思杰系統 (CTXS) 2007 Q3 法說會逐字稿

Good afternoon. My name is Molly, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix System's third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS). Thank you. I would like to introduce Mr. Eduardo Fleites, Director of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Molly. Good afternoon, everyone. Thank you for joining us for today's call where we will be discussing Citrix's third 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. The call is webcast with a slide presentation on the Citrix Systems Investor Relations website and the slide presentation associated with the webcast will be other posted immediately following the call. Before we begin the review of our financial results, I want to state that we have posted product [retroduction] and historical revenue trends related to our four product groupings to our website. 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 risk 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 including the effects of FAS 123R on certain of the company's GAAP financial measures. 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 and contained in our most recent 10K 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, gross and operating margin, operating and net income, and earning per share. The most directly comparable GAAP financial measures and reconciliation of the differences discussed on today's call can be found on the end of our 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 on the third quarter results for the company. In addition to providing with commentary on our performance, I'll discuss the trends in our business and review our current outlook for Q4 and full year 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 U.S. GAAP figures. So as you can see from the numbers, we're experiencing continued momentum across the business and execution against our strategy. Specifically reported revenue of $350 million, up 26% over Q3 last year. License revenue up 24%. Adjusted operating margin of over 24% and adjusted EPS of $0.41. A 21% increase year-over-year. So overall, a great quarter for all product groups and geographies.

Now I would like to provide more color on the three main product areas and the trends in those businesses that we experienced during Q3. Including our App Virtualization business, primarily focused on the presentation server family of products, our App Networking business and the progress we are making to establish Citrix as a leading player in the App Networking market. And our On-Line Services business and continued success in the SMB market, highlighted by strong GoToMeeting and GoToWebinar adoption. So first let me focus on our App Virtualization products which provide customers with the best way to manage and deliver windows applications. In total the group grew 17% year-over-year to $243 million in revenue. Within this number, product license revenue increased 15% in the quarter. A key driver in Q3 was continued strength with the platinum edition of presentation server 4.5. With the added benefit of integrating the adjacent products that add end-to-end value to Window's App delivery such as Password Manager, Access Gateway and EdgeSight. Customers are responding to the product's increased value and effectiveness. In fact, PS platinum contributed 19% of total App Virtualization license revenue in the period. This strength in combination with the other product packaging changes earlier in the year has helped to increase the average deal size of this business by over 10% compared to the same quarter last year. License update revenue was also strong in Q3, up 21% over Q3 '06.

Driven by subscription advantage renewal rates in the mid-80s' and GetCurrent revenue of approximately $10 million. The remains significant opportunity for GetCurrent in the future with several million licenses not currently on SA. So depending on execution and the timing of program activity, this should contribute to the overall license update line and continue to build our recurring revenue pool in the future. The second area of focus is Application Networking business. Total revenue for this group grew 55% year-over-year to $46 million. The tactical issues that we highlighted last quarter were resolved as expected and the product showed solid traction during the quarter. Half of the top ten NetScaler deals were in the enterprise phase with the other half in more Internet Citrix markets. As we discussed in prior quarters, we then focused on building out our capacity to service customers, and while still a work in process, we've doubled field sales and SE head count since last year. One of the beneficiaries of this expansion has been EMEA which had a great quarter and represented nearly 25% of the NetScaler business in Q3. And overall, the pipeline for App Networking products continues to be strong. We are especially encouraged by the growing pipeline of enterprise opportunities and we are confident that we can continue to execute against our goal to establish Citrix as a leading player in the App Networking space.

The last area I would like to highlight is our continued success delivering software as a service through our Citrix On-Line division. Citrix On-Line delivered another excellent quarter with revenue exceeding $55 million, up 43% from last year. The growth in this division is being led by the GoToMeeting and GoToWebinar, Realtime App collaboration solutions that continue to be some of the fastest growing products in the industry delivering greater than 90% year-over-year revenue growth. This result is the tangible payoff of our continued focus on the SMB market and products that are simple to use and predictably priced. Our On-Line marketing and direct sales approach provides us with a balanced revenue model while managing costs effectively to fulfill demand through highly scalable and reliable infrastructure. In addition, the products continue to receive numerous accolades as Best-In-Class. Including five new awards in Q3 alone. These included Laptop Magazine which picked GoToMyPC for an Ultimate Choice Award and GoToMeeting for an Editor's Choice Award.

Moving forward, our On-Line Services business will continue to be focused on App Collaboration and Remote Desk Top Access. This year we are beginning the expansion of markets outside of North America and while it's going to take some time for these investments to contribute to the profitability of the division, this is one example of how we plan to invest for growth and compete vigorously in the markets to expand our leadership. So in total, looking across all of the product areas we were happy to have delivered this kind of performance giving us a solid foundations we exit 2007 and begin to prepare for next year.

Now let me talk briefly about expenses and operations in the quarter. Adjusted gross margin was 92%. Compared to 93% last year. Reflecting the change in mix of software, appliances and services that we were forecasting. Operating expenses were $235 million. Up 26% year-over-year and up 1% on a sequential basis. The annual increase was driven by several factors including head count growth across the company. OpEx associated with acquisitions and variable selling costs driven by higher bookings. Regarding head count we currently have over 4280 employees, up 200 from last quarter. The largest increases in the quarter were in the sales and services teams really focused on application networking and customer support. And finally cash flow from operations in the quarter was $86 million. Bringing the trailing 12 month total to $415 million which is a record for the business. We currently have about a $1 billion in cash and investments on the books. The cash balance has been increasing throughout the years since we've been precluded from repurchasing stock over the past few quarters. And after we close the Xen acquisition, now, we expect to be back in the open market. The remaining authority in our buy-back program is over $200 million with an additional $100 million that's already been committed to structure buy-back programs over the next few quarters. So really overall, very pleased with the Q3 performance. We continue to execute against our strategy and deliver strong growth and profitability while balancing the need for significant investments in the new businesses and the routes to market that will be important for our long-term success.

So finally I would like to discuss our current outlook and expectations for the fourth quarter and full year 2007. But before we discuss the numbers, let me provide you with some context around our forward outlook. Obviously we are continuing to see solid revenue traction across multiple areas of the business. We were also optimistic that our App delivery strategy with the investments we were making will help sustain the momentum into the future quarters. To capitalize on this huge opportunity, there is a number of areas that we believe will benefit from additional investments, focus on further enhancing our product development initiatives as well as our ability to effectively reach more customers around the world.

In addition, the acquisition of XenSource is proceeding faster than expected. We currently believe that we will be able to close the transaction shortly and therefore will be consolidated about two months of financial results during Q4. So included in our Q4 guidance today, we currently expect XenSource revenue of about 1 to $2 million for the partial period, 4 to $5 million in expenses. A $100 million cash out lay upon closing of the deal. And the issuance of approximately 8 million shares upon closing. So all end, the XenSource translate to $0.03 of forecasted dilution for Q4 on an adjusted basis. So with these items I just mentioned, we currently expect consolidated results for the fourth quarter of total revenue in the range of 374 to $382 million. Including contribution of 58 to $60 million from On-Line Services. Adjusted tax rate of 23 to 24%. Interest income of $12 million. Shares outstanding of 194 to $195 million. And adjusted EPS in the range of 42 to $0.43. So including Q4, we now expect for the full year 2007 total revenue in a range of 1.36 to 1.37 billion. And adjusted EPS in the range of $1.52 to $1.53 per share.

Looking ahead I want to provide early thoughts on our 2008 operating model. First, as we previously guided, we expect XenSource to contribute $50 million in total revenue and generate total expenses of 60 to $70 million. These investments plus the additional shares being issued for the acquisition will generate delusion of between 15 and $0.20 for the full year 2008 with the delusion being modestly front end loaded in the year. The tax rate next year in a range of 24 to 25%, and with balance growth of investments to drive revenue plus the temporary delusion from XenSource investments, we expect adjusted operating margin in the lower 20% range during 2008. And then expanding back upwards in 2009. So now I would like to turn it over to Mark to give you additional details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks very much, David. Thanks everyone for joining us today. I am really excited about our third quarter performance. Exceeding expectations for the quarter, posting record revenue of $350 million, and growing 26% over last year. 2007 is shaping up quite well. Up 22% to the first three quarters with revenue of almost $1 billion. I really impressed by the Citrix team and extremely proud. Keeping an eye on the ball, execution focused, strategically aligned. Last quarter on boarding 200 new employees, integrating acquisitions large and small, driving in an unprecedented pipeline of new products, adding much needed go-to-market strength, especially in App Networking and turning in another stellar financial performance.

Last quarter I talked about the leading indicators across the business including opportunity pipelines, new product releases and channel mind share. These indicators gained additional strength in Q3 and created great quarterly results. We are centered up on three high growth hot markets with excellent long-term relevance to individuals, small businesses, middle market firms and global enterprises. The On-Line Services market for Realtime App collaboration and Remote Desktop Access is a 15 to 20% growth opportunity. Our On-Line Services division continues to tap this market at a healthy rate growing 43% in Q3. Further solidifying our presence with SMB customers and giving us new product, market and distribution opportunities going forward. The App Networking market for accelerating and optimizing the delivery of web applications offers 20 to 30% growth. We deliver 55% growth in this space driven by the new NetScaler 8 release and early acceptance of the brand-new NetScaler Platinum Edition and the Virtual Infrastructure market for Applications, Desktops and Servers. It represents our largest opportunity growing 25 to 30% a year. Our virtualization product for Windows Apps, led by the flag ship presentation server family showed another quarter of double-digit growth. We're bullish about the relevance of that virtualization and our game plan to continue as the gold standard. On the horizon as we close the acquisition of XenSource, we will strengthen our position in desktop virtualization. And enter the server virtualization market. Becoming the only company with an end-to-end virtual infrastructure. Architected to deliver applications at a lower cost, at higher performance, with greater security, and maximum business agility.

So next let's talk about our trajectory in each of these spaces. Our On-Line Services growth of 46% year-to-date reflects the compelling value proposition of using the internet for virtual meetings and virtual working. Our focus on the consumer and SMB customer with products that provide no capital investment, no training and are very simple to use has been quite successful. We think enterprises and corporate users around the world will benefit from the same approach. Our Go-To products are supported by an on-line virtualization platform that secure, scalable and fast. In fact, in 2007 alone, this platform will deliver over $100 million on-line virtualization sessions. We also have some exciting plans to further leverage this platform within other Citrix products. Like the integration we have done with our brand-new on-line service for work force continuity. Project Kent. We are taking this prod together market through an OEM relationship with IBM. Launching later this quarter. Project Kent has now been rebranded as the new IBM virtual work force continuity service. This on-demand service is a first. Getting customers a simple way to handle employee communications, collaboration and access to vital applications in the face of a work force disruption. IBM is a perfect partner for going to market and it's a great example of leveraging our core technology while expanding our opportunity in the on-line services marketplace.

This year we introduced new top-of-the-line platinum versions of both Presentation Server and NetScaler. They offer customers end-to-end solution for delivering windows and web Apps. Integrating powerful end-to-end features along the line of site from data centers to end users. In a way that only Citrix can provide. During our summit conference early this year, we trained our sales and channel teams to lead customer meetings with platinum editions. Positioning these products where competition cannot go and offering customers our best value solutions for app delivery. In its first full quarter on the market, NetScaler Platinum generated very strong results. Over 10% of NetScaler product revenue. And early and promising indicator of customer acceptance helping us penetrate enterprise accounts. In conjunction with the June release of NetScaler 8, NetScaler Platinum became the first web app delivery system to offer a fully integrated app firewall, SSL VPN and web app performance monitoring at one attractive price.

This positions NetScaler as a comprehensive solution to delivering secure, fast enterprise web Apps. Well beyond the layer 4 through 7 network box concepts promoted by competitors. Overall, our App Networking product group is up 40% year-to-date. Outgrowing the overall market once again.

Our Access Gateway line of products continues to trend at a healthy pace with much of the growth being reflected in the acceptance of our PS Platinum offering which includes Access Gateway and we continue to rapidly enhance WANScaler as a core component of our overall delivery infrastructure. WANScaler newly available Mobile client software for the Micro Branch and the Branch of One gives us a differentiated solution for the Mobile and small branch market where an appliance form factor doesn't make sense. With the huge growth in user mobility, the combination of Access Gateway and WANScaler gives us a great advantage for delivering applications to Mobile users without compromising performance or security.

Going forward, both Access Gateway and WANScaler products will significantly enhance the delivery of Windows Apps, Web Apps and Windows Desktops as core components of our end-to-end architecture. While we were pleased with 40% growth year-to-date in App Networking, we are still GoToMarket constrained. Especially outside of North America. Early this year we began to expand the EMEA App Networking team which positively impacted Q3 results. We need to do more of this. So in Q4 and throughout 2008, we will be accelerating this expansion as part of our GoToMarket investments. This will build worldwide presence to support customers and partners with NetScaler, WANScaler and Access Gateway.

The platinum product strategy will continue as a strong differentiator for us going forward becoming the corner stone of each product line's market positioning. Enhancing the total application experience for end users and IT administrators alike. Our App Virtualization business has grown 14% over the first three quarters of 2007. Benefiting from repackaging and repositioning of PS 4.5. Presentation Server Platinum is now a complete solution for delivering Windows applications. With the ability to virtualize Apps on both the server and the desktop. With realtime monitoring, single-sign-on and full secure access controls. In the third quarter the PS platform mix was strong, 19% of product licenses. And significantly about double the mix of our previous Access Suite offering. Platinum is allowing partners to gain additional technical service engagement. It's driving higher ASPs for Citrix and it's enabling customers to really expand their use of App Virtualization across the enterprise. Platinum has allowed partners to stimulate new opportunities in the install base. There were some really impressive platinum deals during Q3. In fact, of the top ten platinum deals, six came from international markets, 6 were new customers and 4 were upgrades. So market acceptance is broad based and worldwide. We expect to see more of this.

Next week at I-forum, we will show additional capabilities designed to strengthen our platinum strategy. And further demonstrate the power and value in App Virtualization.

Going forward, we were extending our virtualization solutions. For the data center behind the App, and to the desktop in front of the App. Recently we announced the acquisition of XenSource. A strategic acquisition that expands our virtual infrastructure market opportunity. XenSource brings exciting possibilities to build out a set of dynamic virtualization services. Technologies that enable the building of a full virtual infrastructure spec. This will allow Citrix to expand our leadership in the broader App delivery market. And in key enabling technologies that make the end-to-end computing environment far more flexible, more dynamic and far more responsive to business change. The acquisition will also extend our longtime great partnership with Microsoft. And extend it into the windows desktop and server virtualization spaces. And will present us a whole new opportunity for leveraging Windows as an innovation platform.

Since signing the definitive agreement, XenSource has continued its great momentum. It led the charge to create OVF, the new Open Virtual Machine format for Virtual Machine portability. XenSource released the world's first imbedded [hypervisor]. XenExpress OEM Edition. And recently achieved a strong customer milestone. Very impressive posting its 1000th customer during Q3. All of this being supported by the exciting August introduction of XenEnterprise v4.

Now in August when we announced the deal, we said, and I quote, we will be on a very fast ramp. Planning to generate over $50 million in revenue in 2008 with the potential for $200 million by 2009. End quote. And all of the integration planning has been pointing at these goals. As David mentioned, our time line for closing on the acquisition is near. And so I would like to re-iterate the basic integration plan which is an important component to understanding our outlook. XenSource will form the core of a new division. The virtualization in management division. We call it VMD for short. Led by Peter Levine, presently the CEO of XenSource, This division will drive our business in server virtualization in App delivery management. And will include three product groups. Our Management Systems group. Our Advanced Solutions group. And the new Xen products group. This division will also be responsible for our strategic business development and our OEM routes to market.

Leveraging the new talent and experience on the XenSource team, and allowing us to see the server virtualization market to create opportunities for our value added products sold through our broad base channel. The GoToMarket plan for our new server virtualization business has been designed to ensure we get the speed, focus and leverage we need to meet our aggressive growth objectives to gain market position and to avoid unnecessary disruption of existing businesses. As recently reviewed by CRN, XenEnterprise v4 is quickly catching up to its main rival. Customers and partners that have touched before are getting hands on proof. They love that it's 64 bit to the metal. They love its extreme performance with Windows work loads. They love its Xen motion for live migration. XenCenter and its ability to create virtual pools of servers and storage. And they love how simple and affordable it is. Since the v4 release is new, it hasn't been broadly exposed yet so we will do a lot to change that. At next week's I-forum conference we will demonstrate the technology and many new features that have yet to be experienced by customers and partners. We have an amazing opportunity here so we are front loading the 60 to $70 million investment over the course of 2008. Hiring almost 300 new employees for product development, channel management, partnering and OEM sales. Building out a brand-new infrastructure for training partners and customers. Investing in customer base demand programs. In other investments to leverage the technology in our other product lines. I hope this gives you a better sense for our strategy and how we were building an execution and operating plan around it.

End-to-end virtualization will be one of the main themes at next week's I-forum App Delivery Expo. We have some exciting announcements queued up including some new products. One of the new products we will be showing is Citrix Provisioning Server announced last week. Provisioning server uses streaming technology to deliver any type of work load. Windows or Linux based to any kind of server whether it's physical or virtual. This product is based upon Ardence technologies acquired earlier this year and brings new possibilities to data center operations. Impacting TCO, agility and ability to run green. Provisioning server with extend; however, beyond the server, beyond the data center. In fact, last week during the Gardener Symposium, Michael Dell announced their flexible computing initiative. As part of the initiative, Dell is shipping their on demand desktop screening solution. A solution that allows a full windows desktop whether it's XP or Vista to be delivered from the data center. To a completely stateless diskless PC over the network. The Dell solution includes diskless PC, back end streaming hardware and Citrix Provisioning Server technology licensed under OEM terms for this ground breaking solution. We will have lots more to say and demonstrate in this area and in application desktop and server virtualization next week. And explain just how important and essential virtualization is to an end-to-end application delivery infrastructure. The response to this idea is making huge sense giving IT executives a clear and flexible architecture for really aligning IT with business objectives. The customers I talk to are struggling with the business relevance of IT. Enabling business change and market responsiveness really tops their list of priorities.

So application delivery is resonating extremely well with them. And we fully intend to establish Citrix as the category leader. As you can see from our record results, these infrastructure markets offer tremendous growth potential. Rewarding us for continued investment in geographic GoToMarket gaps. The pace of product innovation and the integration of acquisitions. APP delivery is a profoundly strategic opportunity for Citrix. Our vision, execution and financial results have put us in just an amazing position. So now I like to open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sarah Friar with Goldman Sachs.

If I could just turn to the operating margins. You talked about lower 20% range for 2008. And then extending back upwards again in '09. If you exclude out the XenSource piece, would you still see some decrement to the margins as you invest in the NetScaler business? Or would the idea be to more or less keep those flat and XenSource piece that's dropping you back down?

Yes, I think, this is David, the largest part of the statement is related to XenSource. If you factor in the investments were making, it's A, between 1and 200 basis point impact on margins on an adjusted basis 2008. I think where we are right now running this year between 23 and 24% is appropriate given the large investment year that we have been making. I think when we look forward, the opportunity that we have in front of us to continue to build out the GoToMarket footprint across Application Networking in particular and really across product development efforts throughout the company, I think we see a lot of places where further investment will help drive long-term growth market share and sustainability. So that's -- high level that's what we are think being going into 2008.

If all things were equal with that XenSource we would be looking at a similar margin footprint to what we saw in '07 and slightly bigger given you are getting the top-line growth rate? Is that fair?

Yes, we had a big range for the last few years. We were probably operating closer to the lower end of that range as we focus on driving investments to grow the top line. And I think we have a lot of opportunities as I said a lot of times to expand and grow market share from this point. I think that's a fair statement.

Okay. But the low end of your range was always mid-20s before. You haven't dropped below that for the quarter?

Well, I mean, this is we are talking about an investment year in 2008. Layering on the temporary XenSource solution. Those are pushing us to the lower part or below that range on a temporary basis.

Okay. And then, Mark, on XenSource in terms of GoToMarket for that $50 million, how do you think about in terms of direct versus indirect versus OEMs and when will we hear more about the OEM and channel partners that you are signing up?

The way we think about it is a little over half of that revenue we believe can come through our traditional one and two tier partnerships around the world. And the focus on the GoToMarket integration is they are getting a fast ramp. In the mean time, the XenSource team has done a great job on sort of the other half of that part of the business laying the groundwork for OEM and actually in on-line business selling sort of direct from an on-line store. And think about that as the other half, maybe a little bit less either directly coming through as revenue or influenced revenue when you look at some of the resellers that will be keyed up under the OEM agreements. So that's the way we are thinking about it. I think there will be more to say about it. Unfortunately, we can't -- we haven't closed the deal. We can't make any announcements here. But stay tuned. There is lots more coming.

Sure, sounds great. Thanks a lot.

Thank you, Sara.

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

Hi, guys. Wanted to spend time on presentation server. You obviously seen some mid teens growth year-over-year over the past couple quarters. Just what is your expectation for that when you do look to the December quarter and when you do think about this business longer term?

Sure, Phil this David. Let me take the first part of that question. Yes, we are extremely happy with the performance of the business over the last couple of quarter. I think the big story there continues to be around platinum. We have talked about platinum being nearly 20% contribution from the overall license mix within that business right now as customers are looking at the broader solution instead of the tactical more tactical focus point products. So that is driving a increase in deal size and increase in overall ASP. It's early trend. We have got a couple data points now. If we were trying to watch it the next few quartered to see how to develops. The expectation for Q4 right now is more back to normalized growth rate on a year-over-year basis really a statement of the great Q4 we had in 2006. If you remember, we had really strong growth then. We were looking at kind of lower single-digit growth on a year-over-year basis for Q4 '07. And then longer-term, still think this is a mid single-digit growth business for licenses and then low double-digits when you include the subscription business as well. But early trends in the platinum very encouraging and hopefully we will have more to say on that in the next couple of quarters.

And then also [AnG] was obviously particularly strong this quarter. Talk about benefiting from the investment by the internet portals, quarter before the Q4 surge. How do you think about that in Q4 given the extreme performance they had this quarter?

Again, Q3, great performance, we saw a good blend actually between Enterprise and Internet Citrix accounts. About 50/50 I think I mention earlier. In Q3 historically has been a really strong quarter for us and I think it continued to be this period. In Q4, from of a license standpoint, I expect growth to be north of 40% year-over-year. While it will be somewhat muted on a sequential basis, we really do measure the business and manage it year-over-year. So 40% growth, looking to continue to take some market share in Q4.

Thanks.

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

Thank you. I will ask a question on Presentation Server. How would you characterize where we are in terms of the penetration related to this product cycle and how long do you think we should expect the 4.5 impact to be from a quarter-to-quarter perspective.

Adam, I think most people would say in spite of the tremendous uptake we've seen in 4.0 and 4.5, we are still early in the cycle. Certainly platinum is helping to get customers to upgrade and move forward, maybe ahead of when they normally would which would typically be on an infrastructure refresh. Either server or server operating system or both. And so I think we are still at the front end and I think that will lead us into 5.0. Which will move the bar higher. And I think we will be sort on this endless cycle never really catching up to the opportunity. And always staying out ahead of kind of how Microsoft enhances the platform and make sure that we are leveraging the platform. We are preparing as you know very significant way for next year's launch of windows server 2008 with obviously a product announcements and so forth that we are very confident. So I would say that the goal here is to continue to elevate the strategic value and strategic positioning of App Virtualization and allow Presentation Server to ride that wave and its results be manifested in that. That's why we are pretty excited about Platinum. And I would say that if we are -- if we continue to stay on the trajectory by increasing the mix of Platinum and the overall Presentation Server mix, that will be the core indicator of our success there and we will show next week at the conference how we intend to do that even further with some announcements and demonstrations and so forth. I think we will be able to continue this trajectory.

Terrific. If I could just for a minute shift back to the out year commentary understanding you are trying to give away specific guidance for counter weight. You did give us share count information, some tax rate information and margin commentary. Would you be comfortable talking about what you would expect earnings growth to be for calendar '08?

Not yet at this point in time. Right now we were trying to get an initial look into 2008. Honestly we haven't finished our internal 2008 planning. This is simply an early stage prudent outlook into the next year. We will give more granularity come January call.

Okay. Then if I could just go back to the margin commentary to clarify because there is a violent reaction in the after market to your comments. If you look at the margins this year, you basically would suggest that you will see 100 to 200 basis points of decline on a year-on-year basis to reflect XenSource so your margins will be down 100 to 200 basis points next year?

I think we are talking about a range somewhere in the lower 20s now. And frankly we have been operating in the lower 20s throughout 2007. And this is a early stage comment about the opportunity we have in front of us. I think that the number of places that we could invest to drive higher revenue growth longer term sustainability are pretty pronounced. I think its incumbent upon us to make sure we were investing enough into that cycle. That said, we were seeing a lot of traction as evidenced by Q3 in across the App Virtualization business and App Networking business. And a lot of the investments we have been making this year are starting to pay off. There is opportunity to expand margins into next year? Sure. But we will balance that with the potential investments we may be making. And again, these are early stage comments. And we will give a lot more granularity as we work through the plan.

Terrific. Thank you.

Your next question comes from the line of Rob Owens with Pacific Crest security.

Good afternoon, everyone. Wanted to dig a little deeper into the Application Networking group. I understand there was a few carry-over items from the prior quarter with 8.0 shipping and the WANScaler deferral and help me understand what the run rate business is for Q3 and what we should expect for Q4? It sounded from your commentary it could be up sequentially from these levels.

Yes. I think there was -- the only real carry over was we talked about a deferral of WANScaler. A couple million in Q2 that we didn't recognize, we did recognize in Q3. So couple million there. The other phenomenon was around the late availability was the 8.0 platform. In a normal circumstance we see pause of order as customers look and eVal and order the new platform. So I think that the run rate business was pretty darn close to the reported numbers. We had great strength across the globe and really led by net scaler products.

I think the thing I would add is that the investment we made early in the year bringing on almost 30 specialists in the App Networking team in EMEA specifically really started to pay off in Q3 and we will do and see and do more of that. Which should help us especially on the enterprise side which is where the huge opportunity remains for us.

Are you seeing the payoff more so on the NetScaler side? More traction on the WANScaler side? Can you see us a sense of what bookings did sequentially for WANScaler?

Obviously WANScaler still quite a young and new product for us. And small in the shadow of NetScaler which is the overwhelming majority of the revenue from App Networking.

Thanks.

Your next question comes from the line of Katherine Egbert with Jefferies.

One more time on the operating margin. Dave, you said it would be down a bit in '08. But then you said it would recover in '09. Can you give us a sense what you mean by recovery in '09? Will you make up that 100 to 200 basis points and then some?

I think this is a business that has a lot of leverage potential in it. And when we were talking about 2008, obviously the biggest impact is Xen. We were investing against an enormous opportunity right now. And as we do that, and build that out, we will obviously have to the short-term delusion. Our plan -- delusion. Our plan right now is to show flat to accretive in 2009 from the Xen business. That's the single biggest swing factor you can see the market expansion in 2009 and beyond. Again, that's a long time from now. That's the way we are thinking about it.

Okay. And when do you expect XenSource to close? Will it close this week like before I-forum?

We have got the California Fairness hearing this Friday. So I would say we are virtually done.

Okay. So that means that once it's closed, then the press announcements will become your press announcements.

That's correct.

And then lastly, you comment on the taxes? You consistently say 23, 24% but they are consistently below that. Are you being conservative and as you do more offshore, do the taxes come down over time?

The single biggest factor is just where the earnings are coming in. On a geographic basis. We obviously have a lot lower tax rates in the international markets. And we had great quarters coming out of the Pacific region and the EMEA region in Q3. So there was just more income there driving the tax rate lower. Yes, I think there is the potential for it to come down from our forecasted rate. At this point in time we are comfortable with that. We do think there will be more income coming from the North American markets in 2008 and beyond. At this point in time kind of a 24, 25 range is probably the right place to be.

Okay. Thanks.

Your next question comes from the line of Sal Eyal from CIBC World Market.

Thank you. Hi, good afternoon. Two quick questions from my end. Deal size is obviously getting bigger and without also the ASP as you mentioned. Could you quantify on approximately an average of the ASP this quarter how much they have been going up?

It depends what business you are looking at. Really in the aggregate we have an average deal size of somewhere between 50 and $75,000. And to obviously a great number of transactions. Our largest deals in the quarter -- and we have 10, 12 transactions over a million dollars this period. A number of pretty big deals. Companies looking at the platform very strategically. Overall, I think probably the most important subset of that would be around the App Virtualization business. The impact from the product marketing changes in the Presentation Server Family as well as the impact from platinum has moved that ASP and average deal size up by more than 10% over where we were this quarter last year.

Fair enough. And obviously great success within EMEA region. Can you maybe specifically touch on the country within Europe that you have seen notable strengths this quarter?

We saw pretty balanced growth really. Frankly across the globe and around the specific regions. When I look across like the largest deals. The southern part of Europe had a few. Central Europe had a couple as well. A good balance of business really.

Got it. Thank you very much. Good luck.

Thank you.

Your next question comes from the line of Michael Turits from Raymond James.

First question is this, on the fourth quarter where (inaudible) you are at 8% sequential growth which is lower than you seeing typically in the fourth quarter. Maybe some of that comes from the catch-up on the deferred revenue piece from WANScaler but it seems a little low there. Are you just being conservative? Or why should we see less seasonality?

I'm sorry, could you repeat the first part of your question?

Okay. Let me try again. Just one question. Which is fourth quarter you got 8% sequential growth at the midpoint. I understand that which is lower than typical. There is some catch-up I know because of WANScaler recognition boosted things a couple million dollars but it seems conservative prior to seasonality pattern.

The WANScaler piece was insignificant part of part of the numbers right now. I think that Q4 our current guidance is going to point you for total revenue somewhere about 18 to 19% year-over-year growth. We were looking at the business more across the portfolio. That's consistent with the growth that we have seen historically. And we are very comfortable with the pipeline and the opportunities going into Q4. It's always our biggest quarter. We just look to start closing business right now frankly.

Okay. And then just clarification, on margin and delusion. I think that earlier you did say that 23 to 24% on the core business which is about where you have been currently looks good going into a 2008 is just wanted to clarify that, is that correct?

Yes, I think the core business is unchanged and like I said a couple times earlier I think there is opportunities to continue to expand margins whether it's in '08 or into '09. But we were very, very focused on driving growth in market share at this point in time and we will balance investment against the opportunity, of course. But we are maintain our standard focus of long-term growth and sustainability.

I just wanted to make sure, you said just now that you thought Xen would be flat to accretive in '09. I would have to check where you were before. I thought you said accretive. But is that -- flat to accretive?

No change in our prior stance. No change.

Thanks a lot.

Your next question comes from the line of Brian Essex from Morgan Stanley.

Good afternoon, guys. I want to get a sense around deferred revenue. It looks like it's relatively flat over last quarter. Similar dynamic to what we had last year when licenses were substantially down. Is that just because it was sequential decline or were there a lot of one year deals in there that fell off the balance sheet or different dynamics happening there that caused it to slide (inaudible) -- than expected?

Deferred revenue is really a function of the timing of the opportunity pool for subscription advantage. So what I mean by that is when customers are coming up for their renewal and Q3 each year is the low point for when the opportunity pool is. You go back and look at deferred revenue growth over prior years you will see that Q3 generally is flat. Q4, however, large opportunity pool. I would expect significant growth in deferred revenue in the quarter. So just the timing issue.

With respect to the conclusion of your stock option review process, was there a lot of pent-up exercises there on the employee side that you needed to offset? Or was it pretty stable due to relatively quick time frame which you were able to conclude that?

There was some employee exercises. Nothing that hit my radar as being terribly out of the ordinary. We did conclude that. Pretty close to when we went into our normal quarterly blackout period. Which is why we entered into structured share repurchase program instead of doing an open market one. Nothing terribly interesting there.

Thank you.

Your next question comes from the line of Daniel Ives with Friedman, Billings.

I have a question just on enterprise spending and with everything went on, you had a great quarter. But just in talking to customers and talking to sales guys, was there any discernible change throughout the quarter in regards to spending, trepidation? Obviously didn't show in your results but more from a macro perspective. What's the feel there as you guys are seeing in the street. Thanks.

Daniel, this is Mark. As I traveled during the quarter I didn't see any change in outlook. Certainly from a macro point of view, everyone is concerned about sort of the state of equity markets and kind of how the Fed and sort of their analogs around the world are responding in trying to manage what is pretty volatile environment. So I think there is a lot of concern, but in kind of lower to the ground. I think every customer I talked to is -- has been bullish about their business. And even into 2008. So we are feeling the same way based upon the kind of value proposition that our product offer whether it's to reduce the cost of IT operations, or to gain kind of agility to respond to business opportunity kind of on the upside. We were blessed with having infrastructure that add value in both dimensions which is unusual and unique in the industry and part and parcel of having a strong infrastructure play which really is the underlying rationale for the kind ever guidance we are giving as we look out and establish three year goals for the company and look at the businesses that we understand extremely well. Obviously historical App Virtualization business where we know how to scale it. We know exactly what's involved. And we were going into a period where we are going to be launching a whole new version of it running on Microsoft's windows server 2008. The On-Line business, again, a business whose model we understand extremely well. We know kind of what you get out based upon what you put in. And we think there is a tremendous opportunity there. That sort of the next layer.

App Networking we took probably I would say a good 18 month, maybe even two years most people would say to really get confident about how we GoToMarket in terms of what partners, the products, how to train, certify them. Hiring our own people. APP networking specialists and putting them in the field and I think we understand the metrics around doing that and we are going to the market is huge and strategic to us. That's kind of the next layer.

And then finally I don't need to explain the opportunity in markets is for Desktop and Server Virtualization being the newest market we are entering and we think we have a great combination with XenSource and the ability to combine technologies that are core to Citrix today with XenSource core technologies along with the great channel in Microsoft partnership and we should be investing in that. So we are going -- we think we were doing exactly the right thing. For forgetting the fastest growth rate on the top line which then translates into a long-term market position that you monetize over and over again. We were in that mode and that's what Dave is trying to explain and what we are very, very confident in doing.

Just a final question, with the user conference next week, just the timing of the acquisition, are you have you tried proactively on the XenSource side get customers to come to the user conference. Give the opportunity I'm curious how you are handling that and giving the timing and everything.

The answer is yes. But remember, the XenSource customer base just crossed the 1000 mark. And so really, what we are doing is getting the word out, attracting during this conference the Citrix customer base which is much, much larger and we were going to show that those attendees how we are going to bring them Server and Desktop Virtualization in a complimentary way App Virtualization and how we can tie all three together in a very, very powerful infrastructure. And then obviously at each year we up level the type of attendee that comes to this conference. So this year you will see record number of IT executives where architectural strategy where business relevance around how technologies can impact business strategy are really important. And so that is what we will be showing. Obviously taking the vail off of some really exciting new things. We have a tremendous line-up of media and industry analyst that will be there. Partners from around the world within the industry and because of GoToMarket ecosystem and overall should be a exciting week and everyone is totally geared up for it.

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

Thanks very much. I don't know who wants to answer this, Mark or Dave, can you talk about the networking side, the improvement there. How much of that was the channel finally starting to get hold of it in places like Europe and AsiaPac versus building the direct sales force. Can you give more color on that?

You take sort of half of it and our model around the Internet Citrix marketplace and the teams that do that are second to none. And have done a tremendous job there. So the other half of the business is really the enterprise business. And we were seeing two things. First of all, EMEA is coming on. EMEA can say we made an impact in the App Networking business and that came strictly from great execution around hiring the right people, putting in the right place both SEs and channel partnering people in EMEA. Then the other piece of it came from partners in the U.S. that have just continued to mature in their knowledge of all of these products and are able to take them to market more and more independently. We also had a couple of great architectural wins with very large enterprises which really set the stage for repeat orders and a platform for references to other enterprise customers. So that's what we saw in the quarter kind of inside the App Networking business from a color commentary point of view.

One final one on XenSource, I assume with the deal getting closed, shortly, would the main impetus in terms of training of partners be at your traditional solution summit meeting, is that what you are aiming for or do you think you can accelerate that a little bit in front of that?

We set some aggressive goals out to exit this year with 1000 partners authorized on the XenSource products. And to exit Q1 with an additional 1000. So as you imagine we already begun this process working closely with Peter and his team. And that includes having highly leveraged ways to train and authorize partners and as I think I mentioned earlier, many partners that are certified to sell [BMWARE] products find it to be very, very easy to become authorized to sell the XenSource products. In fact, they are simpler to implement. Faster to implement. And still offer partners a great platform for offering services. So we are doing some things however that are in the investment side to make certification and training of partners much easier and much more leverage for us. And we will be announcing those once we close the deal. So stay tuned on that.

Thanks very much.

Thanks, Kirk.

Your next question come comes from the line of Todd Raker from Deutsche Banc. Todd Raker, your line is now open for a question.

Hello?

Todd?

Hello? Can you hear me?

We can hear you.

Okay. Dave, just quickly, one financial question from FX perspective, any impact on revenue?

No. We bill pretty much in U.S. dollars around the world. So no real impact at the top line. We do have a lot of local currency expenses. There is while we do hedge out up to a year in advance, we have had some impact on expenses as they have gone a bit higher. Slight negative in the quarter, but nothing that I would call out.

Okay. And then, Mark, very quickly when you talk about the XenSource acquisition, you talk about spending Xen into open source project into some type of independent entity or over site. Can you give us insight how you are progressing on that front?

That part of the project is progressing very well. Obviously we are working closely with all of the major contributors to the open source project. And I can say that we have already opened a new website for Xen.org. And we have made just great progress in a lot of the details. A lot of this gets down to the details of how the project is managed. And I think all of the contributors are feeling pretty good about what we are doing there. And including Intel, AMD, HP, IBM et cetera. It's one of those where we will evolve. We will take one big step and Citrix is part of the investment. We promised to fund it. And including people and processes and management and up leveling the sophistication around all of that. And to give it a level of independence that it hasn't had, I think, necessarily hasn't had in order to actually get it to where it is. It's needed strong leadership by a deeply scientific team that invented it to get it to where it is. And I think that now as we go forward there is more interest in it with the dot org we will be able to gradually put it more into the internet status. So I think we are doing really well there Todd.

Okay. Great thanks.

Your next question comes from the line of Richard Sherman with MKM Partners,

On the NetScaler side of things you had indicated I think earlier on the call that you thought that you'd be taking some market share as we headed into the fourth quarter, enlight of the fact that your in a nice product cycle here on NetScaler, Should we infer from that some additional promotional type of activity going into the fourth quarter?

Richard, not specifically we do have a promotional program, it's a channel based bonus program we call SPAM and it's been running all year and it really is a bonus that encourages and rewards Citrix Partners for investing in their network practices. Which is typically where NetScaler, WANScaler, and Access Gateway sales originate from. But other than that we don't have any other specific promotional programs. The rest of the expectation around NetScaler , specifically NetScaler growth in Q4 is a reflection of the pipeline and all the work that has been done going before because a NetScaler sell is not an overnight sale. It usually range from 90 to 120 days I'd say on the enterprise and can be longer if the enterprise is a much larger scale where there making standards type decisions and across maybe multiple data

Okay and maybe one more. You have given us some good insight into the performance by region International versus U.S. could you provide maybe some clarity or insight as well from your perspective on the various vertical markets obviously financial government are probable on the top of those peoples minds?

We had a decent quarter for Federal U.S. Federal government and so we typically do in Q3. On the financial services market, this questions come up quite a bit. Despite the disruption and bankruptcy and all of this in sort of the mortgage brokerage end of the world and so forth we have yet seen any impact what soever or even hear anecdotes. We are aware that a number of these companies are customers but typically many of them the brokerage firms have tended to be smaller ones and with the large one we haven't seen any change what so ever. So overall financial services market for us is some where around figure 10 to 12% depending upon the quarter of our overall business mix and it has remained strong because remember we have got a global business and we do business with financial institutions around the world and for everyone that is having a headache. Let's say U.S. markets there are multiples that are actually expanding and doing well in international markets and that's the benefit of having a global brand.

Okay, Great thank you for taking my questions.

Your next question comes from the line of Walter Pritchard from Cowen.

I know you started investing in the on-line business in Europe. I'm wondering if you have started to see any revenue contribution from that geography, yet, in that business?

Little bit. It's starting to pick up. It's still just a very very minor percentage of the overall total . I think that 2008 as we build up the customer base is when we start seeing more of a material

Got you and then just around the Platinum you mention that 20% of the AVG business was Platinum I'm wondering if you have any internal goals you care to share or if we look forward into next year what you think Platinum could be as a percentage of that business?

Well, /I think it is a strategic question actually and the answer is it's a higher percentage. Were still working through what the actually specific number is right now, but over a long period of time I think we have got a lot of opportunities to move that north of 25%. We are going to do that through a combination of product integration by providing a great solution that solves real probables for customers, marketing efforts et cetera. It's going to be important part not only the App Virtualization business but the App Networking business as well and the new Platinum versions there, so it's a key focus as we head into 2008.

Just lastly, Mark. Around Windows Server 2008 you started taking a little bit about on this call. I know there has been a lot written and talked about in terms of (inaudible) between the two and I guess I'm less interested in that aspect and more interested in your views on how you think the release, we haven't seen a Microsoft server release in about 5 years. How the release of Windows server 2008 may impact the way customers purchase either do they accelerate purchases or defer purchases of Presentation Server or is that not something to be impacted?

Yes, Walter I think this will be the third Windows Server release that we will go through with Microsoft and we have never seen disruption as a result of a server release. I believe the primary reason is because customers will tend to take there time especially on a server release and with Windows Server 2008 because the architecture has been changed in a good way so dramatically I think they will actually take a little bit longer. So I think they will go along with their normal sort of production systems and begin to feather in Windows Server 2008 and that will certainly be our strategy and we will let that play out next year when we make all the announcements as part of Microsoft launch which we are gearing up for and pretty excited about and we want to be able to offer customers the ability to bridge and have both platforms running in there data center and do that seamlessly. Obviously, the new products that we have coming on-line around like Provisioning Server or the XenSource technology et cetera will make it a lot easier for us to help customers make that migration. That's a key part of our gain plan for the next few years. So I don't-- we don't see any disruption we see it as a positive force.

Than you very much.

Your next question comes from Scott Zeller with Needham & Company.

Thanks. Regarding Xen could you just verify that we were told that somewhere between 1 to 2 million in revenue contribution for 4Q?

Yes, that's right for the partial period.

Okay. That's a two month contribution, right?

That's correct.

Could you just give us some color as to why the impact may not be greater with 2 months contribution, because with us looking for 50 in '08 and this being seasonally strong 4Q why would the number not be hire?

I think right now it's just a common carry on. We haven't closed the acquisition yet. Were just starting to get ramped up, it's very, very days. We will need a quarter or two to have a lot more experience and understand the dynamics of how it filters through our channel et cetera. We obviously have tremendous expectations for this business. Were very confident in it, but in the partial period I think a couple million of revenue and obviously higher than that from a booking spaces is a right place to be right now.

Okay. Thank you.

Your next question comes from the line of Steven Ashley from Robert W. Baird.

Hi, just a real quick question. Branch Office in a Box are we still hoping to have that available late this calendar year?

Steven, I think the Branch Office in a Box project, Project Evergreen, I think we have said before that we expected it to ship in the first half of next , early next year. Right now the way it is looking is it may actually slip a few months and were obviously getting our road maps recalibrated for 2008 right now and looking at that, but the product is in alpha test right now. I think it looks great but there is still more work to do on it. It will be at the conference and in the labs and those who attend can actually talk tot he team and see how it is going but I think from a release point of view we are probable looking more toward now a Q2 of next year release of the

Great. and David, were the 10 to 12 $1 million deals were any of those in the App Networking group?

I know there were three customers that had purchases that aggregated over a 1 million in the App Networking group. (inaudible) That would mean that there was a single transaction that was over 1 million in App Networking.

Okay. Than you.

Your next question comes from the line Israel Hernandez from Lehman Brothers.

Hey, guys. Regarding the profitability of the Application Networking group can you talk a little bit about the direction of where you think profitability will trend as we look into 2008. When do you think we are going to get to a respectable operating margin in that business and second, can you talk about WANScaler quickly, are we still join track to get $8 to 10 million for the full year?

Yes, I'll take WANScaler first. It is still a small contributor, a couple million a quarter over the last few quarters so I think 8 to 10 is the right range. As far as profitability for that business, they had a very solid quarter as you saw in Q3 so profitability was way up. I think the place where we have talked about investing and will continue to invest is predominately around the GoToMarket side and I think it will show more and more profitability each quarter going through next year outside of normal seasonality. So I feel very good about the progress we have made there.

Thank you very much.

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

Well, once again, thank you for attending the call this afternoon, your continued support at Citrix on the tremendous journey were are on to establish Application Delivery infrastructure and the market places that surround it. Thanks and we will see you again in three months.

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