思杰系統 (CTXS) 2007 Q2 法說會逐字稿

Good afternoon. My name is Mark, and you will be your conference facilitator today. At this time, I'd like to welcome everyone to the Citrix Systems second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Thank you. I would now like to introduce Mr. Eduardo Fleites, the director of investor relations. Mr. Fleites, you may begin your conference.

Thank you, Mark. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix's second quarter 2007 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 Systems investor relations website and the slide presentation associated with the webcast will be posted immediately following the call. Before we begin the review of our financial results, I want to state that we have posted product classification and historic revenue trends related to our four product groupings to our website, and that David will be discussing their performance in his prepared remarks.

As 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 the U.S. securities laws. These 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 key strategic relationships, the effect of new accounting pronouncements on revenue and expense recognition, acquisition of related integration risks, and the Company's voluntary review of the stock option granting practices and the related accounting. 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.. More information on the non-GAAP financial measures can be found at the end of the press release dated today, and on the investor relations page of the Citrix Systems corporate website.

Now I would like to turn it over to David Henshall, our Chief Financial Officer. David?

Thank you, Eduardo. Today I'm pleased to report second quarter 2007 revenue and financial highlights for the Company. In addition to providing you with some commentary on our performance, I'll discuss the trends in our business and review our current outlook for Q3 and full-year 2007. Before I get started, however, let me provide an update to the voluntary stock option review. As we've already said, the Company intends to restate certain historical financial statements in order to record additional noncash stock-based compensation and other expenses. Please refer to our press release for further details.

We also announced previously our decision to consult with the office of the chief accountant of the SEC on certain interpretive issues before filing the 2006 10-K and first quarter 10-Q. However, since the process is still on-going, the Company has not yet determined the final amount of additional noncash comp expense or the resulting tax impact that's going to be recorded. As you know, the financial information reported today is preliminary and limited and does not take into account any adjustments that we will be required to make in connection with the review. Since the adjustments will affect historical FAS 123(R) and other expenses we're unable to provide a complete set of financial statements for the second quarter or our regular level of detail around the operations of the business. We're obviously very eager to get this wrapped up as soon as possible so that we can become current with our SEC filings and NASDAQ requirements.

So let's get back to the financial summary. As you see from the reported revenue numbers, up 21% over Q2 '06, we're seeing solid momentum as we enter the second half of the year, including very balanced growth across each geographic segment. Looking at the business in more detail, there's really three key areas I'd like to review: One, our App Virtualization business, primarily focused on the first full quarter of results following the product line changes; two, our work to establish Citrix as a leading player in the application networking market; and three, the Company's continued success delivering online softwares and service.

So, first, let me focus on our App Virtualization products. The group grew 16% year over year to $247 million in total revenue. Included in this is a 16% increase in product license revenue. The license growth was stronger than expected and really driven by a few primary catalysts, most of which can be attributed to the product line changes that we announced at the end of Q1. So in particular, we've got great response from customers and partners on the new Platinum Edition of Presentation Server 4.5. In addition to the new 4.5 features, Platinum significantly adds more value than prior versions by integrating EdgeSight, Access Gateway and Password Manager, all at the same price point as the former Access Suite bundle. In fact, PS Platinum contributed nearly 18% of that virtualization license revenue in the period, about double the impact the Access Suite has had on prior periods.

We also saw positive response to the newly upgraded Enterprise Edition of PS 4.5. By adding app streaming capabilities to Enterprise, we're significantly expanding its value beyond client server apps, allowing us to increase the ASP and drive more upgrade activity. And while there may have been some modest purchasing in anticipation of the May 15th price increase of PS Enterprise, we're very satisfied with the trends in licensing. On [the subscription] business, we continue to see strong customer demand, with a near 80% renewal rate in Q2. The rate was down slightly from last quarter, largely due to a number of customers choosing to purchase the upgrade license to Platinum in lieu of simply renewing their subscription on one of the other products. It's a real positive indicator and one that we're going to be watching in the second half of the year.

The second area of focus is our Application Networking business. App Networking grew 12% compared to Q2 '06, and while this growth rate was below plan, there's a few contributing factors that are important to note. First, at the beginning of the quarter, we announced our new NetScaler 8.0 and NetScaler Platinum Editions. Unfortunately the new versions didn't ship until very late in the quarter. While this resulted in a lower recognized revenue number, we're entering Q3 with a strong NetScaler pipeline and we're very optimistic about the demand for Version 8.0. Second, since we include SSL VPN licenses as an integrated part of PS Platinum, some of our stand-alone Access Gateway business moved up into Platinum orders, helping contribute to the success of that product.

And finally, while we saw solid bookings growth in the quarter for WANScaler, we made the decision to defer all revenue until certain features that were originally scheduled to be released in Q2 are generally available later in this quarter. So these tactical issues aside, we continue to be pleased with the progress of our App Networking business. Demand for the new versions is growing, and as a result we expect to see a significant sequential increase in revenue for Q3.

The last area I'd like to highlight is our continued success delivering software as a service. Our go-to products continue to meet the need of customers in this rapidly growing segment of the market, which demands, secure, affordable, fast and easy softwares and service offerings. Revenue from these services in Q2 was $52 million, growing over 47% compared to Q2 '06. Within the group, GoToMyPC represented about half of total revenue and grew 30%, GoToAssist contributed about a quarter revenue and grew 33% over last year, and finally, the Online Collaboration Services, including GoToMeeting and GoToWebinar, continue to be the fastest growing in the group, up 120% year over year. So in total, looking across all the product groups, we're proud to have delivered this performance and Mark will address some of these items in more detail in his comments.

Let me turn briefly to expenses and operations. As a reminder, cost and expenses reported today do not include stock-based comp expense under FAS 123(R). In the second quarter of fiscal 2007, total cost of revenue and operating expenses were approximately $268 million, so let me tell you what that includes. First, total cost of product license and services revenue, total R&D, sales and marketing, and G&A expenses, amortization of approximately $10 million, and over $3 million in accounting, legal and tax fees related to the voluntary stock option review. The primary drivers of the expense increase from Q1 included marketing programs, commissions, and head count investments. In the second quarter we added 155 people, bringing total head count to 4,088, with the largest increases in the sales and services, Citrix Online, and App Networking teams. Because of the options review, as I stated before, we're not in a position to provide additional detail on the P&L or our standard non-GAAP financial metrics at this time.

On the balance sheet, cash investments increased over $80 million sequentially to nearly $1 billion, deferred revenue grew $18 million to just under $400 million, and DSOs were 48 days, within our target range of 45 to 55 days. So overall, I'm pleased with the Q2 performance. The business continues to deliver consistent growth, while still allowing us to balance significant investments in the new business, and the routes to market that are important for along-term success. And while many of our initiatives are still in their early stages, I believe we've created a solid foundation to build on for the remainder of 2007.

So finally I'd like to discuss our current outlook and expectations for the third quarter ending September 30th and for the full year. It should be noted that we're about to make forward-looking statements that incorporate certain risks, so please refer to the Safe Harbor statement noted in our press release and the risks that are stated in the SEC filings. Let me provide you with some context around our forward outlook. Obviously we're continuing to see solid revenue traction across multiple areas of the business, and as I've said, we are optimistic about our application delivery strategy and the investments we've been making to help sustain the momentum in the future quarters. We also see a number of areas of opportunity that we believe will benefit from additional investments to further enhance our product line and our ability to effectively reach more customers.

With this, for the third quarter we currently expect total revenue in the range of $335 million to $343 million, including contribution of $53 million to $54 million from our Online services. Total costs of revenue and operating expenses in the range of approximately $266 million to $272 million, and included in this number is amortization in the range of $10 million to $11 million and $2 million for accounting, legal and tax fees relating to the voluntary stock option review. And please note that this estimate in the third quarter spending does not take into account any stock-based compensation expense or other charges that are likely to result from the conclusion of the operations review.

For the full-year 2007 we now expect total revenue in the range of $1.34 billion to $1.36 billion, an increase of approximately $30 million from our prior guidance. Total cost of revenue and operating expenses to be in the range of $1.066 billion to $1.076 billion. And again, included in this number is amortization expense in the range of $41 million to $42 million, a $1.2 million write-off of in-process R&D related to the closing of the Ardence acquisition, and $11 million for accounting, legal and tax fees related to the ongoing stock option review. And, again, this estimate for fiscal year 2007 spending does not take into account any stock-based comp expense or other charges likely to result from the voluntary stock option review.

Now I'd like to turn it over to Mark to give you additional details on the quarter's performances and discuss our ongoing businesses. Mark?

Thanks, David, and thanks for joining us today. I'm really pleased with our second quarter results, capping off a strong first half performance for Citrix. As you can see, we finished well ahead of our guidance, posting a record $334 million in Q2 and $642 million for the first half, growing 21% and 20% respectively. Picking up from last quarter, I continue to be bullish about growth. Leading indicators in the business are strong. Our Windows app delivery products, supported by new positioning, packaging and pricing for Presentation Server, showed really great strength in Q2. Our web app delivery products, bolstered by the new NetScaler 8.0 release, created strong demand at the end of the quarter, driving the best NetScaler pipeline ever.

We're encouraged by cross-product channel certifications and product-based incentive payouts. More channel partners are selling multiple Citrix products. Our Online Services team has another stellar quarter, almost $52 million in revenue, growing 47% in Q2. First half revenue from license updates and technical services were up 18% and 25% respectively, really showing that customers are architecting and implementing larger systems. During Q1, we introduced our new application delivery messaging model and trained thousands of employees and partners.

At the same time, we introduced the 643 Go-To-Market Plan. To refresh you, our 643 plan is focused on six strategic application delivery products, targeting four different IT buyers and three core selling strategies for mid to large-sized enterprises. The plan is supported by a record number of product releases in the first half of '07; PS 4.5, Access Gateway 4.5, and EdgeSight 4.5, all released in Q1. NetScaler 8 and WANScaler 4.1 released in late Q2, and we also released the first version of Desktop Server in Q2 and updated the Ardence product lines. These messaging, Go-To-Market product plans are working and it's showing in the results, so we're well positioned to deliver a great second half performance, to continue the pace of investment across our three growth engines -- App Virtualization, App Networking and Online Services -- and to stay aggressive, [defining], building and leading the app delivery infrastructure market.

Selling and upselling a complete solution to our customer base by leading with the new Platinum Edition of Presentation Server was a big focus in Q2. The success of PS Platinum helped drive strong license growth. We introduced the product in March 2007, making Presentation Server the only solution that virtualizes, streams, secures, and measures the delivery of both corporate and personal Windows applications. As we exited Q1 three months ago, the pipeline for Platinum was very strong. In Q2, those opportunities began to produce revenue. In fact, new license sales and upgrades of PS Platinum, as David mentioned, amounted to around 18% of our Virtualization licensing, driving higher ASPs and driving larger, more strategic sales in our customer base. For example, at the end of Q2, we met with a CIO and executive IT team of a large Midwest bank to discuss their market expansion plans. Quickly an Enterprise Edition discussion became a Platinum opportunity. Leading with Platinum positioned us not only to establish Presentation Server as the bank's strategic Windows app delivery infrastructure, but also to replace a single sign-on competitor to expand their use of Access Gateway and to introduce the use of EdgeSight across the bank.

Since summit I've spent a lot of time in the field, seeing our customer-facing teams lead with many conversations with customers around the benefits of PS Platinum. Many partners during the quarter did exactly the same thing, taking advantage of our Platinum upgrade incentive program. The Q2 results for PS Platinum was impressive, giving us continued confidence in the position, pricing, packaging and integration moves we made there. The release of EdgeSight 4.5 made a big difference in Q2. We have quite a few examples of customers that started the EdgeSight pilots. then realizing they would get EdgeSight as part of Platinum leading to upgrades of all or part of their presentation server [forum]. We're also seeing great interest in the new EdgeSight for load testing, and in the quarter we closed 15 deals.

Desktop Server, released early in Q2, got off to a great start, posting over 3,000 downloads of the trial version during the quarter. We selected over a dozen Fortune 500 companies for our strategic piloting and evaluation program. As you know, this market is very young. We expect to see demand acceleration in the next 12 to 18 months, as customers look for better, more cost-effective ways to migrate office workers to Windows VISTA. To drive market acceptance, we have exciting plans in this space, focusing on enhanced user experience and leveraging our strategic partnership with Microsoft to make it easier for customers to deliver Windows VISTA. So it was just a great quarter for our App Virtualization business.

Next let's talk about App Networking. We were also pleased with our overall progress on the App Networking front. While the tactical challenges David mentioned reduced our revenue in the quarter, our overall business metrics remained solid. Books were up, pipeline is at an all-time high, and our competitive position has never been stronger. The biggest highlight of Q2 was the release of NetScaler 8 and the new NetScaler Platinum edition, a product line we believe will be just as revolutionary in the web app delivery market as Presentation Server 4.5 is proving to be for Windows app delivery. NetScaler 8 closed [important] gaps in our Enterprise feature set, leaving us well positioned to expand our share of the mainstream enterprise market. It also provides several exciting new capabilities we believe leapfrog the competition.

With version 8, NetScaler becomes the first product on the market to offer fully-integrated app firewall and SSL VPN capabilities, providing enterprise customers with unparalleled security for mission-critical web apps. The new release also gives customers the ability to monitor end-user experience with and integrated version of EdgeSight designed specifically for web apps. This is a game-changing capability that most competitors will be hard pressed to match. Finally NetScaler 8 marked the debut of our exciting new App [expert] technology, making the creation of app-specific policies a snap. While the competition in this market is strong, we believe we have once again raised the bar and established an entirely new level of differentiation. The early demand and quarterly bookings for NetScaler 8 were very encouraging and we're looking forward to a great Q3, as these products move into full-scale production.

While our entry into the financial office app delivery market is still early, we also made significant progress in our WANScaler this quarter. Less than six months ago, after introducing WANScaler to our partner community, we have now over 300 partners authorized on the product, a nearly threefold increase over last quarter. Demand [commit] continues to grow, especially in emerging markets where WAN performance is the most challenging. I'm also very pleased with the innovation we're seeing from the WANScaler team. In Interop Las Vegas we demonstrated the industry's first ever interoperable WAN optimization and SSL VPN software client, giving mobile laptop users LAN-like app performance without security tradeoffs. While we're deferring WANScaler revenue until the client shifts, we're building partner excitement, authorizing and certifying, driving customer opportunities, and implementing solutions.

Next, I'd like to shift to our Online Services business. Our simpler-is-better software as a service approach, combined with great online sales and marketing execution, is fueling growth and higher usage of our GoTo services than ever before. Each service grew by more than 30%, with GoToMeeting now with GoToWebinar continuing to be one of the fastest growing services in the industry. The trend to work flexibly, especially away from the office, continues to accelerate, and GoToMyPC connections grew by 29% in Q1 and Q2. GoToMyPC additionally won Communication Solutions product of the year. Realtime remote support is rapidly becoming a must-have capability for a best-of-breed customer support experience over the web.

GoToAssist customer session growth was up 57% over last year. In Q2 we also launched a new version of GoToAssist. Version 8 combines best-in-class remote support with realtime collaboration, and redefines the gold standard for remote support, winning TMC's CRM excellence award. More SMD customers are realizing how effective the combination of a traditional conference call and realtime visual collaboration can be. This is the (inaudible) force behind growth in GoToMeeting. EarthLink, one of our partners, with over 1.9 million broadband subscribers expanded its alliance with our Online division in Q2, promoting GoToMeeting and GoToWebinar to their SMD customers. Additionally, GoToMeeting won another impressive round of awards from the SSIA, from the eLearning Guild, and was cited for best overall experience and the highest ease of use in the Wainhouse Research web metrics survey. Our Go-To-Market strategy is to continue to focus on being the first choice for small and medium-businesses looking for simple solutions for realtime collaboration and remote access. So, a great first half of building momentum in all of our businesses.

Q2 marked the first full quarter since launching our new messaging at summit. To be honest, the speed of uptake with employees, partners and customers has exceeded my expectations. The response to our app delivery messaging is making huge sense to everyone, giving IT executives a clear and flexible architecture for aligning IT with business objectives. Surveys of enterprise CIOs tell us their most strategic challenges are no longer technology issues. They are around the business relevance of IT. Enabling business change and market responsiveness tops the list of CIO priorities. This was a consistent theme I heard during Q2, while I spent a lot of time in major U.S. and European markets, holding, many, many CIO-type meetings at very high levels. Our partners and customers are really getting it. App delivery is resonating extremely well and we fully intend to establish Citrix as a category leader.

Our strategic approach taps into some of today's hottest software markets for app virtualization, for app networking and for software as a service. And as you can see from our record results, these markets offer tremendous growth potential, rewarding us for continued investment in geographic go-to-market gaps, the pace of product innovation. and the integration of acquisitions. Echoing David's comments, we continue to strive for top-class operating performance while we build out a strategic market position. App delivery is a profoundly strategic opportunity for Citrix. Our vision, execution, and financial results have put us in an amazing position.

We're gaining traction with our Go-To-Market programs and staying aggressive with geographic buildout. We're maintaining velocity and product innovation, including the upcoming Delaware release of Presentation Server, the [Pictor] project with Boeing, the WANScaler Evergreen project with Microsoft, the Kent workforce continuity project with IBM, and several exciting application networking Online Services projects you will be hearing more about in coming months. I'm very proud of our first half and Q2 results. Record revenues in Presentation Server, solid leading indicators within opportunity pipelines, and great execution of our long-term vision.

Thank you for your continued support and belief in our strategy. And now we'd like to open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Daniel Ives with Friedman, Billings, Ramsey.

Thank you. Congrats on the quarter. When you're looking at Platinum as a percent of revenue the next few quarters, maybe just generally, how do you see that trending in 3Q and 4Q as a percent of Presentation Server?

Let me take the first half of that and I'll ask Mark to add some commentary. I think if you look at -- as a percentage of really VSG -- and I use that metric because that's the way we've measured the Access [we had] contribution in the past -- with nearly 20% contribution, I think it was certainly fair to say that it's ahead of our expectations. We had talked about over a protracted period getting to up to a third. I think that coming out of the gate we're just very happy with that. We're pretty mindful right now, looking into how to forecast that with only one quarter of experience under our belt right now, but I will say that the -- certainly the pipeline and the activity we're seeing is really being led in a large degree by Platinum.

So, the value proposition that we put together in that product, the pricing differential between the other versions of the product, and just some of the focus around the messaging I think is helping to drive this contribution. So, going into the next couple of quarters, I think that right now the way to be thinking about it is between about 10% and 20% contribution would be reasonable. Once we have a couple more quarters of experience, we'll be able to provide more granularity on that metric going forward.

Thank you. And just a follow-up question. In regards to margins, you guys had a solid quarter and just looking ahead it looks like revenue [rates] should accelerate. How do you view margin expansion in regards to seeing that flow to the bottom line? Just walk us through in regards to that debt balance and just how we should view that going forward?

Yes, as we've said many times, I mean right now, we're certainly biased for growth. This is a growth industry now and you see the acceleration in the revenue number. And given the opportunities in our market -- and we really believe we're participating in some of the most white-hot markets across software and technology in general -- it's really incumbent upon us to go and attack that opportunity right now. So we're going to continue to invest heavily against the product opportunity, whether that is to complete the platform or really enhance the Go-To-Market activities in each (inaudible), in each way that it makes sense for that particular market. We're operating within the range that we have been stating publicly for the last several years. Obviously we're towards the lower half of that range right now, partially burdened by the ongoing stock-option expense but also just given the market opportunity right now. In fact, I'd say that when we look at head count growth, really an area that we've been focused on, we'd probably be growing faster if we had the capabilities to find and attract highly capable people.

Thanks.

Your next question is from the line of Adam Holt with JPMorgan.

Good afternoon. I'll -- like other, congratulations. My first question relates to the PS strength in the quarter. A couple of questions about execution on the sales side. Did you see a particularly strong quarter from your direct business, as well as were there any particularly large deals or what was the influence of larger deals in the quarter?

Adam, this is Mark. I'll talk about what I saw in the field as I traveled. And frankly, I saw across -- I met with lots of partners and with customers where we actually call them with [ERNs], and the experience I had was very broad based, where we had a lot of partners shifting customers that were their strategic customers to Platinum, especially if they were coming up for renewals. And then ERNs were really using the Platinum story, leading with it and taking some of the enter -- what would have been formerly an Enterprise deal and moving it to Platinum because of the value proposition that David mentioned earlier. So I'd say it was pretty broad based.

Yes, just -- Adam, to put a little contest around that, our two largest transactions in the quarter were both Platinum deals and I will say of the top ten, six were being driven by PS Platinum.

Terrific. And if I could just shift for a question on the [A&G] business. It sounds like you've got quite a bit of confidence in a reacceleration in that business into the third quarter. I was hoping maybe you could drill down a little bit on what gives you that comfort level? And then just lastly, you've talked about a 30% to 40% growth rate in that business for the year. Is that still an achievable target? Should we expect to see that kind of level of reacceleration in the back half? Thanks.

Well, let me take the first part of that question, Mark. I think that right now we -- the things that are giving us the confidence in that business is really balancing a combination of the new products that are just being released at the end of last quarter, and in the WANScaler case in this quarter as well. The product pipeline that we saw exiting Q2 and into the third quarter, and then just finally the momentum that we have on the market side. We've got nearly 350 partners authorized and ready to sell the WANScaler products. I think the number of WANScaler partners is now over 450, and so we've got a lot of momentum in the market. As far as the ongoing growth rates, they are burdened a little bit by some of the execution issues in the second quarter, but certainly for the year that business will grow materially faster than the Company as a whole.

Terrific. Thank you.

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

Yes, good afternoon. I was wondering if you could comment a bit on -- given the strength on the Platinum Edition, how much of that was existing customers taking advantage of upgrade opportunities and what was the proportion of new seats, roughly?

As far as the upgrade business for Platinum we did see upgrades that were running probably two or three [ex] the levels that we had seen from people upgrading to the former Access Suite, so that contributed a 20 or so percent of the Platinum revenue during the quarter, so we're very happy with the upgrades. And if you remember, we had a channel program in place called the JUMP program, which was around -- Just Upgrade Me Please was what the acronym stood for, but that was really focused on driving mind share and activity metrics around the channel and I think we've been successful in that front. So, the upgrades are looking good. In fact, if you caught it in my remarks, I commented that we did see a number of customers that were coming up for renewal on their Subscription Advantage program for one of the other products, choose instead of renewing to simply upgrade and buy the new license for Platinum, so a lot of good metrics. Again, we're watching those closely going into the second half of the year to try and get a couple of quarters of trending under our belt to really be able to drill into the numbers.

Okay. And on the WANScaler deferrals, could you quantify how much that would have been in the quarter? And also, just in terms of your goals for the number of resellers trained. You're at about 300 now. Where would you like that to be by the end of the year?

As far as the deferral numbers, I'd rather not get into the actual details of that. I think it's fair to say that it's immaterial to the total of the -- of the Company's revenue right now, but we have stated previously that we expect the WANScaler revenue to contribute $10 million or $12 million for the year, and I still think that's a reasonable range. It's just now, obviously, a little bit more back-end loaded from a recognized standpoint. As far as channel partners, right now with 350 or so I think we're making great progress sequentially. If we exit the year somewhere north of 500 to 600, I think that would be a great acovement, and really where we're going to be focused.

Great. Thank you.

The next question is from the line of Phil Winslow with Credit Suisse.

Hi, guys. In addition to just the success that you're seeing on the Platinum side -- you discontinued the standard edition this quarter as well -- just wondering if you could give us a sense for just what you're seeing as far as those customers moving up to the Advance and the Enterprise Edition, as well as just the enterprise customers that saw their price points go up on May 15th as well?

Sure, let me take that question. I think -- a couple of things I'd be thinking about. As far as the price increase that you referenced regarding the PS Enterprise, I think we did see some purchasing ahead of the price increase, which took effect on May 15th and that's one of the reasons why we're being somewhat thoughtful about the Q3 and Q4 expectations just simply because it's hard to know if any of that was future-period business. We believe there may be a modest amount. As far as the actual recognized revenue for the individual components, we didn't break it out, but I will say it's -- it's certainly up on a year-over-year and sequential basis for the Advance and the Enterprise Editions.

And then finally, when you do think about spending and you had mentioned near term and long term, I wonder if you'd gauge that for us? Obviously you sort of have a multi-year strategy in place right now. Where are you going to focus your spending and how do you just think about spending a percentage of revenue and so forth across those categories?

Well to take your question in reverse order, I think it's really probably a question about operating margins and where we expect those to go longer term. We've been very, very consistent for the last several years of our operating range and we balance that with what we've stated as really a bias towards growth. We still plan to execute within that range, but it's obviously been towards the lower end of that range for the last many about quarters, and I think going forward we're going to continue to invest pretty heavily across the product set, making sure that we have got the market-leading products and the appropriate integrations, et cetera, to complete the application delivery strategy. But probably more importantly to really flesh out all the Go-To-Market requirements to be able to meet the demand that's out there right now and at the end really driving the Company towards a higher overall growth rate. And you've seen the growth rate even accelerate in the last couple of quarters.

Great. Thanks (inaudible).

The next question is from the line of Dino Diana with UBS.

Hey, guys. Nice quarter. On the --

Thanks.

Sure. On the license side of the Presentation Server, did you say it was 16% of the license side for App Virtualization?

Yes, we saw 16% of VSG license growth was the increase year over year. It just happened to also be the growth of the group in total.

Okay. And that is comparable to the minus 2% of the last quarter, right. because this is pretty much just all organic? This is pretty much all -- there's no new lines in that business, right?

That's all organic.

Wow! Nice quarter.

Thank you very much.

On the margin side for the Networking business, I think the first quarter is probably the first time it hit profitability, so just trying to get a sense for when that comes up into that -- you know, as kind of the corporate 20% rangish. How long do you think it takes for it to get there?

I'm sorry, for which business were you referencing?

The App Networking. And I guess the NetScaler and some of the other business there. My understanding was that the first quarter of -- the past quarter was first time it really got towards profitability or hit profitable or got profitable, so I'm wondering when does it get to the 20 percentish range in line with the rest of the business?

Dino, I think -- unfortunately there's not much granularity I can give, beyond just general themes on the specifics of the business, given the ongoing option review. So, I mean I'm going to have to defer that question. But fair to say we're going to continue to invest in that business and obviously there's a tremendous amount of leverage there as we leverage our Go-To-Market engine.

Okay. And do you have any sense for the license growth in Presentation Server implied in your guidance for 3! and the rest of the year?

Well, I think that right now, as I said before, we've talked about the App Virtualization business growing in the low mid single-digit range and I don't think we're ready to change that yet, even though we had such a great second quarter. It's one data point and we're looking for a few trends. That said, however, we're coming into a pretty easy comp in Q3 on a year-over-year basis, so I do think that we'll looking at growth rates significantly ahead of that long-term target. And for Q4, it's a much tougher comp, but obviously we'll provide a lot more commentary as we get deeper into the third quarter. So, as we -- just reiterate what Mark said, great traction, especially with Platinum. A lot of pipeline visibility and very excited about what we're seeing right now.

Okay. thanks.

The next question is from the line of Sarah Friar with Goldman Sachs.

Good afternoon, guys. Just a follow up on that outside license growth, David. When you saw this a year ago as you launched new product upgrade, it turned out it was kind of pulled forward, so I guess I just want to make sure with Platinum that it's more pent-up demand that you're filling up now from what has been poorer growth on a license basis rather than pulling anything forward. Can you give us some color and some comfort around that?

Sure, Sarah. They're really different dynamics that we saw in the Q4 of '05 and Q1 '06 time frame, and really what went on there is that customers were losing the opportunity to purchase a real high-runner product historically, and so that was --

Right.

-- they could look forward and essentially just take out any future demand that they had, given the lack of future availability. I think in this case we certainly probably converted some Access Suite deals to Platinum, but really this is -- for us this is about increasing penetration in new accounts and broadening the applicability the solution in general. So I did give a little bit of commentary in my prepared remarks, which would -- just talking about timing and any potential for buy ahead of the price increase and just trying to be (inaudible) about that. I think in general we're talking about new business and new seats here.

Great. Okay. And then two other quick things. So first, around the timing of your 10-K, I know you can't give color but you have $1 billion now sitting on the balance sheet. You've talked about stock repurchase, if and when you can. Do you have any idea what sort of size you might plan to do once you're able?

Yes, I think -- you're right. Our primary use of cash over the last several years has really been around share repurchase. We haven't been in the market for a few quarters now because of the option review, so obviously we're going to be biased for continuing that program as we go forward. The timing of when we're going to do that obviously is -- it's out of our hands right now in terms of just working through the -- the final part of the period. We do have, I will say -- just back on the buyback, we have $350ish million remaining against the current authorization for our share repurchase program, and we'll be back at it as soon as we can.

Okay. And then just a final one. A bit more of a technology one. Just given a lot of the hype we're going to see around VMware now as they come out, on the desktop side you just released or just -- you have a fairly new product, there, but it seems like when we talk to customers that this is the next kind of big front for virtualization is on the desktop side. Can you give us any sense for your traction to date, kind of how your -- your thoughts on how that product's tracking?

Sure, Sarah. So first of all, the -- at the [uber] level, while there's lots and lots of smoke, there's not a lot of fire in terms of revenue and customers actually installing this stuff and there are two fundamental reasons why... There are big issues with the economics and there are issues with the experience that the user gets on the end of the wire. And so I'd be so bold as to say that it'll take 12 to 18 months for the right set of things to happen around technologies for user experience to drive adoption. So that when a -- when a user gets their first experience, they won't be telling the IT guy, why are you taking the personal out of computing?

And secondly, some things have to happen around partnerships and integration points, et cetera, to make the economics work so that a larger scale market can develop. Clearly, a lot of investment banks and IT organizations that are very rich and have great leverage on this type of technology, even if it's more expensive than a desk top PC, they'll go for it in the early stage, but that doesn't really lead to a broad market adoption. It's the right economics and user experience. So that's why we;re taking this basically as a longer term gain. We think it's a game that we can have a huge impact in, and it's ours to lose, but a lot of technology and things have to happen before that will take place. And so that's why we are building this expectation around this year as a pilot evaluation year. We'll have some new technology to demonstrate and show early next year, and I think that's when we'll start to see some adoptions that by the time we exit '08, it'll lo -- it'll be a little bit more clear as to how the market's going to ramp going into the next three or four years.

Got it. Okay. Great. Sounds like a good long-term discussion for us.

Yes.

Thanks a lot.

Your next question is from the line of Scott Zeller with Needham & Company.

Thank you. Asking about the customer base and getting people back to be current, can you tell us now that you got the new edition out in Platinum, could you tell us what the minimum pricing has changed to be, so if someone has lapsed, has there been a significant increase in the -- we'll call it the minimum package one needs to get to become current again? Thanks.

Sure, Scott. The answer's not really. I mean, we've had our pricing out there for our getCurrent programs. And in fact, when we increased the the license price in may of some of the products, we actually kept the subscription price the same. And so, right now when I look at our getCurrent, which for those of you on the call, it's the program that we have for people that have lapsed on their subscription of managed programs to really just getCurrent with the latest versions, we saw -- consistent with the record Q1 performance, we saw about the same as far as getCurrent activity in Q2. So still out there. A lot of activity and we're trying to just make it as easy as possible to participate in some of the new technologies.

Okay. Thanks.

And the next question is from the line of Steve Ashley with Robert W. Baird.

Yes, my congratulations as well. With respect to the Platinum Edition, what incremental function you think is really maybe the most enticing and has really spawned this initial interest, Mark?

Steve, I think when it's all said and done, EdgeSight probably created the tipping point, and then probably the next level helped by the technology, the app streaming technology that went into the Presentation Server Enterprise Edition that is obviously part of Platinum as well. I think it's those two things. The strategy that we've employed here and I think it's a -- it's pretty much tried and true is that when we released the first version of Access Suite, which is now back in 2003, we established a price point of $600. And over the course of the last few years we've been working hard to increase the value that you get for the $600 and really establish the price point. And I think adding EdgeSight and the app streaming actually was the tipping point to where customers now look at Platinum, they look at Enterprise and they'll make one of two decisions.

You have those that are already strategically committed to Presentation Server and to Citrix and they'll say, I want the most powerful Windows app delivery product you have, what is it, and the answer is Platinum. Or you get the other customer that'll say, you know, I'm looking for a product that gives me an expanded set of capabilities across particular kinds of parts of the business, whether I'm trying to open up branches in China, support outsourcing, offshoring in India. I'm opening -- I'm trying to support teleworking, whatever. You get that kind of customer as well.

And just to follow up on Sarah's question about partnerships around the DDI initiative. What areas will you hope to develop partnerships in? Is it the service? Is it the SIs? Is it the server vendors? Where would you hope to develop some of that?

Well, the answer is all of the above, which is also one of the issues in the market place. There are so many component parts required in the stack to create a system today that it makes the economics really difficult. And so our strategy is to try to have the keystone set of technologies offering off of the keystone through Go-To-Market partners like SIs, who will eventually do this, as well as service providers. And then be the basically keystone element that brings together server -- server providers, because you need tons of servers, whether they're blade based or standard-type machines, to bring together the Windows terminal -- I'm sorry, the Windows terminals guys, all of which are partners of ours, as well as partners that help in some of the more classical desktop configuration tools, because you need those desktop configuration tools because it's still a windows desktop.

Great. And just lastly, it looks like the expense guidance for the full year is up above $36 million and, David, you talked about taking advantage of opportunities and making some investments. Can you give us just a little bit of color of where that increased spend may go?

I alluded to it a couple of times based on prior questions, but a lot of it is going to be around head count. I mean, head count investments and things to build out, not only on the platform capability standpoint, but probably more on the Go-To-Market aspect, making sure that we're able to go out there and meet customer expectations and fulfill all the demand across all the geos. We stated a few times like EMEA and the Pacific markets, we're frankly just underinvested, and we've got a lot of initiatives that we need to continue to roll out there to be able to leverage some of the success that we've seen in the North American markets into other places in the world. So it's really going to be across those two areas on a real primary basis. Now on a secondary basis, we're continuing to build out the infrastructure of the organization for -- really for scalability. It's about our systems and our facilities and our ability to leverage the rapid growth we're seeing on the top line. So it's pretty balanced, but certainly across those three areas.

Thank you.

The next question is from the line of Steve Freitas with BMO Capital Market.

Hi, good afternoon, and really nicely done on the core business there. I was just wondering if you could break out NetScaler standalone business in the quarter and how that has trended sequentially and perhaps year over year?

Yes, Steve, we haven't been breaking out that for several quarters right now. If you look on the website, though, we'll give you a view of the overall App Networking product group and you can see that was up modestly, frankly, on a year-over-year basis, up about 12%. As far as the contribution of the revenue, obviously NetScaler is by far far the largest piece, especially because we didn't recognize any WANScaler revenue in the quarter.

Okay. Is it true that there's a new hardware platform coming online for NetScaler in the next quarter or two? And if so, should that skew demand at all?

Steve, nothing that -- nothing that we've announced, and so I think we'll have to leave it at that.

Okay. That's it for me.

Okay.

The next question is from the line of Israel Hernandez with Lehman Brothers.

Hey, guys. Most of my questions have been asked, but can you provide a little color on the product performance on a geographic basis? How is the Platinum Edition being accepted in EMEA, in particular, since that's a fairly large market? Second, what's it going to take for NetScaler and some of the hardware products to really see an acceleration in the demand in Europe, in particular? Thanks, guys.

We'll take the geo part of that question first and then ask Mark to talk about NetScaler. Regarding the individual geos, if you look at total growth, we had really balanced growth, frankly, in the second quarter. The Americas grew about 18% on total recognized revenue -- this is all in -- EMEA grew over 15%, and the Pacific region grew 26%. As compared to prior periods, we've just got a real balanced outlook right now. And I would call out, frankly, on the Application Virtualization business, the EMEA market in particular just had a fantastic quarter, as did Pacific. And so those products are doing great all around the world right now.

Israel, with NetScaler, I think your question really applies to all the international territories, both in EMEA and in the Pacific. And it's really going to take a very simple thing and that is to build out our own capabilities to transfer the technical information that a sale and an implementation requires to customers and to partners in those -- in those markets and that takes people. So David talked about the gaps we have in the Go-To-Market end. SEs, consulting teams, even enterprise sales guys that specialize in NetScaler products were very, very slim in EMEA, and in the Pacific, and so we're going to really do a lot to grow those teams dramatically in the second half.

The -- I think it's worth noting that part of our delay in doing this is -- is to really make sure that we -- the products are ready for international markets, that we're ready with the kind of training materials and programs to transfer information to our own employees to on board them, to make sure that we understood the demand generation techniques, et cetera, how to recruit partners, because they're not exactly the same necessarily as a very successful partner around Presentation Server. So I think we now have enough track under our wheels and a complete portfolio for App Networking, including Access Gateway and WANScaler, to have the confidence to start cranking it up in EMEA and the Pacific. So that's the color I'd provide around what David said from a financial perspective.

Thank you.

The next question is from the line of Rob Owens of Pacific Crest Securities.

Yes, good afternoon. With some of the shift in revenue out of the Networking group into the Virtualization group around SSL, can you give us any type of color what the impact was during the quarter?

Well, as we stated before, the Platinum contribution was nearly 20% of that group's revenue, so obviously Platinum was one of the real key stories for the organization. Anecdotally I will say the largest transaction in the quarter was originally scheduled to be a -- a very low seven-figure deal, which was SSL VPN as the lead product, which ultimately morphed into a Platinum transaction at a much larger deal size. And so while it's really tough to nail down the exact number, anecdotally we've heard many instances about (inaudible) right now. It definitely contributed some, but hard to nail down with specifics.

So you can't give me a sense of what the drag was on the Application Networking group?

No, not -- I mean, from a -- while we don't break out the allocation, per se, if you were to just aggregate the MSPRs, it would be 20% of Platinum.

Okay, great. And then with your Online business, can you talk a little bit about the international expansion and maybe some of the success you've seen there, and do you expect to be able to sustain a 45% to 50% type of growth in this business unit?

Well, I think right now on the Online business, it's really dominated by domestic markets, and we've said that a couple of times. The team there is just doing a fantastic executing against the opportunity here and right now just starting to build out, particularly in the EMEA market. That's one that we're focused on this year, starting to drive more and more investment there and I think it'll really be a story into '08 and '09, as we move into more geos. Frankly that's one of the things that'll allow us to continue to keep the growth rate well above the corporate growth rate as a whole. I think that as far as being able to maintain a near 50% growth rate, we're going to hit the law of large numbers and you're starting to see a little pressure on that already just in the last couple of quarters. Our guidance right now would imply somewhere around 40ish percent growth rate. While it's still going to be a fantastic business, we certainly don't anticipate it growing 50% into perpetuity.

Okay, and last question quickly. On the gross margin, it was flat sequentially. Given some of the softness we saw in the Application Networking group, why didn't we see that lift a little bit.?

Well, there's a lot of (inaudible) inside that -- inside the total COGS (inaudible) right now. We still shift a lot of the App Networking products. We also have more in the way of Online Services. So while it's essentially flat sequentially, I wouldn't read into it too much. I think that certainly, however, as we continue to have a higher concentration coming from the App Networking business, it'll be biased for slight margin compression as we've talked, about many, many times in the past.

Great. Thanks.

The next question is from the line of Todd Raker with Deutsche Bank.

Hey, guys, great quarter. Just one quick question. Can you talk about the monthly linearity in the quarter? With the DSO number being so low and this whole issue around prebuying, what does the monthly linearity look like?

Yes, I think you're right. Linearity was a little bit better than what we've seen in a normal quarter. It was more -- more of a -- kind of a 30, 30, 40 quarter instead of what ends up looking more enterprise software, kind of 25, 25, 50, so we did see a very strong midmonth of the quarter. We also saw strength continue into the June period. So nothing terribly impactful there, but just good solid business across the period.

Okay, and any commentary around Ardence or any kind of quantification in terms of what that did in the quarter?

Yes, Ardence continues to grow. It's still an immaterial part of the overall revenue, and one that if you look at our product classification, is certainly the largest contributor to the emerging businesses right now. And while that total group is only -- just a little under 2% of total revenue, that's the largest contributor and the fastest growing at this point in time. So I'd say stay tuned into future quarters as we really start to take the covers off that business and highlight it a lot more.

Okay. Thanks, guys.

The next question is from the line of Walter Pritchard with Cohen.

Hi. Just one question. The rest of them have been asked and answered. Could you tell us about your hiring plans in the second half? You've hired here in the first half I think modestly ahead of where I expected and even where your own guidance was coming into Q2. Could you talk about -- you had 155 additions this quarter. Is that the relative pace you expect in Q3 and Q4?

Yes, I'd say -- I'd say yes, however, if we have the ability to hire faster than that, we probably will.

Okay, great. Thanks a lot.

The next question is from the line of Katherine Egbert of Jefferies.

Hi, thanks. You know, your Online business has [been at a] really steady growth for you. Would you ever consider adding more online, like [SAS] offerings?

Yes, Katherine, I think that's a good question. As part of our software is the service offerings right now, it's a great platform, and frankly we've been able to leverage the platform to offer many new services right now. And I think that in that context, we really already have. When we purchased what was Expercity several years ago, it was really just predominantly the GoToMyPC product with a little bit of GoToAssist coming in, and we're added, obviously, many things since that time and have a few things that we haven't -- really haven't announced yet. So overall, there's a great deal of opportunity that we can do with the Online business, and frankly the challenge is really just determining the balance of investment for growth versus profitability. And I've said a couple of times that I think overtime I'd like to invest more into that business so that we cannot only maintain the growth rate but really be able to leverage the -- the breadth and the opportunity, I guess, in the product platform as you go forward.

Katherine, I would add that we are beginning now to organize the group a little bit more around customer segments, which would lead us to do some additional things that are outside the core, perhaps realtime collaboration space in context with a specific customer segment and what a customer is -- is buying at the same time and what they're using in conjunction with something like GoToMyPC or GoToMeeting or GoToWebinar. But we've invested a lot in a really robust, multi-cast technical platform there that has been able to spawn specifically GoToMeeting and GoToWebinar. We've recently, over the last 12 plus months, moved GoToMyPC and GoToAssist to that technical platform and now we're investing in more instances of it and obviously improving its scalability. We're going to -- this year by the end of the year, we'll have hosted over 100 million sessions on this platform across all of those products and that platform can, in fact, spawn additional products, and so stay tuned on that.

Okay. And then last one, Dave, what does it mean that you've gone to the chief accountant of the SEC? You know, there's a lot of stock option inquiries and that's an unusual -- you know, we haven't seen that before. Can you just explain what's going on there?

Sure, Katherine. Actually, most people that are going through these reviews these days are actually just before filing seeking consultation on a lot of the accounting conclusions before filing, so it's actually very common right now and most of the folks that have filed recently have gone through this process. Really the whole -- the meta message is to make sure it's done right and it's done completely once.

Okay, thank you.

You got it.

The next question is from Kevin Buttigieg with A.G. Edwards.

Thank you. Just quickly back to the question of buying ahead within the Application Virtualization group. As I recall, the price increases went into effect about the middle of the quarter on May 15th. Did you hold the line on those price increases going into effect then? And if so, could you talk a little bit about the buying activity before the price -- before May 15th and after May 15th?

Sure, Kevin, you're right. The prices went into effect May 15th. I think it's fair to say that anybody that had obviously been the pipeline or had quotes out there or things like that, of course we're going to honor the prior price. One thing I'd point out, though, to keep in mind is that this is not type of -- really the type of product that you're going to see a tremendous amount of forward buying or anticipation of a price-point change, so it's really just if we saw any it was business that was already in the pipe. So I don't think it's going to have a real material effect for a long period of time.

Okay, that said, looking at your guidance for the third quarter, by some of my calculations it sounds like the license revenues within the Application Virtualization group, it looks like your guidance is calling for them to be flat to down sequentially in the third quarter. Is that an accurate statement?

Well, the one thing I'd say is we always measure the business on a year-over-year basis, and that's pretty consistent. And we're talking about on a year-over-year business the -- or year-over-year basis -- excuse me -- the business will grow substantially faster than the long-term targets that we've set out.

Right.

But sequentially, because we had such a great quarter, yes, I wouldn't be surprised to see it down sequentially, but again, that's just based on a lot of the commentary that I've talked about in my prepared remarks and as far as answering some of these questions.

Yes, okay, that's consistent with my thinking then as well. And then just real quickly finally, in the past in your SEC statements you had disclosed the profitability of the Citrix Online business, and I recognize now going through the options review that that is going to effect those numbers on a historical basis as well as currently. But I was wondering if you could talk generally speaking about the profitability in the Citrix Online business on a non-GAAP basis and where that has been and what the recent trends in that business have been like? In the past I recall you talking about it in a 20%, 25% range before unallocated expenses, which was what was in the prior SEC documents.

Sure, Kevin. Like you said there's not much I can say about current period or since we've been doing the stock-option review. But just in a systemic context, as we acquired the Company as really has been our pattern, they were running at a little bit of a -- probably a dilutive posture and we were gradually able to march the profitability up over a number of quarters. And up through last year we were operating the business actually above the overall corporate contribu -- or operating margins. And as a pretty self-contained division, I that's -- it's an equivalent apples-to-apples measure. The bigger question is really long terms, and as I stated before, it's balancing the trade-offs between growth and profitability, and those are ongoing discussions we have all the time and we continue to evaluate the market opportunities and turn the dials left and right. But it's a great business, continues to be highly profitable, and I think that's about all there is to say about it.

Okay, great. Thanks very much.

And your next question is from the line of Manny Recarey with Kaufman Brothers.

Thanks for taking my question. It has to do with NetScaler. Last quarter you spoke about you getting some more traction with the enterprise customers. Did that take a step back in the second quarter and what's your outlook for the second half of the year, as that business ramps up?

Yes, Manny, no change actually. We've been running about 50/50, staying very strong in the internet centric market as we always have been, and the enterprise business hung right in there. The -- obviously with the shape of the quarter driven by NetScaler 8, a lot of enterprise customers really wanting NetScaler 8 and especially because a lot of the that features went into it were really designed to enhance the product for the enterprise customer and enterprise web apps, especially when you look at enterprise web apps that -- that face and are delivered over the internet where security, SLVPN, the app firewall, the needing to meet PCI standards and so forth, are really, really critical. So, long way of saying pretty much the same mix as we've seen and what we expect going forward.

Okay, thanks.

Thank you.

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.

Well, thanks for attending the call today. Fantastic quarter, fantastic first half, lots of momentum in the business, a lot of exciting times for Citrix here as we look forward with great optimism and great focus. So thanks again. We'll see you in three months.

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