We do see a little bit of pressure on the operating expense, but we hedge out pretty far in advance. Slightly negative but nothing material.

And then for Mark, can you just talk about project Tarpon and how you see it playing against kind of Microsoft's internal initiatives on virtualization? Microsoft made some announcements around the virtual hard disc image format yesterday. They're clearly selling Softricity at a very low price point for application virtualization. Where do you guys really fit into the Microsoft strategy long-term there?

Well, we continue to believe in a partnering in a synergistic kind of way. So we don't have anything to announce today but we're going to be focused on technology compatibility, making sure our products co-exist and work well together. We're talking about a range of possibilities there. I think our teams that are actually engaged in the direct discussion are optimistic about getting that done. So that's the first piece.

The second piece is that our focus for Tarpon is quite different from Microsoft's focus for Softricity. And so we'll make sure that our products are compatible with the soft grid products that Microsoft is offering through both their subscription advantage program and off the shelf as a product. And then we'll offer our Tarpon application streaming products in places where they're synergistic with our overall App delivery infrastructure, in terms of adding value to like Presentation Servers for example, in markets where customers are looking for simpler, easier, faster to deploy kinds of systems in the small, medium business sector and then obviously we have opportunities across the board with other electronic software distribution players that want to partner with us with our technology. So we're looking at sort of that broad spectrum and feel good about both partnering with Microsoft and being a little bit in the coopetition kind of mode.

Okay. Thanks, guys.

Your next question comes from Katherine Egbert with Jefferies & Company.

Did you say what the contribution from Citrix on-line, I'm sorry from NetScaler was in the quarter?

Yes. I said that the overall A&G business was approaching $30 million in the quarter.

Right. And I think you said 6 million was maintenance. I was just wondering if you broke out what Orbital did versus the other products.

We didn't break out Orbital. But Orbital was about 0.5 million in the quarter consistent with our guidance when we did the acquisition.

Okay. Fair enough. And then can you talk about R&D and G&A expenses in December, they obviously spiked because the acquisition, is this a normalized run rate or do we see them go back down?

I think that what you should expect certainly on the sales and marketing line is that there is obviously seasonality in that as bookings continue to grow and expect those to be up in the fourth quarter. But also, those are the two areas where we're really focusing our investments over the last quarter and certainly over the next few quarters. It's going to be about building out the product portfolio, integrating the products we've got and really doing what we can to continue to take share in all these markets. That will include some sales and services investments as well. I think the way to think about it would be modestly up on both lines and over the longer term, you should see probably more on a percent of revenue basis, starting to see more coming from R&D as we really invest for the future. The investments we're making right now, certainly around Orbital and some of the newer products are what we expect to begin paying dividends in the second half of next year.

Okay. And then can you offer with respect to 2007 anything on the mix? Will it be similar to what it was this year?

Really just not in a position to talk too much about 2007 as we've said a couple of times. We're still working through our internal plans as we speak. This far out we've just never -- we've never really been in a position to talk about '07 yet. Next quarter we'll give a lot more granular guidance not only on the first quarter of '07, but certainly for the full year.

Okay. Thanks.

Your next question comes from Brent Williams with Hepalin Securities.

Just a quick sort of housekeeping question. You mentioned that you were growing the field product specialist for NetScaler. What kind of number of bodies would that look like?

Brent, we can barely hear you. I'm sorry.

Sorry. Let me say it again. What kind of growth in the field product specialist that you mentioned, can you quantify that a little bit for NetScaler? You alluded to that earlier I think in David's remarks.

Yes. So I think that our comments there are more prospective than retrospective in terms of where we're actually spending on developing the GoToMarket machinery that both David and I talked about. So we've had obviously some puts and takes and some growth in that team, primarily in North America. And a key part of our '07 plan will be to not only grow the North America team there, but also begin to do a lot more in EMEA than we've been doing. Remember, most of -- pretty much every acquisition we've done has had very little EMEA business or presence and that's kind of a from scratch kind of project in terms of hiring and ramping and training and setting up distributions. It's timely, it's expensive and we'd like to do a lot more than we've been doing, frankly. We're investing all we think is prudent, given the overall picture.

Okay. Thank you.

Your next question comes from Dino Diana with UBS Securities.

Just trying to reconcile, you mentioned low single digit presentation server growth, still expected. But you also mentioned low to -- you actually mentioned mid teen total Presentation Server growth when you factor in maintenance. Can you just help me understand, would that imply, then, that maintenance revenue would actually be accelerating year-over-year in '07 from '06?

Really, Dino, we weren't talking about '07 at this point in time. We're really focused on what to expect for the balance of 2006. I think the commentary around next year is really just on the few line items that we talked about. I will say that overall, I mean, you really do need to look at that segment of the business combined because now that we've moved a vast majority of our customers to a more of a subscription type model, that's how you're going to see a lot of the revenue recognized over a period of time. That part of the business will certainly continue to grow faster than licensed revenue for some period of time.

Okay. I guess just to clarify, the low mid-single digit you gave was for Presentation Server just licensed revenues, right?

That's correct.

And Mark did mention mid-teens in total with maintenance so the only thing left is maintenance. I'm saying for that to be -- for that to hold true you would have to have an acceleration in maintenance. I'm just trying to understand, is there any reason why inherently that could happen? Is it because you're adding new products that you're bolting on? Could maintenance actually accelerate?

Well, right now the product licenses are growing somewhere around 20% or so year-over-year. And I think that that's a pretty good range to be somewhere in the 15, 20% range going forward. That number is going to continue to get larger and larger as time goes by, certainly as we, A, sell new licenses, get more people on subscription, B, do what we can to continue to increase renewal rate and, C, work towards recapturing some of those five, six, seven million licenses that are active but not on subscription right now. I think that what you should expect is renewal rates to continue to be in this 80% range and we'll do everything we can to continue to drive them towards our longer term targets which are higher than that and working getCurrent to keep that part of the business growing. At this point just not giving much more granular guidance around '07.

Okay. Thanks.

Your next question comes from Manny Recarey with Kaufman Brothers.

Thank you. A question on Application networking. Can you talk a little bit about the competitive environment, you had Cisco in early September announce their wide area applications services, Juniper looks like they're going to introduce some new products and straighten out the acquisitions they made a year ago. Talk how Citrix fits into the competitive environment and how you differentiate yourself.

Okay. First of all, from a overall perspective, we don't believe that the competitive dynamics in the application networking market, which is web app delivery, SSL Gateway and WAN Optimization have changed in any dramatic way. Cisco has always had a core strategy here they've been executing on and every market they go into they get their significant chunk of that marketplace. I don't think that any announcements they've made or moves they've made are significantly changing that. If anything, they're stimulating overall primary market growth, which is a good thing for everyone. Then -- and I think that the this applies to a lot of the networking -- traditional networking vendors that have the relationships with networking buyers, but don't have an application sort of centric view and approach in talking to customers, positioning products, and how all of those products tie into the upper layers of the stack which is exactly what we are great at doing.

And so that's where we differentiate ourselves by really talking about application delivery over networks, at the higher layers and leveraging all of the traditional networking gear as transport. And that's how we're -- I think we're making great inroads in the SSL marketplace. We're getting some momentum in the web app delivery space with the same kind of strategy and we'll see if we can do the same thing in the WAN Optimization space which we're optimistic about.

Just one detailed question. I think the services part of that was about 6 million in the quarter? Did I hear that correctly?

For the A&G business?

Yes.

About fiveish.

About fiveish?

Yes.

Thank you.

Your next question comes from Jason Kraft with SIG.

Thanks. Just real quick to confirm, you mentioned three deals over one million is that correct.

That's correct.

And were those three all Presentation Server or were there any that were NetScaler.

Those were Presentation Server or Suite. I think that the NetScaler transactions are generally the ones that aggregate up to a million. So when I refer to those, those are usually NetScaler customers.

Okay. As a percentage of total license, you guys have done a good job in the Qs of disclosing what percentage of total license was, I'd say core presentation server, as well as what percentage of total license was Access Suite. Can you give those percentage breakdowns?

Yes. Honestly, we really don't look at the business that much internally but just in a ballpark, a little over 10 to 11% of the App virtualization business was the Suite.

Okay. 10, 11% of total?

Yes.

And then just to circle back on getCurrent, what was the total revenue this quarter in getCurrent and what was attributable to license?

I don't have the breakdown handy what was attributable to license. But you have got to think about the various components. North of $10 million was the bookings for getCurrent and the way that gets recognized is some portion of it goes into deferred depending on whether it's greater than a year, probably 25 to 30% goes into defer. If it's less than a year, the vast majority either goes into deferred or into recognized license update. So not a huge contribution to actual core licenses.

Well, if you're looking to capture and please correct me if I'm wrong here, but if you're looking to capture maybe 100,000 licenses a quarter and get current given that they're still north of maybe 1.5 million out there, so the tail is pretty long, but if getCurrent is priced list, let's say $225 a license, Street price is probably 125, split that 50/50 license to maintenance, even at 100,000 licenses that you capture at $62, that's 6.2 million in license that could be put on the P&L. Am I wrong there? It seems like that you guys can get anywhere from kind of mid-single digit in license to help with at least with the flattish, mid-single digit growth.

I agree with you. I think it's a great opportunity right now. We are obviously working through programs and initiatives to look back at those customers that are on XP or maybe even some that are still on 1.A and get those guys current on the more recent platforms. Not only for our benefit financially but just for the immediate benefit that the customer is going to see in total ROI and performance of the system.

Which kind of confirms if you did north of 10 million in getCurrent it seems like that the license portion would at least have to be 5 million which gives you a nice cushion there. But is that kind of logic the way that getCurrent is priced and the way it's allocated licensed and maintenance? We're in the ballpark there?

No. Actually you're not. Because the majority of of the getCurrent this quarter was coming from those that had lapsed less than a year and so in that case you wouldn't see any benefit going to license revenue. It's the minority of those that have lapsed more than a year in this period. So I think the contribution to total revenue, I mean, excuse me, total license was no more than one or two million, at tops.

Okay. Thanks.

Your next question comes from Ed Maguire with Merrill Lynch.

Yes. Good afternoon. You've talked about channel overlap with NetScaler with F5. Have you done a similar analysis on potential overlap for some of the competitive products to Orbital?

Ed, we have not. Notionally though, we have had partnerships historically with Packeteer and Expand Networks which provides some of the capabilities that WANScaler does. The overlap there with our value added distributors, as well as some significant number of integration partners would probably be substantial. So we think that there is actually some really good knowledge in our channel network around WAN Optimization and points of view on that and we've got to bring our product to their attention and show them kind of how it compares and so fort and position ourselves well. So wish I could tell you sort of partner by partner what the overlap is.

Okay. And on the -- back to the Presentation Server business, as you look forward to next year with Longhorn server and Vista, potentially driving some platform migration activity kind of across a lot of your customers, what are you doing essentially to kind of plan for a potential disruption there and I guess sort of more longer term, how much of an opportunity is this potentially for Citrix to kind of go back to some of those -- this still non upgraded 1.8 and XP customers and drive the additional cycle there?

Well, I think the desktop and server cycles are actually different. On the desktop side, my opinion is that first of all, Vista -- I've got Vista on my ThinkPad and I can tell you, it's a better Thinkpad with Vista than it was with XP on it. I think a lot of people are going to realize that despite all of the hubbub around Vista that you read about. I think that's going to drive a big cycle there. At the same time I think a lot of customers are going to be in lots of pain trying to assure that applications are going to run in the Vista environment and I think that's where our opportunity is and I think that's a classical opportunity that we've seen every time Microsoft moves us forward on the Windows, on the desktop side. And we see it as a net opportunity as we always have experienced.

On the server side, I think the dynamics are different. I think that Longhorn server is going to be the best Windows server in history. It's got tremendous new capabilities and -- but I think that customers are going to do a lot of testing and it's going to be a slower burn on the uptake side. I think as a result products that are going to rely on migrations of the server operating system could struggle during a few quarters out when Longhorn server is first introduced as customers may pause. That's at the enterprise level. In the small, medium sort of end of the marketplace, we're believing that when it's available, that's where customers will go. And we'll be ready with products to deliver in conjunction with Microsoft's release. And so that's our game plan.

Okay. Thanks.

Your next question comes from Rob Owens with Pacific Crest Securities.

Hi, good afternoon. You gave us a metric I think that half of your business around NetScaler was e-Commerce or media metrics related and half was enterprise related. Can you give us a sense of where that's tracked over the last few quarters and as we look ahead where you'd hope that ratio to go.

Actually, I think it's been pretty steady around that and so -- which is actually a good -- it's a good thing because the growth on the media metrics side has been great and so our ability to kind of keep up with that on the enterprise side is pretty impressive. Obviously the size of the transactions and the frequency very different as I mentioned earlier. So that's what we've seen over the last few quarters.

Can you give us a sense on the Citrix on-line piece, what was the incremental contribution from GoToWebinar this quarter or what we should look for in Q4?

I think the way to think about that is really in as part of the GoToMeeting family. That's really the way the products are being sold and utilized to a large extent. We're not going to be breaking that out much. Because I don't think it provides a meaningful metric. It's certainly off to a great start. Mark talked a lot about the -- some of the metrics around minutes and meetings, et cetera. And now that we've got the growth in that overall product line growing at over 200% right now it's just -- right now it's a matter of how much we can invest to continue to take share in that space.

Great. Thank you.

Our last question comes from Walter Pritchard with Cowen and Company.

Thanks. Just one last question. You talked about your plans on A&G and taking that into Europe and Asia next year. What you didn't talk about was your plans on taking the online business into international territories which I believe you were just telling me. I'm wondering if there's anything to talk about there?

Yes. We're actually already in the process of taking the online business in a more than opportunistic way, which is where we've been in EMEA. So we've hired a leader there that we like a lot and we're starting the process of investing on both the inside sales side as well as the online demand generation side, so we have seen that these two sort of GoToMarket methods actually work very much hand in hand when we're selling our on-line products. So expect that to be part of our growth model for 2007 entering EMEA with our on-line services.

Last question on this end of life dynamic you talked about. My sense is this you maybe didn't realize how big of an issue this was on the positive side in Q4 and Q1. Was there some survey of the customer base you did, or some deeper analytic dive you did into the numbers here more recently that sort of shed light on the driver here?

Yes, Walter, I think when we -- it's always tough to -- when the numbers are actually in the whole scheme of things, this small, it's hard to see the trends and prospectively from an analytics perspective. But when you look at them retrospectively and especially in context of the current quarter, we can see the acceleration and then across various geos, and timed with when EMEA for example began implementing as well as versus when the Pacific and North America did. So we're a great Hyperion user and we've just begun to roll out the usage of it and that's shed actually a lot of light on where the acceleration occurred and gave us a lot of insight into that.

Great. Thanks a lot, guys.

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

Thank you again for joining the call today and appreciate the good questions and we'll see you in three months.

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