思杰系統 (CTXS) 2008 Q4 法說會逐字稿

Good afternoon. My name is Jason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems fourth quarter 08 and fiscal year 08 earnings conference call. (Operator Instructions). I would now like to introduce Mr. Edward Fleites, Director of Investor Relations. You may begin your conference.

Thank you, Jason. Good afternoon everyone and thanking for joining us for today's where we'll discuss Citrix fourth quarter and fiscal year 2008 financial results. Participating on the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Senior Vice President and Chief Financial Officer.

This call is being webcast with a slide presentation on the Citrix Systems investor relations website and the slide presentation associated with the webcast will be posted immediately following the call. Before we begin the review of our financial results, I want to state that we have posted product classification and 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 pursuant to the Safe Harbor provisions of the US securities laws. These statements involve a number of results that could cause actual results to differ materially from the results today including risks of the impact of a global recession and uncertainty in the IT spending environment, our product concentration and our ability to develop and commercialize new products and services, potential disruption to Citrix and its business from our restructuring program, the impairment of the Company assets, competition and other risks associated with the market of and for our products.

Additional information concerning these and other factors is highlighted in today's press release and in the Company's filings with the S.E.C. including the risk factor 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 Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found on 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.

Thank you Eduardo and welcome to everyone joining us this afternoon. Today we announced our results for the fourth quarter and fiscal year 2008. As you can see from the release, full year revenue is up 14% to $1.6 billion, and adjusted earnings per share came in at $1.63. In the fourth quarter, overall revenue growth slowed to 4% year-over-year, with licensed revenue decreasing 9% to $162 million. The other revenue lines including our SAS business, license updates and services all produced growth in the mid teens over last year and I'll discuss these more in detail later in the call.

While we're disappointed with the growth rate of revenue during the fourth quarter, the remaining financial metrics were all very strong. On an adjusted basis we generated gross margin of 92% and due to our continuing focus on operational efficiencies we drove Op margin to over 26%. In addition, cash flow from operations was a record $166 million.

From a geographic perspective, we saw customers in all regions react to difficult economic conditions, currency volatility and constraints on their own businesses. By region, revenue in the Americas grew 3% year-on-year on year-over-year to $177 million, EMEA revenue was up 2% while Pacific declined 6% to $31 million. So overall despite the volatility of IT spending with our customer base, I'm pleased with our focus on execution and the operating leverage we've been able to demonstrate.

Now I'd like to review our main product areas and the trends in those businesses. First, our App Virtualization business was the most impacted by the macro environment, declining 3% year-on-year as many customers delayed or reduced planned projects in Q4. In the period, the two areas that showed the most pronounced softness were $1 million dollar plus transactions where customers were hesitant to make large capital commitments and on the other end of the spectrum the very small run rate type deals which tend to be more related to employee growth.

From an industry perspective, manufacturing, financial services and retail were the more challenging vertical markets. However, subscription advantage renewals were well ahead of expectations with renewal rate increasing about 5 percentage points sequentially to the mid-80s. In some instances customers chose to renew their subscription instead of upgrading to the Platinum Edition while others simply locked down their existing environments. Overall this was the primary driver of deferred revenue growth which increased $52 million over the prior quarter.

Next, in our App Networking business, revenue was $54 million in Q4, up 13% year-over-year. For the full year, revenue for this group grew 24%. The overall results within the various segments were mixed in the quarter. Consistent with prior periods revenue from customers in the internet centric market was down as their businesses continue to be impacted by slower e-commerce sales and web traffic growth. However we're still increasing traction with our enterprise customers. In Q4 the number of new enterprise accounts increased by more than 25% sequentially, and the platinum edition of NetScaler targeted toward this segment contributed almost a third of license revenue.

The third product I would like to talk discuss is our business and server and desktop revenue. In Q4, XenServer and XenDesktop revenue was up over 40% sequentially to $9 million. Although for the full year we finished shy of our $25 million target in this area. Despite the economic environment, all of the activity-based metrics are quite strong. We exited the quarter with over 4,000 authorized partners. We added several hundred new customers in Q4 and the opportunity pipeline continues to build at record levels. Mark will discuss these products in more detail later in the call.

Finally, touching on our Software-as-a-Service business, revenue was up 18% during Q4 to $69 million. For the full year, our online services grew 22%, and now represent 16% of total Company revenue. The growth here is being led by the collaboration products of the GotoMeeting family which increased about 50% year-on-year. Also in this business, in Q4, required technologies will allow us to offer a number of voice services to our customers beginning this quarter.

Next, I would like to review expenses and operations. In Q4 total operating expenses were down about $2 million sequentially to $272 million contributing to a 250 basis point improvement in adjusted operating margin over the third period. As I discussed in the past, the Company has been focused for several quarters on delivering operational leverage while increasing investments towards the areas of the business that will provide long-term growth opportunities. We've accomplished this through product line simplification, accelerating the integration of acquired business, system automation to enhance long-term scalability as well as other initiatives.

On the rest of the P&L, other income and expense included a realized gain of approximately $3 million offsetting investment impairments that occurred earlier in the year. Also our adjusted tax rate for the quarter was 27%, 6 percentage points higher than our guidance. The delta here is due to the relative mix of income between the geographic markets, specifically driven by the weaknesses in EMEA during the Q4.

Turning to the balance sheet, we currently have over $850 million in cash and investments. And cash generation during the quarter was very strong increasing to a record $166 million in cash flow from operations, and bringing the trailing 12 month total to over $462 million. Our primary use of cash in Q4 was around our ongoing stock buyback program where we repurchased over 2 million shares and for the full year, we've repurchased almost 11 million shares or about 6% of our total shares outstanding, and we will plan to continue this program during 2009.

Finally I would like to discuss our current outlook and expectations for the first quarter and full year 2009. But before I review numbers, I would like to provide you with context around how we built our operating plan for the year. The recession that began in the US triggered by the financial crisis has spread to most geographies around the globe and as a result consumer and capital spending is being significantly impacted on a worldwide basis leading to a lower visibility of revenue. Our sales pipelines have continued their strong growth but in this market climate, it's extremely difficult to know when these projects will go forward. We think that the current economic trend requires a pragmatic approach to fiscal and operational planning with a bias towards being proactive. As a result, we've made the decision to restructure our work force in order to operate more efficiently and drive structural changes to our cost model.

Today we announced a global work force reduction of approximately 10% to take place largely in Q1. This will impact roles in all geographies and in most functional areas of the business. The financial result of this restructuring, once completed, will be a reduction of about $50 million in annualized operating expenses. And in connection with this restructuring, we expect to incur a charge primarily in the first quarter in the range of $19 million to $23 million.

We believe in this environment Citrix is well positioned with products that reduce business costs, increase business flexibility and deliver solid ROI. In addition, over the past several years we've significantly diversified the revenue base of the Company with recurring revenue streams such as on online Software-as-a-Service and license update subscriptions now representing over 50% of the total mix. And despite the cost structure items announced today, we'll continue to make the appropriate investments in our business to ensure that our market leadership remains intact and position the Company for enhanced leverage once economic environment improves. We believe that visibility into the demand environment for IT and software is going to remain challenging for sometime therefore we're providing less quantitative guidance today than in the past. So for the first quarter of 2009 we expect total revenue to be down approximately 5% as compared to the first quarter of 2008, adjusted operating margin to be in line with the first quarter of 2008, excluding restructuring charges, and interest income to be in a range of $3million to $4 million.

For the full year of 2009 we currently expect total revenue to be approximately flat to the result from 2008, and with a continuing focus on operating efficiencies driving as much as 100 basis point improvement in adjusted operating margin over last year. Again, excluding the restructuring charges. 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, David. Today we're reporting good Q4 results and overall solid performance for 2008, especially in the face of an extraordinary worldwide environment. Last July, we saw early signs that the economy was beginning to slow. To get ahead of the curve, we took decisive actions to hold operating expenses, to introduce new cost efficiency programs, and to focus investment in the most strategic areas of the business. Those decisions allowed us to achieve the operating leverage and growth in the second half we're reporting today. In spite of the weakening environment, it's a testimony of team work and responsiveness across the Company to drive profitable growth. I'm extremely proud of this Citrix team and our partners for their courage and performance in an extremely volatile market. In addition, there are thousands of Citrix customers to thank for their business, their confidence, and their growing enthusiasm for our products and strategic vision.

As we enter the year, we had an aggressive game plan. A plan to transform IT into an on-demand service by centralizing the delivery of apps and desktops from a common head end, to extended our leadership and virtualization from data center to the desktop and to help customers transform static data centers into dynamic delivery centers. This game plan drove many remarkable accomplishments in 2008, accelerating both our product and go-to-market strength. In the first half, GotoMeeting became the first online collaboration platform to seamlessly integrate TFTN and VoIP across both Windows and Mac, enhancing our ability to deliver cost effective virtual meetings and work-from home-solutions suited to this economic environment. We also introduced XenDesktop, rapidly becoming the market leader in desktop virtualization and extended our lead in web app delivery with the NetScaler MPX platform.

In the second half we introduced XenApp 5, XenServer 5 and NetScaler 9, all major new releases of our virtualization and web app delivery controllers. We also extended our partnership with Microsoft in virtualization and strengthened go-to-market relationships with global SIs like CFC. And finally we unveiled C3 Citrix Cloud Center, a new offering for cloud service providers that integrates our virtualization and app networking platforms.

2008 also saw a dramatic increase in the market spotlight on Citrix, giving us much greater visibility on the CIO radar. We're exiting the year with an incredibly strong position in some of the hottest markets in the industry, including virtualization, SAS, cloud and web 2.0. More importantly we're combining these technologies into a compelling end-to-end solution for on demand IT It's unparalleled in the industry. A solution with the potential to radically change the economics of computing for customers worldwide.

The industry at large, however, is clearly headed for a challenging year. In many cases customer budgets are still in a state of flux, adding an unprecedented volatility to IT spending forecasts. The tech sector, highly dependent on capital spending, will be impacted across every segment. As a result, we're being appropriately cautious with profitable growth as our top priority both operationally and strategically.

Before we get into the specifics of our 2009 plan, I would like to share a few examples of the steps we're taking to improve overall efficiency in the this economic climate. We're not simply reducing head count. Here are some examples. We're shipping customer facing resources to higher productivity regions like sales reps, SEs, territory managers, channel managers and increasing the number of quota carrying reps selling Citrix Delivery Center. We're doing all of this by reducing the number of overlay positions calling on the same accounts. We're also consolidating operational roles across all divisions and geographies to reduce redundancy and increase standardization. To enable additional cost reductions and improve scaleability going forward, procurement and transaction processes are moving to a shared service model worldwide. And we're increasing our use of web based self-service for customers and partners, improving 7 x 24 support and reducing costs. Of course we're also addressing discretionary costs by reprioritizing some internal projects, reducing contract workers and limiting travel spending. In addition, merit increases normally affected in Q2 are being delayed until Q4 and merit increases for all VP's and Company Officers have been eliminated. Taken together this will allow us to drive both short and long-term changes in our cost model, spending behind demand, while maintaining the ability to invest in the strategic core.

Next I would like to talk about our product and market strategy for 2009. Helping customers reduce travel spending, increase teleworking and enable easy remote support will be even more valuable this year. To capitalize on this, our online services priorities are in two key areas. First, to further increase the integration of audio and online conferencing, to reduce the cost and complexity of holding web-based meetings. Secondly, we'll expand into key international markets with localized versions of our products starting with GoToAssist. This environment is driving more interest in Software-as-a-Service. even with enterprise customers. Making the enhancement of GotoMeeting, GotoWebinar, GotoAssistant and GoToMyPC more strategic than ever.

Next, we're also investing aggressively to change the economics of desktop computing, enabling IT to turn every enterprise desktop and app into an on-demand service, freeing them from the multi billion dollar burden of traditional desktop management. Our industry leading app virtualization solution is already the lowest cost way to deliver Windows apps or thin client desktops. It's made a tremendous impact on desktop TCO for many, many years. In 2008, we successfully rebranded the product at XenApp giving it a clear position in our end-to-end virtualization architecture and we released XenApp 5 , the culmination of a huge set of investments, to enhance user experience, simplify administration and leverage Microsoft's release of Windows server 2008. For most of 2008, much of our new XenApp growth and customer upgrades were driven by XenApp Platinum Edition. This increased our ASP's and created further penetration of the customer base.

During Q4 customers began postponing or reducing deal sizes, especially in Europe and especially late in the quarter. In response, of course, to tighter capital spending budgets. As David mentioned, we saw fewer 7-figure deals in the fourth quarter as customers adjusted to lower budgets. At the same time, however, we saw substantial uptick in license update renewal rates, reflecting the ongoing value proposition of our product and demonstrating the long-term commitment of our customers. As we head into 2009, our XenApp product strategy will focus on driving increased account penetration and subscription renewals. This quarter for example we're adding disaster recovery and operations management features to XenApp Platinum that will further enhance its TCO. The addition of automated work flow orchestration, portable profile management, capacity planning and dynamic provisioning, giving customers more value for the same price.

And we also have some great announcements coming as we enable XenApp for smart phones like the iPhone, Windows mobile, Blackberry and Symbian. Our long standing leadership with XenApp along with investment in core virtualization is giving us a strong entry into the desktop virtualization market with XenDesktop. In 2008, we generated a lot of momentum in building a base of early adopters. In Q4 we saw strong sales growth across all Geos in all industry verticals. I'm really impressed with the accomplishments we've made with XenDesktop since its introduction in May. Over 1,400 partners have been trained. Evaluation downloads topped 14,000. There were three solid product releases in 2008, including the XenDesktop 3 early access release that just occurred in Q4. In Q4 both licensing and customer accounts doubled sequentially. And over six deals in the quarter exceeded 1000 licenses. XenDesktop is getting great reviews, being described as the gold standard, state-of-the-art, clear winner and winning shootouts. Both HP and Dell have delivered OEM versions of XenDesktop to their field and channel partners and working with Microsoft we've established XenDesktop as the preferred Microsoft DDI solution.

So we enter 2009 on a strong footing to really reduce the cost and complexity of desktop computing. Last week we unveiled our vision to go much further with a new bare metal client side hypervisor being developed in collaboration with Intel. This partnership will result in a new Xen based hypervisor that runs directly on a users PC or laptop, enabling our Citrix Delivery Center infrastructure to communicate directly with millions of Intel-based devices anywhere, any time. This technology will be productized later this year in a new solution code name Product Independence transforming the way corporate desktops are delivered and managed, giving IT all the security, simplicity and cost savings of centralized management and for the first time, end users will get an unprecedented level of performance, personalization and freedom. We have an amazing opportunity to free CIO's from owning and managing laptops and give employees the freedom to work anywhere from any device.

Our final strategic focal point is to bring the efficiency and economics of the cloud to the enterprise data center with NetScaler and Xen Server. In 2008, we saw solid expansion of NetScaler in the enterprise segment and we now have a broad base of customers leveraging the product in finance, healthcare, education, government, tech and manufacturing segments, tripling the number of enterprise customers in that scale over the last few years. We've also seen increasing strength and interest from the service provider and cloud segments with key wins in 2008. And a rebound in the second half with internet centric customers boosted by the new MPX platform. MPX now represents 20% of our total NetScaler business. With MPX we've seen increase in competitive position, winning hands down on design and price performance dimensions. Netscaler Platinum which includes our web app firewall now accounts for 30% of the business. A growing number of customers are also now using NetScaler in their XenApp farms for high-performance load balancing, high availability and disaster recovery implementations.

In the first half of 2009, NetScaler MPX will get new capabilities for web 2.0 apps, significant performance accelerations and multi tendency capabilities that I'm really excited about. These will be key drivers for our additional expansion in internet centric and cloud segments. Other enhancements will drive additional ROI, scalability and ease of implementation for continuing our expansion in the enterprise segment. And stay tuned because we have a couple of market changing surprises coming as well in this space.

The scalability, economics and manageability of Xen have firmly established it as the hypervisor of choice for cloud service providers, including the world's largest virtualization deployment, Amazon. Like NetScaler, XenServer puts us in a great position to bring the proven efficiency and economics of the cloud to the enterprise data center.

We entered 2009 with a very solid Xen product line. XenServer 5 released in 2003 continues to get momentum and receive excellent reviews from customers, partners and head-to-head lab reviewers. Version 5 passed the enterprise tipping point with the edition of [P2V VN provisioning] services, enterprise storage enhancements, high availability and disaster recovery. Since this version became available, we've seen some very high profile customer wins in the enterprise space when going head to head against our largest competitor. This year, we'll significantly enhance XenServer and bring our enterprise value add to the Microsoft HyperV platform. We'll have announcements in this area shortly so stay tuned.

As you can see, we're continuing to invest in core virtualization, building new capabilities that strengthen the competitive position not only of XenServer but of XenDesktop and of XenApp as well as allowing us to further our partnership with Microsoft. Market booms and recessions have at least one thing in common, they create winners. These are trying times and IT organizations are under unprecedented pressure. The CIOs I talked to recently are ready to do something different, ready to achieve the IT cost structure of the web by centralizing, virtualizing, optimizing, and delivering apps and desktops from an enterprise cloud.

Why? It's because they're doing the math, finding that cloud economics are amazing. For example, Amazon is selling storage on S3 for about $0.15 a gig a month. That's 250 times less than typical enterprise storage costs today. Google runs 20,000 servers with one admin, today's enterprise average is less than 50 servers per admin. YouTube's bandwidth costs are 50 times less than the typical enterprise. And Salesforce. com upgrades their enterprise app 4 times a year for a million users. Ask your CIO if that's possible with your apps. These are order of magnitude differences between traditional enterprise computing and the web. The old way of doing things just will not last, especially in this environment. All of this points to the real problem, the hard coding, complexity and inflexibility of distributed computing.

I'll make a prediction. This year, squeezed by declining budgets and IT consumerization, thousands of CIOs will have the ah-ha moment. The gap between the web and the enterprise is simply no longer defensible to users, to the CEO, to the CFO. This is the IT revolution that Citrix is at the epicenter of. Technologies like virtualization, cloud computing, SAS and web 2.0 are at the top of every CIO's priority list and no one is better positioned to capitalize on this than Citrix. So now I would like to open it up for

(Operator Instructions) Your first question comes from Adam Holt of Morgan Stanley.

Good afternoon. Two questions on the license (inaudible) line. If you look at the fourth quarter, do you want to -- in a little more detail, I know you talked about large deals being difficult but maybe contrast the direct business versus the indirect business and talk a little bit about the pricing environment and did you see deals shrink because seats are going down or the configuration of the product portfolio is getting a little bit smaller?

And then just looking into the first quarter, it looks like the guidance implies license revenue down as much as 30% year-on-year. Is that right, and if so, why should it be so much worse than normal seasonality, obviously a difficulty notwithstanding.

Sure. This is David. Let me take the first part of that question and then ask Mark to add as well. A couple of things going on in Q4 if you look across the geography one thing that was very evident, especially in the last couple of weeks, people were really focused on preservation of capital and a number of transactions that were down to last signature were just not approved through the finance organization. There were some instances where people simply reduced the size of an overall purchase. I can think of one, in particular, that was a seven-figure transaction and ended up closing less than $200K. And then just the increased volatility that was going on at the end of the period as people were trying to anticipate what their budgets were going to look like into 2009. So a lot of -- a lot of different things impacting the actual results for Q4.

As far as the Q1 guidance, the implication on product license revenue would actually be down about 20% instead of 30%, as you mentioned. Mark?

Adam, the only thing I would add is, just a couple of things. First of all, there are no structural changes in what customers are doing in terms of how they're implementing the product configuration or anything in that area. And having spent a fair amount of time in Europe in the past six months, I can just tell you that its clear that Europe is lagging the US by six months. So the things that we saw in Q4 out of Europe in terms of what the sales organization thought, what customers did, et cetera, was really almost identical to what happened in the US in Q2. And so what happens is -- as we've learned in the US market -- that customers adjust, everyone adjusts their outlook, their expectations so the data you get from the market gets better, but until it gets better and until we get to that part, we're being pretty cautious as you can tell.

And if I could ask a follow-up on the margins for next year, should we assume that's a stand alone Citrix number and if you make acquisitions that might change or should we assume that given obviously the uncertainty of the environment that capital preservation will be the primary objective and we shouldn't expect to see material M&A. Thanks.

We're not trying to communicate anything unique around M&A as part of the guidance right now. I think you should just think of that our all end number and if anything material were to occur, we would describe the impact at that point in time.

Great. Thank you.

Your next question comes from Robert Breza of RBC Capital market.

Hi. Thanks for taking my questions. David, maybe just as a follow-up to Adam's question, when you referenced 20%, were you talking about down quarter-over-quarter or down 20% compared to Q1 of March '08.

That's compared to year-over-year, March '08.

Great. Thanks for the clarification. Mark, as you look at the global work force reduction, can you just maybe help clarify a little bit for us, are you expecting that to be very broad-based, North American centric, and I know you did give some additional color in terms of product areas where you see investments versus the traction, so the geo split would be helpful, thanks.

Robert, thanks for the question. We're really not providing any granular detail around this. I can say that every organization functionally, every geography, location-wise and every level of the Company is impacted. And we really spent a lot of very, very careful and thoughtful time going through organization structure, work design, where our priorities were, projects, et cetera, their implications on the organization, and tried to make every single decision very, very thoughtfully. This is hard stuff for any management team to do. And so you should just consider it to be very broad in its scope.

Great. Thank you.

Your next question comes from John DiFucci from J.P. Morgan.

Thank you. I guess David, if I look at the guidance for the year and you look at the restructuring and you say you're going to save about $50 million on an annual basis, I realize maybe some of that comes in over time, but--and that's just due to the restructuring and if the product license implied in guidance for the year anyway, and especially next quarter is going to be down and that's where most of the -- I guess variable costs for sales and marketing on commission are, it's just -- $50 million just by itself is about 5% of your operating expense on an annual basis and you're saying that margins for the year are only going to increase by about 100 basis points, and in a flat revenue environment. Just curious, is there like a relatively high level of conservatism built into that margin, 100 basis point increase, or is there something else happening there? Just help to reconcile that, please.

Sure, John. I think at the highest level is that it's just a really tough environment to forecast accurately and that's why we're -- based on that lower visibility, we're trying to be pretty high level in our commentary and just give you a better understanding of how we're thinking about the business and planning the business. As far as the actual savings from the restructuring, some of that does come in outside -- outside of the first quarter and it will be layered in during the course of the year. That's an annualized number. And also part of the plan is to be increasing investment in other areas of the business. They're going to drive long-term competitive advantage, et cetera. So all in right now, we're thinking about continuing our focus on operating efficiencies through a lot of the things that Mark and I had mentioned in prepared comments, and continuing to deliver operational leverage, even in a tough environment like we're operating in right now.

Okay. Just a quick follow-up to that because the last couple of quarters you put up good margins better than I think people were looking for-- but then in your prepared remarks you said as much -- I think -- I don't want to -- I think you said something like as much as 100 basis points improvement. And I'm just -- I just want to sort of gauge that relative to the last couple of quarters and relative to these savings and your increased expenses investing in certain areas. I just want to make sure that should 100 basis points be the best you can do next year, is that what we should be thinking or is that what you're planning to and maybe it's better than that and who knows.

I think it's going to be a function of revenue to some extent. Obviously that is one of the bigger drivers to our operating leverage as we go forward. Even in a tough environment, what we're trying to say is that we're looking to expand our operating margin. If the environment is more constructive than our internal planning there could be an opportunity to produce a different margin level. But at this point in time -- that's the best way to think about it. And we'll provide a lot more -- a lot more color as we move through the year and have a better picture on the demand environment.

Okay. Thank you. Just one quick one. If I could squeeze it in there. The mobile functionality that Mark talked about, will that be an upgrade for XenApp or will customers actually get that for free if they're paying for license updates?

As long as they're on subscription they'll get that as part of their subscription. That's what license updates are all about.

Okay great. Thank you.

Your next question comes from Phil Winslow of Credit Suisse.

Hi, guys. I just wanted to talk a little about the pipeline especially when you look at Q1 in the first half here. Obviously you saw some allegiance particularly in the XenApp business and when you look at the guidance of down year-over-year overall revenue, where are you seeing most of the weaknesses at least in the pipeline coming from the NetScaler side or XenApp and then also from a seasonality perspective, obviously you gave Q1 guidance but how should we think of the mix of revenue, first half, second half, as implied in your guidance.

Phil, I'll take the first part of your question. So you know, when we look at the pipeline, the good news is that the growth across all products is really impressive. When you look at the last three quarters, it takes a bigger pipeline to produce the revenues. So the coverage ratios have clearly changed over the last three quarters. So what the biggest sort of question is, do customers have budgets, do they know whether or not they have budgets and how do they communicate that to partners and the salespeople that are on the front line. So it really accounts for the cautiousness in our guidance, even though the pipelines are -- they're growing pretty much at record rates. And I think that's the -- that's the paradox here, what makes this especially difficult to work in. But that's what we're seeing. I think that's probably what most companies that are on the cutting-edge with exciting technology are seeing in their business as well.

I'd just add, on the shape of the year, while we're only really talking about Q1, we are, from a planning standpoint, thinking about the broad deleveraging that's going on in the whole macro-environment around us that's creating a new baseline. It's not so much as a decline, as a step function down, and we do believe that companies will have a chance to adjust and be able to get their budgets in place and we'll get to a normalized environment, albeit at a lower level. So sequential progress throughout the year with Q1 hopefully being the low point.

And also David, just very quickly, on your expectation for tax rate for Q1 in the full year?

I do think tax rate will be up a little bit and that's just a function of the mix between our international and domestic markets. And as Mark mentioned, it does appear that international markets are lagging the US a little bit, so they're relative contribution will be less. So I think a -- a couple of hundred basis points over 2008 is not a bad planning assumption for now.

Okay. Thanks, guys.

Your next question comes from Todd Raker of Deutsche Bank.

Hey, guys how are you?

Hi, Todd.

One quick one for David and then a bigger one. If I look at Capex, it looks like it stepped up in the quarter. Was there anything specific going on there and how should we think about CapEx going forward here?

Yes, Todd, the biggest change in CapEx in Q4 was the purchase of our buildings in Fort Lauderdale. Those have been held in a synthetic lease for a few years prior to this and we made a determination to terminate that. So the cash moved on the balance sheet from restrictive cash out for the payments. That's really the biggest change there. As far as going forward, you should expect capital spending in '09 to be less than 2008, even excluding that building purchase. We just haven't given a specific target around that yet.

Okay. And then can you guys comment on linearity you saw in Q4 and the bigger question for your guys is-- do you expect the competitive landscape to get more aggressive given what we're seeing here and should we start thinking about pricing reversing itself in the industry? Thanks.

Let me take the linearity question and then I'll ask Mark to answer the second part. As far as linearity, we're actually very linear in the quarter. Which was part of the problem. In most Q4s you tend to have a lot more strength in the latter part of December as we see a lot of transactions closing. This period was -- was shaped to much more like a Q1 to Q3. And that's evidenced in our DSOs which were actually down year-over-year and flat on a sequential basis.

Todd, as far as the competitive landscape, I think we have to assume that it gets tougher for a couple of reasons. First, especially larger customers, they're asking for better deals. They have -- they feel like they have more leverage when they have a purchase to make. And we saw that in Q4, and we're pretty steadfast in doing profitable and good business and not giving software away. We just have never done that, have never trained our partners or customers to come to us under those conditions.

We are in some markets that are by definition very competitive in terms of head to head competition with similar -- but of course, lesser capable in our opinion, products, so we, of course, try to sell our value, et cetera and then we respond competitively. And I think we'll see more of that because there is just a deeper competition for one wallet in IT and it's pretty much a zero sum game at this point with the wallet being smaller.

So I think the third piece to watch for is customers actually going a different direction. And that means choosing different licensing models and moving more to SAS. So one of the things we really like is we've got a SAS business, we know a lot about it and we can certainly -- we know how to implement such a model with products. And then look for some licensing programs from us later in the year that will give customers more choices. Because this is a time where being a customer's partner in the sense that there is some shared risk and there is a lot -- and a licensing kind of model that works better with their business, it's the right time to do those things. So that's the way we're looking at it.

Okay. Thanks, Mark. That was useful.

Thanks.

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

Good afternoon. With the mix shift on the revenue side, should we expect some gross margin compression and is that one of the reasons you're only giving us 100 basis points of operating margin expansion next year? And second question for Mark, looking for some color on the desktop market. What do you think becomes the tipping point or what is going to drive major adoption in the market and does Windows 7 play a factor in your mind?

On the gross margin question, not too much change. Maybe a little bit of pressure in the earlier parts of the year. But we've done a number of things, whether it's in just the architecture of the product, supply chain management, et cetera to drive efficiencies there and some of those will be coming online over the course of 2009 and help offset any broad pressure to gross margins, so not much.

Because the salaries are going to save you about 3.5%, 3%-- a little over 3% in terms of margin. But you're only giving us 100 basis points of operating margin. So I guess there is still a bit of a disconnect there.

Yes. The only real takeaway I think is right now is that our full year view is based on a low visibility into the overall demand environment and so at this point in time we're trying to keep it very high level, be conservative in our approach like we always are, and then just continue to focus on execution, but the one thing we are trying to communicate is that regardless of the environment we are definitely focused on driving operational leverage. And I should expect that in 2009.

Thanks.

Rob, from a desktop market, it's kind of a tough call. I've been wrong now for about a year on this in terms of being more conservative about the outlook than what the actuals are beginning to show. And I'm wondering, is there a tipping point or in fact-- is it just sort of a flywheel kind of effect where you have a lot of network effect where customers talk to other customers to analysts, et cetera, and really understand what the benefits are, because yes, there are savings, but yes, there are huge capital commitments to put a significantly sized desktop virtualization system in. And you would think that large scale capital commitment to do this would have a huge breaking effect on the flywheel. But it really is violating the laws of gravity from my point of view so far.

As far as Windows 7 goes, it certainly would not hurt and it probably will help, especially for those customers that have been waiting to upgrade and do not want to go to desktop virtualization solution that is Windows XP based. And most of the pilots and most of the rollouts are XP based and these are customers that have decided to not wait. Windows 7 is obviously getting some really good solid reviews. All of our tests are showing that density is better, because Microsoft has done a lot of optimization-- a lot of really smart things on Windows 7, so that should help.

The other thing that I would add as a potential tipping point is when we cross this threshold where we're not talking about desktop virtualization any more, we're talking about desktop delivery. And desktop delivery has really a different kind of characteristic because -- and it's a super set of desktop virtualization and that's when, for example, our products will be able to work more like XenApp does, that it will host or stream an application or do a hybrid set of things based upon IT policies and how the IT organization wants it to work. So that's probably what creates more of a tipping point and that's a--think about it as a 2010 phenomenon as we introduce lots more technology this year in this space.

Thank you.

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

Hi. This is actually Mike Bower for Daniel. You can guys give me what the XenApp platinum percentage for licenses in the quarter?

Yes. It was about 35%.

And then back on guidance, can you -- on the application networking side, what is your expectations for growth on that specific product group as well as the online services? Can you give a little bit more color on that, what you think in terms of growth for those two lines? Thanks.

Sure, Mike. As far as the individual license components, we're not going into granular line by line guidance at this point in time. I don't think it's appropriate given the lack of visibility out there. As far as online, it is a SAS business. So it will continue to demonstrate positive growth. We are being conservative when it comes to our assumptions around new customer acquisition and customer retention rates and think there will certainly be some pressure from macro effects going into 2009 as people have less money to spend. So the growth rate will come down a little bit from where it is right now.

And then lastly, hopping back on to the platinum for XenApp, do you anticipate that to hold steady or would you think in terms of percentage that that will start to decline or even actually maybe even increase? Thanks.

I think the opportunity is still there like it has been for a long time to continue to increase. Because there is a lot of value in the solution. And as we bring together new technologies really taking individual products and creating solutions with them, it broadens the applicability and the strategic nature of the solution for a lot our customers. And while somewhat influenced of course by customers capital constraints, spending and the environment, I do think over time it continues to trend upwards as a percent of the mix, it's just really tough right now to tell exactly what that is going to be over the next couple of quarters.

Thanks again.

Your next question comes from Jonathan Doros of Raymond James.

I think I may have missed this. Did you give XenApp license growth in the quarter?

No we didn't. But it was about 15% down on a year-over-year basis.

And I know you're not talking about individual line item guidance, but is there any way you can give high level color on how that will go forward?

No. I think it's -- I mean right now, like I said, on the last question, it's really just a function of the environment and trying not to give specific guidance for the individual components, just based on the limited visibility.

Thanks.

Your next question comes from Katherine Egbert of Jeffries. Katherine, please go ahead. Your line is open.

Hi, this is [Greg Ochara] in for Katherine. Just regarding the question about the expected softness, are there any particular products that you think are most likely to be affected? Or more vulnerable to the general macro environment?

I don't think we have products that are more or less impacted. Actually we feel that all of our products in their relevance to the marketplace in this kind of environment actually are in that sort of upper quartile of priorities for IT organizations. The issue is will they have money to spend on those priority items and how much will they spend and how will they spend it? And so nothing in particular and we can give you the pitch on the relevance of all of our technologies for virtual working, teleworking, and how that contributes in this kind of environment to productivity and green and so forth. We could talk about how those same technologies really allow unfortunately companies to downsize or up size or globalize because we break the connections between physical locations and people. So it's easy -- the hotel people, or to spread the work out and so forth. So all of those things are highly relevant, it's just the question is how much will IT have to invest.

Right. And then you mentioned that you're having some success with internet centric customers. We're wondering, do you expect to perform better with that customer segment in this environment? Are you seeing more strength from those customers?

I think, yes, actually we said two things that are important to understand. So I talked about our NPX platform and really helping us rebound with internet centric customers and what that means is many of the large scale websites that have large data centers or colos want a smaller footprint, a more green kind of footprint, and MPX actually cuts the prior NetScaler footprint in half for -- at the same work load. So these customers are replacing a number of the NetScaler appliances historically, trying to get that smaller footprint. So that's the rebound that we're talking about. But in general, internet centric customers, as Dave mentioned, e-commerce is down and traffic is down, et cetera, and these products are very sensitive to traffic. That's what they do. They accelerate traffic.

Right.

So that's why you sort of got two points of view there that are very consistent.

Right. Okay. And then one final question. I apologize, it's another one on the operating margin front. But in the prior quarter, you had mentioned that -- that you still thought there could be 100 basis point improvement in operating margin and that has stayed consistent this quarter, although things have sort of generally deteriorated-- is there anything else we should be understanding about -- I don't know -- or thinking about with respect to what is going to influence the operating margin for this year? If things continue to deteriorate, is it possible that it could come down?

Well, Greg, actually I'll just refer you to our guidance right now for the way we're thinking about 2009.

Okay. All right. Thanks.

Thank you.

Your next question comes from Sara Friar of Goldman Sachs.

Hi, gentlemen. It's Derek Bingham for Sarah. I wanted to ask you on your Q1 guidance if the implication for license is something in the ballpark of down 20, to get to your full revenue guidance, it looks like it implies some of the kind of more recurring segments, the license updates and online services maybe being down sequentially, and is that a plausible scenario for Q1 and what would have to happen there?

It's not likely for the online services piece. For the license updates, that is the one that is obviously more influenced by the combination of prior period license revenue as well as current period license revenue as things are booked and then we start to recognize the stream on a ratable basis. So that's the one that I think is more volatile than our SAS business.

Now, and it's just a function of less -- I mean, would your renewal rate have to go down, though, for it to go down sequentially because otherwise you would just continue to kind of build that base, right, sequentially.

Yes. If you think about any annuity that will have a renewal rate based on the pool that is coming up for renewal and then new licenses coming to the top. So it's a function of both of those, and we are making assumptions in our operational planning around renewal rates and trying to be conservative on the assumption there, the expectation that there is potential for customers to have budget constraints, et cetera. So we're just trying to be thoughtful there.

Okay. Very good. The mix in the fourth quarter, in terms of how your app virtualization revenues came in, was it all function of units or was there some ASP softness as well?

Actually ASP in the pricing environment in general, didn't change too much. I think it was more function of units, and there was a number of instances where, as I mentioned earlier, where we saw customers that just didn't have as much money to spend as they thought and so they reduced the size of their project. And that was really the more the prevalent case.

And just one more if I could. The Xen Server revenue, I know it's quite small right now, but where is that revenue coming so far? We've gotten some feedback that you had some traction in selling into the underlying layer -- the underlying layer in PS farms and virtualizing those. I mean is that where you are seeing more traction right now and can that be a big opportunity or is it more coming from desktop pilots and the like?

Derek, I would say it's all of the above. Let me parse it a little bit. Let me say first of all, the majority of the XenServer implementations are coming from core server virtualization solutions. And getting traction, we actually saw good progress with our partners--we do measure how many partners sell, how many transactions they sell per quarter, and how much repeat business and those numbers once again doubled quarter-over-quarter. And so we're pleased with that. And those are really core service virtualization solutions. Those that actually get more experience start to put it underneath XenApp. We'll do a number of things this year to encourage that because when you take NetScaler and you take XenServer and you plug XenApp into it, you get quite a dynamic HA, DR system built all out of Citrix infrastructure. And at this point there isn't another virtual infrastructure that you really can practically put XenApp on top of because the overhead is too high. Other solutions consume about 40% of the overhead, which just changes the economics. Where XenServer is today -- XenServer 5 is running between 6% and 7% overhead.

So there is a great optimization for it. And so, yes, there is opportunity there. Because there is no other platform to put XenApp on.

And then XenDesktop, we're pleased. Obviously XenDesktop is the only desktop virtualization product that can run on all of the virtual infrastructure that's out there. And also it includes a full stack and we see more and more customers appreciating our low overhead 64 bit bare metal implementation and getting higher density, faster performance, et cetera so we have some opportunities there so we're pleased with the mix we're seeing there. And in fact, I think in Q4 about 40% of XenDesktop licenses were the Platinum Edition, which is really the full -- it really is a full desktop delivery service in the hosted sense. So hopefully that gives you enough additional color around it.

I appreciate it. Thank you.

Thanks, Derek.

Your next question comes from the Walter Pritchard of Cowan and Company.

Hi, guys, this is Ken Wahl in for Walter. Most of my questions have been asked, but with the cuts, how do you guys see your product priorities changing? Have you guys had any discussions about dropping or selling any?

No. Yes, Ken, basically a couple of things to give a little color around. So some of the things that we've done here to actually not have impact there and find cost savings is to take some of the products that were very low volume, very attached type products to XenApp and we basically continue the development, but package them as features with the products. So let me give you an example. We used to have a separate SKU called provisioning server for data centers. And that technology is now packaged as provisioning services, and embedded in XenApp, Xen Server, and XenDesktop. So by doing that, we get savings, we still get leverage on the technology, and we increase the value of a strategic product where we're trying to drive either a new license, a new account or whatever, or trying to drive of course subscription renewals where customers look for those reasons to keep a subscription current. So that's what we're doing there.

And then we are skewing some priorities to really drive a lot of the things you see us talking about in the external world to try to really change the cost model for computing and so a lot of investment is going on in the smart phone area and bringing Macintosh up to being a full citizen in our end point world and other things like that. So that we really give IT organizations some options around how they manage desktops to whether they need to own the asset. And so we think this is where the future is for IT and we want to be there and actually help them get there faster.

Great. Thanks a lot.

Your next question comes from Joel Fishbein of Lazard.

Good evening Guys. Just a couple of questions. Obviously you guys have accumulated a ton of cash. Any thoughts about an accelerated buyback at current levels or are you guys going to be in cash preserve mode?

Well buyback has been our single largest use of cash for just about every quarter for quite some time now and I think going forward it will continue to be. We do have a lot of cash. We continue to generate a lot of cash. But the timing of how we're going to do our buyback is -- we'll see as we get through the year, but certainly continue to expect our program to continue.

And then in terms of share count, any guidance there on share count for 2009 or Q1?

Just for planning assumption, I would assume flat for next year.

And then last question, in terms of -- I understand the cuts you're making and everything. In terms of what -- with are your expectations and what should we think about in terms of cash flow for '09 versus '08.

Cash flow is a tough one to guide because there is a lot of moving parts. Especially if you look at the primary drivers of our cash flow, net income and deferred revenue growth tend to be the largest ones and then of course all the working capital lines. So we're not going to give guidance for -- we're not going to give guidance, at this point in time, for cash flow for 2009 .

Your next question is from Abhey Lamba of UBS.

David, just talking about the operating margin guidance, can you do the high end (inaudible) of expansion with flat revenues in 2009 or do you need any kind of growth to deliver that and what type of revenue decline can you sustain get to deliver flat operating margin?

Well it's a good question. I mean obviously, the absolute amount of leverage that we show next year or this year is going to be predicated to some degree on the external environment, our ability to drive revenue growth. I really do not want to get into the specifics of the high low because if the environment were to change materially from our planning assumptions, then we would reassess our business in a number of different ways. But as we're thinking about it right now, consistent with our guidance, and we're thinking a flat revenue scenario and improving operating leverage.

But -- Mark, given the (inaudible) what are your rules about executing M&A ability from (inaudible) values.

Yes, thanks, Abby. Well first of all, I think we do not really comment on potential M&A transactions and our mindset here has not changed in terms of our belief around M&A and its purpose. So we really have done a number of smaller transactions. I think you see them. We've done a little bit more of using our balance by investing in startups and some interesting companies that are adjacent -- in adjacent spaces. And that should be the pattern here. I mean I'm not sure if cheap prices are the thing that makes an M&A transaction work-- it's about strategic alignment, cultural alignment and how a potential transaction actually worked in the overall strategy. We're not given toward sort of transactions that are about financial engineering and sort of buying channels or those sorts of things because honestly, the history books are full of disasters that were driven by that kind of thinking. So we do not -- so that's kind of how we're thinking about it and hopefully that gives you enough color.

Thanks.

Operator, is there another question?

There are no further questions at this time.

Okay. Well then I think we should wrap up. So just a couple of final quick comments. Obviously, you know, it's a challenging environment and we've made a lot of decisions here to adjust our business and make sure we're doing all of the right things. I'm totally convinced that our plan that we talked about today will significantly improve our ability to drive our strategic objectives at one end, but at lower operating costs. And look, in the end, this is how you create long-term value, not only for shareholders, but for the other stakeholders that we really are very accountable to, employees, customers and partners. So by doing all of these things, we'll be able to operate in this kind of environment, which is-- I think we should all be thinking, there is going to be a new norm that comes out of this. It's not going to be kind of the way it was a year ago. And we want to make sure we can operate in that kind of new norm environment. Because that's how we're going to position Citrix to emerge from this kind of downturn as one of the clear winners. And that's our long-term goal here. And so we're making a lot of tough decisions to make sure we're in a position to do that. Thanks again for the questions, for your attention, and we'll see you in three months.

That concludes this evening's teleconference. You may now disconnect.