思杰系統 (CTXS) 2010 Q3 法說會逐字稿

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

(Operator Instructions)

Thank you. I would now like to introduce Mr. Eduardo Fleites, Senior Director of Investor Relations. Mr. Fleites, you may begin the conference. Mr. Fleites, you may begin.

Thank you, Casey. Good afternoon, everyone. And thank you for joining us for today's call. Where we will be discussing Citrix's third 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 Relation's 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 contain 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. Today we announced our results for the third quarter 2010. Delivering total revenue up 18% to $472 million, adjusted op margin of over 27%, and record cash flow from operations. I'm very pleased with our execution in the field, gains and app networking and SaaS and a growing leadership position across the emerging Desktop Virtualization opportunity.

So, looking at the third quarter, revenue from new license sales was $152 million, up 18% from last year. License update revenue increased 15% annually, driven by strong year-to-date demand in the XenDesktop trade-up program. Technical services increased 30%, led by record consulting utilization and maintenance agreements that are attached to our NetScaler products and online SaaS revenue is $92 million, with growth of 16% over last year and once again led by the strength of the collaboration products.

From a geographic perspective, the Americas region continues to execute extremely well, delivering total revenue up 22% from last year for a total of $217 million. And included in this number is product license growth of about 28%. Internationally, business environment was mixed in Q3. Japan and Pacific combined for a healthy 27% year-on-year growth, while EMEA was up 9% to $123 million, as we saw some customer caution in Q3 delaying decisions on new capital purchases. And we'll talk more about this later in the call.

So, overall a very solid quarter within a mixed economic environment. As we exited Q3, customer interest and pipeline build were record levels and we remain focussed on delivering financial results while building momentum across our main product categories of desktop, data center and Cloud and SaaS. So, now I'd like to discuss the Q3 results within these three areas.

Our desktop business increased 11% from last year to $277 million, including license revenue growth of 5% in the period. Within these numbers there were some particular dynamics I'd like to highlight. First, while license revenue was up from last year, it was down 6% sequentially due to the timing of XenDesktop trade-up orders. As you recall, earlier this year we were running a trade-up promotion that ended in Q2, which was extremely successful in generating interest for Desktop Virtualization on our installed base, reengaging customers and increasing channel vibrancy. Financially the net result was that the promotion pulled in more business than expected in the third quarter. But despite the specific timing issues from Q2 and Q3, we remain very bullish on the program and expect that many existing customers will continue to take advantage of this easy upgrade path leading to much stronger Q4 trade-up revenue.

The next item I'd like to point out is the non-trade-up business, essentially new customer licenses of XenDesktop, and this is an area that was very strong posting revenue growth of 17% sequentially, and well over 200% from last year. Additionally, there is a few Q3 metrics within the total desktop business that really demonstrate the breadth of adoption we're seeing and the strategic value that customers are placing on Desktop Virtualization their infrastructure. In fact, 10 of the 19 $1 million plus transactions included XenDesktop licenses. Approximately 2,000 different customers bought XenDesktop in Q3. Many of these net new to Citrix. There were 85 XenDesktop transactions for more than a thousand seats each, while 13 customers purchased over 5,000 XDseats. And more than two-thirds of the total XenDesktop revenue came from the higher ASP Platinum Edition, where customers can leverage the greatest flexibility in delivery models for both virtual aps and virtual desktops. So, looking ahead into Q4, we're confident about the overall desktop business. We expect to see the year-over-year license growth rate increase from Q3 levels and for deferred revenue to be up sequentially.

So, next let's review the data center and Cloud business which consists primarily of our app networking and server virtualization solutions. In total, revenue is up 47% from last year to $84 million, led by the NetScaler products where we saw significant demand from Cloud service providers and Internet centric businesses. We're also continuing to gain traction with enterprise accounts, accounting for more than half of the top 20 deals. This is a result of the programs we've had in place this year to cross-sell networking solutions into our traditional base. So, regarding the specific platforms we continue to see the transition to the higher end MPX appliances that were introduced in Q1. While two new products, the 21,000 series, our most scaleable product ever and a FIPS edition targeted at the government vertical both generated solid business as well. Additionally, the VPX line of virtual appliances posted strong momentum, growing 40% sequentially. Finally, touching on our software as a service business, Citrix online revenue was up 16% in Q3, this is led by the collaboration products in the GoToMeeting family which were up about 30% from last year. Customers are very focused on improving productivity while cutting costs and by leveraging our GoTo services, they can immediately reduce travel budgets while expanding customer reach.

As we look forward we're pursuing a number of different initiatives to accelerate the long-term growth rate of this business including international expansion, video, IT management and mobile solutions. So, we'll be investing accordingly to maintain our market leading position as well as grow share in some of these new areas.

So, turning to expenses and operations. Q3 adjusted operating margin was up over 2 points from last year to 27%. This is due to revenue acceleration and our continued focus on operating leverage. As the demand in the opportunity pipeline have been improving this year, we've been investing in a number of areas designed to drive future growth opportunities and to expand our competitive advantage.

The primary investments have come in the form of head count growth with a focus on two areas. First, expanding GoTo market reach and customer touch through Enterprise account managers, consulting capacity and tech support. Second, product innovation. To bring the market new technologies as well as improving integration of the total solution to drive simplicity and greater end user experience. So in total, we added nearly 300 people in the third quarter and would expect similar growth in the fourth quarter.

Looking down the rest of the P&L, other income was up mostly due to foreign exchange remeasurement items and higher cash balances. While the tax rate for the quarter was effectively zero on a GAAP basis and about 12% on a non-GAAP basis. Now this tax rate was impacted by $18 million of credits largely from an R&D tax credit study that's been in process for a little over a year. Net impact of these tax items was a $0.10 increase in adjusted EPS and this was not anticipated in our original Q3 guidance.

So, turning to the balance sheet, cash and investments increased to $1.6 billion, driven by a record $190 million cash flow from operations and DSOs that were in the low 50's. Year-to-date our cash flow from ops as well as free cash flow are both up about 50% from the same period last year. The primary use of cash in Q3 was once again for share repurchase where we bought back 1.9 million shares at an average price of $59 per share. Year-to-date we've repurchased about 6.5 million shares. In Q4 you should expect us to continue our buyback at at least a similar pace to Q3. Deferred revenue ended Q3 at $680 million, while this is up 23% from the last year, down about 1% sequentially. The result is both a decline in the trade-up orders that I talked about earlier and in a fewer number of large term based licenses like those seen in Q2. We do expect to see sequential growth in deferred revenue in the fourth quarter.

So finally I'd like to discuss our current expectations for Q4, as well as provide a preliminary outlook on the full year 2011. We're going into Q4 with solid momentum in most areas of the business. We do remain a little cautious on the EMEA market given the customer behavior from last quarter but in general we're really encouraged by our leadership position across Desktop Virtualization. The continued gains in networking and SaS and in a record opportunity pipeline.

So for the fourth quarter 2010, we currently expect total revenue to be in a range of $500 to $510 million. Adjusted tax rate of 23% to 24%, and an adjusted EPS of $0.59 to $0.60 per share.

So, when you include the outperformance in Q3, and the increase in our Q4 outlook, the full-year 2010 now has total revenue in a range of $1.845 billion to $1.855 billion and adjusted EPS of $2.02 to $2.03 per share. With respect to 2011, planning cycle still in process which is normal for this time of year. However, our initial guidance at this point is for total revenue to be in a range of $2.04 billion to $2.07 billion, and a continued commitment to operating leverage that will drive a 50 basis-point expansion and adjusted operating margins. We'll update these expectations on our fourth quarter earnings call as we have more visibility into next year and customer 2011 budgets. Ultimately, our confidence in our market position and our ability to drive long-term growth while improving margins remains unchanged. So now I'd like to turn it over to Mark, who'll give you more details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks, David. I'm really pleased with our Q3 performance and proud of the strategic and financial results we've delivered this year. We have great confidence in our execution and growth in three focal markets. For virtual meetings, virtual desktops and virtual data centers. In Q3 we continued the process of strengthening our GoTo market muscle. Elevating our brand visibility, expanding our global SaaS footprint, driving more penetration in Cloud infrastructure, and delivering fabulous product innovation.

As we enter Q4, we're wrapping up a record year in Citrix's history. I love our trajectory, investing in core innovation, market demand and customer touch, while driving profitable growth. I also like our timing. Broad market forces are reshaping the face of computing. The definitions of work and computing are being reinvented. Work is going virtual. Computing is going virtual. And Citrix is perfectly positioned to capitalize on these historic transformations in both business and computing, by delivering better ways for people in IT to work.

All this was crystal clear at Synergy Berlin, our first EMEA-wide customer and partner conference. Synergy sold out weeks ahead of time with more than 60% attending their very first Citrix event. Customer enthusiasm was effusive, with lots of "ah-ha" moments, as they they saw the first time what it really means to go virtual the Citrix way, from virtual meetings to desktops and into external clouds. I am convinced many came to simply attend the technology conference, but they left inspired to go back and transform the way they do business. EMEA customers and partners got really energized. Synergy was also a strategic event where we unveiled important new products and partnerships across our virtual computing platform.

Let's start with virtual meetings. Virtual work styles begin with web collaboration. Making it easy for people to connect and work together from anywhere. It makes people more productive and far more cost effective to support. We have one of the world's most scalable platforms for doing this, hosting more than 100 million on-line support and collaboration sessions on our GoTo platform in the last year alone.

At Synergy, we raised the bar on virtual meetings once again with a breakthrough new technology called HD Faces. GoToMeeting with HD Faces, available next quarter will make web conferencing richer and finally allow video to be an integral part of real time web collaboration. When users fire up an on-line meeting they'll instantly see their colleagues in full HD quality. There is nothing to set up, no extra modules to purchase or configure, it's all software and it just works. We're using it internally at Citrix, the experience is stunning and completely immersive.

We also announced significant expansion of our on-line business in Europe launching GoToMeeting and GoToAssist in Germany, France, Austria and Switzerland. We're thrilled to be offering one-click meetings. The easiest way to start an online meeting in the industry. Total audio with seamless integration of PSTM and VOIP conferencing and integrated toll-free, enabling convenient toll-free access numbers from over 35 countries in these new markets. These announcements expand our addressable market geographically and to a wider range of customers. They continue to push the envelope in innovation while keeping the user experience simple, fast and secure.

We also made several exciting new announcements at Synergy in our data center and Cloud business. When it comes to the Cloud, customers are excited about the concept. They love the idea of more elastic computing giving them choice from a vast array of external services rather than having to build and run everything themselves. At the same time they're nervous about the Cloud wars they see, with every major vendor in the industry promoting their own proprietary Cloud stack. That's why we're taking a very different approach. The Citrix open Cloud platform makes it easy for customers to connect their existing data centers to any external Cloud service, regardless of the hypervisor, regardless of the network, regardless of the app platform on either side.

To make that vision a reality, we announced two new products at Synergy, Citrix Open Cloud Bridge which seamlessly connects existing data centers to any external Cloud with full security, performance and network transparency. And Citrix Open Cloud Access which connects employees to any external web or SaaS application with Enterprise, single sign-on security and full provisioning capabilities.

Both of these new products are software add-on modules to NetScaler making it easy for customers to buy and simple to implement. They also further accelerate our growing NetScaler momentum in the Enterprise and with Cloud service providers. We also announced the acquisition of VMLogix to further extend our open Cloud platform at the VM level, making it possible to move workloads across different Cloud environments for the first time ever, regardless of the underlying hypervisor or Cloud platform. We believe this any-to-any approach is a real differentiator and it's a winner, and it's all about Citrix. It means customers can leverage the promise of Cloud computing without having to bet on which providers, stacks and standards will win in the long run. In other words, they get choice and control.

Finally, I'd like to discuss our Desktop Virtualization business. We're coming off an extraordinary first half in XenDesktop with solid license growth from new customers and amazing results from existing customers who are trading-up. This promotional phase of trade-up, which ended in Q2, created a strong uptick in channel vibrancy. Same partner sales metrics have increased steadily driving far more strategic customer engagements. The second phase of trade-up expires at year-end when it's most valuable for two types of buyers, strategic thin app customers and the large pool of SA renewal customers. This year we're on track to trade up nearly 15% of our installed base. I think we can take that even further in 2011, by making trade-up part of the normal XenApp upgrade process.

I'm also pleased with new customer acquisition in Q3, which continued to ramp nicely driven by good fundamentals in customer demand generation, re-orders, overall channel activity, and technical services growth. As David mentioned, we closed an impressive number of 1,000 and 5,000 seat deals during the quarter and the leading indicators here continue to be very solid with record increases in pipeline formation.

We saw strong customer traction in Q3 across a wide variety of customer scenarios. Like the Fortune 500 food and beverage manufacturer who traded up 2,000 XenApp licenses to reduce costs, simplify management, enable iPad's and make it easier to open branch offices. Then they turned around and purchased an additional 6500 new XenDesktop licenses to extend Desktop Virtualization to 100% of their user community.

Or the large federal agency who traded up 1,000 XenApp licenses for 2,000 seats of XenDesktop to enhance security and simplify management, bringing their total XenDesktop license purchases since the beginning of this year to 13,000. Over the next few months they plan to nearly double this total again extending XenDesktop to more than 70% of their users.

And then there's the leading Korean services company, who deployed their first XenDesktop pilot of 500 seats last year to improve data security and mobile user access. Then in the first half they added another 2,000 seats and in Q3, 5,000 more.

These customers and many more like them, are experiencing the benefits of desktop virtualization firsthand and expanding their usage enterprise wide. We also saw tremendous momentum with our industry partners in the quarter, further accelerating our XenDesktop business on all fronts. Our partnership with Microsoft from desktop to datecenter, set new records in Q3 for joint pilots, for wins on deals, and pipeline creation. Wipro announced desktop as a service offer built on the joint Citrix Microsoft stack. We announced an exciting new partnership with Cisco to deliver a comprehensive joint solution combining XenDesktop with the Cisco UCS platform and giving customers a single support number to call. Both Dell and HP are ramping up to ship XenClient as a factory installed option on their Enterprise laptops. Lenovo announced their plan to offer XenClient on ThinkPad laptops and ThinkCenter desktops. McAfee announced their groundbreaking new MOVE solution for XenDesktop making it easy for customers to scale virtual desktop security to tens of thousands of users Enterprisewide. And we announced an incredible 15,000 products that are now verified to work with XenDesktop through our Citrix ready program.

So, we have momentum and a solid foundation for Q4 business and into the first half of 2011. Just one year ago we launched XenDesktop4 as the first comprehensive desktop virtualization solution, delivering unparalleled value to customers and putting us into market leadership position. XenDesktop is allowing us to drive top-down strategic engagements with Enterprise desktop customers, and up-sell our higher end XenApp customer base. Since then, we have shipped well over 4 million licenses working with customers of all shapes and sizes, where banking, education, government and healthcare are the fastest moving segments.

Two weeks ago in Berlin, we raised the bar again with the launch of XenDesktop5, an amazing new release that's getting rave reviews already from customers and partners. They're loving new XenDesktop features like 10 to XEN, making it easy to install XenDesktop in just 10 minutes and roll out new desktops in seconds. Supports for a full range of exciting new consumer devices covering PCs, MACs, ZeroClients, tablets and SmartPhones. A beautiful and new stunning new user experience that is also a lot easier to use. XenDesktop5 also takes self-service to an entirely new level giving users a single place with a single click and a single log-in to access any Enterprise, SaaS or Cloud app. Including apps that automatically synchronize as users move between virtual and physical desk ops. It is a first we call Follow Me Apps.

And finally, the new XenClient feature, giving mobile employees secure virtual desktops to go, even when they're not connected. In short, we enter Q4 with great momentum, market leading partnerships and a new release that completely changes the game again. But we're not slowing down. Our goal is to drive the primary market for Desktop Virtualization and to maximize our share. Heading into 2011, I'm more convinced than ever that the Desktop Virtualization market is, first it's multi-dimensional across virtual clients, desktops and apps. Secondly, that it's moving rapidly toward broad adoption. And third, that Citrix is the clear market leader and growing.

From here, our focus is to drive the market by allowing customers to optimize the desktop around security or mobility or agility or cost or any mix of these. As David mentioned earlier, we've continued to invest in CIO engagement. All the data says we're moving up the stack to more strategic IT conversations. About faster migration to Windows 7. Lower desktop refresh costs. Broader adoption of collaboration. Better data center flexibility and Cloud enabling data centers. But what is even more impactful is how these CIO conversations map directly to their critical business issues, like greater mobility for their work force, getting to tighter security controls, making regulatory compliance easier, faster merger integrations, increased employee productivity and creating a greener enterprise footprint. And how all of this lets them say, yes. Yes, to virtual working, yes to BYOC, yes to FAS apps, yes to Cloud infrastructure, and yes to iPads and tablets from everywhere.

Our virtual computing platform delivers a lighter, simpler, more flexible IT, where people, not data centers, are at the center of computing. Business is done by people and the best business happens when people are free to do whatever, whenever, wherever. With full access to IT services, at any time, from any device, in collaboration with anyone. We're at the intersection of some very powerful market forces. The transformation of IT to an on-demand service, the consumerization of the enterprise and the promise of Cloud services. This means Citrix gets more relevant everyday, more capable, and more strategic in the marketplace. It's exciting. And now I'd like to open it up for questions.

(Operator Instructions)

We'll pause for a moment to compile the Q&A roster. And our first question will come from Bhavan Suri from William Blair & Company.

Afternoon, guys. Just some questions on the, obviously XenDesktop piece here, from your comments, Mark, about 4 million licenses. That sort of implies there were 500,000 licenses sold this quarter which, and again you haven't spit out the business, but if you can provide some color of what ASPs were like in the quarter if those numbers are correct?

Hello Bhavan, this is David. Why don't I take that question?

Sure.

We shipped between 500,000 and 600,000 licenses last quarter. Definitely a different mix of the type of licenses than we saw last quarter. In this case fully two-thirds of them were what we call new licenses, kind of that non-trade-up business. And because of that it carries a much higher ASP. So, for the first time overall ASPs in the desktop business was up, was well over $100.

Great. And then you provided some color on some of the SIs, but what are you seeing as the drivers for some of the desktop as a service offerings, and how do you see that playing out sort of longer term?

Yes, there's a tremendous amount of interest in building these DAAS kinds of Clouds, and SIs are not only -- some of them are actually building themselves like the partnership we announced with Wipro, but others are actually helping Enterprise customers build out their own DAAS Clouds. And I think the drivers, they are first within the Enterprise, no different from what we've been seeing, security, control, speed, flexibility.

When it comes to the external Cloud, I think the jury is still out there. I mean, these are being built, and many of the partners that we're working with, are saying they see demand from medium-sized businesses and they want to build out of an infrastructure to service them. I think one of the issues is right now for a VDI type of solution out of a DAAS Cloud, the customer actually has to bring their own licenses, because Microsoft doesn't yet have a SPLA license for the Windows 7 desktop. But obviously they can still use the other license -- the other types of virtual desktop models that XenDesktop offers, whether it is a server hosted desktop or streamed VHD or even a local VM desktop based on XenClient. So, it is sort of this broad spectrum that they're working on but it is still pretty early on that, Bhavan.

Okay. David, one more quick one if I could squeeze in, what was the deferred impact from XenDesktop?

Well, deferred, as I mentioned, was down on a -- a kind of a gross -- net basis.

That's right.

And we certainly deferred a fair chunk of XenDesktop as well. And what drove the decline, I commented on that in my script, just on some of the timing things around the trade-up. And also, if you look at from a recognized standpoint, we had a big bump in tech services. So, there was a number of things that were hung up on the balance sheet on that line item waiting for completion of project, et cetera, which have worked their way through. So, I haven't broken out how much of the deferred revenue balance is related to XenDesktop, but you know bookings were higher than like customer bookings were higher than recognized. It's just that, you know, the defined version of bookings is recognize plus change and deferred.

Right. Okay. Thanks.

Thank you .

Our next question will come from Sarah Friar from Goldman Sachs.

Great. Thanks very much. I'm going to continue the XenDesktop question. David, you're teasing us a little, giving us a lot of stats around XenDesktop but last quarter you gave us very explicitly $60 million in XenDesktop revenue, $90 million in bookings. Can you just clarify for us what those two numbers are for the third quarter?

Yes, let me answer the last question, first, and that is the definition of bookings. And it is a Reg G issue for us, so we have to define it as recognized revenue plus the change in deferred. So, we want to be consistent about that. That is how we defined it last quarter. We have to assume that the change in deferred for XenDesktop was zero in the third quarter. So, on a recognized basis, revenue was $60 million in Q3. That's how much we recognized from our XenDesktop business. And, I mentioned earlier that, new license revenue, kind of the non-trade-up business, was up 17% sequentially, so that one is continuing to do really well. But then trade-up component was down, it was down two-thirds sequentially, which is the timing item I talked about. And then the SA piece, which is really just the recognition of prior trade-ups, that was also up about, I don't know, 50% sequentially. So, net-net, modest growth on a sequential basis and obviously very strong growth year-over-year.

Got it. Okay. That makes sense. And then on the 4 million licenses shipped, do you have any sense how many have actually gone live? And what can you guys continue to do to speed up the deployments, because I'm sure that is also a gaining factor to keep this really fast growth momentum going?

Sarah, so, no we don't have a precise count on which are live, but there are proxies for all of this. And the two proxies that we like to use, are the tech services, especially in our consulting services, because a lot of those services go toward XenDesktop deployments. Okay?

Got it.

And so if you look at the metrics there, the consulting hours are up 50% sequentially. That's sort of at all-time levels. And that's after adding a grow in the head count in our professional services organization, about 12% sequentially in the quarter. The other proxy for it is a partner activity, and we're seeing our partners busier than ever with implementations and they love it, and it's where they make their money. And then the third piece is reorders and those reorder rates have continued to be in the three to five-month range and I gave a couple of examples, customer examples where we're talking about trade-up, plus an order for new, plus a reorder and then another reorder. And that momentum continues to roll. So we're very happy with the deployments that we're seeing, and the -- there's great flow.

Great. Okay. Thanks very much. Good quarter.

Thanks, Sarah.

Thank you.

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

Hello, guys. Can you guys comment on the pipeline for large deals? Obviously the trade-up accelerated some purchases in Q2. As you look out to the balance of the year and into 2011, do you think that the trade-up essentially accelerated those large purchases and now we're in the process of having to rebuild that large deal pipeline, can you just make some comments around that, please?

Sure, Israel, this is David. We closed 19 deals over a million dollars in the third quarter which is basically what we did in the second quarter. And excluding Q4 of last year is the highest we've ever had as a Company. I will say that looking at the pipeline going into Q4, we have by far and away a record number of million-dollar-plus opportunities out there. And, a lot of this is just the build that Mark mentioned in his comments, with the real sharp growth in pipeline opportunity on a sequential basis and we're really seeing that across all products and across all regions.

And maybe just one follow-up, any comments around EMEA still being rather sloppy? You saw some flip purchases. Maybe just comment on what you're seeing for Q4, are some of those deals returning? Are they just kind of sitting out there in the ether? What are you seeing out in Europe this quarter?

Yes, Israel, after having spent a couple of weeks in EMEA, in and around Synergy, talking to go a lot of EMEA customers, I think the net-net is for Q3 with the overall economic environment, it's never a fabulous quarter in EMEA, to begin with. I think a little loss of business confidence and a little bit of a pullback. But at the conference we had a number of meetings with customers obviously while we were there. Our customer counsel, which is about 30 customers, about a third, are from EMEA, and they're all indicating not only good Q4 business, but great business into 2011. And in the forecast and looking at the pipeline, the things that did not close in EMEA, in the third quarter, are at the top of the stack for Q4. So, we're still a little cautious, as David mentioned, because it's just they're a little behind the US overall. They continue to be lagging. And, they -- so we just want to be a little cautious, that's all.

Great. Thank you.

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

Hello, guys. Just two quick questions, first just a point of clarification, David, was desktop $60 million in total revenue, so the same as the last quarter's $6o million?

No, mix was a little bit different. From a license standpoint it was north of $32 million with the balance being SA.

Okay. But total -- but total revenue quarter to quarter they were both $60 million?

Yes, it was $58 million last quarter and $60 million in Q3.

Got it. Okay. And then, Mark, when you just look out going forward here, when you talk to your customers about 2011, obviously you saw a very strong first half of 2010, what are they talking about as far as just deployments going, and relative to the seats that they've bought so far? Thanks.

Yes, Phil, the truth is that I don't think they're that granular in the conversations. I think the intent to buy and deploy continues to grow year-over-year, just in the -- when you look at the metrics, and in the conversation in terms of the intensity and the enthusiasm around this full range of Virtualization at the desktop, whether that's about XenClient and sort of in the client Virtualization area, or about the various modes for virtualizing the desktop OS, or the modes we have for delivering virtual apps. So, it's -- I just think we're going to see continued momentum there, and we're planning on, by the way, continuing to drive our services capacity and do a lot of work with our partners, to drive their services capacity, because that can be a bottleneck, and so, we're growing it. I talked a little bit about the head count growth there.

We also announced a program, we call it (inaudible) and basically it is a pretty sophisticated program for really moving customers into the how do I do this step by step by step kind of process, and we're bringing all of our partners in, training all of them, from the local type (inaudible) all the way through the largest SIs that we work with. They were all at our conference in Berlin, and pretty enthusiastic about that. So we're just going to keep investing in that deployment and in terms of services, know how, methodologies, and trying at the same time make it simpler and simpler over time. Which then Desktop5 really is a big leap in that direction, to make it simpler to implement.

One last quick follow-up for David. So is 500,000 seat shipments this quarter, and correct me if I'm wrong, was it 200,000 or 250,000 last quarter?

It was little under 200,000 last quarter.

Got it. All right. Thank you.

Thanks.

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

Great. I'm going to continue to dig down in the XenDesktop business. Could you tell us what trade-up revenue and trade-up bookings were in the quarter?

Steve, you know, similar to the -- to the answer that I gave to Sarah on bookings, we don't report billings, which I think is what you're looking for, but based on our Reg G limitation we've always defined bookings a certain way. So, I'm just going to point you back to the recognized revenue, and because deferreds were flat, assume there was no change there. And on a revenue basis, the recognized license revenue attached with trade-up, was little over $6 million in Q3.

And what gives you confidence -- you talked about that rebounding in the fourth quarter, what gives you confidence that you could see a rebound in that activity?

Yes, Steve, it is really a function of two things. One of them is opportunity pipeline, and the huge rate of growth that we saw during Q3 -- Q4 pipeline, and also 2011 pipeline. And, what we saw similar going into the second quarter, and we certainly saw the results of that. The other was once we had a chance to really go through and look at all of the dynamics that occurred in -- throughout Q3 and how much business was really a function of, call it trade-in -- or pull-in, to Q2, based on the success of the trade-up program, we think it normalized itself. So year-to-date we've traded-up about 14%, 15% of what we consider to be the eligible base. And Q4 is the largest opportunity pool of the year when it comes to subscription advantage. Marry that with the pipeline and all of the dynamics are in place, and we certainly expect to see a rebound in Q4.

Perfect. Thank you.

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

Michael?

Mr. Turit, your line is open.

Okay. Operator, next question.

Our next question will come from John DiFucci from J.P. Morgan.

Hello, guys, this is Giuseppe on for John. Just a quick question around sales and marketing expense in the quarter. Seems to be down sequentially and also down a bit as a percentage of revenue, just curious if that was for any reason and how we should think about that going forward? Thanks.

Sure Giuseppe, no reason other than it was up big in Q2 based on the success of the trade-up. You know, we just had a really high level of bookings and attainment in Q2, lower in Q3, and as far as going into the Q4, that is the time where you usually see a pretty good pop in sales and marketing expenses on a dollar basis, and that's just simply a function of people being ahead of plan and lots of variable comp and so that is what you should expect this quarter.

Thanks, guys. Our next question will come from Kash Rangan from Bank of America Merrill Lynch.

Hello, thank you very much. Just looking at the trade-up metrics, arguably there was some pull-in into Q2, just wondering what gives you the confidence looking into next year, is pricing really an important lever for this market, how sensitive are customers to pricing? And have we gotten over, as an industry, the hurdle of the high CapEx that comes with storage and networking costs that go with Desktop Virtualization if we were to get more confidence in this? A question -- and also secondly, just curious, how should we look at license revenues when I go back and compare it to the prior peak in license revenues? We look at 2008 levels, we still are not back at those 2008 levels. Lot of the software coming out of the recession have come back with license revenues that are at or above their prior peaks. I'm curious how we should think about license revenues in this environment? Thanks.

Hello Kash. I'll take the first couple of questions. First on price. I think our read on this is that pricing is not the magic in the trade-up program at all. And I know that the metrics that we've shown over Q2 to Q3 might not suggest that, but I'm talking about in market, in conversations with customers, looking at individual transactions. And also, what gives us confidence that this will rebound in Q4. So not a pricing issue. It's really a value issue. And we think that the value in the trade-up program in terms of the costs of the trade-up, as well as the ongoing subscription, actually delivers great value when you look at the full stack of capabilities that a XenDesktop, especially the Platinum Edition, which is as David mentioned, about two-thirds of the business. Is delivering everything from the high performance delivery networking components, access control, et cetera, all the way back to the core infrastructure for provisioning and delivering of virtual desktop or a virtual app.

Secondly, in terms of your question around the cost of storage and network, I think you're really referring to the VDI model. That's where the cost of storage and networking actually comes seriously into play in the cost stack. There's a lot of innovation going on to bring those costs down. I don't -- I don't think that they're -- we are at any inflection point yet in terms of driving those costs down. But we're still seeing customers go forward with the VDI model and the way -- and the customers that are going forward with it, sort of in spite of those costs, is because they're going forward where security, agility and speed actually trump the costs. And so when you think about that, they're getting the ROI on security and agility and speed, not on just sort of a head to head comparison between like a physical PC and a VDI style virtual desktop. We'll keep innovating and keep driving that down. We made some announcements in Berlin, in the XenServer area which is a component of every XenDesktop sale even though it doesn't get implemented in every case. And we introduced an intelli-cash technology that seriously reduces the amount of (SAN) needed and reduces the amount of IOPS needed and so that impacts, obviously both storage and networking in the data center in a huge way. Stay tuned for that. That is more of a 2011 story when it comes to impacting the product and the momentum in the marketplace. David you want to take the license?

Yes, Kash, let me take a shot at that last question you had. You mentioned that some vendors were back up to the '08 peaks in terms of license revenue, I can't speak much to their business. I'm going off of memory here, but I think we posted about $620 million in license revenue in 2008 which is certainly a peak for the business. And if you look at our performance in 2010 we were on a -- just taking them on a year-over-year growth rates, we've posted 10% Q1, 15% Q2, 18% Q3, and guidance pointing you to, again, into the low double-digits for Q4. So on a full-year basis, just running a guidance number will take you between $610 million and $620 million. So I would say we're certainly back to those peaks having worked through the unique dynamics around the last 24 months from an economic standpoint and feel very good about our position as we look into the next couple of years.

Great. Thank you very much.

Great.

Our next question will come from Heather Bellini from the ISI Group.

Hello, thank you very much, guys. I had two questions. One, just because I'm sure as many people on the call have their inboxes flooded with questions, I'm just wondering, you defined XenDesktop bookings on last quarter's call using the same Reg G rules, and I guess I'm just wondering if you define it the same way this quarter, what is the number? Because even if the change in deferred is negative, meaning you recognize more than what you brought in, there should be some sense to compare it to last quarter. So that would be the first question.

And then the second question, given I think we all understand that the promotion is going on till the end of Q4, and that was a big driver in 2Q, meaning that there was a lot of pent-up demand in Q4. I guess, I'm wondering, if you could give us an idea of whether or not it is fair to think we could see the same type of Q4 sequential growth in bookings, the same way you defined them in the second quarter, that you saw from the -- from the March to the June quarter? So, sorry for the mouthful, but those are the two questions. Thank you.

Okay, Heather, on the first part of your question, when we talked about the business last quarter, we said that the recognized revenue was X plus about $30 million in the growth of deferred revenue was related to the trade-up program.

Right.

That's consistent. When we talk about recognized plus change in deferred, that's the way we've always defined bookings. And because there was no change in deferred, there is not much I can say about that. So I got to just say if you want to use that type of math, it would have been $90 million last quarter, $60 million in Q3.

Okay. Was the change in deferreds negative this quarter?

Yes, but it was down a little bit but not related to XenDesktop.

Okay. And then on the second part if you don't mind, just about the growth expectations in Q4.

Yes, you bet. If you look at our guidance we talk about total desktop product license, and that's XenApp, XenDesktop, et cetera. I think the expectation for Q4 ought to be a range that gets you into the low double-digits, year-over-year off a tougher comp and that would equate to 35% to 40% sequential growth off of Q3. As far as deferred revenue growth, it is a tough one to forecast just given the number of parts, but certainly expected to be -- to be up pretty significantly from Q3 with the vast majority of the driver being the trade-up program around XenDesktop, as well as the potential for some very large multi-year deals that I see in the pipeline.

Okay. So does that mean it is possible that you could see then the same type of growth from Q1 to Q2 deferred? I mean in that ballpark it was a big number.

Yes, I think it is possible.

Okay.

It is certainly possible that Q4 is larger than Q2, even including the dynamic that we saw around the timing.

Great. Thank you very much.

Thank you.

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

Thank you very much. Could you guys tell us what the reclassification of revenue was this quarter and what you moved down into other?

Rob, there wasn't really any reclassification that went down to other, there is a small line item of other that was about $2.4 million in Q3. That's just the miscellaneous little products that don't fit anywhere else. That was actually down from $3.2 million, I believe, in Q2. No reclass.

I must have pulled the wrong sheet off your website. Second, if you look at Citrix online, I think it decelerated a little bit. I'm just curious, what is going on there?

Yes, it grew 16%, decelerated a little bit. I would say there is probably two things. One of them, is we're a little bit behind where we would like to be in building out the international footprint. We have been focused on a number of newer initiatives this year around video, training, management, audio, et cetera. And just haven't put as much investment towards that. Mark mentioned we just launched a product for France, product in Germany, starting to scale those investments right now, and that's what we think it really helps broaden the market opportunity and keeps that business growing.

So, do you anticipate that that reaccelerates, then, in Q4 as far as 2011?

I would say it is steady right now into Q4 and then the opportunity for it to reaccelerate into 2011. The readable nature of SAAS makes the media investment pay back over a period of time. So, it is a timing difference.

Okay. And then lastly, I think DSOs improved quarter-over-quarter back to historical levels. Do you see it as sustainable here, in that 50-day range, other than Q4 where it ticks up?

Yes, I think the low 50s is where we have been most of the time and the only swing factor is generally just change in deferreds. Right? So, when we talked about this in Q2, we had the huge pop in deferreds so DSOs went up. I'd expect DSOs to go up again in Q4, again, just a function of accounts receivable and then come back in Q1. Has no impact on the underlying quality of receivables. Those have always been terrific.

Okay. And you might want to check the spread sheet you posted on the website, because I'm now getting emailed that other people are seeing a bit of reclass as well. So--

I'll check that and make sure that what we've got externally is clear. There is certainly nothing material that has been moved between categories.

Thanks, guys.

Thanks, Rob.

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

Hello, guys, how are you?

Good, thanks.

Two questions for you, Mark, you guys highlighted a bunch of deals, 1,000 seats and a few 5,000 seats-plus. Can you give us a sense for how many of those are new customers versus trade-up? And then in trying to size this market, where do you think penetration can go within the Enterprise versus what was your traditional XenApp penetration?

So, let me start with the second one first, Rob, so I would say that, we've traditionally looked at 15% when you look at XenApp virtual apps, concurrency, and the kinds of projects that customers classically did with XenApp. And still are doing, by the way, with XenApp. So, sort of an average -- a typical customer would be up 15%. I mean, you're going to have some outliers that are 75%, 80%. You are going to have some that are very, very small percentage. But about 15%. If you look at the pattern of -- now that we have pretty much four quarters of data, we see that creeping up and ranging out with XenDesktop to being much more in the 35% to 50% range. Again, with still some outliers. I mentioned a few on the prepared comments where they're close to or at 100%. But I don't think that the opportunity is there broadly any time soon to get to 100% penetration across a broad range of customers. So think -- sort of moving from 15% to 35% to 50% is kind of what is on our mind right now. And some of that will really get down to how we evolve the technology and how the market continues to evolve and mature, as sort of the early adopter community really drives this sort of the early majority community if you subscribe to the Jeffrey Moore's Crossing the Chasm model. When it comes -- let me let David handle the second question.

Todd, as far as the breakdown of the 85 customers, 1000 seats or more, don't have that in terms of what was trade-up and non-trade-up handy. But what I will say is that when we talked about the top million-dollar-plus deals, there were 19 of them in the quarter, 10 of those were XenDesktop or included XenDesktop, so you can draw a pretty good correlation here. And none of those were trade-up exclusive deals. So, I would call those new license transactions.

That's actually a trend. I think two out of the three examples I gave really had a mix and it is what we're looking for. I mean the whole idea of the trade-up program was, a, to get the flywheel spinning with partners, but also with customers, so that they would also add new XenDesktop licenses to their deals. So, it is harder and harder to parse that apart in a pure -- with pure metrics.

And as you guys look out 12 to 18 months would you expect the ASP to hold over $100?

It's going to be a function of trade-up. So, I mean the trade-up piece in Q4, as we talked about this afternoon, I think is going to be strong, and that component of the business will be less than $100. And then the new licenses' components will be more than $100. So, over time I think the general trend is up into the right. And that's simply because the new license component will gradually become a greater and greater percent of the total.

Okay. Thanks, guys.

Thanks, Todd.

Our next question will come from Walter Pritchard from Citi.

Two questions, one on the A&G end, I guess no one's asked about that, but that was surprisingly strong in the quarter. I wonder if you can help set some expectations as we look at that in Q4 or into next year, should we expect that business to continue to grow well ahead of the overall Company's growth rate?

Yes. A&G, especially NetScaler just had a great quarter in Q3. We talked a little bit about it in some of the prepared remarks about the segments that were driving growth right now. The one thing that ends up being a little bit unique to Q3 is generally internetcentric customers. Those are the big web properties that are building out capacity in anticipation of holiday shopping season, et cetera. While those have been a little bit absent in the last couple of years, we've really seen them come back and buying a lot of the newer high end NetScaler appliances to help build out their data centers. So that was good. We had about 390 new customers in the third quarter, as well, a lot of those being early design wins across Cloud service providers and then the cross-sell activity that I talked about in the Enterprise. But, as far as go-forward, we had a good Q4 last year. If you remember, I think we did just over $46 million in recognized license revenue. So, I think this quarter will be -- expectation for Q4 ought be up about 20%, off of a big Q4 last year. Certainly not the 50% we saw in Q3, but, still growing faster than the Company as a whole. So, real happy with what we're seeing in that business right now.

Got you, I guess we all hear your excitement around Desktop Virtualization, but if I look at license revenue in that business over the first nine months of the year, I think it has grown about 9% year-over-year, off of something over nine months of last year, that was down about 23%. I'm wondering -- those numbers don't speak to a business that is accelerating. I'm wondering as we get into Q4 and into next year as trade-up starts to fade maybe a bit, should we expect that that license growth rate actually accelerates or is there some reason why we'll continue to see it elsewhere but not in license revenue and in desktop solutions?

Desktop solutions, as you know, is made up of the two big pieces, the historical XenApp revenue as well as the new broader XenDesktop revenue and the phenomenon that's been going on for a couple of years now is the decline in XenApp with the rapid growth in XenDesktop. Some of that is intentional upgrade growth activity which we're trying to drive within our customer base, and really the reason why we look at it as one combined business. So, you're right. Year-to-date we've had 9% license revenue growth over a comparable period. And the outlook for Q4 is a higher number than that. So we ought to be in the low double-digits into Q4, and then as we move further into the year -- actually at the end of next quarter, we'll give you more granular expectation for 2011.

Okay. Great. Thanks a lot.

You bet .

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

Hello, thanks for taking my question. Maybe as a follow-up to Walter's question, David, is there a way that you could talk to us maybe around just overall expectations for bookings as we think about the XenDesktop numbers going into next year? I know you said you would give us more granularity later. Thanks.

Not for 2011 at this point. You know, we -- our general patterns like we've done the past few years, is to give high level directional guidance, the way we're thinking about the plan, the way we're shaping our business plan. So right now it's the $2.04 billion to 2.07 billion in total revenue and the the common adjusted operating margin is really just a directional indicator to demonstrate -- we take the growth and leverage seriously and we plan to deliver that again next year. It's a very similar profile to what we had going into this year.

Thanks.

Yes. More commentary on Desktop in the fourth quarter.

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

Hi, guys, thanks for sneaking me in here. I had two quick questions. But the first is, is 100% of the business that you do in XenDesktop showing up in billings, or is there any kind of a off balance sheet component that may not actually be captured in billings?

Yes, we never talk about off balance sheet backlog, per se. The one thing that does occur is, when, for example, an SI partner might win a very large contract from a government agency, or whatnot, we've had that in the past, where they may be awarded something for, lets make up the number, 50,000 seats. And then we'll recognize that as they place orders against the deployment schedule. So we might get 5,000 or 10,000 of those in the current period, and then the rest over a multi-year time frame. So that's the only way that we ever really talk about what I would consider off balance sheet backlog, but not a -- nothing that we run intentionally in the business.

Perfect. My next question's on cash flow. Looks like this year operating cash flow will relatively materially outpace earnings. Should we expect to see the same kind of relationship between cash flow and earnings and operating income into next year?

Not ready to give next year's guidance yet. But you're right, operating cash flow has been -- and free cash flow, has been great this year. We run a very efficient financial model, as you know, we're driving cash flow ops, free cash flow between 45% and 57% growth, year-to-date metrics. And, substantially fashioned the growth in any other line items. It is really pretty simple. Net income and change in deferreds plus the working capital items and we try to manage those as efficiently as possible. So, I don't want to give guidance around 2011, yet, but rest assured we're certainly focused on driving that kind of performance.

Terrific. Thank you.

Our next question will come from Kirk Materne from Evercore Partners.

Thanks very much. David or Mark, can you talk a little bit about the expectations that you have for the trade-up program? Is this going to be the final end of it, in December? And I guess if you don't want to answer that, can you just talk around the strategy of if you're going to keep it in place? Is it just, how many of your existing customers get -- get on boarded on to XenApp or XenDesktop at the end of this calendar year? I guess just talk around the thought process around either ending it or maybe keeping it going with a lower discount rate similar to what you did this last six months?

Thanks, Kirk. So the way to think about this, is in three pieces, sort of a phase I, phase II and phase three. Phase I was introduction of the trade-up promotion, which had some incentives and encouragement and was all about getting the channel partner and customer and existing customer flywheel spinning. That was the focus of Q4 last year, through the first half of this year.

And then it expired and phase II is really about the trade-up program. Which the terms and conditions changed, yes, the pricing is a little bit different, and the sales motion a little bit different, and as we've talked about really tying it more to the SA renewal sort of conversation that we're having with customers, as well as continuing to address the strategic XenApp customer base.

Sort of Phase III will begin on January 1, and we're not -- so the current program will expire at the end of this year, and we have not made any final decisions regarding what that looks like for 2011. But, as I mentioned in my prepared comments, stage three is the way to think about it, is a trade-up like SKU, that is simply -- doesn't have a time app, that doesn't have an expiration date, that is really is the sort of a normal in the flow XenApp upgrade SKU for customers that love virtual apps and get the -- get the vision and get it around virtual desktops and want to step into that, in a much more natural basis, maybe more tied to their normal SA renewal cycle. And so that's what to expect. But the current program will expire at the end of the year.

And, David, just maybe a follow-up to that, I know you don't want to get into 2011 very much, but as were we're thinking about, sequentially from 4Q to 1Q, should we think about that given the trade-up dynamics similar from 2Q to 3Q this year just in terms of how we build out bookings and revenues associated with XenDesktop.

I would look at it as Q4 to Q1 in a normal year and the seasonal decline that we see. That is probably the best starting point.

Great. Thanks very much.

Our next question will come from Brent Thill from UBS.

Brent?

Sorry, Mark, I don't know how to work my meet button. How would you characterize the tailwind your seeing from the Windows 7 corporate upgrade, if any? And for David, if you could talk about composition of deferred, what percents maintenance versus license? And If you could also just speak quickly to the recent 25% price rise, how the channel is taking that price hike?

Brett, I'll take the first. So the tailwinds from Windows 7 continues to build mostly because Enterprises are as every quarter goes by you get closer to their planned migration process. And that allows us to be in the conversation and even if they are not doing any virtual desktops and they wanted to do physical desktops and devices, but with virtual apps, we are in the conversation, that helps. And then obviously, in that discussion we like to talk about how to optimize different types of user communities within their organization to where they can actually do a more efficient Windows 7 migration and lower their cost of desktop refresh by reusing some of the hardware that they have and moving at the desktop and moving more of the pieces to the data center. So, I just think that with every quarter that goes by, the WIN-XP platform ages further the hardware ages and that creates just more urgency with Enterprise customers and helps the conversations we're having with them.

Just to clarify, do you think we've seen -- we haven't even hit the sweet spot yet for the WIN-7 corporate upgrade.

I think it's nicely in play. When you look at -- when I look at conversations we have with customers, it is in play. I think it's going to -- it's going to roll for the next couple of years, and I think you see that in some of the OEM numbers that have been pretty strong on their Enterprise business. And certainly as we have conversations with HP, Dell, Lenovo, Toshiba, et cetera, they're interested in XenClient as part of the future of desktop and managing desktops. That's another leading indicator of where things are going. David, you want to take the other question?

Sure. Brian, I think the question was about the composition of the total deferred revenue balance. You know, right now, I would say renewals, subscription advantage, is about, lets see, it's about 40% of the base. Maintenance and support making up about another 20%, 25%. And then the balance being online. We really don't have a lot of product license essentially that gets hung up in deferred. Whenever we've got really a large contracts, multi-year contracts, the way the (inaudible) works, is usually it comes back through the P&L in the form of a license update, and so we'll put that up as a renewal. So there is some license revenue in there. It's just not a -- it is just not a very large piece.

And I'd also like to come back to -- I'll take this opportunity to answer Rob's question about the spreadsheet that was on the website. Because I did get a flag, since I made that comment. And there is an error on the title of the spreadsheet. We will get that corrected. So, there was a reclassification, but it was just the education and consulting pieces that were put into a category called, Other Enterprise Services. It shouldn't say Other Enterprise Products. So, there was no product that was being reclassed, it was just some of the tech services pieces. So, I think my statement is still correct. It's just that we'll get that spreadsheet corrected.

Operator, neck question.

Our next question will come from Tim Klasell from Stifel Nicolaus.

Good afternoon, everybody. Just, one quick question here. You mentioned that the new customer bookings were up 17%, sequentially. I wanted to get sort of a feel for was there any, maybe, change in focus by your channel, i.e. , they were focussed on the trade-up program in Q2 and then in Q3 went back to focused on maybe some of the new opportunities that had been maybe lagging a bit? Just so we can get -- what we should be expecting going forward smoothed

Yes, it's a good question. I think that it's fair probably to assume that some of the channel capacity got consumed by trade-up in Q2 and taken away from new license. But it's not a metric that we measure or even have a way to measure in a way that measures capacity and so forth. And so, I think for the most part we'll see this normalizing and you really have to look at the dynamics here across the entire year, taking Q4 into consideration and around our guidance. And then as I mentioned earlier, with trade-up SKU's will become much more of a standard kind of SKU in 2011, and then we'll normalize this, and then our partners will spend the time with customers that they have kind of gotten it and they can spend the time with customers that really can benefit from a full Desktop Virtualization stack and if trade-up is the right thing to take to them, they'll do that. That SKU. And if that's -- if they're a new customer, they'll take new XenDesktop license to them. Or if they're a strategic customer, they will be taking a mix of them to them. That is the way to think about it in 2011 after it normalizes here out for the year 2010.

Great. Thank you very much.

Our next question will come from Ed Maguire from CLSA.

Good afternoon, everyone, looking past this initial phase of the trade-up program and focus on VDI, I just want to ask about your strategy of tying XenClient very closely to the V-Pro chips. How much of a -- of a limitation is there that there is a broader perception that this is purely going to be a V-Pro related solution for the type 1 hypervisor? And how does this figure into your broader growth plans looking into 2011? Thanks.

Ed, the way to think about this is that V-Pro is where we're starting because the focus of XenClients is around secure mobility. And that means having a CPU platform that has all the characteristics that allow us to deliver a highly secure and highly mobile kind of environment so that we can address all those use cases that we're hearing from government, that we're hearing from healthcare, that we're hearing from banking customers. And they require the horsepower and the capabilities that are in V-Pro and, by the way, these solutions that they're planning and they're building, they're buying new hardware for those things. And so, that's the beginning. That's where we're starting. And we've got a pretty good hardware compatibility list going now with HP, Dell, and Lenovo. There will be more coming and as that fills in, and as we roll forward and these platforms become more common in the Enterprise. And on the price lists of the OEMs that becomes less and less of an issue in terms of volumes, and I might add that the volumes of the laptops that we're talking about here, these major OEMs, are somewhere between 40% and 50% of all of the Enterprise laptops that they ship. So, the volumes there are actually huge. So, V-Pro is not, you know, a limiting factor for the XenClient solution whatsoever. And as we go forward we don't have to be limited to that, but certainly you won't get all of the security and mobility capabilities that V-Pro can deliver if we move it to some of the other CPU platforms.

Okay. Thank you.

Sure.

Our next question will come from Brad Whitt from Gleacher & Company.

It looks like kind of going forward that the subscription of manage renewals is going to be a driver of the trade-up. I'm just curious if you have any idea what percentage of your XenApp install base would be up for renewal in the fourth quarter?

Yes, you're right. I mean, the customers that are on subscription advantage right now for XenApp, that is the population that is eligible for trade-up right now. Q4 is our largest opportunity pool of any quarter of the year. That simply distracts to the fact that that's when historically most of the product license deals have gotten done. So, one of the things that is making us feel good about the Q4 trade-up number that we expect right now. As far as what we've seen year-to-date, I mentioned earlier that we've got about -- roughly 15% of the installed base that's been up for, call it SA renewal through the first nine months has upgraded to XenDesktop and we think that's probably a good number to use for Q4, at this point in time. And then, obviously I think that we can drive that deeper into the population in 2011.

Okay. Thank you .

And our last question will come from Curtis Shauger from Caris & Company.

Hello, guys. Thank you for taking our questions today.

Glad to do that, Curtis.

Mark, first for you, do you have a view on what a fully burdened virtual desktop is roughly today and a perspective on what it might be two or three years from now?

Okay. So, that's a very tricky question because a fully burdened virtual desktop for us in the XenDesktop environment, is going to -- what are you asking? Is it sort of a VDI, a server-hosted stream VHD, or a local VM desktop? Does it have virtual apps? Or not? Or is it used more traditional ESD kinds of technology to put the apps in it. I mean, there are a lot of variables there.

So, I think the way to think about it is more in those slices and then we can -- I don't have the -- the fully burdened cost models in my head, but here is what I would say. First of all, when customers are looking for a lower-cost Windows desktop to put in front of a user, hands down the lowest cost is to go with a server-hosted desktop that's built on XenDesktop with terminal services underneath it. I mean, it is by far the lowest end -- there are probably between 10 to 20 million of those, by the way, in service everyday. When -- so that's where you get sort of a cost optimization.

Where you want to get a security optimization, that's when you turn to the hosted VM, so that the VDI type model or the streamed VHD model, it's because, in both cases it's the entire desktop is centralized, it's stored and it is provision and lit up and it runs only on demand. And it runs either at the data center or at the end point. But its full total control, backup encryption, et cetera, that'll have higher costs, but also it has better security parameters.

And then the last model is really optimized around security, and that's the local VM running on like a XenClient hypervisor on the end point. That is where you're optimizing around mobility without trading off any issues. And so the costs there are probably a little higher on average than sort of a traditional physical laptop that you might buy. In term of the upfront costs. But the ongoing savings around support, around upgrades, patching, around security issues, that invariably come along, backup, et cetera, that's where all the cost savings come, in that kind of model.

I know that is a long answer and it is not specific to what you want -- with what you asked, but, we continue to see customers that come back and they say, you know, when I take all of this in, I'm trying to hit, and I think I can hit about 50% lower cost of ownership across a wide range of desktop and app delivery scenarios within my enterprise. Okay? And that's a TCO statement , not an OpEx exclusively statement or a CapEx statement exclusively. I hope that answers, Curtis

It is helpful. Maybe a more simplistic way of looking at it, is there anything to suggest as we get into higher volumes, that the cost structure across the board, for all models that you talked about, might be improving through the next two or three years?

Yes, I mean, it's a core goal of our ours to drive the marginal cost of a virtual desktop or a virtual app down. And that will come in some of the places that we talked about a little earlier around storage, the consumption of storage, the consumption of IOPS in the data center, in terms of what kind of end point platforms we can operate on when it comes to client Virtualization. It will come in the form of higher densities, when it comes to server, as well as higher densities in terms of transmission over the network to make sure that we can efficiently use networks. So, it will come in all of those places and it's a key element in continuing to drive primary demand here. But, again, it will come back to -- it will always circle back to sort of a fundamental thing. I like to think of it as a two-by-two matrix. There are costs that are OpEx, costs that are CapEx, and then there are tangible sort of benefits and the intangibles.

But what I observe in customers, the more the customers use this technology, they more -- the more they value the intangibles, and the more they see the OpEx savings, and, therefore, they're willing to make the kind of CapEx investments. So, that's the way I think about the dynamics of what I see every single day.

The most enlightened customers are the ones that start out saying, well, I got to save some money, I have this project, I implement XenDesktop, I get a feel for it. And then they have a fire or a flood or an emergency at a branch operation or a factory or a warehouse where they were actually delivering the applications of the desktop, and they figured out and figured out quickly, well I got a DR solution for free, that wasn't in the original tangible cost model and model on which they bought the product. And that happens when someone shows up with an iPad, someone shows up with a Mac, someone shows up with some other kind of consumer or personal device. It shows up when someone all of a sudden says, you know, I have to move this work from my own facility to the facilities of somewhere where I don't own the network, I don't own the devices. See, those are all of the intangibles that are learned with time and business change, and that's why we have this very deep belief, and very intense focus, on driving the primary marketplace. And knowing that as customers see these things and learn these things, it comes back in the form of reorders, it comes back in the form of license renewals, it comes back in the form of customers wanting to trade up from a virtual app only type solution to a much bigger strategic solution. So that's how to think about the dynamics there.

Excellent. And if I could, one quick question for Dave? Does the tax benefit you saw in Q3, is that irrespective of the federal R&D tax credit and with that I'll stop and leave an open mic for you?

Yes, it is, it is specifically related to a long-term R&D tax credit study we've been doing, for a year, year and a half now, to make sure that we've effectively utilized what we're eligible for. Our guidance that we put out right now, excuse me, 23% to 24% adjusted tax rate for Q4 is what everybody should use for modeling purposes. Mark?

Okay. Well, I'll just wrap up the call here and adjourn the meeting. And just by saying, thank you again for your confidence, your support, great questions and discussion this afternoon, and as you can tell, we're feeling bullish about virtual computing. You know, and how we defined it from end to end, from virtual meetings and virtual support, through what happens at the desktop, around client hardware, and desktop OS and apps, all the way into the Cloud, in the data center, and external Cloud providers. So we're in a great, great spot. We're executing well. We're keeping our eye on the ball and trying to deliver the kind of profitable growth that you've seen us deliver over three-quarters of this year, our guidance for Q4, and how we're looking at 2011. So, once again, thank you, we'll see you in three months.

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