思杰系統 (CTXS) 2010 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems first quarter 2010 financial results 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 session. (Operator Instructions) Thank you. I would now like to introduce Mr. Eduardo Fleites, Senior Director of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Casey. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix first quarter 2010 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Senior Vice President and Chief Financial Officer. This call is being webcast with a slide presentation on the Citrix 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 product groupings to the investor relations page of our website. I'd like to remind you that today's conversation will include forward-looking statements made under the Safe Harbor Provisions of the US 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. Additional information concerning these and other factors is highlighted in today's press release and in the Company's filings with the SEC, including the risk factor disclosure contained in our most recent annual report on Form 10-K which is available from the SEC or on the Company's investor relations website.

Furthermore, we will discuss various non-GAAP financial measures as defined by the SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the investor relations page of our website. Now, I would like to turn it over to David Henshall, our Chief Financial Officer. David?

Thanks, Eduardo, and welcome to everyone joining us this afternoon. As you can see from the release, we're off to a strong start in 2010 delivering $414 million in total revenue, a more than three point increase in adjusted Op margin and $144 million in cash flow from operations, all driving adjusted earnings per share of $0.40, up 23% from last year. So coming off a record Q4, we entered 2010 cautiously optimistic. In Q1, while there were really only a handful of large transactions that closed, the demand environment continues to trend towards a more normalized seasonal spending cycle with EMEA still trailing the US as expected. I'm very pleased with our execution in the field operationally and within our product divisions.

So drilling into the different revenue line items in Q1, new sales were $123 million, up 10% from last year, driven by growth across both the desktop and data center businesses. License updates increased 10% from last year due to strong customer interest in the XenDesktop trade up program. Technical services grew 18% led by consulting and tech support, and online SAS revenue was $85 million, up 18% year-on-year with web collaboration leading the way, up over 30%. From a geographic perspective, the Americas region continues to execute well delivering revenue growth of 14% from last year for a total of $178 million. Included in this total is product license growth of about 20% year-on-year. Internationally, EMEA showed slow but steady improvement in the business environment leading to $119 million in total revenue, up 6% from last year. And finally, revenue in Japan and the Pacific grew 13% to $32 million. So overall, a real solid quarter within a mixed economic environment.

Customer interest in pipeline build are record levels, and we remain focused on delivering results while building momentum across the main product categories of desktop, data center and cloud and online collaboration. So now I'd like to discuss the Q1 results within these three areas. First, our desktop business grew 9% over last year to $264 million. The results in the quarter were highlighted by demand of our latest desktop virtualization product, XenDesktop 4 and the desktop trade up program, which gives existing XenApp customers the opportunity to upgrade to the complete solution for delivering both apps and desktops on demand. In total, XenDesktop contributed $32 million of recognized revenue with trade up products adding another $14 million to the deferred revenue balance. And as a reminder, the accounting for trade ups is largely ratable in nature with revenue hitting the P&L over future quarters. Also within the desktop business, there were a number of strong metrics in the quarter. In fact, four out of the five largest transactions across the Company included XenDesktop.

More than 10% of existing XenApp customers that were up for renewal in Q1 chose instead to trade up to XenDesktop. We also added several hundred brand new customers and partners to Citrix due to increasing interest in desktop virtualization. So overall, really good momentum across the board. And as we reviewed over the past couple of quarters, we'll continue to call out certain metrics for the standalone products within the category, but they are clearly becoming less relevant as customers acquire the full desktop solution which incorporates both the virtual app and virtual desktop capabilities.

So next, let's review the data center and cloud business which consists primarily of our app networking and server virtualization solutions. Lead by NetScaler, revenue in this business was up 23% year-over-year to $61 million. Overall, the NetScaler product line continues to gain share in the enterprise market with two-thirds of deals coming from this segment in Q1 and the number of unique customers growing by more than 40% from Q1 '09. On a product basis, strength came from the low to mid range MTX appliances and from the new VPX virtual appliances. While in the market only a short time, VPX is showing good early traction across several different verticals and geographies. The other key component in this business is end server, where we've seen significant growth in the number of downloads, activations and unit market share which Mark will address further in his comments.

Finally, touching on our software as a service business, revenue was up 18% from last year. The online services team continues to deliver solid execution with this segment now contributing over 20% of total Citrix revenue. The growth continues to be led by the collaboration products including GoToMeeting, GoToWebinar and the newly released GoToTraining. Customers continue to be focused on improving productivity while cutting costs and our easy to use, purpose build solutions allow them to do just that. By leveraging our GoTo services, they can immediately reduce travel, training and support budgets, all while expanding customer reach.

So turning to expenses and operations, in Q1, adjusted Op margin was up over three percentage points from last year to 23%. This is a direct result of improving revenue performance in our continued focus on leverage. And as I've said before, our initiatives have been centered not only on cost structure changes, but also on a broad reallocation of spending to materially increase focus on the areas of the business such as desktop, cloud and SAS in order to accelerate future growth opportunities. We increased the pace of hiring modestly in the first quarter as the demand environment improved and in total, we added 140 people, with the largest increases coming in the SAS business and in the field organization. I expect this pace to continue for the balance of the year. On the rest of the P&L, other income was up modestly due to the higher investment balances, and tax rate increased significantly, both sequentially and year-over-year. The higher tax rate is really a function of the geographic mix of revenue in the period and because the federal R&D tax credit is yet to be extended for 2010.

So, looking at the balance sheet, cash and investments grew to a record $1.4 billion, aided by very strong cash flow from operations of $144 million. Primary use of cash in Q1 was again for stock repurchase where we bought back 2 million shares at an average price of $44 a share. However, despite our continuing focus on share repurchase, weighted average shares outstanding increased by over 2 million shares last quarter due to the higher equity price and the volume of option exercises. Looking forward though, we remain very committed to buying back our own stock, and today we announced that the board has approved an additional $400 million in share repurchase authorization, which brings the total amount available to approximately $460 million. Also, deferred revenue increased $17 million sequentially, or 3%, now stands at a total of $636 million, and this is due to the XenDesktop trade up program, strong subscription advantage renewals and through customer agreements for our SAS products.

So finally, I'd like to discuss our current outlook and expectations for Q2 and update the full year 2010. We're executing on a business plan to continue to drive an expansion of Op margin while strongly investing in the strategic area of the business and our ability to service customers around the globe.

We're really encouraged by the improving spending dynamics we're seeing in most geos, our leadership position across desktop virtualization, continued gains in app networking and SAS and an opportunity pipeline that's never been stronger. So balancing this optimism against a global economic recovery, and it's still uneven, we currently expect that for the second quarter of 2010, total revenue to be in a range of $430 million to $440 million, adjusted operating margin of between 24% and 24.5%, adjusted tax rate of 23% to 24%, shares outstanding at a range of $190 million to $192 million and adjusted EPS of $0.44 to $0.45 a share. And for the full year 2010, we're raising our outlook and currently expect that total revenue will be in a range of $1.765 billion to $1.78 billion. We expect adjusted operating margin to increase 100 basis points compared to 2009, average shares outstanding of $192 million to $194 million and finally, adjusted EPS between $1.88 and $1.91 a share. So now I'd like to turn it over to Mark to give you additional details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks a lot, David. I'm really pleased to be reporting solid Q1 results today and increasing traction across our core markets. Improvements in operational efficiency are allowing us to intensify our focus on strategic initiatives and deliver strong financial results. Double digit increases in revenue, adjusted income and EPS reflect the improving environment, disciplined expense management, and strengthening demand for our innovative solutions. We're off to a great start in 2010, and I'm really proud of the Citrix team.

Citrix was born from the idea of changing the way IT and business can work, unlocking people from the office, applications from the desktop, computing from the data center, all with the power of virtual computing. This vision continues to define the three areas of our business that I'd like to focus on and highlight today: virtual desktops, virtual meetings and virtual data centers. In Q1, our desktop virtualization business, including XenDesktop and XenApp, continued to build momentum coming off an amazing Q4 performance. Demand is being driven by a perfect storm of the desktop, migrating to Windows 7, assuring information security, managing the explosion of consumer devices, supporting the growing needs of virtual work styles and extreme pressure to reduce IT costs. These factors drove unprecedented growth in our desktop virtualization pipeline during Q1. Our strategic platform delivers both desktops and apps as an on demand service to every enterprise user and at the same time, keeps them isolated and managed separately from maximum efficiency, security and agility. The desktop virtualization customer engagement really includes two conversations: desktops on demand with XenDesktop and applications on demand with XenApp.

In November, we began shipping to industry's first comprehensive desktop virtualization product, XenDesktop 4. Going far beyond VDI only products, supporting all major virtual desktop models in one integrated solution. The Q4 uptake of XenDesktop was impressive. Q1 continued this very fast pace. We added over 700 new XenDesktop customers, many of them adopting the enterprise and platinum editions. We had over 20 deals ranging from 5,000 to 20,000 seats in Q1, with over 400 new channel partners completing their first XenDesktop sale in the quarter. In the VDI segment, the XenDesktop VDI edition is winning the vast majority of competitive deals. We had more than 10,000 downloads of XenDesktop Express and evaluations. Looking forward, the deal pipeline for XenDesktop continued to grow to a record level, including a win for a public sector customer in Europe for 140,000 seats.

In the 18 weeks since the October announcement of XenDesktop 4, we have shipped over 1.5 million new XenDesktop licenses. We also work to further amp up the market by joining forces with Microsoft with some groundbreaking announcements. First, as a part of a joint launch event with Citrix, Microsoft broadly endorsed desktop virtualization and announced dramatically improved licensing for Windows virtual desktops. Beginning July 1, virtual desktops will become a core part of Windows' client essay at no additional charge. This simplifies licensing for customers and opens the door for desktop virtualization to be used enterprise-wide as a mainstream solution.

Next, Citrix and Microsoft jointly announced two GoTo market programs, the VDI Kick Start giving customers a deep discount on a complete VDI stack built on Citrix and Microsoft, and the second is the Rescue for VMware VDI program, allowing customers to trade in 500 VMware view licenses. This is especially valuable in the many cases where view has simply failed or where customers receive free view licenses as part of the VMware server ELA.

The desktops are useless without apps. Apps on demand is at the core of a comprehensive approach to desktop virtualization. In Q1, we raised the bar again with the release of XenApp 6 offering major new enhancements across-the-board. Users will see enormous performance improvements, faster logins, faster printing, faster across-the-board, and faster means better productivity. Admins are loving significant improvements in scalability, increasing users per server by 17% over XenApp 5, and greater user density means much better TCO. XenApp 6 also includes new HDX technologies that up the ante on user experience with high fidelity support from video, flash and USB devices, allowing customers to fully virtualize VoIP, video and flash across PCs, Macs, laptops, thin clients, netbooks and smartphones.

Finally, XenApp 6 includes App Center, a powerful new tool that makes it far easier to centrally manage and deliver apps to any number of physical and virtual desktops across a fully distributed enterprise. And App Center also seamlessly integrates with Microsoft System Center and AppV. Apps on demand gets much more strategic from here, especially as the desktop evolves from device to service. Nothing illustrates this better than Citrix receiver for iPad, enabling Windows apps and desktops to go. It's already the number one free IPAD app for business and a great example of how we're extending the reach of desktop virtualization far beyond the walls of desktop PCs and thin clients. Net, we're very much on track in desktop virtualization, touching millions of users and devices, leveraging our 200,000 strong customer base and setting the innovation pace by enabling virtual work styles that revolutionize desktop computing for IT and users. Every quarter, we also make this vision a reality from millions of people with our web base GoTo services. Growth in Q1 for Citrix online continues at an impressive pace, positioning us as one of the world's top five SAS providers, fueled by demand for simple, easy to use, virtual computing products, with zero up front capital required.

There were a number of highlights during Q1. First, continued pressure on travel budgets and the growing popularity of both virtual meetings on the go drove record growth in our flagship GoToMeeting and GoToWebinar products. Online meeting attendance was up an incredible 43% over Q1 of last year. Attendees who experienced the GoToMeeting difference are much more likely to become paid subscribers themselves. This is a key part of our viral growth strategy. We also extended the reach of online meetings to an entirely new generation of devices with the introduction of GoToMeeting for IPAD, making on the go meetings effortless and visually stunning. This gives Citrix our second IPAD business app to hit the top five on the Apple app store.

GoToMyPC remote desktop sessions grew 7% sequentially to more than 23 million sessions driven by the availability of our new Mac addition and harsh winter weather that limited business travel in many of our key markets. And finally, our GoToAssist remote support business saw double digit growth driven by increased pressure on IT to reduce support costs coupled with the need to support an increasingly mobile workforce.

In addition, we also launched two new products in Q1, GoToTraining and GoToManage. GoToTraining puts us in the virtual training market segment, estimated to grow from 600 million last year to 1.6 billion in 2014. GoToTraining was designed from the ground up for training professionals, filling a market void by offering an easy to use solution with predictable pricing that saves time and travel costs and gives students a rich interactive experience. During the quarter, we also acquired Paglo, a SAS based IT management solution for SFD customers. Now rebranded as GoToManage, this gives us an exciting new add-on service to offer our growing GoToAssist customer base, allowing them to monitor, control and support unattended or unattended IT infrastructure from anywhere. The market for SAS based virtual computing is global and rich with opportunity, driving core innovation to expand functionality, geographically and into the Citrix customer base are all primary objectives.

I'd like to close with some color around our virtual data center business. It's quite clear data centers are transforming, delivering new levels of economics and elasticity. The breadth of our networking and virtualization portfolio puts us in our unique position to meet these requirements. Growing 23% in Q1, we're building momentum in data center and cloud infrastructure led by our NetScaler and XenServer product lines. NetScaler provides the high performance networking that made virtual data centers fast, secure and always available, kind of the front door to the virtual data center. With groundbreaking innovations like VPX virtual appliances and pay as you go pricing, NetScaler continues to gain share in a market that's increasingly strategic to the data center and cloud space.

We now have the industry's most comprehensive and cost effective product line from small single application virtual appliances to massive high end systems designed to power the world's busiest websites and data centers. This level of flexibility is one of the key reasons NetScaler was named number one in customer satisfaction in a recent survey of enterprise customers, decisively beating both F5 and Cisco. Incorporating the power virtualization into the heart of NetScaler has allowed us to rapidly accelerate the rate of innovation in this space.

In Q1, we introduced a new line of MPX appliances that are 2X more efficient than competitors and what matters most to customers, power, footprint and price performance. We also unveiled new NetScaler app firewall appliances that double the throughput of the nearest competitor, setting a very high bar for web app security in both public and private clouds. And we completed our line of virtual networking appliances, shipping brand for Peter VPX and Access Gateway VPX. We'll have even more to show next week at Interop, launching some new super performance products designed specifically for our large scale E-business, cloud and hosting customers. XenServer, our virtualization platform for private and public clouds, is on a solid trajectory.

Q1 marks one full year since we announced our strategy to accelerate XenServer market penetration by making the core product free and monetizing on the sale of add-on management capabilities. According to IDC, XenServer unit share grew from 3% in 2008 to 11% at the end of 2009. New activations for production use hit an all-time record in Q1. In fact, we believe we're on track to nearly double our share by the end of 2010, increasing our strategic footprint in corporate data centers and within cloud service providers. We're now in beta test with the newest versions of XenServer and essentials for Hyper-V, adding some amazing features for cloud providers and pushing the performance envelope for virtual networking, desktops and apps. We'll have lots more to say about this at Synergy in a few weeks.

The combined one-two punch of XenServer and Citrix Essentials for Hyper-V is clearly paying off, creating thousands of ready made sockets for XenDesktop, XenApp and our VPX line of virtual appliances, broadening our opportunity in the growing cloud market and leveraging our 20 year partnership with Microsoft. We're ideally positioned to capitalize on the transformation of IT to an on demand service. So in the coming months, you'll see us accelerate spending on primary demand in desktop virtualization and SAS. You'll also see us expand our global brand awareness, increase our sales and services capacity and invest in GoTo market initiatives with key partners like Microsoft and large system integrators, all designed to significantly expand our leverage and reach.

Before I open it up for Q&A, there's one more thing. I'd like to personally invite you to our upcoming industry conference, Synergy 2010 at San Francisco's Moscone Center from May 12 to May 14. Synergy is designed around a holistic view of virtualization, networking and cloud computing. We'll be introducing the future with exciting announcements, breakthrough technologies, demonstrations and new partnerships, along with a few surprises. You can register at citrixsynergy.com, and I hope you'll join us. I promise you won't be disappointed. And now, I'd like to open it up for questions.

(Operator Instructions) Our first question will come from Sarah Frier from Goldman Sachs.

Thank you so much for taking my question, guys. I'd like to get a little bit more color on the booking side for XenDesktop. I know you gave out that $32 million in revenue, but I think last quarter you were willing to give us a bookings number, and your deferred revenue is up so much, I just want to know what sort of impact VDI is having there?

Sure, Sarah. It's David. The easiest way to really get a good feel for the strength of the XenDesktop business is look at the change in deferred plus the recognized. So you add those two together and it gets you to about $50 million for the quarter.

Okay, so about flat bookings quarter-over-quarter, but clearly, Q1 comparing to Q4 for bookings for XenDesktop, correct?

Correct. Not as great a quarter as Q1, and we expect the trade up program to continue to be strong this quarter as well.

Got it. And then the cash flow number also kind of on a year-over-year basis, incredibly strong. I'm assuming that even as the model shifts more to bookings and deferred revenue, you're still collecting that cash up front. But was there anything else that drove particular strength on the cash flow this quarter?

No, I think cash flow was pretty straightforward. It was just your normal items, including net income. We did have a pick up from receivables, and you see that in the DSOs that came down about eight days sequentially from Q4, and then really just the change in deferred revenue being the other big item.

Got it. Okay great. Thanks a lot. Good quarter.

Thanks, Sarah.

Our next question will come from Phil Winslow from Credit Suisse.

Hi, guys. Just focusing back to the desktop virtualization side, just wondering if you can give us a sense for what you're seeing as far as sales cycles, are they shortening at all, extending? And then also, David, historically used to give the XenApp license growth year-over-year, wondering if I can get a sense for what that was this quarter. Then I think last quarter you had $26 million in XenDesktop license revenue, just curious what it was this quarter. Thanks.

Thanks, Phil. As far as sales cycles, nothing changing dramatically. Obviously, trade up sales cycles tend to be reasonably short, two quarters or less. And basically, because those customers are already sort of thinking strategically about virtualization at the desktop and they understand the value proposition of XenDesktop 4 that includes desktops and apps on demand. The POCs that we've been doing have continued to accelerate and obviously, more of those means faster sales cycles when it comes to reorders, and we saw good traction in reorders in the first quarter accounting for a tremendous number of transactions and especially in the medium size area. But other than that, we don't see any other material changes in sales cycles.

Phil, on the second part of your question, it's certainly, as I've pointed out, becoming less and less relevant to look at the individual pieces certainly, given the motion that we have in the field organization, our partners and with customers. But just for continuity, the desktop component just pure standalone desktop was up about 700% year-on-year and represented $20 million of standalone product license revenue.

Our next question will come from Robert Breza from RBC Capital Markets.

Hi. Thanks for taking my questions. Mark, I was wondering, you talked about the pipeline building and obviously, EMEA trailed a little bit. Can you tell us what you're seeing there from a pipeline perspective and possibly when you think Europe might start to catch back up? Thanks.

Thanks, Robert. It feels like overall, and this is sort of internal and some of the external conversations that I'm involved in, that EMEA feels one, two quarters behind the US in terms of overall recovery and confidence in IT spending. Having said that, the pipeline build that we saw in -- across the board in XenDesktop was geographic independent. EMEA racked up a huge build in their XenDesktop pipeline. I think the way to think about this is we made this XenDesktop 4 announcement, which signaled for the first time that you could buy desktop virtualization simply with one license, early in October of last year. And, so with the normal close cycles and business in Q4, a lot of the focus was just simply bringing the business in for the quarter, and a lot of the focus on Q1 went on really building the pipeline. And so I think you'd start to see results from that Q1 pipeline build start to really materialize in the back half of the year, some in Q3 perhaps, but mostly starting in Q4.

Maybe as a follow-up Mark, could you talk about the XenDesktop and some of the changes you made there, with the adoption of virtualization at the desktop? When do you -- obviously, it appears that most of the big large global 2000 organizations seem to be some of the people who can benefit the most from adopting it quicker. When does the inflection point start to move down into that upper tier of the mid market? Or how do you think about the mid market starting to get involved in adopting XenDesktop?

Honestly, I think the mid market is already involved, and they're involved via the experience they have had with great products like XenApp and engagements with our partners where it's a very easy conversation to have. So I would not think about this as a global 2000 kind of market at this point in time. And then secondly, I think the Windows 7 migration and uptake is quite a catalyst, and I think most of the industry analysts that are watching customer intent, et cetera, feel like most of the investment there is going to be focused more in the back half of this year, and that should support our second half business very nicely as well. So -- and that I think is broad based, medium and large enterprise on a global basis.

Perfect.

Rob, this is David. I'd just add one more piece of context there is that if I look across the top 10 XenDesktop deals in the quarter, it really was a good mix of different industries and it's not necessarily a who's who of the global 1000, including transactions with customers in the education vertical, government, hospitality, communications, and it is pretty broad based what we're seeing right now.

Perfect. Thank you, David.

Operator, next question? Next question, Operator?

Our next question will come from Abhey Lamba.

The impact of XenDesktop adoption on your XenApp business, we've seen XenApp revenues kind of declining in low single digits. So as the adoption of XenDesktop accelerates, can that stay in that low single digit decline or could there be acceleration in that decline as well?

Abhey, this is David. Similar to the way I've been characterizing over the last couple quarters, I really want to encourage people to look at this as the broader desktop business, because it's not necessarily a one for one tradeoff here. The idea and the motion around the strategy of moving people from a, what I would call more of a tactical XenApp solution to a much more strategic desktop infrastructure solution is about driving long term penetration and share across these customers. So look at the two items combined, and those are showing growth up, as I mentioned earlier, about 9% for the total business and mid single digits from a license business. And so I think that you're going to continue to see the shift in the individual mix within that line, and it will certainly favor desktop, and if I look at the product pipeline, it's going to be driving that over the next several quarters as well, so that's how I'd tie it out.

Okay, thanks. And very quickly, any update on Microsoft's source code agreement that you had? And secondly on the R&D tax credit, is that baked into your guidance, and what would be the impact if it's not baked into your guidance if it is flash?

Let me take the second part of the question first. Regarding the R&D tax credit, this is a typical thing that's happened, I think it's the last 13 years or so, where the federal government has let the R&D tax credit expire. And because of that, it made our tax rate -- adjusted tax rate up by about 100 basis points last quarter and a similar amount in Q2. If it gets approved, which it usually does in the second half of the year, we would be able to essentially book those balances at that point in time and in that quarter, we would have a -- we would be picking up the benefit and it would certainly push down the tax rate in that period. But it's in our guidance, assuming that it does not get approved in Q2 -- or renewed in Q2, excuse me.

And we have wrapped up our agreement with Microsoft with no impact whatsoever. And as part of our agreement to incorporate remote effects into our HDX technologies and fully support Microsoft on that end, and so it should be sort of a non-issue now.

Thank you.

Our next question will come from Bhavan Suri from William Blair & Company.

Hey, guys. Good quarter. Just a couple of quick clarification questions before I go in. David, I thought you said that, and my sense was that bookings for XenDesktop in the fourth quarter were 60 million not 50 million, so I was surprised you said it was flat quarter-over-quarter. I just want to make sure I was right or wrong on that, whichever way it was.

I think for a bookings basis it was down a little bit sequentially. On a recognized revenue basis, it was flat to up fractionally.

Right, okay, so bookings were down and then revenue was up to a nice 32, I think it was. And then on a more strategic basis, as you look at the XenDesktop opportunity out there, how often are you sort of running out and replacing VMware and how often is it kind of a greenfield type of opportunity?

We don't plan on talking about those specific metrics. As I mentioned in the prepared comments, when we are in a competitive situation with VMware, it's always going to be a VDI situation because that's the only kind of solution they have, and we're winning the vast majority of those. And in a lot of those that they -- seeds that they had planted, VDI seeds they had planted, customers have done POCs and tried to make them work, and we're also doing a fair number of replacing those systems that just did not work in the conditions of the customer had to deploy on. Then the greenfield is really the overall desktop virtualization space, which is where we're being broadly successful without seeing VMware, frankly, a whole lot. And in that space, customers are engaged in a higher level conversation around both desktops and apps on demand, keeping them separate in terms of how they're managed, how they are rolled out, et cetera , but as a single solution for being able to touch every enterprise desktop. And I think that the research would show that they are not -- the customers have never had VDI in mind for a broad enterprise rollout, and desktop virtualization is what makes it different. It's really applicable to touch every single desktop where you're going to deliver apps to physical or virtual desktops or virtual desktops to any kind of device. That's the way to think about

And one follow-up to that I guess, Mark. As you start deploying XenClient, have you guys got any sense of what that does to the ROI? Obviously it improves it, but any sort of metrics around that, given that some of the pushback we've heard from folks is there isn't an immediate ROI around desktop virtualization?

Well, there is an immediate ROI around desktop virtualization when you think of it in the way we do that involves multiple desktop delivery models that have very different ROI characteristics. Hosted desktop versus a VM desktop in the data center versus a streamed desktop to a mobile VDI desktop all have different ROI characteristics, and it's what makes our approach very unique in the marketplace.

XenClient will have, yes it will have a different ROI type model and where in a hosted VM, you're investing in the data center in terms of servers and data center infrastructure. And on the client side, you're going to be investing in a laptop, let's say, that's a new laptop that has the great Intel VT technology, VPro technology. And with XenClient running on it, all of the MIPs and all the CPUs are going to be distributed out to the end point, and the ROI there is -- it's a very different kind of model.

I'd say generally speaking that VMs, whether they're hosted in the data center or running out at the end point, the key focus that customers have starts with security and then the second focus is -- security is the first, speed of delivery in terms of being able to turn on and turn off users very rapidly, and ROI becomes a third level priority for them, and I think that will apply both to the XenClient side as well as to the data center side running on, let's say, XenServer.

Great. Thanks for taking my questions.

Thank you.

You're welcome.

Our next question will come from Rob Owens from Pacific Crest.

Great. Thank you very much. With regard to the margin guidance for the full year, I'm curious why there's not more margin lift in the second half, especially given the performance in Q1 and margin guidance for Q2.

Yes, Rob, when we think about margin guidance right now, last quarter we were talking about 75 to 100 basis point improvement over last year. Now I think we've essentially collapsed the range and said 100 basis point improvement and signaling it's moving in that direction. And the second answer that we're three months in to the year at this point in time and we'll continue to update the outlook as we move further. We're really excited about what we see in the opportunity pipeline and the -- just the momentum around some of our markets as we get in the back half. And so we'll play it by ear and balance that against the opportunities we have for investment that's going to accelerate growth, and it's really just a function of those variables.

That being said, is there anything on the horizon, either Q3 or Q4, that you would anticipate increasing investment for? Or is it just conservatism on your part?

I'd say nothing specific at this point in time. We've talked about the areas that we've been investing in. We called out a number of them, including the big ones like R&D. We think innovation is critically important to the long term success, our sales and services' capacity to be able to meet customer needs around the world, our SAS business, which just continues quarter after quarter to do really well. So it would be in those areas and just a continuation of what we're doing right now.

Great, thanks.

You bet.

Our next question will come from Steve Ashley from Robert W. Baird.

You could comment on the large deal activity number of deals greater than a million dollars in the first quarter this year and maybe compare it to a year ago?

Yes, Steve. There were just, actually a very few number of large deals this quarter. It's really made up of small, medium size business to a large extent. I think that they are -- looking back, there may have been some large deals that fell into the fourth quarter, always hard to tell. There were five individual transactions, new license transactions that were greater than a million dollars in Q1, and I think that's roughly in line with where we were in Q1 of last year and certainly expect that number to increase into Q2 as we look at the pipeline in the forecast.

Great, and then your trade up program is scheduled to expire in June. What would be the prospects of extending that, given the success you've had with it?

Steve, right now we're focused on Q2 and trade up program and executing on it. And of course, when we put it in place, it was designed to really create urgency on the part of our field forces, our partners and our customers who are most strategic to have some urgency to actually start down the track of desktop virtualization to get that flywheel going. Once we close Q2, we'll look at kind of all of the data and consider that again. I think that if we do something to extend it, the economics will be different. We wanted to do something very aggressive to really start that flywheel going. And so we haven't ruled it out, but all of the focus is on Q2.

Perfect. Thank you.

Our next question will come from Daniel Ives from FBR Capital Markets.

Yes, can you talk about just the adoption on XenDesktop, and is there any change anecdotally in regards to selling it in terms of customer familiarity, adoption cycle, maybe an easier sell? If you could just walk us through being in those deals, any sort of change that you've seen over the last three to six months.

Yes, Daniel, I think that we're seeing a marketplace that's forming, probably a little more rapidly than I expected it to personally, and that means that it does get easier. We're seeing more partners get certified. In fact in Q1, we had about 24% or 25% growth in the number of partners certified to sell XenDesktop, and we see a big increase in their demand generation activity in Q1. And that's even flowing into our channel event, which is just prior to Synergy where we're seeing higher partner registrations. So what happens here is it's sort of a self-reinforcing cycle when one partner is successful with a customer, others see and hear about it, customers ask for it, they -- which encourages the partner to invest in training. And so that's where we get lots of leverage when a lot of partners act independently, get certified, trained and are out generating demand, which then for us makes it feel like the market is easier to grow. And that's what you get when you have an upward spiraling marketplace that is built on a strong value proposition around virtualization in general and the strong market forces and sort of catalyst that I mentioned in the prepared comments.

Thanks.

So that's how it feels.

Thank you.

Our next question will come from John DiFucci from JPMorgan.

Thank you. A question for David. David, if the environment is trending towards normal as you said, and you did put up normal seasonal patterns in the fourth quarter, why was license revenue down similar to last year when the economy was certainly declining, especially since it appears, anyway, that you're at the onset of a positive secular trend?

I think product license, we still look at that on a year-over-year basis, always, and that's because of the way customers buy, it's the way we set our comp plans, et cetera. And our license revenue being up 10% in Q1 was a good result, and I think as we go into the year, there's opportunities to accelerate that, and we certainly see it in the pipeline. And -- but right now, our forecast is going to point you to about 10% to 12% growth in total revenue and then the mix of that will move around a little bit during the quarter.

Okay, so you don't -- you -- but you're just looking at year-over-year and was that -- do you think it was driven by the quotas you set for the quarter for your sales force then mostly? Because normally, we look year-over-year too, we all do, right? But at the same time, especially coming out of an economic environment we're coming out of, we tend to look more, or at least pay more attention to the seasonal patterns and it just -- these seasonal patterns, although they were at the high end of your guidance and that's good, and I guess that's what you set, but it's actually below what you would expect from years other than last year. Last year obviously was a unique time, though.

Yes, last year was a unique time. If you remember, we had very strong growth into the fourth quarter, ahead of most normal years from a sequential basis, which would point to certainly a normal step down into Q1, normal seasonality. I think on a sequential basis, we were down about 27%, I believe, on product license versus 35% a year ago and then somewhere in the 15% to 20% range in the years before that. So it is kind of hard to compare 2009 to anything given the unique shape of what that year looked like and coming off a great Q4, which by the way, was a record Q4 for Citrix in most dimensions. We're really happy with the Q1 result and look for continued growth throughout the year.

Okay, thanks.

Our next question will come from Michael Turits from Raymond James.

Yes, on the $32 million for XenDesktop, you said you had a $14 million contribution to defer, but how much of the $32 million for XenDesktop was from trade up?

A relatively small component. I'd have to pull the numbers out. If you look at the trade up, the way the trade up offerings work and there's a number of them, they are going to be deferred anywhere from about 50% to 100% deferred. So on balance, I'd say the way to think about it is three quarters are related -- three quarters is related to, excuse me, three quarters of each new sale will be deferred on balance. And if we look at how much of it actually flowed through the P&L, single digit millions, mid single digit millions, and then the majority of it showing up in subsequent quarters as license update revenue.

Got it, and then you did mid single digit Xen -- mid single digit desktop license growth in the quarter, you said. Is that about the right trend for the year? Part of the problem is that it's hard to figure out what -- XenApp was down and not really recovered yet, so do you think that can accelerate during the year?

Yes, actually I do. I think in Q2, the broad desktop license will accelerate from the year-over-year rate you saw in Q1.

Okay, and then just last question on the tax rate. Any thoughts on what it should be for the full year?

Yes, I included that in my prepared remarks, so I think for the full year right now, we're looking at a tax rate in the 23, maybe 23.5 range.

Okay, must have missed it. Thanks very much.

Our next question will come from Todd Raker from Deutsche Bank.

Hi guys. A few quick questions. First on the trade up programs, can you give us any sense in terms of kind of the attach rate you're seeing into renewals of the installed base?

Yes, what we're seeing in -- what we saw in Q1 was a little over 10% of those XenApp customers that were coming up for renewal on their subscription advantage instead chose to upgrade to XenDesktop. And I think our expectation for Q2, at this point in time, at least in our guidance is between 10% and 15% of the base in Q2 to choose to trade up.

I just want to make sure I understand, if I'm a XenApp renewal customer, the reason I wouldn't do the trade up economically is my VDI project is probably further than 12 to 18 months out?

Well, I think it's hard to really put all of the XenApp customers into a bucket. There's a lot that have a specific project that they've bought XenApp for in the past, and it's working extremely well for them, and they aren't looking at broader desktop virtualization at this point in time. And we'll always have an upgrade path should there in internal environment change and they are looking at this,. So when we talk about the XenApp installed base, it's really kind of a mix between that project base, which I'd probably classify as tactical and more strategic where they've actually used XenApp as a technology to deliver hosted virtual desktops over the years, so it's really tough to put them all into one bucket.

Okay, and then my second question is can just walk through the VDI Kick Start program, how is that -- is that designed to penetrate customers who are not XenApp customers (inaudible), or what's the strategy behind that one?

Yes, the Kick Start program is designed to basically allow Citrix and Microsoft partners and field teams to work together to move new customers into a Citrix Microsoft VDI stack. It's pretty much that simple.

Okay, so if I'm XenApp --

Making it really low cost for them to do, and by the way, there are also some incentives for the field and for channels to actually do those proof of concepts, so it's sort of a fully integrated program.

Okay, so if I'm a XenApp customer, Kick Start does not apply to me then?

That's correct.

Okay, thanks guys.

Thank you.

Our next question will come from Ed Maguire from CLSA.

Good afternoon. A couple questions. What impact does the pending XenClient and Microsoft license changes have on your conversations this quarter around desktop?

Well, it's all easier, Ed. I think the net/net answer in that if you're a client SA customer of Microsoft, you're going to be able to use virtual desktops, virtual machines, images of desktops in very, very flexible ways, whether they are hosted in the data center or they run down on a XenClient. So I just think it gets overall easier and customers have lots of degrees of freedom to use Windows in a lot of different ways. I guess that's the way to think of it.

Okay, and just to follow-up, kind of turning around Todd's question, have you been able to track what the uptake would be of new licenses in the trade up program? As you move from concurrent to named user, what is kind of the incremental ratio of sales that your customers are willing to commit that you're seeing?

I don't think we've got great data at this point in time, Ed, to be fair. I think what we have seen is a trend for customers that, let's say are renewing 1,000 licenses to actually use this as an opportunity to trade up those 1,00. And in some programs, they could actually trade up for 2,000 named -- excuse me, user or device license and then buy another 1,000 XenDesktop on top of that. So the ratio is certainly greater than 1 to 1 at this point in time. It's just, I don't think we really have enough data points to call it a trend yet.

Great. Thank you.

Our next question will come from Israel Hernandez from Barclays Capital.

Good afternoon, guys. Mark, can you share or give us a little bit of color on that 140,000 seat customer win in the public sector and Europe? Can you talk about the competitive dynamics, was Citrix the incumbent? Was there already a large XenApp deployment in place? Can you share a little bit of color as to what was the tipping point that got you the win?

Yes, okay Israel. The deals actually led by one of the large global SI partners that we have, and XenDesktop is a catalyst component of it, but by no means is it the entire deal. And obviously at that scale, it requires a lot of system integration work. The customer was not a large scale XenApp customer, although they would have had some because it's hard to find, especially in Europe, any significant government agencies that don't have some XenApp product. And we believe that it will start to actually get implemented in the second half of the year and obviously, as the largest desktop virtualization deal reported, at least at the public so far. And the interesting thing is that when we look at the pipeline and the opportunities, these deals are out there. They tend to be more government because there aren't that many companies that could have that kind of install base, but they tend to be large scale government kind of opportunities, whether they're in the US and internationally. So that's about the color that I can provide right now.

Israel, I'd like to add just a couple of comments on that. Just because of the size of this specific transaction, is that there is nothing in our reported financials related to this deal at this point in time. And the way it's going to flow through is we will book the PO's as they are received and probably starting with the first and the second quarter this year.

That was my follow-up question, thank you.

You bet.

Our next question will come from Walter Pritchard from Citigroup.

David, I'm wondering if you could help us out with just, I know you guys take revenue in US dollars, so no major currency impact on the top line. Any impact year-over-year from a currency perspective on the bottom line?

Yes, a little bit. We hedge out anywhere from six to 12 months forward, and so the wait impacts our expenses and we have, call it 25% of our expenses denominated in euro currencies right now. And so we're probably picking up a couple million dollars on a translation basis versus where we would be a year ago.

Great, and then just relative to Europe, I'm wondering if you could just help us out with some color in terms of across the territory. Just in the news there's everything from Greece, where the country is near bankruptcy to Germany, where things sound pretty strong from a macro perspective. Could you help us out in terms of understanding how homogeneous the performance was across the territory for you and how you think it improves from here?

Yes Walter, I think mostly it tracks to Germany, UK, kind of in the lead in terms of coming back by far strength in Germany. And then with France behind and then Spain as a really big lagger, and eastern Europe was also quite weak relative to where things looked even a year, five quarters ago. So I think that's why I mentioned that. We think Europe is, depending upon the area of -- you're talking about geography, one to two quarters behind what it feels like in the US.

And then just last question, I hope I can explain it well, but we're trying to understand in the channel, you were paying much more for trade up activity versus what a normal maintenance renewal would be in a quarter that you didn't have the promotion going on and we're trying to understand, was there a major impact on the top line from sort of the contra revenue or the card type activity that you did in the quarter to incent the channel to drive the trade up program?

No, in fact, we always have a number of different incentives going on with the channel related to card bonuses and things like that, and the actual trade up is not eligible for card bonus. It's just eligible for a normal Citrix advisory award payment. So I think it would be in line, probably a little bit more than a renewal sale, but not materially.

Okay, thank you very much.

Our next question will come from Adam Holt from Morgan Stanley.

Thank you. A question on the XenDesktop seats sold versus seats deployed. Of the 1.5 million that you sold, do you have a sense for how many are actually live, and do you feel like you've now gotten critical mass in terms of live customers to be able to go out and proselytize the platform?

Adam, with -- the 1.5 million is actually from October through the end of Q1. Hard for us to know how many are actually in service at this point, especially with the strong Q1 that we had. So you'd have to be doing some estimates here, but my guess is that there's still plenty of absorption going on from Q4 purchases, which by the way is part of what causes a Q1 step off in licensing typically with larger enterprise customers, because they're absorbing Q4 purchases and implementations. So if I had to guess, I'd say we're probably a third of the way into the 1.5 million in terms of in service, but it's completely a guess. And as far as being a critical mass, I think we are at critical mass already, to quote -- using your term, proselytize the platform. And because when you are doing these deals that are 5,000 seats, these are not proof of concepts, these are customers that have made a strategic decision to move, and they do that based upon a lot of things, not only their own testing but customer references and listening to partners and industry analysts, et cetera and really taking in the entire view.

So I'd say we're already to that point and now, it's just a process of step and repeat and trying to amplify all of the activities that we've talked about, whether it's about proof of concepts, downloads of evals, doing things to encourage our partners to generate demand, encourage our partners to get trained, et cetera, engaging customers at higher levels. The XenDesktop since we made the XenDesktop 4 announcement has given us a great platform to proselytize at the CIO level, because we have a very strategic story about desktop virtualization. It's not just about VDI. So I guess that's how I'd answer your question.

If I could ask, I know we're running long on time, just a quick follow-up on the app networking business which is flying a little below the radar but looks like it had a really good quarter, first of all, do you think that's more about the market improving there, or do you feel like you've got Company specific momentum. And as you look into the pipeline, do you think the kind of growth rates that you saw this quarter can continue for the next several quarters?

I think it's both things. I think first of all, the VPX line, being a virtual appliance, is giving us access to entirely new revenue, entirely new customers where you're putting a NetScaler in front of an application on a specific basis, at a cost that you just couldn't justify a physical appliance. And at the same time, the advances we've made on the MPX side are encouraging some existing customers to refresh hardware and also, many enterprise customers now step forward because the price performance, footprint, some of the things I mentioned are -- have gotten quite compelling. And from a competitiveness perspective, really stepped up our competitive profile with the things that we've done in the past two quarters on both VPX and MPX. And as I mentioned in my prepared comments, we're going to basically set off another round of this in a week or so when we make some great announcements at the high end at Interop.

Adam, this is David. I'd also like to add that from a guidance standpoint, embedded in our guidance is a deceleration of year-over-year growth rates in the broader ANG market, and that's simply because we had a really good Q2 last year. If you remember, there was some large government transactions that popped, so while I do expect it to be up pretty sharply sequentially, I think the growth rate will decelerate from Q1 into Q2.

That's very helpful, thank you.

That appears to be all of the time we have for questions.

Well, once again, thank you very much for joining the call. Clearly, we're at a great inflection point in the industry in the marketplace across an entire stack of virtual computing infrastructure, and we're grateful for your support, and we'll see you in three months on our Q2 call. Thank you.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.