思杰系統 (CTXS) 2008 Q2 法說會逐字稿

Good afternoon. My name is Don, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems second quarter 2008 financial results 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 now would like to introduce Mr. Eduardo Fleites. Mr. Fleites, you may begin your conference.

Thank you, Don. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix' second quarter 2008 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Senior Vice President and CFO. This call is being webcast with a slide presentation on the Citrix Systems Investor Relations web site, 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 historical revenue trends related to our four products to the investor relations page of our website. As we get started, I want to emphasize that some of the information discussed on this call may be characterized as forward-looking statements made pursuant to the Safe Harbor provisions of the US securities laws.

These statements involve a number of factors that could cause actual results to differ materially from the statements made today including risks associated with uncertainty in the IT spending environment, and the downturn in economic conditions generally, the success and growth of our product lines including risks associated with successfully introducing new products into our distribution channels, effectively managing operating expenses, our product concentration and our ability to develop and commercialize new products and services, our ability to develop and market application delivery and virtualization problems, disruptions due to changes in key personnel, failure to further develop and successfully market the technology and products of acquired companies including the possible failure to achieve or maintain anticipated revenues and profits from acquisitions, our ability to maintain and expand our businesses, litigation, charges in the event of impairment of assets and competition.

Additional information concerning these factors is highlighted in today's press release and in the company's filings with the SEC and including the risk disclosure contained in our most recent annual report on Form 10-K which is available from the SEC or on the company's investor relations website. Additionally during this call we will discuss various non-GAAP financial measures as defined by the SEC's Reg D which include adjusted operating expenses, gross and operating margin, operating and net income, and earnings per share. The most directly comparable GAAP financial measures and reconciliation of the differences between the non-GAAP financial measures discussed on today's call and the most directly comparable GAAP financial measures can be found at the end of today's press release and on the investor relations page of our website.

Now I would like to turn it over to David Henshall, our CFO. David?

Thank you, Eduardo, and welcome to everyone joining us this afternoon. Today Citrix reports another solid quarter with the business growing 17% year-over-year to $392 million, an adjusted EPS of $0.38 and adjusted operating margin of 21%. Looking at revenue versus a year ago, product license increased 12% to $153 million while license updates increased 16%. Technical services revenue grew 34% due to strong support in consulting sales, and online services are up 23% to a total of $64 million.

From a geographic perspective, our international businesses continue to execute well, demonstrating faster growth than we're currently seeing in the Americas. Our initiatives and investments in building a more global footprint, product line breadth and business model diversity are serving us well in spite of continued economic headwinds in the US and abroad. So overall good numbers for the quarter.

Now let me provide more detail on our results by region and product area. As I mentioned, performance by geography was varied during Q2. Europe, Middle East and Africa revenue was $127 million growing 22%. America's revenue was $168 million, an increase of 13%, while the Pacific geo was $33 million, up 11% year on year. Results from the EMEA region demonstrate the return on many of the go-to-market investments from last year, but within the US and parts of the Pacific we did see customers acting more cautiously, as expected, as they adjusted to the broader macro economic environment. We expect this pattern to continue through year-end leading us to maintain the cautious bias in our forecasts.

Now I'd like to review the main product areas and the trends in those businesses. First, our App Virtualization group grew 7% year on year to $265 million including a small decline in license revenue. As a reminder, the second quarter of '07 is when we initiated global price changes for XenApp making the license revenue comps a bit more challenging. Looking forward we believe that XenApp license growth in the second half of the year will be flat to modestly up when compared to last year.

During Q2 we continued to have success with the Platinum edition of XenApp which contributed over 30% of total App Virtualization license revenue. The number of Platinum deals also increased significantly. In fact, four of five largest XenApp transactions, all over $1 million each, were from Platinum, demonstrating the strategic value that customers see with this solution. Customers are also renewing subscription Advantage contracts for XenApp at consistent levels in the mid-80s percent range which helped decrease to deferred revenue by about $17 million during the period.

The second product area I'll discuss is our App Networking business. Total revenue in this group was $54 million, an increase of 83%, showing strong results from all products including NetScaler, WanScaler and the Access Gateway. In Q,2 NetScaler posted good results and was particularly strong in the international markets, a larger result of the go to market investments made over the last year, increasing our ability to reach customers throughout our various regions. We also saw early traction from the new MPX platform which represented more than 13% of NetScaler product license revenue. Within customer segments, the number of new enterprise accounts continues to increase sequentially due to a focus on targeting the XenApp install base.

We estimate that approximately 25% of new NetScaler customers in Q2 are also current XenApp customers. The rest of the App Networking products, particularly WanScaler had a very strong showing. However, this growth was heavily influenced by a large federal government transaction. And while the pipeline contains another -- a number of other very significant WanScaler opportunities, the specific timing of these deals is unknown, so I would not expect this to be repeated on a quarterly basis.

The last area I'd like to touch on is our business and server and desktop virtualization. In Q2 server and desktop revenue was between $3 million and $4 million. Almost all of the early businesses being generated through our channel where we now have over 3,100 partners authorized to sell XenServer. In the first half of the year we focused on the go-to-market foundation, getting partners certified and trained, and preparing for a broader ramp in the second half. In addition, while our new OEM partners have now begun shipping their embed server offerings, we'll be recognizing revenue one quarter in arrears the way these arrangements are structured.

So overall, the channel business has been doubling sequentially and we've driven very strong growth in the opportunity pipeline. However, after accounting for slower than anticipated ramp of OEM revenues, as well as the current macro economic environment, we now expect these products to contribute approximately $25 million in revenue for the full year. Mark will provide greater details on this later in the call.

Next let me talk about expenses and operations in the quarter. Adjusted rating expenses were $278 million in Q2, an increase of less than 2% sequentially. As we said last quarter, we've been focused on driving spending controls by reprioritizing certain investments and addressing opportunities to increase organizational efficiencies. The main impact of this has been the headcount where we added less than 100 people in Q2. This hiring rate is less than half of that seen in prior periods. On a departmental basis the largest increases continue to be in our R&D teams and in quota-carrying personnel, many focused on server and desktop virtualization. Looking forward I'd expect a further decline in the hiring rate for the remainder of 2008 and into next year.

Also, FX headwinds continue to impact expenses negatively on a year-over-year basis. Obviously the cost of doing business outside the US has changed considerably over the past couple years. So in the second half we're exploring options to address this trend including local pricing initiatives as well as some overall potential pricing uplifts.

Turning to the balance sheet, we currently have $833 million of cash in investments. From operations we generated $75 million in cash flow in Q2 bringing the 12 month total to $380 million. Our primary use of cash in Q2 was for share repurchase. In the quarter we received over 2 million shares from a combination of open market purchases and other structures, and the company now has approximately 180 million available under this program.

So overall looking at the results, I'm pleased with the second quarter financial performance, continue to execute against our strategy while delivering solid growth.

Finally, I'd like to discuss our current outlook and expectations for the third quarter and the remainder of 2008. Before we discuss numbers, let me provide you with some context around our forward outlook.

While we're continuing to see solid demand across many areas of the business and remain optimistic regarding the huge market opportunity in front of us, we also believe that the value proposition continues to be highly relevant for customers, and the investments we've made will help strengthen our competitive advantage into future quarters. Notwithstanding these factors we know that the current economic climate is affecting our customers and will continue to impact visibility into the specific timing of purchases. And because of this we'll continue to optimize our investment plans, reprioritizing where appropriate toward strategic projects and maintaining a focus in our profitability targets. To account for all these items we're modestly expanding our 2008 guidance ranges.

So turning back to the numbers, we currently expect for the third quarter of 2008 total revenue in the range of $385 million to $400 million, interest income of $6 million to $7 million, adjusted tax rate 19% to 20%, and adjusted EPS in a range of $0.36 to $0.39 a share. For the full year 2008 our current outlook is total revenue in a range of $1.59 billion to $1.62 billion including contribution of $260 million to $265 million from our online services, and an adjusted EPS in a range of $1.54 to $1.60 per share.

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

Thanks a lot, David. I'm delighted to report another quarter of double-digit revenue growth up 17% year-over-year and up 20% for the first half. During Q 2 I spent a lot of time with partners and customers in the US and EMEA. They talked a lot about tighter capital spending policies, further consolidation across vendors and technologies, and intensified focus on ROI driven projects. We have compelling solutions for this kind of environment. Our end to end architects are up to delivering enterprise absent desktops is generating tremendous interest driven by desktop TCO, that's best, and data center consolidation, enabling timely business initiatives around virtual working, offshoring, office hoteling and travel savings. All of this is reflected in our opportunity pipeline which grew at a very brisk rate in Q2.

We took our message to the market in significant way during the quarter at Citrix Synergy, our first industrywide event for application delivery. We also drew record attendance at regional events throughout Europe, Australia and Japan, and continued our top tier participation in the Windows Server 2008 launch process. I talked to many customers at these events and personally saw their enthusiastic response to our message. Our message is resonating especially well in this kind of business environment.

We also continued to introduce new products and enhancements at an impressive pace during the quarter. We launched XenDesktop, our highly anticipated desktop virtualization infrastructure. We released XenServer Platinum edition, the industry's first virtualization solution that enables app workload delivery to both bare metal and virtual servers. We launched NetScaler MPX, our most powerful app networking platform ever. And we released our next generation online collaboration products, GoToMeeting V4 and GoToWebinar V2, now integrating voice, telephony, and web conferencing for both Mac and PC users.

Our partnership with Microsoft continued to strengthen and get more visible in Q2. We were recognized as Microsoft's global infrastructure ISD partner of the year for the third time in 5 years. In addition, Microsoft honored Citrix with its annual citizenship award for the work we're doing with the Kofei Annan information and communications technology center in rural Africa. I'm really proud of this Citrix team and the acknowledgement we're receiving in the marketplace.

Earlier this month we bid fare well to John Burris wishing him good luck as he stepped into the well deserved post as CEO of Sourcefire. Taking over the reins as our new senior VP of sales and services is Al Montserrat, With eight years of Citrix's leadership roles in North America sales, professional services, education, sales operations and channel strategy. Al has an impressive range as a critical thinker, business strategist, motivational leader and operational executive. He's demonstrated a consistent ability to operationalize our corporate strategy with partners and customers. Al is extremely well respected throughout the worldwide sales organization and he's already making a positive impact. He's a great example of the deep bench strength we've developed across the board. With this change comes opportunity to take on new routes to market and further expand our go-to-market strategy.

Next I'd like to discuss each of our market areas and highlight the business dynamics we're seeing. First let's look at app virtualization. We're now two quarters into the relaunch of XenApp, the market's de facto standard for app virtualization. Sales pipelines are running at unprecedented levels and we saw a record number of seven figure deals in Q2, With strong uptake of Platinum and Platinum upgrades. Our biggest partners are weathering the environment best since they tend to have larger, more strategic, customer relationships where the app virtualization value proposition is a must do.

At the same time the market climate is impacting the timing of some projects that are in the pipeline. This quarter we'll be introducing XenApp 5. With this new release we've made major strides in centralizing and delivering all Windows applications driving even better TCO, bandwidth efficiency, management and user experience. Customer interest is high coming off the global Windows Server 2008 launch in the first half of the year and we've already seen more than 10,000 downloads of the XenApp 5 tech preview.

Q2 saw solid a rebound in our app networking business, as David mentioned, with a balance performance across the entire product line. We were particularly encouraged by the early response to our new NetScaler MPX series which began shipping midquarter. Delivering twice as many WebApps with the same appliance footprint, MPX dramatically improves data center efficiency and green computing initiatives, a powerful combination that's ideally suited to current economic climate. The new NetScaler MPX series also significantly strengthens our position as the leading delivery infrastructure for the web.

As IT cost pressures mount, we expect an increasing number of enterprise customers to look to web-based cloud computing models as a way to increase capacity on the fly without investing in new infrastructure or personnel. With the new MPX platform, Citrix is ideally positioned to capitalize on the emerging cloud computing market.

Q2 was also a strong quarter for our branch office solutions. In addition to solid revenue growth in our WANScaler business, we extended our long time Microsoft partnership in May with the debut of Citrix BranchRepeater. This jointly developed branch-in-a-box appliance dramatically enhances IT efficiency, reducing the need for expensive IT support staff in each branch by consolidating multiple branch services into a single remotely managed appliance. With more than 50% of all corporate employees now working out of branch offices, the timing of this solution couldn't be more ideal.

All in all a very solid quarter for app networking positioning us well for future growth in this important space.

Next let's talk about online services. Overall, our online services were up 23% in the quarter continuing our position as a top five software service vendor. Q2 growth was largely driven by GoToMeeting and GoToWebinar up 50% year-over-year. Earlier this month we launched brand-new versions of these products that include our new seamlessly integrated total audio solution that features unlimited voice and audio conferencing, new capabilities designed to allow Mac users to organize meetings and enhanced Webinar planning and management tools. Now anyone with a Mac or a PC can easily host or join a web conference from the home or office with fully integrated audio, all with a single click of the mouse.

We also began the introduction of GoToAssist Express specifically built as a remote support solution that is simpler, lower priced and designed for one-toone support interactions, perfect for professionals and small businesses. It offers a flat rate pricing model and an innovative day pass option bringing affordable remote support solutions to the and small business market.

During the quarter we completed the transition of many smaller GoToAssist corporate customers to Express. As a result, this impacted recognized revenue during Q2, but opens a new large market segment for the GoToAssist product line at exactly the right price point. Express is currently in public beta and is scheduled to be released in the second half.

We believe the fast business model and web-based collaboration becomes even more valuable in the current market environment as higher fuel and travel costs are causing companies to look for alternative solutions to reduce expenses and improve employee retention and satisfaction.

Next let's turn to server virtualization. When we acquired XenSource we had a two-pronged strategy to enter both server and desktop markets. Given the expected velocity of these markets, our channel reach, OEM opportunities, our ability to provide differentiated products and our Microsoft relationship, our 2008 revenue goal was $50 million. Now after two quarters in the market it's clear we're on a slower ramp. So I expect the revenue to be more in the range of $25 million as David mentioned.

There are a number of factors here including the macro environment. OEM sell-through has been slow and, from what we can tell, across all embedded and virtualization solutions. To date, our focus with OEMs has been on training sales and technical teams while they ramp up their own market demand processes. As a result, we now expect only modest OEM contribution in 2008.

In the channel the introduction process is taking a little longer than expected. We are, however, seeing encouraging metrics. We reached our target number of channel partners, over 3,000, six months ahead of plan. We doubled the number of certified sales and technical specialists during the quarter. Twice as many authorized partners sold XenServer in Q2 over Q1, in fact, almost 500 on a worldwide basis. And we added over 800 new customers in the quarter most of which admittedly are in pilot mode. The net is we're planting lots of valuable seeds and seeing significant growth in the opportunity pipeline. It's still very early in our ramp-up process and we're steadfastly determined, encouraged by customer wins from the ground up and in head to head bakeoffs. XenServer is winning on price, performance, simplicity and XenApp optimization.

A couple of Q2 examples. large European bank selected XenServer replacing an existing solution to run their domestic core banking applications. This follows their successful implementation of XenServer earlier in the year for running international operations. A global web property added to their XenServer implementation now over 80 servers as part of their long term plan to virtualize all their web and back office apps. They were impressed by XenServer's stability, performance and storage integration as key differentiators in their choice.

In server virtualization, we've been on a fast track with product releases, rapidly expanding enterprise functionality and delivering the first server virtualization product that dynamically delivers app workloads to both virtual and bare metal servers bringing the overall value proposition of virtualization to every server in the data center. Version 4.1 released in Q1 introduced over 100 new features including Citrix XenApp Optimization. This innovation reduces system overhead to less than 7%, a fraction of typical solutions which require over 40% overhead tax. This makes XenServer by far the best virtual infrastructure for XenApp and a competitive differentiator that's getting a lot of attention.

In Q3 we'll deliver another major XenServer release featuring a long list of exciting enhancements. Let me highlight just a few.

First, high availability, to automatically place and start machines if they fail. Second, disaster recovery by supporting myriad storage configurations. Third, the new Xen convert tool making it really easy to do P to V migrations. Fourth, additional XenApp optimizations for even better XenApp performance, and a new feature in XenCenter that allows web tool, like tagging, searching and grouping of physical and virtual machines, dramatically enhancing operational and configuration management -- and it's really cool. The new version also includes significant provisioning enhancements with intelligent streaming of Windows Server 2008 and even Hyper V to both bare metal and virtual servers, Full support for Microsoft BHD format and role-based administration.

So barely nine months from closing the acquisition we've accomplished a lot. The roadmap gets even more exciting from here including value add and interoperability with Microsoft's Hyper V, working towards zero overhead performance across more app workloads and optimizing for desktop virtualization.

At the end of May we introduced XenDesktop, the industry's most complete solution for desktop virtualization. This exciting new product put Citrix in the driver's seat in a space that industry analysts expect to exceed $1 billion over the next five years. It also allows us to leverage the full range of technologies in our portfolio, our strong industry partnerships and our existing XenApp install base on more than 100 million corporate desktops. With TCO savings of up to 40% over traditional desktop PCs, XenDesktop changes the economics of computing for millions of office workers. And because it's virtual, it's also a perfect fit for branch office, offshoring and teleworking initiatives, top business priorities for customers.

Our first 30 days of availability saw nearly 10,000 downloads of XenDesktop. Two customers have already deployed more than 1,000 seats in production and the majority of our white glove beta customers have indicated they'll move to production deployments in the second half. Customer interest has also sparked significant channel interest. XenDesktop leverages the app virtualization knowledge base, skill set and customers our partners already have. To make desktop virtualization an easy upgrade for their XenApp Platinum customers, we announced a program to add XenDesktop licenses for only $95 per user.

Working together XenApp and XenDesktop providing the best TCO, security and performance when it comes to delivering a Windows-based workplace. This is the power of separating PC hardware, the desktop OS and installed apps, and only Citrix has the full stack from data center to desktop.

We're also working closely with Microsoft in this space jointly targeting global enterprise and mid market customers delivering a combined Citrix/Microsoft solution. This expands our customer and channel reach worldwide. At our Synergy event Bob Muglia, SVP of Microsoft Server and Tools, delivered a compelling keynote which included a live demonstration of our joint solution featuring Windows Server 2008, Hyper V, App V, Citrix XenApp and XenDesktop all managed by Microsoft system center. and we're quite bullish about our joint announcement with CSC, the top provider of outsource desktops of a new solution called CSC Dynamic Desktop powered by Citrix. Early progress here has been outstanding with many pilot projects already underway.

We're confident and excited about our position in desktop virtualization. We have an aggressive product roadmap that will introduce many exciting innovations and will further exploit the broad base of client tier virtualization technologies unique to Citrix.

At Synergy, Nick Carr delivered a riveting keynote based on his new best seller, "The Big Switch." Nick describes a coming revolution in computing where every desktop and application will be delivered as an on-demand service bringing radically new flexibility, velocity, economics and security to computing. Looking at worldwide economic conditions, the complexity of enterprise computing today, escalating fixed costs, underfunded IT innovation, the velocity of business change we are in violent agreement with Nick Carr. The tipping point is near.

Our vision is to enable IT organizations to operate in a whole new way, like the provider behind your cable or satellite entertainment service where a simple receiver can provide all the on-demand services you need. The Citrix Delivery Center product family includes desktop and application receivers along with all the matching head end infrastructure as powerful tools to centralize complexity and give IT control of the most important parts of computing, desktops, apps and data. And like the service provider, it allows IT to operate with the efficiency, flexibility and agility needed to keep pace with business change.

In my experience at Citrix any time we've gone through a period of tighter IT spending, our value propositions have become more visible to customers enabling us to exit these periods as a stronger company viewed as a long term strategic partner, giving us a competitive edge and the ability to accelerate our position in the marketplace.

Thank you, and now let's open it up for discussion. Don?

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

Hi, guys, good quarter. David, I just want to dig into a little bit on the Xen side. You mentioned you're going to be bringing down the Xen guidance for the full year due to a variety of reasons but how should we think about spending there? Previously you guys talked about a certain level of spending and just curious how you think about it this year, but also when you think about building this longer term. And kind of how should we think about the margin structure and maybe break even in that segment?

Sure, Phil. I think the way to think about it is really consistent with our prior statements -- expect the business to be roughly $0.20 diluted for this year. So obviously with the broader environments right now we will be adjusting spending in line. We're also leveraging other parts of the business, other investments to integrate and, in some cases, accelerate the integration and drive the leverage sooner. From a break even standpoint, I still believe that first half of next year is the right way to be thinking about it.

Okay. And then also when you do look at the presentation server business, I wonder if you would give just a sense for what you are seeing there on the macro side. You talked about still strength in large deals. Any variation on small and midsize businesses and large enterprise?

Phil, this is Mark. Yeah, I think we saw a little bit of difference in the quarter where the smaller transactions and smaller business ran reasonably flat, reasonably predictably and that it was the enterprise business that put in a decent performance. But as we came through the quarter I think everyone saw a very different kind of business environment in the last couple weeks of the quarter especially looking at, headlines, oil prices, et cetera, and I think a whole bunch of customers decided to recalibrate and try to figure out what their business model, their spending models would be for the rest of the year, and that definitely put the brakes on a couple of deals that, you know, some of which have closed already.

Great. Thanks, guys.

Thanks, Phil.

And your next question comes from the line of Bhavan Suri William Blair and Company.

Thanks. Good quarter, guys. A couple quick questions, one on just XenApp. You mentioned flattish growth, modest growth for the rest of this year. What's going to kind of drive growth the end of this year and early '09? What could we look as a catalyst in that product grouping to help maintain growth?

I think a couple of things on our drawing board at this point including other ways to license and package the product more in line with where customers are and where they want to be going into the future without making any pre-announcements here. So we're looking in that area. Secondly, the launch of XenApp 5 that brings in all the enhancements we've made to leverage the Windows Server 2008 platform. We'll be able to get some traction there and demonstrate the value proposition that improves on the Windows Server 2008 platform in some markets. And then obviously, as we are out really talking about desktop virtualization, at the same time we believe that those two stories go together very nicely around the user or client tier of computing, add value to each other around better TCO, better security, better administration and faster roll-outs at much lower costs. And we think all of those things will be accretive to the XenApp product line in that time frame.

I think it's also important for everyone to consider yeah, the macro environment, we've kind of seen this coming. It's been primarily focused on the financial services market. It's obviously cascading with into lots of other sectors and a lot of that is new to the other sectors that we're serving. And that means these customers are recalibrating their plans and it takes IT organizations some time to go back through their projects and rack and stack those that should get priority, and those are the projects that we all are aware of in terms of ROI, payback periods and supporting very strategic business initiatives. And so as of -- there's an adjustment in IT. We think that we're going to be one of the winners, one of those that comes out above the bar in the priority list.

Have you seen that happen where people have gone through, reevaluated, especially in financial services, and XenApp has made the cut?

Yeah, absolutely. I mean, our financial services businesses continue to do pretty well. In fact in an odd way I see -- I'm spending more time with financial services customers than ever as they look for improved productivity for IT and their employees. I'll give you a little example of how powerful this is.

One of our great customers has calculated the productivity improvements they received having a XenApp infrastructure that supports after hours and weekend work time. And it calculates out to a huge number serving over 15,000 employees in the company and it's the No. 1 most requested solution, IT solution, that they have. And so these are the kinds of direct, tangible, measurable impacts that this kind of product can have in this kind of environment. And we'll be featuring those kinds of business value propositions as we promote the product in the appropriate way in this environment.

Great. One more quick one if I can squeeze it in. The GoToAssist Express, what sort of cannibalization do you expect from the GoToAssist product as those customers switch over to what is a lower price product?

Well, the numbers actually already affect the cannibalization and switching over, so the corporate product is really designed for a corporate environment where you have quite a few people working in a call center or customer care center. When that's the only product we had, everyone bought it, even the small business customer and prosumer. So now with Express we can give them a really tailored solution. So in the first half of the year we've been gradually moving these prosumers and small businesses over to Express -- By the way, to the beta program of Express, and so they'll come up for renewals and to make a decision to actually buy the product in the second half of the year, which is when we'll start to see that revenue start to come back.

Great. Thanks.

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

Good afternoon, everyone. AppNetworking had a nice sequential improvement. Can you provide us a little bit more color as to what you saw with respect to NetScaler, MPX adoption? How does the pipeline shape up as you look out to Q3. And also lastly, any color on that large government deal be with great. Thanks.

Thanks, Israel. Let's see. Just a few comments. As far as NetScaler and MPX, a lot of strength in the overall for NetScaler in the enterprise marketplace. Internet customers are running at moderate levels and that's not where the growth is coming from. It's coming from enterprise customers.

MPX accounted for just over 10% of the product shipments in the quarter, very positive since it was only available to mid-quarter, and really addresses some of the highest end kind of customers in terms of size of the web apps and the amount of usage they get. So we're pleased with the progress we've made in the quarter on NetScaler.

On WANScaler, the big deal that you refer to, David can talk a little bit about the financials but a great win for us and the results have actually -- the rubble of actually taking WANScaler and putting some innovative secret sauce in it that really makes it work well and really, really long haul, highly latent network environments. And we think this is the kind of solution that there's lots more need for. As David mentioned, we have some other deals like it in the pipeline, especially in the government area and that's on a worldwide basis and so, there are good prospects ahead for that segment in the WANScaler business.

Access Gateway, very much an important component of XenApp now and also still one of the leading SSL/VPNs. Another good quarter, solid quarter there. So, David, do you want to talk a little bit about the financials?

Sure, Mark. I'd just add that from a recognized revenue standpoint it was north of $5 million in the period. It was a great transaction because it also included five years of maintenance. There are a number of these opportunities I'd say in the pipeline, as Mark mentioned. The timing, however, is going to be fairly choppy. So I wouldn't anticipate them coming in each quarter, but from time to time we will see a nice big pop.

Great. And if I could just throw in one last question. Thanks for lowering the XenSource expectation for this year. Any venture on what 2009 could look like?

I think at this point the way to think about it is at least a double from where we're going right now. As we go into the third quarter, and really post third quarter when we provide our 2009 guidance and more commentary around the investments we're making, we'll give it a lot more specificity, but that's a way to be thinking about it this early on.

Yeah, Israel, the only thing I would add is that, obviously, a lot will be dependent on continued development of the channel model and some of the metrics we talked about, the impact that the next release of XenServer has in the server virtualization market which we feel really good about. And then obviously another big one, big factor, is the uptake on virtual desktop infrastructure, generally speaking, in the marketplace and what we can do as a primary driver of primary demand.

So, and we'll have, you know, we'll have another data point when we report in three months and provide '09 guidance and that will give us a little bit more confidence in what we might see and especially what the outlook is for the macro environment and how long it might last because I think that's a question that a lot of people are asking right now and including us.

Due to time restraints management requests that everyone limit yourself to one question. (OPERATOR INSTRUCTIONS) And your next question comes from the line of Sarah Friar with Goldman Sachs. Go ahead, Sarah. Your line's open. Ms. Friar, your your line is open. And your next question comes from Kirk Materne of Banc of America.

Yeah. Thanks very much. David, could you go on back to the app networking business. Obviously you guys had a little bit of a slower first quarter and a very strong second quarter. I think of that run rate heading into the third quarter given that I know that's usually a bigger quarter for you guys from some of the Internet buyers. How should I think about the run rate heading into that quarter and the expectations sequentially? I know you don't want to get into it. I'm just trying to get a better baseline on how I should be thinking about that business for the back half.

Sure. My thought right now is that the overall app networking business will be fairly choppy throughout the balance of the year. That includes both the Internet area as well as the enterprise where we've certainly seen a lot of success, as Mark referenced before. The way that we're modeling it at this point is trying to be very conservative with respect to the macro impact, not only in the US market but internationally as well. So I think the range of potential outcomes is actually fairly broad going into Q3 and Q4. I'd say for the overall ANG business, anywhere from down a few percent on a year-over-year basis to up 10% is probably a reasonable re for both the third and the fourth quarter.

And your next question comes from the line of Michael Turits with Raymond James.

It looks like your forecast for XenApp license was mid to high single digits, down towards mid-single digits now. What about the license updates? We were, we had models for it going in the mid-teens growth for this year. Will that be affected by the slower license sale or do you think you'll still do mid-teens growth go in the license update?

Michael, I think mid teens is still the right way to be thinking about it. It is impacted a little bit, I'd say, from a macro standpoint, but we really haven't been able to identify any material impact at this point in time. So mid-teens is still what I'm comfortable with.

And your next question comes from the line of Adam Holt with Morgan Stanley.

Good afternoon. Just a quick follow-up with the XenApp business. Could you tell us where you think you are in terms of penetrating the installed base with the Platinum edition and where you think that level of penetration can go.

Sure, Adam. Platinum continues to do really well, as we talked about before. Again, ahead of our forecasts every quarter. Last period represented about 30% of total app virtualization revenue. I think for the full year it could reach 1/3 of new licenses. As far as the total installed base when I look at those new licenses as well as people that have upgraded we're in about the 15%, maybe 20% range of total new active licenses. So there's a ton of head room still to go. Over the long term I believe that Platinum can contribute as much as half of total app virtualization license revenue but that's a multiyear statement.

And your next question comes from the line of Sara Friar with Goldman Sachs.

Can you guys hear me now?

Yes, we can, Sarah.

Sorry about that. David, you made a comment in your prepared remarks about raising prices and also looking to local pricing. Would that come hand in hand with something like the V5 launch. And how much pricing elasticity do you still think you have in your core business XenApp versus perhaps raising some of it in some of the newer areas?

It's a good question, Sarah. We certainly believe there is good price elasticity in our customer base, although we do have the unknown of the broad macro impact right now and hard to tell exactly when customers reprioritize certain transactions.

The statement about the increasing costs of doing business overseas, obviously we price in a kind of a US dollar format all around the world and are considering uplifting prices. We haven't actually concluded when, how much and which products. We haven't communicated that broadly, so we'll be doing that over the course of this quarter if we decide to go that route.

And your next question comes from the line of John DiFucci with JPMorgan.

Thank you. Question's for David. David, of the $3 million to $4 million that you did in XenSource business this quarter, was there any benefit this quarter from XenDesktop contracts that were booked previously but couldn't be recognized until the general availability of the product. And just a quick follow-up, may be related on cash flow from operations was a little weaker than we expected, although accounts receivable, and that looks -- why? It was a huge jump in accounts receivable. Is this quarter a little more back end loaded than normal?

Sure. Actually, before I answer those questions, operator, could we allow for a follow-up question, as well, for all future callers, please?

Yes, sir.

Okay. So related to those specific questions, let me take the cash flow item first. You're absolutely right. Accounts receivable was the primary driver this period up about $40 million or so in a sequential basis, largely related to the quarter being a little bit more back end loaded. I expect that to reverse in the -- in this quarter.

Regarding XenDesktop, XenServer, all the revenue recognized was from a current period. Any of the prior customers we have talked about related to the white glove program, I don't believe any of those have converted yet. They're still working through their large beta implementations, although many have indicated an intent to purchase in the back half of the year.

Thank you.

And your next question comes from the line of Walter Pritchard with Cowen

Question around on the Xen side. With the ramp, I guess you're still expecting a good growth net business in '09 but the absolute number is significantly lower. Could you tell us just how you're thinking about the difference there between the desktop opportunity which you're not seeing much of today but is a larger opportunity in the server market which seems like it's the one that's getting a slower start right now?

Sure, Walter. I think,let me take them in reverse order. Because, remember, all of the development, innovations, etc. that we do in the server all accrete to the desktop, along with some unique requirements that desktop virtualization has.

So, in the server environment, obviously we're in an environment where there's a very capable, well entrenched market leader and our approach there is to continue to differentiate and move the bar up in the areas that we can innovate, and that is on performance, in the areas of XenApp optimization, in the areas of differentiation, and adding powerful features like provisioning to the product to then give customers a choice of a different sort of approach to server virtualization. And to do all of those things in context and in partnership with Microsoft.

So what you'll see us do there is take a lot of the enhancements that XenServer has over and above what Hyper V and VMM currently are, and package those in a way that they'll add significant value to the Microsoft XenServer and VMM virtual platform. And so the uptake there is really going to depend upon how quickly we can get those products out, and also the metrics around the channel in terms of the trainings and a lot of just the basic blocking and tackling there that we're doing, and, of course, all sort of matched against the macro environment.

So I think that, our game plan there is to have a steady platform in server virtualization from a revenue point of view that drives the big opportunity for us where our competency, our channel, our partnerships and many other things really can pay off, and that's in desktop virtualization. And I talked a lot about that in the prepared comments.

I'm not sure there's a whole lot more to add other than a lot of the desktop virtualization market wil depend upon the true TCO that is tangible, that customers can feel, and that will take some time for them to figure out. They don't always believe the spreadsheets that vendors give them. And secondly, the availability of capital. There are a lot of capital constraints right now out there and desktop virtualization requires a significant amount of data center infrastructure to implement even though there are great operating cost savings. So that will provide some headwinds to the marketplace in its development.

We have some great plans that we won't talk about right now to actually alleviate some of that, but that's what we're expecting. So we're keeping reasonably conservative expectations. We've always said that this would be the pilot year for desktop virtualization and that we'll see some significant implementations next year. I don't think our perspective on that has changed dramatically. Perhaps with the macro environment working against the early enthusiasm that's been developed around the kind of technology and product that we're delivering in XenDesktop.

And then, David, just around the spending, so you did still mention $0.20 or so dilution from Xen and you cut the revenue down significantly. Should we read into that that you're still hiring the same amount of people in Xen and you're just tightening up in other areas of overall Citrix? Or are you significantly cutting the number of people you're hiring in support of your Xen business?

I wouldn't actually look at it specific to Xen. It's really more of an overall comment about the business. We are running the business in totality and then focusing the incremental investments against the new strategic areas like XenServer and XenDesktop. So it's really an overall commentary.

And your next question comes from the line of Abhey Lamba with UBS.

I know you're not giving 2009 guidance at this point, but what will be the factors that will determine your ability to expand margins in '09? So from a margin standpoint as I mentioned before we're maintaining our profitability targets.

Well, right now, if you think about our cost structure, part of the process right now for addressing the current macro environment is also beneficial in positioning ourselves for 2009 or '10 whenever the environment turns into a more constructive place. So, from a margin standpoint, as I mentioned before, we're maintaining our profitability targets. You should expect sequential improvement in op margins from the second quarter both in Q3 and Q4, with the overall, at a high level thought, of, on a full year basis, seeing continued expansion into 2009. We'll provide a lot more commentary on that after the third quarter.

Got you. Thanks. And the last one is what was the FX impact on the margins in the second quarter?

Over yeah FX, as you know, impacts us on the expense line to the tune of about a $5 million on a year-over-year basis. It does not benefit us on the top line because we price in US dollars around the world.

Okay. Thank you.

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

XenServer business channel adoptionis a little bit behind what you thought. Are you taking any steps or are there any new initiatives there to try to drive adoption on the channel side?

Steve, it really is basic blocking and tackling. And a lot of the dependency there is on training, especially technical training. In Q2 we doubled the number of certified XenServer technicians, if you will, during the quarter. So we're on a good ramp there. It's just that in the whole scheme of things having 1,000 people technically certified in a market that's of this size is still just a start.

And obviously we have incentives in place to encourage partners to sell multiple deals and to really start them up. I think that they're working. The incentive program -- we call it Five By Five -- and it awards partners who sell five different customers in a quarter an additional 5% in advisor awards. And we saw the number of those partners triple during the quarter. So we're getting repeat sales. Partners are going back and selling the product over and over again. So all the right things are happening. I just think that this kind of environment, on top of having -- I mean let's face it. There's a profound competitor in the space, is creating this kind of a challenge in getting the channel mind share going this way.

But it will tend to accelerate as partners look over at other partners, see them successful. They come to our conferences. They go to our local meetings, et cetera, and the case studies get exposed, et cetera. Then that gives them the kind of confidence to jump in the water in a more deep kind of way. So it's a self-propelling kind of process but the flywheel takes a while to get spun up.

Just lastly, David, in terms of seven figure deals you mentioned the government deal was a $5 million deal. Can you tell us just how many seven figure deals there were in the period and if any of those were in the ANG space. Thanks.

There were eight overall individual transactions that were greater than a million dollars, none of which were with ANG. And that's because most of the ANG customers actually purchased several different orders instead of one big one the way we actually measure that. So, on top of that number I just mentioned, there were also four customers that, in the aggregate, produced over $1 million worth of bookings during the period.

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

Can you tell us what you expect to end the year at in terms of operating margin, or maybe just give us the tax rate and interest income and we could figure it out.

Sure. I think for the overall tax rate -- let me start there. In the 20% range is the way I would be thinking about it for the full year. And as far as interest and other income, $28 million, $29 million for the full year is the right number.

Okay. And then just a follow-up, a little bit about what Walter said. You're still expecting your Xen area to break even in early '09, yet the revenues are coming down significantly. How does that work? Are you decreasing investment in that area, or is the investment coming from somewhere else? And how early in '09, because it looks like if you're guiding the $50 million, you're going to be in like a $7 million or $8 million run rate in March. That seems awfully low. Why wouldn't you break even in December on that run rate but you would break even in March on that kind of run rate?

Katherine, this is Mark. One of the things I think David was trying to say is that the integration process of the Xen technology into products and the products into the channel is actually a little ahead of schedule in terms of how we're actually doing that on a go-to-market basis. So, for example, the XenApp focused sales organization is the organization that's out promoting and selling XenDesktop. So there is an incremental cost there. It's all leverage and, of course, there's leverage against the partner base that already sells XenApp. So that's how you get that kind of result and that kind of guidance from David.

All right. Thanks, Mark.

And your next question comes from the line of Tim Klasell with Thomas Weisel Partners.

Good afternoon, everybody. Just a question on your international pricing. You mentioned you think you have some flexibility to raise possibly prices there. What sort of mechanisms do you have to keep your large multinational customers from just coming over to the US buying and then deploying back internationally, if you will?

Yeah. We already have in place, and have for obviously many years, a cross geo policy. The larger transactions, the ones that would actually be beneficial for customers to look at across a geo arbitrage opportunity are ones that are being worked by the teams in that existing geo. So we would know and be able to enforce the license mechanisms in that case. So we're not anticipating that being a significant issue for us.

Okay. Good. And then one quick follow-up. Given the lower interest rate environment, what are you thinking about share backs versus other uses of cash?

Well, share buyback has certainly been our primary use of cash flow over the past couple of quarters. We've been spending order of magnitude level $70 million, $75 million against share repurchase, and I think that in the back half of the year you should expect it to continue to be our primary use of free cash flow.

Great. Thank you.

And your next question comes from the line of Kevin Buttigieg with Stanford Group.

Thank you. Just a question about the XenApp 5 upgrade cycle. The value proposition is obviously on Windows Server 2008, and as I understand it Windows Server 2008 customers leveraging Citrix will have to use version 5. They can't use versions prior to 5 on Windows Server 2008. So how should we think about what the upgrade cycle will look like? Do you expect it to ramp after Windows Server 2008 ramps, and then it would seem that you'd be selling version 4 for a much longer period of time than you otherwise would because of those particular dynamics on XenApp 5? Any help there would be great.

Sure. Okay, Kevin. So a couple things. XenApp 5 will run on Windows Server 2008 and Windows Server 2003, okay? Secondly, customers of XenApp are on subscription and so there isn't, quote, an upgrade cycle explicitly since the subscription gives them -- their license update subscription gives them the licenses on XenApp 5 at no additional charge. Now what XenApp 5 will do is help us in the getCurrent program and some of the other programs we have to mind the install base of customers that let subscriptions lapse. So it does help there. That revenue tends to run in the, around the $10 million a quarter range typically.

And then lastly, in terms of the Windows Server 2008 cycle, it will typically actually run either on top of or a little bit behind the adoption cycle on a Windows Server release, the reason being that a lot of customers that move to Windows Server 2008 or a new Windows Server model are doing it at the same time that they're moving XenApp. So we're one of the useful drivers for the uptake of a new Windows Server release for Microsoft obviously being part of our partnership with them. I'd say on average we'll run a little bit behind the cycle as customers actually do their first implementations on much simpler workloads like file and print servers and web servers and other things before they'll sort of tackle an app virtualization environment like with XenApp 5.

Right, okay. And then, any comments on VMware making ESX free?

No specific comments on that. I think the embedded market is really -- is not a big revenue driving marketplace. It's a seed planting marketplace and I don't think any of the OEMs pay much, if anything, for embedded anything that they put on their servers. That's not where the revenue comes from, at least certainly not in our business model. The business model for embedded is really to plant sockets and seats for upgrades to more functional versions of the product that have value propositions that customers can justify paying for on an incremental basis. So that would be the comment.

And your next question comes from Daniel Ives with Friedman Billings.

Yeah. I just had a question in regards to linearity in the quarter. If you could just talk month by month if you saw any difference in customer spending. Has it really been, the last few weeks, the past month, that maybe you've seen more caution from a spending habits in costs? Maybe you can just anecdotally talk about that. That would be helpful. Thanks.

Sure. I will tell you this anecdotal. I think it was almost the first few days of June I got on a plane and went to Europe and spent four weeks seeing partners, customers, being part of many of these events with CIO levels all the way to very much hands on IT administrative types, seeing value added distributors from one end of Europe all the way into eastern Europe and Russia. So talked to a tremendous number of people and obviously Citrix team members as well.

And what I noticed over the course of the four weeks was it was remarkably different when I left Europe than when I arrived. And the caution that I was hearing in customers and partners around the macro environment was remarkably higher at the end of my trip. A lot of that really followed the kinds of headlines I saw on the newspapers and on television, et cetera, and in the conversations. I was reminded that so many of the headlines that hit Europe, for example, in the month of June around the financial sector, we had seen, let's say, six months prior in the US.

I think, a lot of people paying attention to that and, of course, in context, at the same time of skyrocketing oil prices on a worldwide basis, I think we just started to see a much more cautious view around how people would spend money, how customers would spend money and where their priorities would be. So yes, and I thought it was markedly different in the last couple of weeks than it was in the first couple of weeks.

And could you just walk us through, like in an environment like this, just help us understand where it maybe a bit more uncertain. Is there anything you do differently as a management team? Do you do more conversations with partners, maybe twice a week instead of once a week? I mean what is it as a management team that you'll do going forward to make sure that you really have the pulse to the spending and that costs are in line appropriately? Thanks.

It's a really good question. First of all, radar systems that great companies like Citrix are built on top of that track pipelines and timing and size of deals and of customer intent, where a project is in its sales cycle, et cetera, that they tend to be really good when there's a reasonably straight line. But when there's a turn, they lag in terms of the signals that they send you. And that's why, when you start to see actual behavior look different from the radar systems, you get real cautious. And that's what we do. We compare radar systems which we have which are very metric driven to what we hear directly from our field leaders on a weekly basis.

And then we reforecast on a weekly basis revenue, and then we steer the business on expenses in the same context based upon what we see. And I think all good management teams do that, hopefully in all times.

And then obviously what's been at the top of our minds in the last weeks and months, is how do we get in a position to get some of the issues around the macro environment actually as wind in our sails, and that is really focusing our messaging, our values and the value proposition that our products give because they provide a full range from these early tangible TCO-like things to very, very strategic kinds of things. And during turns like this customers want to know a lot more about the tangible value proposition.

So it impacts our marketing, our demand generation, all the plans we have there. They start to change pretty rapidly and everyone starts to line up against a whole different set of priorities when's it comes to go- to-market including which partners we're more focused on, which products we're more focused on, et cetera, and then how we set the plans for that, four out quarters.

I think the only thing I'd add on top of that is we're also in the fortunate position to have about 50% of our revenue coming from subscription based agreements that have very high visibility, and then services on top of that, many of which are also subscription type arrangements. So that obviously helps in terms of our linearity and our confidence in the forward outlook.

And the only last thing that I'd like to add, Katherine asked a question I think a little while ago that reminded me that a lot of what you do when you're sitting down looking at this kind of environment is looking at the radar systems, all the metrics of the anecdotal information, et cetera. But you're also looking at how long will this kind of environment last. And I talked to a number of investors last year, quite a few, this question came up. What if the macro environment changes and how will Citrix respond? And my answer was pretty straightforward.

If we thought that the macro environment was going to be depressed for some period of time, multiples of quarters, then we would steer our spending very, very consistently with that kind of environment, and protect our op margin and profitability, because putting more coal to the fire just won't produce a faster locomotive in that kind of environment. If we believe that this kind of macro environment would be short in duration, then we would be more likely to take a short term hit on profitability to be able to stay in position, strategic position.

We've been through this one time where we actually made some of the budget changes that we needed to make and when, in fact, the macro environment improved dramatically quickly, and so we had to rebuild some of the spending that we turned off. So right now we're thinking that we're looking at a four to six quarter kind of environment and at this point you can see how we're responding in the guidance and David's comment So thanks for letting me explain that a little bit more.

And your next question comes from the line of Brent Thill with the Citi.

Mark, just on that, the comment around EMEA, you obviously had a really good quarter, 22% growth. Your comment that that doesn't seem like it showed up in the current quarter, but as you look out on your forecasts and your pipelines for Europe, can you assume now a lower close rate in Europe considering that's been your highest growth area?

Yeah. I think, that's part of a caution that you're hearing in our guidance. There's a huge factor in Europe that makes it tricky to call because in Europe our strategic value proposition is much better understood on an average basis within the install base. And so the propensity to build new and bigger systems is much greater in Europe than, let's say, in the Americas where we're still, you know, climbing that same ladder.

And then the other phenomenon that you find in Europe is that IT organizations will tend to study technologies longer, and when they make a decision, they make a real commitment to them. So that if you're in that sort of position with them, it's really tough to get knocked out, and so that's what makes this a tricky call in terms of how the European business takes shape in the second half of the year.

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.

Thanks again for listening in on our call and our outlook and the kind of plans we have to take Citrix into the future, steering through some pretty rough waters, as everyone in the industry is, but with a very unique strategy and a real solid team around execution, determination and the kind of passion that's made Citrix what it is today. So thanks and we'll see you in three months.

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