思杰系統 (CTXS) 2009 Q1 法說會逐字稿

Good afternoon. I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period.

(Operator Instructions). Thank you. I would now like to turn the call over to Mr. Eduardo Fleites, Director of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Teresa. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix first quarter 2009 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 our Investor Relations Web site. We will be posting the slide presentation to our Web site immediately following the call. To provide additional context for our call today we've also updated the Investor Relations page with product classification and historical revenue trends for our four product groupings.

Also since we will be discussing non-GAAP financial measures on this call we've posted a reconciliation of the differences between GAAP and non-GAAP. Before we get started, I'd like to remind you that today's conversation will include forward-looking statements made under Safe Harbor provisions of the U.S. securities laws.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties, such as the impact of the global economic climate, uncertainty in the IT spending environment, risks associated with our products and competition. Obviously, these risks could cause actual results to differ from those anticipated.

To fully understand these risk factors we encourage you to review today's press release along with the Company's most recent Annual Report on Form 10-K filed with the SEC. 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 first quarter of 2009 with total revenue coming in at $369 million, and adjusted earnings per share of $0.32.

Despite the challenging environment , Citrix had a solid quarter in Q1 within the context of a very difficult economic backdrop and reduced IT spending. We're pleased with the execution in the field operationally and with our products' organizations. Customers continue to leverage Citrix products and services to deliver substantial cost savings, improved agility and performance for their infrastructure.

However, as we predicted must businesses have been in the mode of preserving cash and have delayed or reduced the size of new capital commitments. The result of this is a shift in our business mix, with our subscription services including SAS and license updates increasing to 60% of total revenue. New licenses contributed 30% and text services the remaining 10%.

In the first quarter, revenue from new licenses declined year-over-year to $112 million due to the environment with other types of revenue including license updates, and online services, producing double-digit growth rates, while technical services increased 8% over last year. From a geographic perspective, customers in all regions continue to deal with the difficult market conditions, currency volatility and business constraints. By region, revenue in the Americas was flat at $156 million, although beginning to show some signs of stabilization.

EMEA was the most challenging from a market point of view, decreasing 11% to $113 million, while revenue in the Pacific region decreased 9% from last year. So basically what we are seeing is that similar to prior economic cycles the international markets are showing the dynamics comparable to what we experienced in the U.S. two or three quarters earlier.

So overall we expected Q1 to be challenging from a growth standpoint due the global recession and we're using this time frame as an opportunity to further concentrate our focus on cost structure initiatives, operational excellence and the execution of our product strategies. Now I would like to review the main product areas and the trends in those businesses. First, our App Virtualization business has been the most impacted by the spending environment with revenue declining 10% year-over-year.

We saw a decrease in the number of million dollars plus transactions compared to last year as customers initiated fewer large projects. Additionally, smaller run-rate type orders, often correlated with employee growth, continued to show the weakness we reviewed last quarter. From an industry perspective manufacturing, retail and financial services were the most challenging verticals.

During the quarter, though, we saw strong demand for our subscription advantage offerings. Customers continue to demonstrate commitment here with renewal rates in the mid-80s, a real solid performance. In some instances, however, this meant the customers chose to renew their existing subscriptions, essentially optimizing the current environments instead of upgrading to the Platinum Edition of XenApp. This led to higher deferred revenue, but at the expense of new license.

Next, in our Application Networking business revenue was $45 million in Q1, up over 20% year-on-year. Continuing the trend we've seen over the past several quarters, our at App Networking business is led by enterprise customers and was much less dependant on the Internet-centric market which has been impacted by slower e-commerce sales and Web traffic growth.

In the period, nearly two-thirds of total revenue is generated through traditional enterprise accounts and government agencies. The number of new enterprise customers increased by over 35% over last year, and the Platinum Edition of NetScaler, really targeted towards this segment, contributed 25% of NetScaler license. It's a positive indicator as it demonstrates the value that customers see in a single, integrated Web app delivery product.

The third product area I would like to discuss is our business in server and desktop virtualization. In Q1, XenServer and XenDesktop revenue grew by over 150% year-on-year with all of the activity metrics remaining really strong. We exited the quarter with over 5,000 enterprise customer deployments globally and the opportunity pipeline stands at record levels. Mark will discuss a lot more about this business in his comments.

Finally, touching on our softwares and service business, online revenue was up 16% during Q1 to $72 million, with the growth being led by the collaboration products and the GoToMeeting family which increased by 45%. Customers are seeing increased productivity and expense savings from leveraging collaboration tools, in fact, Web conferencing is being adopted by many customers as the standard as travel budgets get tighter.

Also in Q1, we made available our new audio services under the product name HiDef Conferencing. We expect this new service to begin contributing to growth in the second half of the year. Next I would like review our expenses and operations. In Q1, adjusted gross margin declined by 1% from last year, driven primarily by an increase in inventory reserves as customers transitioned to our newer appliances and also from investments in our SAS platform response to a dramatic increase in utilization.

Total operating expenses were down $7 million sequentially to $265 million due to a decrease in employee-related costs and marketing programs. These items resulted in adjusted operating margin of 19.2%, down slightly from a year ago and largely the result of the change in COGS.

As I said before, the Company is focused on delivering operational leverage while increasing investments in strategic market opportunities. And to achieve this we are working on simplifying our product portfolio, standardizing business processes around the world, and continuing to enhance long-term scalability through systems automations.

Through Q2 we expect to maintain relatively flat head count from Q1 and this, plus existing controls on discretionary spending, should allow us to demonstrate expansion of adjusted operating margin both sequentially and year-over-year. As part of the restructuring we announced in January, total head count was reduced by about 8% net in Q1.

The severance and benefits charges associated this action accounted for the majority of the $21 million restructuring charge reported in our numbers today. As a reminder, this charge is not included in our non-GAAP results.

Finally, on the rest of the P&L, other income decline by about $8 million sequentially due to foreign exchange impact, lower interest rates on invested capital, as well as one-time items. Turning to the balance sheet, we currently have $905 million in cash and investments, up $50 million since the beginning of the year.

Cash flow from operations during the quarter was strong at $82 million, bringing the trailing 12-month total to over $437 million. The primary use of cash in the quarter was again for share repurchase, where we bought back 1.1 million shares. Over the past year, we've repurchased a total of about 8 million shares.

Today we also announced that the board of directors has approved additional $300 million increase in our ongoing buyback program, bringing the current authorization up to $350 million. Finally, I like to discuss our outlook and expectations for the second quarter of 2009.

But before I review numbers, I would like to provide some context around how we're managing our operating plan this year. The recession that began in the U.S. has obviously spread throughout most end markets around the globe and as a result IT spending has been significantly impacted, leading to lower visibility into the timing of revenue, particularly new licensing revenue.

Our sales pipelines have continued to grow, but in this market climate it's extremely difficult to know exactly when those capital projects are going to go forward. While we are starting to see positive signs in consumer spending patterns in the U.S., we think the current environment requires a pragmatic approach to fiscal and operational planning with a bias towards being conservative.

We believe that visibility into the demand environment for IT and software will remain challenging for some time, and, therefore, providing less quantitative guidance than we have in the past. So for the second quarter 2009, we currently expect total revenue to be flat to slightly down as compared to the second quarter of 2008, adjusted operating margin to increase by between 100 and 150 basis points from the second quarter last year, and interest income of $3 million to $4 million.

For the full year 2009, we reiterate our expectation for total revenue to be flat to the results from 2008, with a continuing focus on operating efficiencies, driving as much as a 100-basis-point improvement in adjusted operating margin over last year, excluding the restructuring charge.

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

Thanks, David, and good afternoon, everyone. We're reporting solid results today. As I look at our Q1 business, financial, operational, and strategic, I'm pleased with our execution in the toughest macroenvironment we have seen in years. As we said in January, we expected Q1 IT spending to be very tight, especially around new projects. And indeed it was.

In the meantime, we have taken decisive steps to improve our overall efficiency including a workforce reduction at the beginning of the year, reprioritizing discretionary spend and renegotiating larger contracts, shifting customer facing resources to higher productivity regions, and increasing our strategic focus on the combination of enterprise products into a single cohesive system known as Citrix Delivery Center.

Going forward, we'll continue to operate with conservative macro assumptions, while funding the virtualization, networking and collaboration strategic core of the business, keeping our spend running behind demand. From a demand perspective, customers are preserving cash, trimming the largest projects and eliminating smallest. As IT spending continues this way, we believe our enterprise and SAS products become even more relevant and more compelling.

They enable customers to rethink and implement strategies that reduce operating costs while gaining much needed business flexibility. In fact, we believe that smaller IT budgets are not a short-term trend, it's the new reality. The traditional computing model is aging rapidly exposing the realities of its complexity, true cost and inflexibility.

While this is a problem for some in the industry, it's good for Citrix because it encourages IT to break with the legacy thinking of distributed computing and embrace a transformational approach -- enterprise computing that's built and operated as an on-demand service, delivering enhanced business agility at greatly reduced costs.

There are three areas of our business that enable IT transformation. So I would like to discuss each of them next. The first area is the desktop where our way of thinking includes both app and desktop virtualization. Our customer base, over 200,000 strong now, has demonstrated that XenApp, our industry leading app virtualization solution, is the best way to deliver Windows apps and thin client desktops.

We have a lot of headroom left in XenApp penetration, so we are continuing to drive install base demand by highlighting its simplification benefits and rapid ROI. And by delivering on innovations that expand its enterprise applicability across a broader array of apps and users. This was the goal of the XenApp feature pack we released in March, available at no charge to customers subscribing to our license update service.

This feature pack added disaster recovery, operations management, portable profile management, capacity planning, dynamic provisioning and work flow orchestration to XenApp. These are important features for driving account penetration and for enhancing the value of our license update service.

While the impact of the macroenvironment drove fewer seven-figure deals than usual and slowed our run rate business, we remain very bullish on XenApp. We're convinced its TCO, security, performance and [aft] delivery capabilities make it more valuable to customers going forward, especially with some of the exciting announcements we will be demonstrating at our Synergy Conference next week.

Complementing XenApp is XenDesktop, our fast growing desktop virtualization solution. XenDesktop continues to grain customer momentum across all geos and industry verticals. In Q1, revenue growth was strong with a nice sequential step up. Seven deals were over a thousand licenses each. And over 50% of licensing came from the most powerful version, XenDesktop Platinum Edition.

We added over 300 new customers, and saw solid expansion of pilots and evaluation downloads. XenDesktop continues to beat the competition and reviews, being described as the gold standard, state-of-the-art, clear winner and winning head-to-head shootouts. And we are seeing a growing opportunity pipeline. In Q1, we released Version 3 of XenDesktop, including several new features that move the bar well beyond the competition.

First,VM scalability was doubled, driving down implementation and operational costs. Second, we added support for desktop streaming, allowing diskless devices to boot from a single image, actually reducing data center costs by leveraging CPU power at the end point. Third, enhanced XenDesktop's multimedia capabilities with Citrix HDX technologies creating a high-definition experience that now includes voice, video and 3D graphics.

Starting at just $75 per concurrent user the economics are becoming more and more compelling for those looking to shed the constraints and costs of the traditional enterprise PC model. We're pushing forward very rapidly delivering a truly dynamic desktop solution without sacrificing performance.

Also in the desktop space, we announce Project Independence, a project that will deliver a bare metal client hypervisor based on Xen and full collaboration with Intel. This partnership allows next generation laptops to be shipped with virtualization as a built-in feature. This will result in a new Xen-based hypervisor that runs directly on a user's PC or laptop allowing both personal and business desktops to run securely and independently.

This further improves desktop security and costs for IT while giving end users unprecedented personalization and freedom. Project Independence allows us to tap into the rapidly growing laptop market by taking desktop virtualization offline, for the first time making it a practical reality for disconnected mobile workers. We will have more to say about this project next week during our Synergy Conference. So as you can see, we are staying aggressive to drive radical change in the economics of desktop computing by allowing IT to turn every enterprise desktop and app into an on-demand service.

Next I would like to discuss the data center and cloud area of our business where NetScaler and XenServer are bringing the efficiency and economics of the cloud to the enterprise. 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 Web services.

In Q1, we unveiled a powerful new release of XenServer that brings cloud-proven, enterprise-class virtualization to customers of all sizes. A release that now beats competitors in head-to-head performance reviews recently prompting Virtualization Review Magazine to call the latest XenServer "the Porsche of hypervisors." This new XenServer release includes comprehensive multi-server management, live VM motion, integrated storage management, and support for unlimited servers and VM's.

At the same time, we announced a bold strategy to make XenServer free. This will accelerate penetration to unvirtualized servers, about 75% of all servers out there today. While the new XenServer has been on the market for less than 30 days the initial signs are quite promising. More than 250 Web sites in 50 countries have already posted XenServer for download.

This has dramatically expanded our customer reach. And activations from these downloads are exceeding even our best expectations. The monetization piece of the strategy is Citrix Essentials, a new product line that adds advanced virtualization management capabilities, not only for XenServer but also for Microsoft Hyper-V. We believe XenServer and Hyper-V will be the two fastest growing server virtualization platforms going forward, each serving unique segments of the market.

Essentials allows us to capitalize on this opportunity by offering features like automated lifecycle management, storage integration, dynamic provisioning services, and hypervisor interoperability to both Citrix and Microsoft virtualization customers alike. Citrix Essentials expands our 20-year partnership with Microsoft, reaching deeper into adjacent virtualization markets.

Citrix XenDesktop has already been established as the preferred Microsoft DDI solution and now Citrix Essentials for hyper-V builds the partnership further in server virtualization. The level of excitement I've seen from partners and customers around XenServer has never been higher. Many have gone out of their way to tell me there is no rational reason why any customer wouldn't now consider XenServer. It's simply too good and too compelling to ignore.

Another component of the next generation data center is Citrix NetScaler. The performance of our App Networking business in Q1 was great, growing over 20% especially in the enterprise market segment. Much credit goes to NetScaler Platinum Edition which is targeted at the enterprise customer as a fully integrated Web app delivery controller all in a single appliance.

Platinum accounted for about 25% of the business in Q1. We are seeing a growing number of customers use NetScaler in their XenApp farms for high performance load balancing, high availability and disaster recovery implementations. The NetScaler MPX platform, barely nine months old, has continued to grow rapidly, representing 15% of the Q1 product mix.

MPX has really strengthened our competitive position, winning on design and price performance dimensions. Soon, MPX will get new capabilities for Web 2.0 apps significant performance acceleration and multi-tendency capabilities. These will be key drivers for additional expansion with Internet-centric and cloud customers. Next week, during Synergy, we will have some exciting new announcements for NetScaler that change the game once again in ROI, scalability and ease of implementation.

The combination of XenServer and NetScaler puts us in a great position to bring the proven efficiency and economics of the cloud to the enterprise data center. While the worldwide recession has temporarily slowed the growth of our premise-based products, it's accelerating the adoption of our software as a service business, helping customers reduce travel spending, increase teleworking and enabling cost-effective remote support.

This is reflected in the growth of our SAS products delivering strong results during Q1. Revenue was up an impressive 16%. Our GoToMeeting Web collaboration is one of the fastest growing services in the industry. And our remote support services exited the quarter with momentum driven by the February launch of GoToAssist Express and Version 9 of GoToAssist Corporate.

We are also seeing increased adoption of softwares of service with enterprise customers. In the enterprise, we've seen strong renewals, competitive replacements, and an increase in average deal sizes. During Q1, we launched our HiDef conferencing service, a high quality audio service designed for the SMD segment. It's off to a great start and it's a natural cross sell to GoToMeeting and to GoToWebinar customers.

We also launched GoView, a new online screen casting tool, that sets a new standard for simplicity. It's our first product with a purely advertising driven business model. As Web commuting continues to grow, as Web collaboration moves from discretionary to mandatory, as webinars become a top marketing tactic we are positioned to leverage these trends with our online services.

Before I wrap up, I would like to invite you to our annual industry conference known as Synergy 2009. This event brings a holistic view to today's hottest technologies in virtualization, networking and application delivery. I hope you will be able to join us in Las Vegas at the MGM Grand from May 4 through 7. We'll be making a number of very exciting announcements including updates on our cloud initiatives and virtualization strategies along with a few other surprises.

For more information and to register, just go to Citrixsynergy.com. I promise you this is one you won't want to miss.

So, it's clear, IT spending will continue to be under enormous pressure. It's also quite clear that customers will be driven even more rapidly to centralize complexity in the data center, to leverage the cloud and to distribute simplicity to the desktop. This creates a tremendous potential for a true industry tipping point that's great for Citrix because centralization, optimization and virtualization have been at the core of our customer value now for over 20 years.

Over the next couple of years, squeezed between declining budgets and IT consumerization, I believe thousands of CIOs will have that "a ha" moment. The gap between the Web and enterprise computing will no longer be defensible to users, to the CEO, or to the CFO.

We're at the epicenter of this IT revolution with transformational on-demand computing products that customers need. This is how we will continue to drive long-term value for shareholders, for employees, for partners and for our customers. So now I would like to open it up for questions.

(Operator Instructions). We will pause just a moment to compile the Q&A roster. Our first question comes from Steven Ashley from Robert W. Baird.

I can just start with a housekeeping question, with respect to XenApp, what was the license revenue year-over-year in that product, and what kind of expectation might you have for the second quarter there?

Sure, Steve, this is David. Let me take that question. And ask Mark to follow up. In Q1, license revenue was down about 30% on a year-over-year basis. Pretty consistent with what we talked about on the last quarter call.

I think what we saw with customers, again, consistent with what we were thinking is that most of them were looking at Q1 as a time to really evaluate their own business, looking at the results from Q4, put budgets in place and start prioritization. So it was certainly one of those periods where, frankly, not a lot happened in the first month of the quarter.

And as people got budgets in place, started to work on the prioritization and got back to much more normal spending patterns, albeit at a lower level than a year ago. So I think on a sequential basis, we definitely see improvement in the app virtualization license revenue moving up from Q1 which I believe is a a low point in the year.

Great. On the Networking group, the NetScaler business performed very well in the period and you've already called out that was driven by the enterprise segment. Wondering if we could get more just color on within enterprise is it specific verticals or domains where you are seeing that uptake or any commonality or color on that would be helpful?

Steve, it's pretty broad based. It's not vertical driven at all. But I would break it down in two places. Our, first of all, the cross selling within the XenApp customer base has continued to grow as we've done a lot of work to make it really easy to turn a NetScaler on in front of XenApp farm to do load balancing and DR and these kinds of functions.

So that's been one area of enterprise strength. The other area is straight up the middle core Web app delivery, and load balancing, in the enterprise, and I think we've continued to move the ball forward there in terms of scalability, but also in ease of operation and implementation which today I think the enterprise customer is even more sensitive to than ever. Those are the two thrusts we've had, where we've seen strength in the enterprise side.

Great. Thank you.

Our next question comes from Phil Winslow with Credit Suisse.

Hi, guys. Just a couple of quick questions. First, David, I may have missed the Platinum mix on XenApp this quarter, and also obviously Platinum has been a big driver for you over the past couple of years, we've seen a trading down effect across IT due to lower priced solutions. How do you think will that affect the mix of that this year?

Sure, Phil. It was about a third. It was a third in Q1, consistent with what we saw in the fourth quarter of the year. As we get into the remainder of 2009, that's probably the level where I would expect it to be over the next couple of quarters. Maybe moving up a little bit in the fourth period.

But customers are seeing the value that we've put in the solution, integrating the various parts. And as we talked about last quarter, one of our main thrusts has been around simplifying the product portfolio and bringing value towards the Platinum Editions of the different solutions and that's certainly showing up in XenApp.

I think we will be able to maintain this as a mix component and over the long-term, and measured in two or three years at this point, increasing that up to as much as 50% of the mix.

Thanks, also you guys, your guys' technical services line held up well quarter-to-quarter. We've seen that from falling off in some other companies, just what do you expect there also over the course of the year? I will go back in the queue.

Sure. Yes, we actually had a great quarter in tech services across consulting, education, support and in particular the maintenance contracts around our App Networking business have had great uptake and really been the place that contributed to Q1.

I think for the balance of the year, at least for Q2 it would be flat, maybe a little bit down. Not a lot of movement one way or the other over the next couple of quarters.

Great. Thanks, guys.

Our next question comes from Sarah Friar with Goldman Sachs.

Thank you for taking my question. Mark and David, could you talk a little bit about the spending trends that you saw through the quarter, and in particular, David, I'm intrigued by your comment that the assumption that Q1 is effectively the bottom in terms of the declines in year-over-year license revenue growth and inn the app virtualization area.

What is it that gives you some of that confidence in terms of what you are seeing in the pipeline and hearing from customers?

Sarah, the comment is really based on the fact that if you go back to three months ago we were talking about expectations for Q1, a lot of the CFOs I talked to and also, frankly, the way we were doing our business was to use Q1 as a time frame where we're really putting budgets in place. Several months later than we would in a normal year just as a reflection of the uncertain environment and wanting to see how Q4 turned out for our business was what a lot of our customers are doing at the same time.

Because of that, I had made a lot of comments around Q1 being a period that was the first half is going to be the settling and the putting the budgets in place and the second half of the quarter getting back to little bit more normal, normalized environment. I think that's exactly what, that's exactly what we did and what we saw in a lot of our customers. So the thing that gives me confidence to say that I think we will see sequential improvement in the XenApp business is based on the opportunity pipeline, what we are seeing in the forecast right now and just the fact that we've got a full quarter to work with.

If I could follow up, Mark, with a bigger picture question on the XenDesktop side. Clearly you have a big competitor in VMware on the server side which they can leverage on the desktop side just given the brand name, and so on. What else, you laid out a very kind of full product road map and so on, are there other things in the go to market side that you feel you could and should be doing maybe in terms of partners or just how to get out there and have a big presence when you've got such a land grab going on?

Yes, Sarah, we have a real broad go to market initiative going on. So I really focused my comments on sort of the product and the essence of the market there driven by the product.

If you look at the wins that we had in the quarter, and the pipeline, you see them driven by great partners like CFC, EVS, other partnerships that have made a huge impact in that pipeline or our partnership with Microsoft as we roll this out with them on a worldwide basis. And so we feel good about all the go to market activity that we have.

Obviously, our classic integration partner network really knows a lot about XenDesktop because of all the knowledge they have about XenApp, and everything that they learn and know about implementing the HDX technologies that are part of XenApp are part of XenDesktop, which is really where we've maintained for a long time where the rubber hits the road in desktop virtualization, and that is delivering consistent high-definition user experience over all the kind of connectivity cases and end point cases that are the reality in the enterprise. We feel really good about what we've done in virtualization on the desktop and there's lots more to come.

Thanks for taking my questions.

Thanks, Sarah.

Our next question comes from Bhavan Suri with William Blair & Co.

Thanks. Hi, guys. Couple of quick questions. Can you talk a little bit about pricing in the environment in general and the mix between lower prices and lower units contributing to the XenApp decline?

I think we don't really publish ASPs, but I think as David indicated in his comments that we did see some of the business that would have been Platinum upgrades as a part of our renewal process. Customers dropped back to just renewing their subscription on enterprise. And then, obviously, that pulled the ASP down because those Platinum units aren't in the product licensing. You want to add something, David?

I would just say that overall ASP trends were fairly stable from Q4 to Q1 in some areas up a little bit just because of the lack of large deals. That's usually the place where you'd see more aggressive pricing, just volume discounting. So in general no real new trends to report.

Great, just a quick one on the XenDesktop pipeline, I know, just piggybacking on the previous question, have you seen any impact or conversion from sort of the trials to smaller production environments and a little more color as sort of how do you see that unfolding over the course of the next six to 12 months?

That was one of the things we've seen going back to Q4 and continuing in Q1, and that is pilots being moved to production. And I think I mentioned that seven of the largest -- the largest seven deals for over 1,000 users each and those are production, those are not pilots, as we really amped up on more and more pilots and evaluations.

So we are seeing that trend. Working against that, clearly, I think everyone understands that when you implement a VDI solution it requires a pretty substantial capital investment in the date and space in the data center.

Sure.

So that's the headwind that all of these solutions have. And so that's why we've continued to be very assertive and aggressive in this area, but also recognizing that customers are going to take their time in testing not only the technology to make sure it works across all of the delivery scenarios they have, but also the economics and that's a step-by-step process.

Great. Thanks, guys.

Thank you.

Our next question comes from Robert Breza with RBC Capital Markets.

Hi, guys. Good afternoon. This is actually Matt Hedberg in for Rob. We're hearing some pretty good feedback in the channel on the free XenServer product. Mark, in your prepared remarks, you did talk about that. Can you give us a little bit more color on that product and maybe some attach rates you are thinking you will see on the Citrix Essentials side?

It's too early, Matt, to talk about attach rates. We literally just started shipping Essentials about 10 days ago. So a little too early there. But the partner community sees this as an opportunity to do a couple of things. First of all to bring server virtualization into customers that just haven't been able to afford it from a dollars or complexity point of view. And then, of course, it's an opportunity to add the implementation services that, which is where they make their money.

So that's where a lot of the enthusiasm is coming from and it's a Citrix product and it's been well-tested in not only at the customer level, but it's winning lots of product reviews, et cetera, and they're growing very confident with it and that allows them to take it out there. I think the second thing is the Essentials product strategy that they understand, they understand the value of these extensions that we've provided with Essentials in terms of the lab management, storage integration, et cetera.

These are the kind of things also that are very friendly to middle market customers that are largely unpenetrated with server virtualization where they are looking for these kinds of high performance technologies that plug into the storage technologies that they already own from, let's say, NetApp, one of our great partners, and that are easy to consume and these products that we've built and features in Essentials are very easy to consume.

You don't have to be a rocket scientist to bring them online and use them. That's what we say about XenServer and the potential here.

Thank you, and one quick follow-up for David on the tax rate, a little lower than we were anticipating this quarter. Could you maybe talk about what you are thinking for Q2 and maybe the remainder of 2009? Thanks.

Sure, I think at this point 21%, 22% is probably a good planning number for the rest of the year. Operator, next question.

Our next question comes from Rob Owens with Pacific Crest.

Good afternoon, everyone. I think with regard to ANG Group and the strong performance, you also mentioned the government vertical a bit. I was wondering if you could elaborate on that?

I think everyone around the world is seeing good federal and overall government business. Let's face it, that's where the tremendous amount of stimulus and otherwise spending. We are no different from any other tech vendor, and at the same time we've seen our federal business growing quite organically over the past couple of years, that continued in the quarter across not only all the App Networking products but beyond that.

We feel good about the federal segment, it's rich with opportunity thanks to all the stimulus that's going on on a worldwide basis.

Were there any sizable deals to come out of that vertical this quarter?

No. There wasn't one huge one like we've had in a couple quarters.

I'd actually just follow up to that and say as important point when you are thinking about Q2, remember Q2 last year was when we had a very large spike in our App Networking business including some big deals in the government. And so I don't anticipate us repeating that in the second quarter, just think about that when we are putting together year-over-year models.

Okay. On the OpEx side I was a little surprised that OpEx didn't come down more sequentially, given some of the cost containment that you did early on in the quarter. Will that fully be realized in the June quarter or is there more to do throughout the remainder of the year?

As far as specific restructuring items, you're right, it was a mid-quarter item, we didn't recognize the full benefit there. As far as overall cost structure as well as cost cutting initiatives, there are things we will be doing throughout the year. Some of them will really not return a whole lot of benefits til the back half of the year when we are talking about major systems initiatives and whatnot, specific to the restructuring, yes, June quarter.

Thanks.

Our next question comes from Israel Hernandez with Barclays.

Hey, guys. The question on Europe, obviously, that's an important geography for Citrix and it's been tough. Can you talk about the outlook you expect for the remainder of the year for Europe? Are you seeing deals just disappearing or are they just getting pushed out and what does that imply in terms of your ability to see an acceleration once IT budgets firm in Europe?

Yes, Israel, what we saw in Europe is a continuation of Q4 where the impact of the recession really started to be felt by customers and cascaded into our partners and our own sales team's ability to really understand when projects would go forward. No change in the pipelines, the pipelines and opportunities continue to grow, they are strong, so we feel really good about that market and the team.

I just think that they are like -- it's reminiscent of last year with our U.S. team where went they hit this sort of time frame, they really took about two quarters to recalibrate how they would read the radar screen and understand how to forecast better, and, therefore, get expectations right.

So I think we will see some stabilization there this quarter in terms of their ability to actually read the radar and give us good data. And some of that comes from customers feeling more comfortable with the environment and the priorities they have.

So it's hard -- like most like most of us it's hard to know when there will be a turn, but I think the first thing we want to see is just better reading of the data that exists.

Thank you.

Our next question comes from John DiFucci with JPMorgan.

Thank you. Just a follow-up, Mark, on that question.

It was, I think, in the summer where you raised prices internationally and it just so happens it sort of coincides with the weakness in international markets at least relative to the U.S. I'm wondering if there is any adjustments you've made along those lines, either officially or unofficially, perhaps, I guess, discounting more to try to offset that because as you remember, you also had the accelerating ,or the strengthening dollar.

And, I guess, in addition, David, if you would follow up, given this lower tax rate, we had expected a lower -- it seems a lot lower, especially given the weakening in international markets where tax rates are lower , I'm just curious as to why that's

Sure. John, let me take the first part of your question. As far as the international pricing, just to remind everybody, we had announced back in the early to mid part of last year that we were going to be raising prices internationally by about 10% across the board to account for the significant change in currencies.

It was just about that time when the dollar bottomed out and started going strongly in the other direction and everything happened on a global macro basis. We never, practical basis we never effectively put the price increase in place. We've been essentially backing it off through various promotions and I don't think that we are certainly in any position to raise prices at this point in those markets. I wouldn't expect that to happen going forward.

One of the things we have done is allow customers in Europe to elect, or distributors in Europe to elect to buy in local currency and quite a few of them have done that. And so the results are riding up and down a little bit with the change in currency for both customers as well as us.

As far as the tax rate, there is couple of anomalies in Q1, nothing terribly exciting to point out. I think that going forward 21%, 22% is the right thing to expect in Q2 and the balance of the year.

Okay, just a quick follow-up, but people in Europe can buy in local currencies at this point?

Yes, they can. Distributors need to make an election at the beginning of a period and then we will essentially have fixed prices during that period or a fixed rate during that period. And quite a number of them have chosen to do so.

Just on the promotions you talked about, because I would assume when you raise list prices it's hard to pull them back, but you can give promotions. Are those available to even like small customers?

Yes. It was across the board. The promotion was really just a tool to back off the price increase.

Okay. Great, thanks, David.

Thank you.

Our next question comes from Adam Holt with Morgan Stanley.

Terrific, thanks. David, first question is for you, I know you didn't give specific license guidance for the upcoming quarter, but it looks like you are counting on a modest acceleration. I just want to make sure that's the right assumption, if you could bracket the outcomes there? And then secondly, what was the contribution in the quarter of the XenDesktop and Server combination?

Sure, Adam, in the quarter, it was up about 160% actually overall, $7 million to $8 million of contribution, and I think we are on track for the original guidance we put out last quarter of seeing those businesses double on a year-over-year basis.

As far as overall license, product license, you're right, I didn't give specific guidance, but it would imply that license would grow on a sequential basis.

If I could just ask a follow-up on the XenServer, XenDesktop side given the model change and the fact that the Essentials are just starting to get into the marketplace, how should we think about the mix then, is that doubling going to be almost exclusively driven by the desktop side?

I think it's going be both. I mean, we certainly saw some impact after we made the announcement in the first quarter to the actual XenServer recognized license revenue. But going forward I think the growth will be really be coming from both products.

Great, thank you.

Our next question comes from Todd Raker with Deutsche Bank.

Hey, guys. Two quick questions for you. First, David, can you just quantify, you said in the gross margin there was an inventory write-off, can you give us what that number was?

Yes, it was $1 million to $2 million.

Okay. And then there's a broader question for you, Mark, if you look at the server side, XenServer, where do you guys stands on large enterprise? Is that a market that you guys just got there too late and VMware still hasn't sewn up? Or have your change in strategies here -- do you think there is an opportunity to pick up some share there?

Obviously, when you have huge incumbent player that has such large share, competing in the market on a direct basis is usually a bad idea. It's usually an idea that doesn't work. We are taking a very different tact here. First and foremost, attacking the wide open marketplace where their customers are not committed in any strategic way to any virtualization platform.

And the move we made last quarter will allow us to open that up. And then one of the things that made it straight forward to do is that when we looked at the mix of XenServer sales they were really skewed more towards the high end of the product line where customers do need the advanced virtualization management capabilities.

So we felt that by releasing Essentials on both XenServer and hyper-V, gives us the kind of product that we need to create an entry point into enterprise customers that either have not completely sort of strategically committed to VMware or reach an inflection point where they have a decision to make like when there is a new product transition the way VMware now has presented their (inaudible) product.

We think creates an opening for us in partnership with Microsoft, as well as for XenServer and Essentials. So then kind of the third piece of this is to use XenDesktop and XenApp, kind of the strength we have in the desktop, to push back into the data center, and run XenApp and XenDesktop on top of XenServer, on top of hyper-V, both of which are completely compatible with and are actually leveraged by the Essentials product.

So that's our approach to the marketplace and there will be multiple players and winners and we've maintained that since day one.

Okay. Thanks, guys.

Thank you. Next question?

Our next question comes from Walter Pritchard with Cowen and Company.

Hi. Just a couple of questions, David, one on the expenses for the year. I'm wondering, the guidance implies about a $30 million or so decrease in OpEx. I'm wondering, it seems like currency just might even give you that type of decrease in spending. I'm wondering if I'm doing the math right, and then, two, if you could just give us the employee head count for the quarter, I don't think I heard the exact number?

Sure, Walter. There is a lot of moving parts looking a at the environment now, looking at our investment opportunities and then looking at the various cost structure, cost cutting things we are doing. So the best way to think about it is less in terms of actual dollars and more in terms of the operating margin guidance that we've provided, because that's really how we are thinking about it.

And just to reiterate, we are talking about 2009 showing improvement in adjusted operating margin of as much as 100 basis points over 2008, and within that there is a lot of puts and takes. Because even though we have been cutting costs in some areas and dialing back expenses, we are also at the same time increasing investment on a number of different places, or increasing investment on our online services, which are rocking along right now, and our Xen client initiatives and XenDesktop and many other areas. There is definitely some puts and takes there. As far as over all head count we ended the quarter at a little over 4,600 people.

And then, Mark, on the A&G side that business has been volatile, if I go back two years or so on a quarterly basis, and it seems like this quarter definitely surprised most of us to the upside. I'm wondering what gives you confidence in stability of that business because it seems like if it's not stable in any of the next few quarters it could be below what people expect?

Well, I'm not sure it hasn't been stable. Remember there are three components to it. There's Web app delivery controller, NetScaler. There is our access controller, Access Gateway, and our branch controller which is Branch Repeater.

And the Branch Repeater product, formerly known as WANScaler, has had a couple of really good quarters on some significant large scale deals in the federal space, and that creates some lumpiness in the overall App Networking business. In specifically in the NetScaler business, in the Web app delivery business, we are really confident in what we are doing, and I think you will see that play out next week in some of the announcements we've made.

It's been sort of a roll here on the product side, scaling up, making the appliance faster with a smaller footprint and driving scale there.

And taking all of that into the enterprise segment which was a complete greenfield for us going back pretty much just 18, 24 months ago. And we've done that as I mentioned earlier through straight up the middle load balancing and Web app delivery business as well as cross selling into the XenApp base and getting in front of the XenApp farms.

So I think our confidence in growing that business really comes from the product road map we have for Web app delivery, how all of that fits into the overall infrastructure for Citrix Delivery Center and then some of the specific segments we have, not only Internet centric, federal, et cetera, for some of the other products in the App Networking space like Branch Repeater. So that's how we think of it.

Great. Thanks a lot.

Our next question comes from Jonathan Doros with Raymond James.

(inaudible) number was pretty good this quarter, but are you seeing any customers begin to evaluate their Xen App licenses and trim some licenses given reductions in head count?

Well, Jonathan, our XenApp product -- most of our products actually are licensed on a concurrent user basis which allows customers to roll them out to a user population, not necessarily on a one-on-one basis.

When they come to renew, we see customers renewing their entire license pool, and so we haven't seen them not renewing. And then we've always had a strategy here because it's shared infrastructure, overall, that it should be able to flex with customer demand.

And the way we grow is when customers use the infrastructure more and that's been a key piece of what we have done from an innovation point of view, making our, especially our XenApp infrastructure more applicable and more consumable by more users and more applications in the enterprise, which then drives up utilization and drives customers to needing more licenses.

And next week when we show some of the newest things we are going to release, you will see how that strategy will play out in a very clear way for the existing customer base, but also give us some entry points into some new market segments and customers.

There's no decrease, you're not expecting any decrease in renewal rates for the full year?

Jonathan, this is David. We saw real strong renewal rates both in Q4 and Q1, when we report those it's on a dollar basis so we would be picking up really both seat decline as well as any pricing pressure. So far so good. It looks good, good demand across the board.

Thanks.

Our next question comes from Abhey Lamba with UBS.

Yes, thanks. David, just following up on the -- question from John DiFucci, you mentioned in Europe some of the places can buy products in local currencies, should we expect your revenues to start becoming sensitive to FX movements as well or is that a small part yet?

It's still a small part. If it's anything material I will call it out in future quarters both up and down. I don't think it really moved the needle in the first period.

Got you. And, Mark, I think you mentioned that XenServer and hyper-V will adjust two separate market segments, can you elaborate on that and how do you segment the market and what will be each product's sweet spot?

Obviously, hyper-V is going to be very attractive to shops that are really trying to build a pure Windows type of environment. Working with Microsoft for such a long time, we kind of understand those customer mind sets. There is one mind set that says, look, I'm going to drive standardization around Windows and Microsoft technologies from kind of the bottom to the top of the stack.

And in hyper-V in that marketplace is what customers will choose. And certainly we will help customers choose hyper-V with Citrix Essentials for hyper-V and deliver as much value add to that hyper-V environment as possible. Really sort of, it's page one from the Citrix play book, that's sort of gotten us here.

On the other side, there is the customer that is more segmented in the way they buy products and implement products in data centers, and that will range from enterprise customers to beyond, like service providers cloud providers, et cetera. And they are more likely to have hybrid types of environments looking for best-of-breed for particular types of workloads or for particular types of business models.

And so we think that offering a full stack, the free XenServer plus Citrix Essentials for XenServer will be the solution there. And the really nice thing is the customer that's hybrid that has both hyper-V and XenServer gets an interoperability story that's unprecedented with the advanced virtualization tools that we provide that work across both.

And so so far it's a story that I think customers like, partners like, because they can offer choices to customers, and it has been really good in forging a deeper relationship with Microsoft.

Thank you.

Our next question comes from Brent Thill with Citi.

Thanks. David, on the license updates up 11% in the quarter, is there anything preventing the growth from dipping into the single-digit growth rates in the second half of the year?

Brent, yes, there is, and I think it's the impact of the decline in license revenue. If you remember the way our software products at least, not the hardware appliances, but the software products between 20% and 25% of an initial license sale is deferred onto the balance sheet and that's really the license update components and we will recognize that ratably over the course of 12 months back through license updates. So I do think that that line item could be flattish going into Q2.

Okay. And no changes on prices, correct?

No, not, overall no change of prices.

Thanks.

Our next question comes from Kash Rangan with Merrill Lynch.

Hi, thank you for taking my question, apologies for the overhead noise here. Just a couple, one for you, Mark. You portrayed the IT spending (inaudible) as looking to be tight, sort, that's the new reality. I'm trying to reconcile that in the context of how your XenApp business does going forward in the new reality, maybe the business did bottom out really, and this was the trough point in the quarter. How do we get comfort that the new reality of tight IT budgets were to persist for a while that we have truly indeed hit the bottom, what gives you the confidence you could see better performance in the XenApp business, and I will follow up on the other segment, the desktop product, thanks.

Well, I think that the simple answer is not only XenApp but most of our products allow IT organizations to sweat the assets they already have. And there is no better way than to save money on the capital side and operating side than to sweat the existing assets.

For example, XenApp, when you use XenApp to deliver an application you take all the pressure off of upgrading the end points and upgrading the network because you are using those same assets more efficiently, and which saves you a tremendous amount of time, capital, et cetera. I think XenServer and Essentials allow you to sweat server assets, so keep the server assets you have, get more utilization from them.

And I think when we look at all of our products, through that lens, that's why we feel good about this kind of environment, and the more it continues the more customers come to these conclusions that change the way they are actually delivering applications to end users, including desktops and the way they deliver desktops to end users and get more leverage off of the assets they already have. That's how we think of it.

I guess the take away is that the message should resonate better in a tighter environment, that the performance for the XenApp product will get better as it resonates with customers?

I think so, and the force of inertia is the most powerful force in all of the world. So when customers have budgets, the easiest thing to do is to keep doing what they've been doing for the last 25 years in distributed computing. And there are too many things that are new and different that have changed, not only in technology but in the external environment.

And so to the degree that a crisis forces people to do things that they wouldn't otherwise do, all right, given all the time and money in the world, then that's a good thing for us. And that's why the longer it goes, the better and, honestly, it's not going to come back. Capital spending on IT peaked out at 22% of all capital spending. And it's coming down.

It's the largest capital spending category that exists. So it's kind of collapsing under that weight. We believe that's a good thing for us.

Great, and the final question is I was wondering, Mark, if you had any comment at all on VMware's vSphere pricing on a, for maximum of 12-course, I think they priced it at about $3,495 which is pretty close to your pricing on a per server basis for the highest in SKU. Does this impact at all or not impact your XenServer business going forward, I guess XenDesktop and XenServer business, as a result of what seems to be or appears to be a pricing reduction for vSphere. That's it. Thanks.

I think if you do the numbers, you actually will see that what this is, it's actually a price increase, because they've gone to a per processor pricing model. We've stayed and are going to stay with a per server model. So what happens is as more processors go into the data center, their per processor model obviously yields more revenue to them. And that's sort of the math. And what it does for us is it contrasts the solutions and the approach in a larger way.

And so if you take Essentials plus XenServer and you do the math around a two-way server or a four-way server it's actually pretty easy to do. A two-way server with vSphere is going to cost you twice as much. And a four-way server is going to cost you four times as much. So that's the way we do the math here.

And, yes, they did introduce some new lower priced editions but they're kind of neutered in terms of the number of servers, I think they are limited to three servers. Very, very entry level and our free XenServer is more functional than these entry level products. So think, again, their announcement, I mean important to the industry, et cetera. Certainly not dissing that.

But their announcement also points out the large differences between our approach and their approach and how working with Microsoft, we're offering customers a different type of solution.

Great, thank you very much.

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

Thanks, Teresa. Just in closing a couple of things. First of all, I want to thank all of you for acknowledging Citrix as being shareholder friendly. We saw the institutional investor awards and placing third means a lot to us because we believe in transparency and being here at your service every day. So thank you for that.

In general, now in closing, look, these are really challenging times for everyone in the industry. And including Citrix, but speaking for us, these are probably the most exciting times in the world for us as we look forward and see the kind of changes that are coming.

So you can see that we are driving forward, we're confident, we are being very, very aggressive, and we have a really bullish conviction about our strategy, the products we've built and the acquisitions we've done and our ability to bring all of that together to the benefit of customers. And when you do that, you usually win.

Thanks for your support, and hope to see you next week at Synergy 2009. Thank you.

This concludes today's conference call. You may now disconnect