思杰系統 (CTXS) 2008 Q3 法說會逐字稿

Good afternoon. My name is Kayla, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (OPERATOR INSTRUCTIONS) Thank you. I would now like to introduce Mr. Eduardo Fleites, Director of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Kayla. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix's third quarter 2008 financial results. Participating in the call will be: Mark Templeton, President and Chief Executive Officer, and David Henshall, Senior Vice President and Chief Financial Officer. This call is being webcast with a slide presentation on the Citrix System's investor relations website and the slide presentation associated with the webcast will be posted immediately following the call. Before we begin the review of our financial results, I want to state that we have posted product classification and historical revenue trends related to our four product groupings 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 pursuit 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 the uncertainty in the IT spending environment and the risk of a further downturn economic conditions generally. Our product concentration and our ability to develop commercialized new products and services, the impairment of the value of the company's assets and competition and other risks associated with the markets of our products. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC including the risk factor disclosure contained in our most recent annual report on Form 10K, which is available from the SEC or on the company's investor relations website.

Additionally, during this call, we will discuss various nonGAAP financial measures as defined by the SEC's Reg G. A reconciliation of the differences between GAAP and nonGAAP financial measures discussed on today's call 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 Chief Financial Officer. David.

Thanks, Eduardo, and welcome to everyone joining us this afternoon. Today Citrix reports another solid quarter with revenue growing 14% year-over-year to $399 million, and adjusted EPS of $0.43 and adjusted operating margin of 24%. From a geographic perspective our international businesses are executing well with EMEA growing 21% and Pacific up 11%. EMEA continues to show strong returns from last year's go to market investments. And other initiatives targeted to building a more global footprint, product line breadth and business model diversity are serving us well. In the Americas, revenue was up 9% with steady demand across vertical markets in spite of the challenging IT spending environment seen in most regions. So overall good execution.

Now I would like to review the main product areas in the trends in those businesses. First, our app virtualization business was strong, increasing 12% year on year to $273 million about with new licenses up over 10%. One of the major drivers was XenApp platinum edition which contributed to 30% of the mix generating five deals greater than $1 million and demonstrating strategic value of customers see with this solution. Looking forward, we believe XenApp license growth will be flat to up modestly when compared to last year due to macro headwinds and a difficult comparison from a year ago.

Second, in our app atmosphere networking business, network was $47 million basically flat year on year. Overall results were somewhat disappointing due to the continued weakness in enterprise -- or, excuse me internet centric customers. Revenue in this segment was down from last year as our businesses have been impacted by slower eCommerce sales and web traffic growth. However, we are still seeing increasing traction with enterprise customers. In Q3 the number of new enterprise customers increased by more than 75%. The platinum edition of NetScaler, a system targeted toward delivering enterprise apps with high level of performance, security and manageability contributed roughly 30% of license. Going forward we expect to see muted growth with app networking due to uncertainty that remains in the landscape.

The third area I would like to discuss is our business in server and desktop virtualization. In Q3, XenServer and XenDesktop revenue was $7 million up about 100% sequentially. The majority of this growth is being driven by our traditional channel. We exited the quarter with over 3,300 partners authorized to sell XenServer, but more importantly the number of repeat resellers nearly quadrupled during the quarter. So with the channel metrics continuing to grow and the opportunity pipeline at record levels, we believe that we are on pace to achieve our target of $25 million per year and provide momentum as we enter 2009.

Finally, touching on our software service business revenue is up 17% during Q3 to $65 million, led by the collaboration products of the GoToMeeting family which grew to 40% and now represent a third of total online services revenue. However, the overall growth rate of the business was slightly impacted in the period by the migration of certain GoToAssist corporate customers to the lower priced express version, as well as a small increase in deferrals in connection with service activation fees. We expect that revenue growth rate will be up a few percentage points in Q4.

Now I would like to turn to expenses and operations. Adjusted operating expense was $274 million, a decline of about $4 million from Q2 and contributing to the 300 basis points sequential improvement in adjusted operating margin. As I stated last quarter we're very focused on delivering operational efficiencies by reprioritizing certain investments, accelerating the integration of acquired businesses and addressing opportunities to position the cost structure for long-term leverage. When primary outcome of this has been our headcount growth where we added less than 40 people in Q3, our slowest pace in three years. We were focusing the hiring priority of quota carrying personnel and India based development teams for the highest leverage. I expect similar trends in hiring for the remainder of 2008 and next year.

On the balance sheet we currently have $830 million in cash and investments. Cash generation during the period was very strong, increasing to a record $115 million in cash flow from operations and bringing the trailing 12 month total to over $400 million. Our primary use of cash in Q3 was for our ongoing stock buy-back program where we repurchased 2.4 million shares. Year to date, we've repurchased almost nine million shares or about 5% of our total shares outstanding. Entering Q4, we have over $100 million authorized in the repurchase program and I expect we will continue to be active in this market.

On other balance sheet accounts, I wanted to point out two unique items. First, with the volatility in the financial and credit markets in the past several quarters we have been proactively taking steps to limb any potential impact of the company. While the effects of the crisis were minimum during Q3 we recorded a temporary impairment of about $20 million to the balance sheet related to investments that were issued by AIG. These securities are still performing as expected, but due to the concerns around the issuer we will be evaluating these on a monthly basis. Second, we made the decision to purchase two buildings in our Fort Lauderdale campus that are currently held under a synthetic lease. The transaction will be neutral to our liquidity position as the purchase value has been segregated as restricted cash over the past several years. Additionally this purchase will be neutral to the P&L for Q4 in 2009. So overall, looking at the results, I'm pleased with Q3 financial performance, we've continued to execute against our strategy while delivering solid growth and operating leverage.

Finally I'd like to discuss our current outlook and expectations for the fourth quarter. But before I review numbers, let me provide you with context around our forward outlook. We continue to see solid demand in many areas of the business and remain optimistic about the long-term market opportunity. We also believe that our solutions are becoming even more relevant for customers and the investments we made will help further strengthen our competitive advantage. Notwithstanding these factors, the current economic climate is impacting our customer's buying behaviors and will continue to impact visibilities into those specific timing of purchases. Despite the uncertainty in the marketplace, we are committed to accelerating the development of our strategic products and enhancing our go-to-market reach while maintaining a plan to show continued expansion of off leverage.

So turning back to the numbers, we currently expect for the fourth quarter of 2008 total revenue in the range of $425 million to $440 million, interest income of $6 million, adjusted tax rate of 21%, and adjusted EPS in a range of $0.46 to $0.48 a share. So including Q4 this now brings our expectation for the full year of 2008 to total revenue in the range of $1.59 billion to $1.61 billion, adjusted operating margin of 22%, and adjusted EPS of $1.61 to $1.63 per share. With respect to 2009, we are committed to making further progress on expanding operating leverage through both short-term and long-term changes to our cost structure. Therefore our current expectation is to deliver at least 100 basis point expansion to adjusted operating margins for next year. As we obtain more visibility to our customer's '09 budget process over the next few months we will update our expectation for business trends and the revenue outlook on our fourth quarter conference call. Ultimately our confidence in our long-term ability to drive growth and improve margins remains unchanged. Now I would like to turn it over to Mark to give additional details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks, David. We are reporting great results today, another quarter of double digit revenue growth up 14% from last year and up 18% year to date. As we mentioned last quarter, we anticipated the economic downturn affecting the tech sector today. So in July we took early and decisive actions to hold operating expenses flat, to closely examine noncritical projects, to introduce new cost efficiency programs, and to smartly invest in customer facing headcount. As we now enter Q4, we were better prepared to drive profitable growth, to operations getting more efficient, and a sharp focus on crisp customer value that rises above market noise.

During Q3 we made some really exciting announcements. First, we introduced XenApp V, a ground-breaking new release that raises the bar in performance, user experience and TCO, designed to accelerate the mainstream adoption of APP virtualization. Secondly, we announced an OEM agreement with HP, allowing them to offer a full VDI solution from thin client to server, based on Citrix XenDesktop. And third, we launched version five XenServer a significant milestone, delivering enterprise ready virtualization that sets a new standard for simple, powerful and open. Fourth, we released new versions of GoToMeeting and GoToWebinar integrating VoIP, phone and web conferences for both Mac and PC users. And fifth, we unveiled C3, Citrix Cloud center. A new offering for cloud service providers that integrates our virtualization and App networking products. I'm very pleased with our Q3 results especially in this business climate. And I'm really proud of the responsiveness of this Citrix team.

As customers adjust to new spending levels in the coming quarters, every tech sector will face marketed uncertainty. So the rest of my comes will address three topics. First, how we see the IT environment in the quarters ahead. Secondly, our product strategy for delivering customer value. And third, our game plan for leveraging this kind of environment. As we listen to the market, many customers have been cutting big ticket investments and low value projects. But they are continuing to fund existing products with tangible ROI. While this gives us confidence in our near-term pipeline, the fact is there is uncertainty about the shape, size and timing of our 2009 opportunity.

As I talked with many CIOs and integration partners, it's clear that already tight IT budgets are getting tighter creating a bright spotlight on the real problem: distributed computing. The complexity, cost and inflexibility of distributed computing has never been more exposed and the need for simpler way has never been greater. Clearly this environment will favor mature proven vendors who deliver tangible cost savings. Winning vendors will be those who help customers reduce their spend in areas like T&E, merger integration, data center and site consolidation and desktop management. Forces like these will drive customers to a tipping point to consider a whole new way to deliver IT services, a way to centralize, optimize and virtualize complexity, so what's distributed is pure simplicity.

This radically simple approach is what we offer and has been our driving vision from the beginning. Our products simplify IT with centralized management of APPs and desktops to dramatically reduce [DCO]. They optimize APP delivery across locations, users and devices to provide the best user experience. And they accelerate business with a single efficient infrastructure that can rapidly respond to change. This creates a timely opportunity for Citrix to capture greater mind share and to exit the downturn with even great strategic momentum. We are executing well on our strategy to deliver tangible and compelling customer value across three product families: Citrix on-line services, Citrix delivery center, and the newest member, Citrix Cloud Center.

Today I'm going to focus my comments on Citrix delivery center, highlighting our execution and strategy in its four product lines: XenApp, XenDesktop, XenServer and NetScaler. As evidenced in our recent results, ongoing adoption of our APP virtualization products remains healthy, up 12% in the third quarter. These products are proven to significantly reduce the cost of desktop management and extend the life of desktop PCs, exactly what customers want. Our entry into the exciting new VDI market with XenDesktop has given new visibility and growth to our XenApp business because XenApp can completely eliminate the app installation that make Windows desktops so costly to own and manage. In September, we introduced XenApp V providing a big step up for delivering Windows application to both physical and virtual desktop was better than installed experience. With this release customers will be able to cut the cost of APP management in half by centralizing applications and managing them once as a single instance in the data center. They will be able to provide security with centralized access control to applications and data, and increase business agility by instantly delivering any windows APP to users any location. Citrix XenApp V is revolutionizing app management by delivering any Windows APP as a centralized on-demand service.

Next let's talk about XenDesktop, our next generation VDI solution. Q3 was the first full quarter of availability for XenDesktop, providing an exciting alternative to traditional PCs that are expensive to manage, slow to deploy and highly subject to data loss. Unlike first generation VDI technologies, XenDesktop is a comprehensive end to end desktop delivery system that offers an unparalleled user experience and a dramatically simpler desktop management, all while reducing the cost of traditional desktop computing by up to 40%. Partners and customers are embracing this new product rapidly and exceeding our expectations in Q3. We added over 200 new customers during the quarter and closed several deals over $100,000. The platinum edition our complete VDI stack that includes XenApp for virtual desktops contributed almost 50% of the mix. We had over 6,000 downloads of the free evaluation edition of XenDesktop. Over 1,200 partners have been trained and certified to sell the solution. Our desktop virtualization partnership with [CSC] began to ramp up and we delivered version 2.1 in September with full support from Microsoft Hyper V and virtual machine manager. There is a lot of momentum in this product line.

Going forward, we will stay aggressive on market execution, working closely with Microsoft and our alliance partner network. We have a robust and very innovative product road map that will further unfold this quarter, and we believe we were well positioned to maintain our leadership in this emerging market.

Now let's move from the virtual desktop to virtual data center and talk about XenServer. The channel and customer seating strategy from the first half started to produce results in Q3. As David mentioned earlier, XenServer was up strongly on the sequential basis. Channel metrics continue to increase rapidly and we are on a solid trajectory. I'm really pleased with our progress, especially when we were head to head with the competition. A great example is our Q3 win at Tesco, the largest retailer in the UK who did extensive head to head comparisons. Their requirements were very tough. To win, XenServer had to demonstrate that it was the best enterprise virtualization infrastructure for mission critical systems in their data center. With aggressive goals for power and cost savings in the end, they chose XenServer.

Another exciting win in Q3 was at SAP, who selected XenServer platinum to virtualize a mission critical XenApp server form delivering applications to 80,000 SAP employees worldwide. Deploying XenServer to replace 720 physical servers with 150 virtualized servers, giving them more computing horsepower while reducing power consumption and data center space by more than 60%, all on top of the 35% they expect to save in operating costs, an amazing achievement. XenServer is on a very fast development cycle. I think you can all see that. In September we released version five, a strategically important upgrade with more than 100 new features including major advances in ease of use, management, high availability and disaster recovery. This builds on XenServer's ready features like live migration, resource pooling and workload provision, and we have a lot more coming. There is plenty of white space and head room in server virtualization even in the current environment. So we are staying aggressive in this space as the only vendor to offer virtual infrastructure for both OS independent and for Hyper V environments.

Next let's move to the world of delivering web APPs. In Q3 we saw mixed results in our NetScaler web APP delivery product line. The new NetScaler MPX platform continues to set the standard in web APP delivery cutting server cost in half and making web APPs run five times faster. During Q3, MPX, our new platform, jumped to 12% of product mix in its first full quarter of availability, with solid uptake in the enterprise segment and strong interest across service providers and internet centric consumers. The release of MPX drove NetScaler up and to the right as leader in (inaudible) and NetScaler also received comment criteria certification which expands our addressable opportunity in government markets worldwide.

As David mentioned, our focus on enterprise web APPs is producing steady growth within our enterprise customer base. This growth, however, was offset by a slow down in our internet centric customers impacted by slow internet traffic growth and uncertainty heading into the traditionally strong Christmas eCommerce season. Going forward, web 2.0 APP upgrades, data center efficiency and green computing initiatives will serve as catalysts for NetScaler growth as the overall market improves. The ability to deliver web APPs especially in the world of web 2.0 makes NetScaler a strategically important component of Citrix delivery center and a core component of C3, Citrix Cloud Center. So watch this space. We have an exciting road map to further enhance MPX performance, scalability and TCO significantly, and a few surprises up our sleeves as well. In short, we've never had a product line up so compelling or so ideally suited to solving today's most pressing IT challenges.

To capitalize on this opportunity, our game plan focuses on five strategic initiatives. First, our first priority is to amplify our message in the marketplace. In many ways the timing couldn't be more perfect as economic pressures drive already fragile IT departments to the breaking point, the need for dramatically simpler more cost effective solutions will only intensify. We see this as an incredible opportunity to turn up the volume on the -- and the power of the Citrix value proposition, a message that resonates with both IT and business decision makers like never before. Our second area of focus is to drive increased go to market leverage. We are doing this by introducing new channel programs that encourage deeper engagement and accountability from existing partners by investing in alternate routes to market like SIs and OEMs that open up entirely new revenue opportunities, and by leveraging our subscription advantage renewal engine to upsell and cross sell new solutions that drive better TCO for our customers.

Next we're accelerating our focused on product innovation, driving greater integration across products, making them easier to manage, designing them to be more consumable, and challenging ourselves to raise the bar once again on solutions that simplify computing even further. Our fourth initiative is on product line simplification. Over the past few years we have assembled one of the most comprehensive portfolios in the industry, with solutions that span from the data center to the desktop and meet the unique needs of prosumers, SMBs and global enterprises. This initiative drives new simplification and packaging, licensing and cross-selling that make our products easier to buy and easier to sell. Finally, we will continue to focus on optimizing the cost structure of every function in the company, simplifying, standardizing and centralizing wherever possible. These improvements will position us well for profitable growth and allow us to exit this downturn with even greater financial leverage.

So wrapping up, while this environment will be challenging we are convinced it will drive customers to rethink their entire approach to IT. The take aways for today. First, no one knows how the IT environment will play out over the next six quarters. We are planning with the assumption that it could get worse before it gets better. I believe this is the right approach to take when visibility is uncertain. Secondly, we were aggressively investing in products that centralize the complexity of distributed computing, giving customers a far simpler way to deliver IT as an on-demand service, resulting in significant cost reductions in travel, facilities, mergers, off-shoring and more, while improving security, performance and TCO.

And third, our game plan is to focus on what we can control. We can inspire customers with a radically simple approach to computing. We can focus demand generation on our huge install base. We can align partners, products and go to market programs with the things that matter most to customers. We can make our products simpler and more consumable. We can operate more efficiently and we can use this environment to position ourselves for profitable growth. So thank you. And now we'll open it up for questions. Kayla?

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q&A roster. Your first question will come from the line of Adam Holt with Morgan Stanley.

Good afternoon, and congratulations on the quarter. I was going to ask about a few details on the actual third quarter. Number one, you talk about some the vertical markets in particular touch in the financial services verticals? Then secondly you had a number of changes in the quarter. Can you touch on any impact you saw from the shift to Ingram as a preferred distributor and the price changes in the quarter? Thank you.

Sure, Adam. This is David. Let me take all of those questions and then ask Mark to add as well. Start with the change to Ingram. It's too early to tell if we saw any significant positive movement at this point in time. We certainly didn't see any negative impact in the quarter. The great news is that we were able to streamline a lot of our back office operations, improve our efficiencies and in fact several partners commented on the ease of working with Citrix and how it's improved during the period. Over time we will be able to kick off a number of strategic initiatives with Ingram is that will be focused on improving the reach of recruitment of new partners, channel readiness and the type of activities that will ultimately improve our ability to drive long term customer success, higher revenue, etc. So all good news on that front.

As far as price increase is concerned, let me start by framing that out for everyone who maybe not, maybe doesn't have all of the background. So September 1st, we instituted an international price increase of about 10% for all of our international markets. We did that because historically we have priced in dollars and had local currency expenses as the dollar has weakened progressively over the last several years our cost of business has gone up substantially. This was a first step towards probably a longer plan to have a multicurrency approach. I think the [impacter] in the quarter it did help to improve linearity. We had a very good middle of the quarter in all of our international markets. We probably moved a little bit of business from September into that July/August time frame. We believe it's all contained within the period. Obviously with the dollar strengthening substantially since that time, we will continue to evaluate this on an ongoing basis and see if we need to make any adjustments.

And if I could ask a follow up on margin guidance for next year, obviously you aren't giving revenue guidance. But should we be think being 100 basis points of expansion tied to a particular revenue level, or if the revenue is volatile say gets worse than you think, you will be more aggressive on the cost savings to preserve that 100 basis points? Thanks.

I think for the latter. Right now that's the one thing we can control is our cost structure, our efficiencies and the program that Mark referred to that are driving right now are going to be accelerated into next year, both short-term and long-term changes to our cost structure. So that's our position right now is to show the sequential improvements regardless of the environment.

Thanks again.

Your next question will come from the line of Michael Turits with Raymond James.

It looks like some of the best performance in the quarter was out of XenApp, especially the XenApp licenses, which was what was surprisingly weak in prior quarters. It really bounced back. One, if you could give us any granularity on if there were particular verticals, any particular geos where it was strongest. And two, how much of it was due to a reacceleration of unit sales and how much is from ASPs?

Okay, Michael. Good news is that we have strong business across both the Americas region as well as EMEA. From a vertical standpoint broad a lot of diversification. Obviously people are concerned about financial services. For us to represents anywhere from 10% to 13% of revenue in any given quarter. We closed a lot of fairly significant deals there. We haven't seen a materially change, mostly because those types of customers are focused on the type of value proposition that the products provide: TCO, rapid return on investment, off-shoring, cost cutting initiatives, etc., etc. So good diversification. Being a Q3 we saw strong federal sector. The federal team has really executed over the last 12 to 18 months and continue to see returns there.

So again little bit more specific than XenApp. If I had a concern about it was from hiring slowing, I was concerned that we might see less concurrent user licenses. So then my question was what happened with unit sales? Did they accelerate as well or more driven by ASPs on the XenApp license side.

ASP was reasonably flat, so it was predominantly a unit growth.

Okay. Thanks very much, guys.

Your next question will come from the line of Bhavan Suri with William Blair & Company.

Hey, guys. Congratulations on the quarter. Just a couple of quick questions. Just piggy backing off the previous question, the federal business. Any color around application networking sales in the quarter? I know last quarter we said there were a few in the pipeline. Any of those close this quarter and can you provide a little more color about that?

Sure. Yes, APP networking continues to be more volatile than any of the other lines. Federal we did have one deal that was of size. It was in that $1 million to $2 million range. But as far as the very, very large deals, nothing booked this period. Continue to see a lot of opportunity in the pipeline especially around WANScaler and some of those technologies, as I mentioned last quarter there are several very large opportunities and just wait and see how those close over the next several quarters.

Sure. Sure. And then turning to XenDesktop, can you provide a little bit more color around the adoption of XenDesktop and what the pipeline for the product look like in 2009? And more on a comparison basis, how does the pipeline which you said was solid look like compared to what you thought it looked like, say three months ago?

This is Mark. I would say consistent with the comments we made, XenDesktop continues to surprise us in a good way on the upside when it comes to what our expectations were. And I don't think anything reflects that better than the pipeline. I would say the pipeline is probably 3X larger than we expect it to be. I think there are two fundamental reasons. The first one is that the market has been stimulated for quite a while by various competitors in the market with first generation VDI products. Really, capturing the imagination of customers but not being able to deliver on providing a real solution that works.

And then the second reason is that so many of our partners are so experienced in this sort of end user computing and virtualizing the end user computing environment through their years of work with XenApp. And so it's a very natural conversation for them to have. You put those things together along with an industry leading product like XenDesktops that got a great platform to build off of with a really strong road map, it's -- I guess we shouldn't be too surprised. I think we are wanting to be cautious going into 2009 around what is possible there. But the early indications are really good. The pilots are numerous and many are going to production. And as I mentioned, in my prepared comments, over we had a couple deals over 100K, and we are starting to see number of implementations in the 1,000 seat and higher sort of range. Overall really good quarter performance there. Outperforming our expectation.

Great. Thanks, guys.

Your next question will come from the line of Kirk Materne with Banc of America.

Hi, yes. Thanks very much. And my congratulations to you both. Mark or David, could one of you guys talk a little bit about what you look out for the fourth quarter in terms of your guidance. Clearly your Asia/Pacific business and EMEA had strong growth this quarter. As we head into the fourth quarter, is your expectation that those businesses sort of trend back down to be more in line with the US, or do you expect all three geographies to sort of be impacted somewhat equally by the macro overhangs?

Kirk, I think that what you should hear in our guidance is that while we have these amazing pipelines of identified opportunities and projects on a worldwide basis, we have to assume that the kind of muted effect that we've seen in the US over the last three quarters is going to have that kind of effect on a worldwide basis. And we need to do that from a planning assumption point of view without respect to what our kind of radar systems actually tell us. So it's a bit sort of -- we are a bit two mindsets when we look at the opportunity and across geographies and even across time and market segments, it all looks great. But the overhang of this kind of environment is creating so much uncertainty that that cascades to customers and you can't nail them down as to when they are actually going to spend the money. And that will be a worldwide phenomenon is what we are assuming. To the degree that we are wrong, that will be a fantastic thing and we will see incredible growth and margin expansion at the same time.

That would definitely be nice. And maybe just one other one. You talked a little bit about the NetScaler business being impacted by the end market. Another business of your Citrix on-line had phenomenal growth over the last few years and that's a little bit of a difference of customer set to a certain degree, sort of the Soho market. Could you just talk a little bit about your thoughts there? It sounds like it had a good quarter with the exception of GoToAssist translations I guess over to a lower price point. Could you talk about it sounds like it's going to bounce back in the fourth quarter? Have you seen different customer behavior from that part of your business?

Actually we haven't. And we are at this point the SMB customers that we serve, these products save them a lot of money, give them market reach and do a lot of really core and positive things for their business that's very efficient. And you look at churn rates and so forth in the business, they've actually have been really good. Very solid in terms of retention and so forth. We think that business will actually have lots of headroom going forward and as David mentioned we were getting through still getting through this transition moving GoToAssist customers to the right sizing them to go to GoToAssist Express. In the prosumer area where something like GoToMyPC could be discretionary item, that's anyone's guess at this point. We aren't seeing anything there. We will continue to invest. We will be bringing out Macintosh capabilities next year, etc. But it's anyone's guess how the consumer will behave. That's probably a true statement across many, many product lines.

Okay. I will leave it there. Thanks very much.

Your next question will come from Charlie DiBona with Sanford Bernstein.

-- XenDesktop pipeline, and I'm just curious about the macro environment, the sale cycle generally -- is there any impact on the initiation of trials or on the conversion of trials to production in the near term here and sort of how do you sea that unfolding over the course of the next six to 12 months?

Yes. Charlie, I think that's the essence of why we want to deep our expectations managed. Because the fact is that a VDI solution of any flavor requires a significant investment in data center infrastructure as in server hardware. And at this point we have the best platform for doing that, i.e., requiring the least amount of data center infrastructure because of how we handle desktop images, the density that we can get on a physical server, etc, etc. But it's still a lot to stomach at a time when enterprises are looking to reduce data center footprints and managing the capital going to IT at sort of a macro level. So that will naturally put longer decision cycles in place to move to production. I don't think that the pilot programs will slow down because it's a very simple product to pilot. And there are many data centers that have idle or last generation servers that you can do very adequate pilots on.

And what we will be doing here going forward is releasing some additional technologies that will allow some breakthroughs in this area and allow the mix that a virtual desktop virtual desktop solution requires to be distributed not only into the data center but all the way out to the end point, to the desktop itself, and give IT that choice of being able to dial it up and down and back and forth. That should help with the XenDesktop product line and one of the things that we are excited about as we get that technology released.

Thank you.

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

Hi, guys. Good quarter. Most of my questions have been answered, but I wanted to touch briefly on NetScaler. You mentioned weakness in the internet centric accounts. When you look at that business heading into Q4 and into next year, how do you generally think about the growth rate of NetScaler? It seems to be normalizing down a bit, but obviously would be with the macro economy, and then on the flip side of that, when you start to look forward on XenDesktop, when you start to talk to customers right now, obviously pressure on IT budgets, how is that affecting the expected deal sizes on the XenDesktop?

Phil, I will take the XenDesktop question first, and then David and I can talk to you about NetScaler. So honestly, it's hard to know. One of the reasons the pipeline is so big is that customers have very high expectations. A 40% savings on desktop management is a huge number when you roll it out within an organization that has thousands of employees. So the savings opportunity and the promise of this technology is enormous. I just think that as we look at the realities of the capital availability environment, the realities of what it takes in the data center, that we should just expect more moderate approach in 2009. I mean, I think that's the prudent sort of planning assumption to be working under.

And Phil, let me -- a couple of comments about the networking business. Like I said before, I think it is going to be more volatile result probably in any given quarter, just given the capital required on some of these purchases. It's a pretty big ticket item. We have been growing the enterprise business substantially faster than overall market growth. In fact total license in this area is up over 20% kind of a year to date versus prior year, which in retrospect will probably be fashion as the market is growing. As we keep targeting the enterprise, embedding more and more features, strengthening the Citrix delivery center, I think we have got a huge opportunity there. It will probably be less visible from an external standpoint in the next three quarters. So I'm a little hesitant to make an '09 statement. Our plan is to continue to grow faster than overall market growth, and the things we have talked about in both the enterprises as well as the cloud initiatives will help us drive that.

I think the only thing I would add on that, Phil, is that the MPX platform in terms of what it can -- it's footprint and horsepower will be a very natural purchase for internet Citrix customers as they want to reduce power, increase performance and replace the NetScaler 12000 series footprint that they have. With MPX at 12% of the mix in its first quarter out, actually more than we expected, and to the degree that it can actually deliver on those TCO, green computing and web 2.0 initiatives, we think that -- there is an opportunity there. But sort of pinpointing what quarter, what part of next year, that starts to kick in is what David is talking about.

And then one quick follow-up from an M&A standpoint, just how comfortable do you feel with your current product portfolio, and if you do feel reasonably stable there, you talked about $400 million share repurchase, how do you think we should think about the share count over the next several quarters?

I will let David take the share count question. We've done some great acquisitions over the last few years and we are absorbing and beginning to really exploit the technologies and leverage the product lines that we've brought in. I think the message in terms of sort of the big strategic ones, we think we have the right mix of strategic components at that level. Now, we continue to do tuck-in acquisitions to -- for time to market, domain expertise, etc. And they end up being absorbed by the OP expense, the operating budgets, and we won't slow down there. If anything we will speed up, because it's a buyer's market and there are some great technologies and teams out there that are struggling to productize their technologies. So that's how we were think being M&A. Remember, it's a tool for us.

And Phil, regarding share count, I think that share repurchase is going to continue to be our largest use of free cash flow. As I said in my remarks we repurchased about nine million shares to date and brought down total share count by 4% or 5% from last year. And I think that right now continue to keep it flat to modestly down into Q4 and into next year at this point.

And your next question will come from the line of Sarah Friar with Goldman Sachs.

Guys, how are you doing? Can I come back to 2009 thoughts? It sounds as if you are definitely assuming more of a global recession-type scenario as you think about the business. The question I get asked a lot is, what's different this time around versus say 2002, the last year that you saw your business actually shrink? I'm wondering, Mark, how different is the business? How do you think of maintenance streams and their stickiness even when times get tough?

Well, okay, so from an outside, a macro perspective, things I think are very different. And the impact on IT could be similar, however, given that so much of the cost of computing happens to be fixed costs. Most organizations when they look at their IT budgets they are looking at 70% and 80% fixed costs. So the discretionary spending they have is not that huge to begin with. But as we sort of look at ourselves in this kind of environment, Sarah, I would say there are a lot of things that are different.

First of all, we have a lot of revenue stream disversatility where we have a way larger ratable and deferred revenue stream than we had back in '02. Secondly in '02, we had the expiration of Microsoft royalties being paid to us which contributed to the downturn in our top line revenue. Third, we were a single product company and in a marketplace that was growing historically very nicely. But followed the downturn where today we are a multiproduct company that has new entries in desktop and server virtualization that produce very tangible, high ROI return for customers and with a lot of white space ahead of us there. So I think that's very different. And obviously we have the on-line services business that has a whole different kind of subscription based revenue kind of patterns. So I think it's very, very different this time around.

But when we look at the kinds of things that we saw in the business in 2002, we are being really cautious. Here is the short version of the story. After 9/11, our business was going great guns. We had a great Q3 in 2001. We had an excellent Q4. And we had a big plan for 2002, and then it turned south very rapidly starting in Q1 at the bottom end of the business, the run rate part of the business where we had a lot of shrink wrap back in those days. So by the time we got to mid-year, first half was very weak and that's when we took some pretty serious actions to bring the cost structure in line, taking $5 million of spending out of our OP expenses in one quarter. So we went from $97 million to $92 million in Q3 of 2002. You can tell that -- I don't have to look it up on a spreadsheet.

And so what we are doing is we are saying to ourselves, we don't want to do that again we are better off erring on the downside here undershooting even if we give up market share in doing that because we can always add back at a very high speed. And so that's how we were thinking about '09 and how we position the company going in, and we've talked about all of internal operating efficiencies we were getting in the process of doing that.

Got it. And maybe you kind of answered the question then because the fear is always when you give guidance that's 100 basis point margin improvement that sounds great, except if the top line starts coming down faster than you expect. It's hard for companies to catch up. When you think about now your costs going into '09, are you running that off of more of a fixed base in '08, so not really thinking too strongly what the growth rate will be in '09 on the top line, if you know what I mean?

That's a great question, Sarah. And frankly, what Mark said earlier about expect the best and prepare for the worst is our normal prudent approach. That's how we are approaching our cost structure right now, assuming it's going to be a challenging environment in the market and then if it proves to be more constructive, then we can add back. And I think it's much easier that way. Then just to add a couple of comments on the prior question, to put some numbers around it, in 2002 we had about 20% of our business coming from recurring revenue sources. High visibility subscription base. Today we have got well over 50% and we've also moved from one product with a high market share in one market to four much, much broader markets and plenty of cases where we are not the market leaders. So we have got room to go just by share of wallet, market share, etc.

Yes. Just one final one. A shorter one. Tax rate, so your tax rate in '08 will be running more around 20%. And I think previously you'd guided us that will come up to more the 24% type level. How should we be thinking about it in 2009?

Right now I would expect it to be up maybe a couple hundred basis points.

Got it. Okay.

We'll give more clarity on that next quarter.

Okay. Thank you very much.

Your next question will come from the line of Rob Owens with Pacific Crest.

-- everyone. Did you guys quantify the total number of deals over $1 million in the quarter?

We didn't, but it was -- it was 11 or 12.

Okay. And of those related to XenApp, were any of those carry over from Q2, any pushouts you got from Q3?

I would have to go back and look. It's a tough question because there are transactions that always move between quarters. So I can't remember anything specifically that was pushed out of Q2 that we closed in Q3.

And then with regard to the price increase internationally, do you think there was any pull forward demand as a result? You mentioned better linearity in the quarter, but anything that may have closed in Q4, fell into Q3 instead?

We talked to the team, and we don't think so. We certainly haven't identified anything at this point in time.

Great. Thanks.

Thanks, Rob.

Your next question comes from Israel Hernandez with Barclay's Capital.

Good evening, gentlemen, and congratulations on the quarter. Mark, a question for you on XenServer. You talked about a couple of wins with Tesco and SAP. You talked about XenServer V as a potential catalyst, do you think this is the release to get the server moving? And also in related to the SAP transaction, that with a XenApp consolidation deal, could you talk about the opportunity in that market moving forward?

Thanks, Israel. Yes, the answer is absolutely yes. We think XenServer V is that inflection point released that will catalyze our participation in the market, especially in the enterprise end. And it comes not only with HA and DR and a lot of enhancements around performance and manageability, etc. It also comes with some great new extensions in being able to plug into the storage infrastructures that customers already own. So I think it is that inflection point release. We have got another one on the drawing board here that is coming soon -- sooner rather than later to keep the momentum up in that space. In the mean time, we are intersecting very nicely with a channel population that is now above 3,300 that have been certified.

The trainings continue to go extremely well. David mentioned the same reseller sales continuing to go up. We saw quadrupling in Q3 there. So the metrics are all really looking the way that we want them to look. And all that intersects with this great inflection point release. As far as the SAP deal, it is a great way to see our opportunity to open the door in enterprise accounts that we already know. So XenServer has this incredibly low overhead when it comes to server virtualization. So when you put a work load on and you get to tap almost all of the power of the bare metal. And XenApp needs really this kind of capability in order to be virtualized in any kind of cost effective, high performance way.

So great bake off at SAP. We won. And we were seeing this sort of XenApp on XenServer sort of trend in a number of places in the world, so you will see us actually promote that in terms of our go to market plays in Q4 and beyond the 2009. So it's a great opportunity to show -- to really showcase the performance and ease of use manageability and all of the HA, DR and all of the great advanced features, live motion, etc., of XenServer running on bare metal.

Great. Thanks. And just a follow-up. Can you give us an update on progress report on XenServer with your OEM partners, and how we should be think being that over the course of the next few quarters?

Actually, the Tesco deal was really initiated and closed by HP. Okay? And so one of the things I should actually distinguish in this area is in terms of OEM. There is the OEM piece that comes from embedding and sort of upgrading off of momentum around imbedded servers. I think that sort of imbedded server market really hasn't taken off. Then there is the OEM sort of piece where these same companies, HP, Dell, etc., are resellers of integration partners for XenServer and that's starting to get traction, and what you need to start that is a few significant strategic customer wins that are references and Tesco certainly serves that purpose in the HP services world.

Thank you.

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

Thanks. David, if you look at the currency today that alone could give you margin benefit next year which could exceed the 100 to 200 bips you talking about. What are the currency assumptions you have in your margin expansion for next year?

Sure, Abhey. Basically it's a flat planning rate from 2008 to 2009. And when I say that the way we do hedging is forward anywhere from six to 12 months. So there is definitely a lag effect that occurs. So we try plan around a constant rate. And in the past several years that rate has been going up each year. This year since we seen a pretty strong appreciation in the second half of this year, we are looking at it to be flat on a year-over-year basis. So at the highest level that's the only thing we were really calling out right now. And again, as we get through Q4, get more granularity around 09'.

Just to be clear, it's flat with today's rate or flat -- you aren't assuming anything in terms?

It's flat with a call it an average rate for '09 to -- or '08 to '09.

Got you. And lastly, about XenApp platinum version, now it's traction in this quarter seem to be relatively in line with second quarter after it was executing for over a year now. How she should we expect its traction in Q4 and beyond?Should it be exiting from here? Should we expect it to stay around 30%?

I said in prior quarters and I think it could be as much as a third exiting this year and I think that's possible. I would expect the mix to probably be a little higher fourth quarter than we seen in the third or second quarter. And that's generally because platinum tends to be viewed as more strategic and has a little bit larger deal size, etc., and there will be large transactions in the fourth quarter more so than any other period.

Thank you.

Your next question will come from the line of John DiFucci with JPMorgan.

Thank you. Mark, it's nice to see expense focus as one of your five strategic messages and it looks like you did get ahead of it here and it really showed in the numbers this quarter. But there are some things as you point out I think David pointed out, you can't control and you want to focus on what you can control. But can you estimate how much of your application virtualization business, your core business is really small business, when we get into tough -- if things get tougher, like the market seems to appear to think it's going to be?

Yes. Well, it's a great question. Certainly maps to kind of the commentary I made about 2002. And I think we need to assume that we are looking at probably around 20% of the business in that area. And that's small transactions and small projects, okay? So don't think of it as much as SMB as just small things. And when -- it's like any business, when you are looking at things to cut, the two obvious ones to focus on are the huge line items. Okay? You get big movements there. And then the small very, very small ones that don't move the needle per se. And that's why in 2002 we saw weakness in that run rate business where you are selling five to 50 licenses at a time. And while in 2002 by the way, we saw continued strength in the enterprise business that XenApp was in the middle of in that year. So we need to probably think about 20% at this point.

Okay, thanks. And just a quick follow-up. EMEA was real strong this quarter. And you had the price increase, but you announced it at the beginning of the quarter and as you point out you have linearity and you don't think you pulled anything from the third quarter to the fourth quarter but are still looking at that. But essentially your EMEA customers just because of the strengthening dollar had a price hike and you increased that price by another 10% on top of that. And if we were headed into a difficult period worldwide, you sort of run the risk of choking off demand if there is any price elasticity which there's got to be some in these products. How do you plan to deal with that? I think David mentioned you will keep an eye on it. And if something like that were to happen, how would you deal with it?

Yes. It's a good question. And as I said it's one of those things we're keeping an eye on as the dollar moves up and down. We do have a process in place already and we have for some time to deal with price exceptions and we aren't losing business due to price in the app virtualization world. So we will continue to monitor it. If the dollar continues to strengthen materially, we could revisit it. And we will cross that bridge when we get there.

Yes, I think, John, the other thing is for everyone to remember is that, this is really the first step to really solving the issue and the problem here and that is to get to local currency price list, etc. So that we don't have this issue on an ongoing basis, and customers aren't faced with this issue because no one likes the issue. Customers don't like it. We don't like it. So we will do the right thing. And teams that are kind of on the front lines understand how to work with exceptions to make sure we don't lose business just because of currency fluctuations.

Okay. Thanks a lot. Nice job, guys.

Thank you.

Your next question will come from the line of Walter Pritchard with Cowen.

Hi, guys. Just two questions around the spending. I guess one for you, Mark. You have spent quite aggressively in the last several years and a lot on customer facing go to market stuff. I am trying to get a sense of how sensitive we should expect your top line growth rate to be to that cut in spending. It sounds like you've got multiple factors with macro also potentially hurting things. But if you could isolate or try to isolate the impact of lower spending on your top line, how would you help us think about that?

Well, Walter, I think the way to think about this is in maybe two pieces. So the first piece is, over the course of the last four years we have done enough acquisitions to where there is enough sort of redundancy in systems and even some teams, where they are not merged together into maybe a single or centralized organization. And so there are a number of things that we can do to wring costs out just on the basis of getting more efficient around the things that we are already doing. And so some of that money can then go to margin expansion and some of it can go to funding the second area and that is investing in development and in the customer facing activities that we were talking about, ranging from a number of new things we will be doing in field marketing as well as specifically customer facing people.

So we were trying to make sure that we don't starve sort of hot hands, is what we like to call them in the company, and they will be basically in product organizations and in geographic sales organizations. And to also not overspend in markets, especially in a sales area where the market just isn't there at this point to be attacked. So, it's kind of a balancing act and that's why you see a lot of focus here and comments from David around really managing the company, especially through this kind of cycle around more of an OP margin story, and taking all the growth we can get by investing what we can save through efficiency. So that's the way to kind of understand our mindset in the dynamics here.

And maybe a question for David. Just this may sound like something out of the presidential debate here, but you guys are cutting budget in a sense and you talked about putting more money on customer facing activities. Where are areas it sounds like maybe on the product side where you are defocusing or you're going to pull back from spending, maybe lengthen out product cycles and so forth? It seems like you can't do everything with less. I'm just trying to get a sense where that may be.

That's right, Walter. So what you see us doing is really taking the strategic products that we have that really make up the point of the spear. XenApp, XenDesktop, XenServer, NetScaler, GoToMeeting and Webinar. Alright? And really focusing there. And prioritizing the innovation and development cycles on those products up, while then taking smaller products that actually are designed to really amplify one or more of those products and moving them down the stack and focusing development activity and priorities there around the kinds of features and capabilities that amplify the point of the spear. And so, for example, direct example would be in the WAN optimization marketplace investing more in [branch for Peter] in its ability to actually deliver desktops and APP to branches and less in the general purpose WAN optimization space. So there's a very specific example.

There are also a number of others. We have obviously a very rich portfolio of projects and we are lengthening some. One of them we are going to move out one year is a product that we named virtual design studio, which is basically our solution for virtualizing open GL 3D kinds of graphics apps. And we will make some tradeoffs there and take those resources and put them more towards the front and to the point of the spear. Hopefully that gives you --

Absolutely. Thanks, Mark.

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

Thanks. A quick question just on your pipeline close rate. We've heard a number of tech companies moving up their pipeline to close ratio from three to four to five to one. Can you give us a sense of kind of how you are managing the close rates? I guess if you give it at a very high level where do you gauge your close rates today versus what you seen in the last three or four years?

Sure, Brent. This is David. We definitely made a change to all of our radar systems as we call it around the pipeline and customer close rates, etc., to just being much more thoughtful around the current environment. Also has forced us to add a couple new layers of discussions to make sure we really understand what's going on from a customer standpoint, their prioritizations and also influencing our messaging around the thing that will stay top of the list regardless of what happens, their budgets, etc. Our pipeline coverage ratios have definitely gone up. And we think that's prudent at this point in time. So we have got a pretty good feel for the last several quarters and what is required to close the quarter and get business over the line, but also as I said much closer to the conversation that we've probably been the last couple of years. So I feel pretty good on that front.

Okay. We all been used to a budget flush in Q4 the last few years. And I guess you are taking that off the table as well.

I just think it's prudent at this point in time to assume it's going to be more muted. And if it happens, great. But in this type of environment I think there is just -- budgets do lag. But I do think that it will be more muted than we've seen in the prior periods.

Thanks.

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.

Thank you. Well, everyone, we are facing challenging, exciting and uncertain times. Paraphrasing the words of Jeff Bezos of Amazon, "Frugality drives innovation, just like other constraints do. Innovations don't always require big budgets. They require thoughtfulness and focus on the customer. The winners will always put the customer first," and you can count on Citrix to do that. Thanks very much. We will see you in three months.

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