思杰系統 (CTXS) 2012 Q3 法說會逐字稿

Good afternoon. My name is Patsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems third-quarter 2012 financial results conference call.

(Operator Instructions)

I would like to now turn the call over to Mr. Eduardo Fleites, Vice President of Investor Relations. You may begin your conference.

Thank you, Patsy. Good afternoon, everyone, and thank you for joining us for today's call where we'll be discussing Citrix' third quarter 2012 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer, and David Henshall, Executive Vice President of Operations and Chief Financial Officer. This call is being webcast with a slide presentation on 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 the 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 would like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor Provision 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, risk associated with our products, acquisitions, 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 the 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 EVP Operation and Chief Financial Officer. David?

Thanks, Eduardo, and welcome to everyone joining us today. As you can see from the release, in Q3, total revenue was $641 million, up 13% from last year. Adjusted EPS was $0.68. Deferred revenue was up 26% year-on-year, and cash flow from ops was $181 million, bringing the trailing 12-month total to over $760 million.

Before I move on, I would like to provide a little context around the business dynamics that we saw in the quarter. Overall, Q3 customer behavior was uneven across really the different markets and products, particularly evident in new license sales, due to hesitancy in initiating new capital projects. The continued macro head winds drove an unusually large number of opportunities that were either pushed into a future period or were split into multiple transactions with only a portion closing in Q3. This dynamic was most pronounced in North America during September. Despite these environmental issues, we haven't seen any material changes in the underlying market or competitive dynamics, so the majority of these opportunities remain in the active pipeline.

While we were disappointed with the level of new license bookings, we continue to engage with customers at a strategic level. In total, we closed 42 $1 million plus orders in the quarter, which was our second highest total ever. However, the average value of these transactions declined about 15% sequentially and year-over-year due to the factors that I mentioned earlier.

Geographically, the Americas region closed 25 of these strategic transactions, leading to total revenue growth that was up 7% from Q3 2011. In EMEA, while the results varied across the different areas, revenue was up 20% from last year, including 15 $1 million plus transactions. And finally, the Pacific and Japan regions combined for 17% growth and closed two of these large customer transactions.

Let's look at the Q3 results within our primary markets. First, our desktop solutions business grew 10% to over $349 million, while license revenue declined by 1% from last year. For some context on this business, there is a few metrics that really help demonstrate the market adoption we're seeing in this area. In Q3, there were over 20 different $1 million-plus new license orders for the desktop products representing customers in government, finance, services, healthcare, and technology verticals. In total, we transacted with over 3,000 different customers in this area, which included 153 orders for more than a thousand seats of XenDesktop, and 28 projects for over 5,000 seats. We now have over 2,000 cloud providers delivering several hundred thousand desktop licenses as a subscription service to their end customers, representing an important future growth opportunity as more businesses opt for the simplicity of cloud-delivered apps. And finally, license updates for the desktop products accelerated to 17% year-on- year growth with strong renewal rates across Subscription Advantage.

Next, in our data center and cloud business, total revenue was up 15% in the quarter to $127 million with product revenue increasing 6%. The largest contributor to this business continues to be our NetScaler solutions, with small, but accelerating contribution coming from our Cloud platform business. The NetScaler growth is coming from a number of different areas. First, we're continuing to drive a cross-sell motion into our enterprise account base, with over 540 desktop transactions, including NetScaler as part of the solution. Second, we're expanding the customer base, with both MPX hardware appliances and VPX, virtual appliance versions of the products, adding more than 500 net new accounts in Q3. And third, the new high-end FDX service delivery platform is gaining momentum with service providers in large enterprises, up 14% sequentially and representing more than 10% of total NetScaler license sales.

Also in Q3, we closed the acquisition of ByteMobile, giving us a key foothold with mobile network operators and creating an important new on-ramp for integrations with the other Cloud networking solutions. Overall, the data center and Cloud business has had a solid performance year to date, growing more than 20%.

Next, within our software as a service business, revenue was up 18% from last year. Our collaboration products, which account for about 60% of our total SAS revenue, were up 24%. In general, we saw steady gains in new customer acquisition from both the direct and online channels, as well as solid retention rates within the subscriber base.

In Q3, we completed the acquisition of Beetle, a small Cloud-based service desk technology that will become part of a GoToAssist IT support offering. Additionally, we announced an updated version of our share file data sharing app with new IT control capabilities to ensure the security of company data when accessed from a mobile device and new productivity features for users.

So, looking at the rest of the P&L, as forecasted, we've seen a slow, but steady increase in COGS as a percent of revenue, and the main reason here being the mix of revenue as we've seen higher contribution from consulting services, SAS, and hardware appliances. Our operating margin increased 100 basis points sequentially, driven by the increase in total revenue and certain cost controls. Cash and investments totaled just over $1.4 billion at the end of the quarter, with a sequential decline due to the closing of the Bytemobile acquisition and the repurchase of 1 million shares of stock during the quarter.

Our other income was aided by a net gain from our strategic investment portfolio, realized upon the acquisition of one of the companies which we previously invested in. And finally, we added about 700 new people to Citrix in the third quarter, bringing total head count to over 8,000. More than half of the increase came through acquisitions with the remainder from organic hiring, as we continue to focus on expanding go-to-market capacity, customer touch, and on product innovation, to bring to market new technologies as well as improving integrations across the solutions. Looking into Q4, we expect growth in head count to slow significantly as we focus on absorption and on ramping productivity.

So, before I wrap up, I would like to discuss our current outlook and expectations for Q4 and 2013. Entering Q4, the opportunity pipeline is at a record level. However, given the volatility in customer spending patterns over the past two quarters, we think it's appropriate to assume that the environment will continue to be volatile across all geos, and we're planning accordingly. So, for the full-year 2012, our current expectations are now for total revenue to be in the range of $2.55 billion to $2.56 billion, and we're slightly increasing the adjusted EPS range to between $2.80 a share and $2.82 a share.

For the fourth quarter 2012, we currently expect total revenue to be in a range of $700 million to $710 million, and adjusted EPS of between $0.83 and $0.85 a share. With respect to 2013, our planning cycle is still in process, which is very normal for this point in the fourth quarter. At this stage, we're balancing the high level of predictability from our subscription-based businesses, which account for more than half of total revenue, with an expectation for the spending environment to be -- to continue to be volatile into next year. So, we're currently modeling total revenue growth of at least 14% for next year, and a commitment to operating leverage that will drive a minimum of 50-basis point expansion and adjusted operating margins from the 2012 levels.

Our focus next year will be on helping customers embrace enterprise mobility, build and deliver Cloud services, and expanding our go-to-market reach through both direct touch and go-to-market partnerships. We'll update our expectations for 2013 with more specifics on our fourth quarter earnings call. Ultimately, our confidence in our market position and our ability to drive long-term growth remains unchanged. So now, I would like to turn it over to Mark to give you additional details on the quarter's performance and discuss our ongoing businesses. Mark?

Thanks, David, and good afternoon, everyone. We executed well in Q3, in spite of the macro factors creating uncertainty around IT spending. The forces of mobile and Cloud are fueling a huge transformation, and Citrix is in great position to capitalize on it. This was very clear last week at our Synergy Conference in Barcelona, where the energy level from partners and customers was at an all-time high. We unveiled our latest innovations, solutions, and partnerships, showing customers how to design for mobile first and Cloud first, how to architect for device in app and location independence, and how to deliver flexible, scalable Cloud infrastructure needed to deliver a work-anywhere experience. So today, I would like to highlight the announcements that are so vital to our mobile and Cloud strategy going forward.

Last week, we demonstrated that mobile is not about devices. It's about a way of working from anywhere with anyone across any device. A mobile work style solution empowers people to work securely with each other, with their apps, with their data, in a seamless, contextual, and continuous experience. Delivering Windows to mobile devices has been a strong driver for XenDesktop and XenApp. From here, we're expanding into the center of the enterprise mobility management market, a market expected to top $3 billion in 2015, with a compelling solution that includes three powerful components. First is Citrix Receiver, our universal software client available on over 3 billion devices, including all major tablet, smartphone, laptop, Mac and PC platforms. The second is CloudGateway, our single, unified control point for Windows Apps and now supporting web apps, mobile apps, and enterprise data. And, the third is the Me@Work mobile app family, five Citrix-built apps for collaboration, social teamwork, data sharing, secure e-mail, and Internet access. This is a solution approach that leverages both existing and new Citrix technologies, giving us up-sell and cross-sell opportunities within our huge partner and customer base. And a solution that gives users the mobility they want, and IT organizations the security and control they need across both apps and data.

As a user, you simply download Citrix Receiver to your iPad and enter your e-mail credentials and your apps and data are automatically provisioned in minutes, creating secure at-work containers for company apps and data that isolate your at-work apps from your at-life Apps. We've just added support for native IOS, native Android, and HTML 5 apps, along with auto-provisioning of our Cloud-based share file data sharing service. We also introduced two new mobile apps from Citrix, @WorkMail and @WorkWeb, providing enterprise-grade secure e-mail, calendar, and contacts, and secure browsing for access to corporate websites and SAS apps through an on-demand micro VPN. @WorkMail and @WorkWeb now join Citrix ShareFile, GoToMeeting, and Podio to form the Citrix Me@Work mobile app family, providing a secure, amazing work-anywhere experience.

Next is desktop virtualization and where we take it from here. It's just amazing how virtualizing Windows apps and desktops has become more relevant over time. From our first remote access product to highly strategic infrastructure now known as desktop virtualization. Today, there are five core customer value drivers. First is Desk TCO for desktops and apps, by lowering the cost of Windows administration and extending the life of end point devices. Second, centralized security and access control. This is especially valuable in regulated industries, government, and off-shoring projects. Third, faster Windows OS migrations, by eliminating the installation of apps on desktops and desktops on devices. Fourth, is BYO and mobility enablement, delivering the Windows experience to personal devices like smartphones, tablets, and ultra books -- running any device OS. And, fifth is something that we call business TVO, or the total value of ownership. As a strategic infrastructure for faster on-boarding of employees, for enabling flexible work spaces, for accelerating M&A integration, for simpler business reorganization, or for always-on business continuity. These drivers have created a value chain where customers can implement projects for TCO, security, or OS migrations, and over time, harvest more value by graduating to broader strategic usage for BYO, mobility, and TVO.

We invented, innovated, and have invested in this value chain process in partnership with Microsoft. These market drivers are more compelling today than they have ever been and will continue into the future, into the Windows 8 era and beyond, which is just now beginning. The introduction of Windows 8 technology at the end point, at the server, and in the Cloud, will create a new set of partnership opportunities with Microsoft, helping our joint customers merge and migrate traditional windows apps and desktops with the new world of Windows 8 style devices, apps, and Cloud services. The Windows 8 wave starts on Friday this week. The velocity of consumerization is just amazing. Inside of four months, we've had new generations of consumer devices, along with the apps and Cloud services behind them from Apple, from Google, from Amazon, and now from Microsoft and their many OEM partners. It's all part of a major inflection in consumerization and what we believe becomes a new normal for IT.

Think of it as fragmentation. This is why we began investing in the reinvention of desktop virtualization a couple years ago and unveiled it as Project Avalon in Barcelona. Project Avalon will be delivered in two powerful releases. The first release is called Excalibur. Think of it as the Cloudification of XenDesktop and XenApp in a single, simple infrastructure designed to speed adoption, to grow to larger scale, and to be easier to manage. It features major advances in simplicity, manageability, scalability, and rich multimedia services, all needed to deliver the Windows experience to millions of devices. Last week, we demonstrated Excalibur and announced the Q4 availability of the tech preview. We just loved the response.

The second release called Merlin adds powerful automation and orchestration features designed to abstract away the complexity of the underlying compute network and storage and dramatically simplify day-to-day administration through self-service provisioning. Together, Excalibur and Merlin will enable customers to deliver Windows as a Cloud service, an amazing set of innovations that continues our leadership in Windows app and desktop delivery.

Next up is Cloud infrastructure. Cloud infrastructure is all about building Cloud services, bridging between Clouds, and delivering those services anywhere. At the platform level, we're focused on being an active member of the Apache CloudStack open source project. Momentum around CloudStack is remarkable in terms of download rates and new people joining the community, now over 30,000 strong. CloudStack has become one of the fastest growing and most active open source community projects, which has made it the most widely deployed open source Cloud platform today. A number of these Clouds are running over 1,000 servers with the largest being over 30,000 physical servers, powering infrastructure as a service, and SAS services that generate over $1 billion in revenue.

We're excited about CloudStack adoption, with both enterprise and servers provider customers. We are monetizing CloudStack with our new Citrix CloudPlatform solution that includes the support, update, and additional technologies needed to build reliable Cloud services. Even though CloudPlatform is hypervisor agnostic, it includes XenServer and has native integration with NetScaler. In Barcelona, new strategic partners announced their support, including Alcatel-Lucent, CA, Cisco, and NetApp. There were also announcements from some of the world's largest telecom companies, including BT, China Telecom, Korea Telecom, and NPT, and how they are standardizing on Citrix CloudPlatform.

We also had some exciting news in Cloud networking. We demonstrated the next generation of NetScaler SDX, our consolidated service delivery platform. Introduced last year, SDX allows up to 40 virtual NetScaler instances to run on a single multi-tenant appliance. It's amazing throughput in a very strong and small footprint. Last week, we introduced the next generation SDX, now open to third- party delivery services and unifying for the first time ever, a wide range of layer 4 through 7 network services in a seamless application control layer. Top tier partners have stepped up to support the new SDX platform, including Aruba Networks, Palo Alto Networks, RSA, Splunk, and Trend Micro. The new SDX includes the ability to apply app-driven policies that automate the deployment of network services. This will also provide app layer intelligence to existing transport networks and emerging SDN solutions.

We also introduced an exciting new addition to our Citrix ByteMobile product line, designed to further optimize data and video traffic, extending our value within the explosive growth of rich media over 3G, 4G, and LTE networks. Our new UXI technology allows ByteMobile infrastructure to autonomically adjust mobile data optimization in response to real-time sensing of user experience. It's a powerful new innovation that gives users a better mobile experience while saving millions in bandwidth costs for mobile network operators. The combination of CloudPlatform, NetScaler, and ByteMobile position us well for the massive buildout of Cloud services that's transforming private data center, Cloud providers, and mobile operators around the world.

At Synergy, we expanded our strategic partnership with Cisco, which began just over a year ago when we announced the multi-year initiative to give customers a brilliant, high-def experience when delivering Citrix XenDesktop over Cisco networks. Over the last year, working together, tens of thousands of virtual desktops have been deployed worldwide, serving customers of every size and across every industry segment. In addition to the great technology innovations, we've also developed some effective go-to-market programs around the world.

To build on this success, we're expanding into three new strategic areas, mobility, Cloud, and networking. First, our collaboration in mobility will result in a powerful set of integrated solutions for mobile work styles and BYO. These solutions will bring together the combined strength of Citrix Receiver, CloudGateway, XenDesktop, and ShareFile, with Cisco's Jabber collaboration portfolio, secure access products, and media net technology. Working together, we will give customers an unparalleled experience for accessing any mix of apps, data, voice, and video across billions of mobile devices. Secondly is our collaboration in Cloud will result in an open, integrated Cloud solution for both enterprise and service provider customers. This will bring together Citrix CloudPlatform with the technologies like Cisco Nexus switches, Cisco UCS servers, and Cisco 1 networking technologies. This powerful combination will make it easy for customers of all sizes to build true Amazon-style Clouds with incredible scalability, elasticity, and economics.

Finally, our collaboration in networking will help customers deliver Cloud-scale networks with built-in application intelligence. The centerpiece of this strategy will involve integrating Citrix NetScaler as a strategic component in the Cisco Cloud network services architecture, right alongside core Cisco networking services. As part of this strategy, Cisco will also reference-sell NetScaler to its worldwide customer base as a preferred solution for next generation app delivery controllers. Both companies are investing significantly in technology innovation, solution integration, and joint go-to-market capacity. We're excited to take this key relationship to the next level, and we're convinced it will deliver tremendous value for Citrix, for Cisco, and for our joint customers.

So, last week was both exciting and really important for Citrix. We're moving aggressively with innovations, solutions, and partnerships, and establishing our focal points for 2013, to grow end to end across social collaboration, enterprise mobility, Windows as a service, and Cloud infrastructure markets. Looking forward, there's ambiguity and uncertainty in the macro sense, creating even greater stress on IT organizations who are already challenged by transformation, consumerization, and the fragmentation of computing. While all this can create head winds to even the most compelling solutions, it's also an environment that spotlights the value we deliver at the enterprise frontiers of efficiency, speed, and agility. So, the current environment doesn't change our view of these markets. It increases our commitment, our confidence in our strategy, a tight focus on execution, and belief in our opportunity.

Before we begin the Q&A, I would like to take a moment to share some news about the loss of a valued, long-time Citrix colleague and friend, John Burriss. We lost John on Friday after his terrible fight with colon cancer. He was 57. Excuse me.

Before John became CEO of Sourcefire in 2008, he left an indelible mark on Citrix and the many people he touched. For 10 critical years in our evolution, John successfully led our global sales and services teams and was a vital member of the executive leadership team. John was someone whose wisdom was always in demand. You could always count on John for the truth, for optimism, and for a lot of fun. He was always caring, authentic, and professional. From here, we celebrate John's life of good work and the joyful memories he's left with so many people around the world. And now, I would like to open it up for questions.

(Operator Instructions)

Our first question comes from Heather Bellini with Goldman Sachs.

Great. Thank you very much. I was wondering if you could give us a little more color on your guidance for next year. I'm wondering, usually you give a very conservative forecast at this time of the year for the out-year. I'm just wondering, what are the things giving you the greatest confidence in the 14% revenue growth level for 2013, given your overall commentary about the macro as we look to close out 2012?

Sure, Heather. This is David. Obviously, we're heavily influenced by the overall uncertainty of the environment right now and as we've seen that over the past couple of years impact just the timing of customers pulling the trigger on new capital orders. You offset that with the fact we've got well over half of our total revenue base coming from subscription or annuity-type services, whether those are our license updates, which continue to do very well and have actually been accelerating over the past year, our SAS solutions, which are coming in right near 20%, and technical services. Because there continues to be a tremendous amount of demand for knowledge transfer and helping customers be successful with implementations of large solutions like virtualization of the desktop and others.

The -- so I'm looking at a number of different growth engines that are kind of incremental even to what we're doing today. It's innovation in areas like CloudGateway, which helps drive enterprise mobility and help customers adopt BYO, including access to things like native apps and whatnot. We've got data sharing, which is really now coming on through our ShareFile integration. We've got networking across a number of different areas, including some pretty interesting things we're very excited about with Cisco. And then, inorganically, we're also looking at incremental opportunity through ByteMobile, which as I mentioned just closed earlier this quarter. That's addressing their explosive growth around carrier networks and also opens up a new market opportunity for us to pull through NetScalers and some of the other products. So, that's really the layer cake of how we've thought about this going into next year.

But, if I could -- I'm sorry. I just was going to ask a follow-up. The desktop solutions business, that's one where I think based on kind of what I'm hearing from people is one of the areas where growth has been a lot slower this year than what they would have thought. And, I think you started the year talking about a low to mid-teens growth rate in that segment, and looking out to next year, how do you, how should we think about that business kind of reaccelerating from the levels that we have seen kind of this quarter and last quarter?

Yes, Heather, I think it's definitely one that's going to be influenced by the environment to some extent. I think after Q4, we'll give more granularity in terms of the individual product areas, but overall, this is still an opportunity that is generating hundreds of millions of dollars for us, is solving some real world imperatives for a lot of our customers, and has an opportunity pipeline that is a -- well, I would just say it's significantly higher than it's ever been. So, really excited about the opportunities, the timing that is more specific.

Mark talked about individual things that we're really focused on in the short-term that tend to be a touch more tactical around virtualization at the desktop, and whether that is addressing mobile, whether that is M&A integration, compliance, security -- those things that people are going to spend money on in any environment. And then, longer term, the things that we're doing from a product level, to really address complexity and making it way, way easier for customers to adopt scale and manage large infrastructure at the type of level that they are looking at. So, long answer, lot of things going on, and it's going to be a bit lumpy given the environment for -- probably for the next couple of quarters.

Great. Thank you.

Our next question will be from Adam Holt with Morgan Stanley.

Thank you. This has been sort of an interesting quarter across our group, where we've had different companies call out different pockets of weakness. You all saw it in the US, which is different than some. Could you maybe drill down on where you saw it? Was it a particular vertical? And, as you look into the fourth quarter, are you assuming that the deals continue to be smaller -- broken apart as you described? What are some of the assumptions underpinning the fourth quarter guide in the US?

Sure, Adam. It's David again. In terms of verticals, there was nothing that really stood out from an end industry. It was more the phenomenon that I mentioned earlier, where deals just pushed. We had a disproportionate number push, get smaller in some cases, where something was carried at X and closed at 75% of that number. Or, in the case where customers just actively said I'm going to cut this into a few transactions and spread it over the next couple of quarters. I think that's just the general impact of the overall environment.

More specifically in terms of regions, the one area that was quite weak for us was around US fed. That is an area that has been, again, somewhat lumpy, but more weak in Q4. And then, in a couple of markets, as you would expect in EMEA, those were challenging as well.

If I could just ask a follow-up, in this quarter, like some of the last several quarters, there's a pretty wide delta between your billings growth rate and your license growth rate. Could you maybe give us some color on the bridge there? Did you see more longer term deals going into deferred? Are you comfortable giving any kind of deferred license number? Maybe help us get from the license growth rate to the billings growth rate?

Sure, Adam. In terms of actually breaking out the components in deferred, we've never done that, and we really don't want to because they do bounce around quarter to quarter. Overall, I would say that we did close what was probably the second highest quarter ever for large transactions. We're executing with customers at that level. Those do tend to have some element of either term-based or annual licenses, or in some cases, where customers will buy a more ELA-type agreement.

And so, you look at the growth in long-term deferred revenue. That's usually the best proxy. I think long-term deferreds are up 54%, if I recall year-on-year, and it's been one of the bigger growth engines there. That's probably the best way to think about it. We're still focused mostly on shorter-term transactions. The majority of business is still in a year, but this trend that we've been highlighting for a couple of quarters is one that will be slow, but kind of steady up and to the right.

Terrific. Thank you.

Our next question will be from Bhavan Suri with William Blair.

Hi. Thanks for taking my question. Just on the quarter itself and the large deals, David, could you share what proportion was SI driven? Just to help us understand what component might have gone to deferred from some of those larger deals.

Sure, Bhavan. I wouldn't say that SIs in particular tend to have a higher or lower deferred. It's really on a deal-by-deal basis. Overall, SIs -- contribution from SIs was up about 11% year-on-year, representing -- again, probably in the 15% of product bookings. Largest contributors continue to be Hewlett-Packard, IBM, and Fujitsu and then Dimension Data. Those are the four biggest ones in the quarter.

It's an interesting area that we spent a lot of time focusing on. We now have about 10,000 people across the SIs that have been trained, and we met with a huge number of them last week in Synergy Barcelona. And, a lot of the message was around how we provide more capacity out to customers. Because in a lot of areas, we are -- let's call it capacity-constrained from an implementation, but also from a knowledge transfer standpoint to make sure that successful early implementations extend to that next phase and become more enterprise wall-to-wall. So, work in process, and we're excited about the opportunity, but it's going to take some time.

Yes, yes. And then, similar to last quarter where you had some deals push, and then they closed. Did you see sort of where we're now 3.5, 4 weeks into the quarter, have you seen a similar phenomenon? Or, has it been less pronounced than it was in, say, the beginning of Q3?

Yes, the beginning of Q3 was interesting because Q2 had much more -- let's call it short-term noise around some economic changes in EMEA, and that caused a big pause in the last week or so. This quarter was also, near the second half of September, I would say, it was much more pronounced. But, there wasn't any general dislocation out there, or any news event that caused that. I think it's more just general customer behavior. So, this resizing, pushing of deals, splitting of deals late in the quarter -- it's more of just a general concern as customers look into Q4 and into 2013.

Yes, yes. And, maybe one quickly for Mark. Mark, you're obviously talking to customers and CIOs and operations executives all the time. As you look at next year, coming into this year -- desktop virtualization, application virtualization ranked pretty high on that top 10 list of things to do. Any sense of how that feels going into '13?

I don't think it feels any differently. I think what's different is their anticipation of their own businesses and how that affects the IT budget, and the mix of spend in sort of run versus grow kinds of categories. And, there's no doubt that a whole bunch of the growth that we've seen in desktop virtualization has come from really grow kinds of initiatives, more of the TVO kinds of implementations that have been really profound when you look at some of the larger customers we have around the world. But that means that projects and more of the TCO-type style implementations will be -- will probably dominate more customers as they look to sort of squeeze through what looks like to us and to them to be a pretty uncertain environment.

So, I think this is a macro issue and becomes a timing issue, and I think we'll be one of the first to benefit from a change in buying behavior as there's a lot of pent-up understanding and demand around the value of desktop virtualization. And, of course, the intersection of that with the product cycle we're driving first with the release of the Excalibur, release of Avalon. I feel really good about where we're going in that space.

Great. That's helpful. Thanks.

Our next question will be from Rob Owens with Pacific Crest.

Great. On the networking side of the business, could you drill down a little bit more on the new Cisco relationship and the expansion there? I think you talked about integrating NetScalers as a strategic component of Cisco's Cloud networking strategy and referred to the reference sell that Cisco is going to do. Are their sales people actually compensated? Is there more formalization in that relationship that needs to occur? Now that Cisco is no longer really in the market with its own ADC, would you hope to pick up a fraction of that revenue, a majority of that revenue that they enjoyed in the market? Thanks.

Okay, Rob, thanks. So, the way to understand this is as a series of phases that really starts with the reference selling and doing certified designs to put NetScaler in place for customers that have been using Cisco load balancers and want to move to an advanced delivery controller kind of architecture. And, as I mentioned in the comments, the reference sell is really Cisco sales force will refer customers to us as a preferred solution for those that want to move forward. They will still continue to support ACE. They have said that. But for customers that want to move forward to ADC, they will reference sell NetScaler.

The second phase really which starts actually now as well is really more about technical integrations that allow NetScaler to become part of the Cisco fabric. And so, I think everyone knows that Cisco has done a tremendous amount of work in making their intelligent network platform highly programmable at the lower layers of the network, and we've done a lot of work to make NetScaler programmable at the higher layers of the network. And so, a key project is to get that integration going so that NetScaler can pass the application awareness from the higher layers into the transport network and vice versa so that we can do a lot of really interesting and autonomic kinds of configuration and reconfiguration of the network based upon the upper layers of demand all the way down to the lower layers of transport. So, that will be the second phase, and you can expect that to be more -- that's a few quarters out.

And then, the final phase is really how we integrate further with the overall Cisco Cloud networking platform and strategy, which will play out over simultaneously and over a longer period of time. So, this is a multi-year commitment and agreement and partnership, and we're pretty excited about it. It's off to a great start.

As far as the details around compensation and all of those things, I think you need to expect that for this year, the reference selling -- everyone already has a fiscal year plan, et cetera, and the timing of this relationship and putting things in place allow us to incorporate what we want to do to compensate people in the field properly in 2013 and beyond to get even greater levels of collaboration. So, it's very strategic, and we'll back it with great investments and great tactical, if you will, kinds of programs that makes sure everyone's on the same page, pulling the same direction.

Great. Thanks, Mark. David, on the desktop solutions update side, you've seen increased growth this year on a year-over-year basis, and I think it may have even accelerated a little bit sequentially. And again, on the year-over-year growth for updates. Is that a function of renewal rates? Are there other timing issues at play here? And, I know it's early to think about the components of '13, but should you sustain in that kind of mid-teens growth rate there?

Rob, it's a function of a couple of different things. One of them is the transition that we've made from XenApp to XenDesktop over the years. And, just being able to yield a higher amount per customer. Second is the more strategic nature of -- I hate to call it that, but the more strategic nature of desktop as part of a customer's infrastructure tends to yield a higher renewal rate. And, we've been slowly rolling out the idea of software maintenance, which includes not only the license updates, but also more of an integrated support solution, and that carries a higher ASP. That's one of the things that we've been doing on a very slow basis, but has a lot of room to run over the next couple of years as we can get closer and closer to customers.

Great, thanks.

Your next question comes from Phil Winslow with Credit Suisse.

Hi, thanks. Just wanted to dig into the desktop solutions line a bit and sort of get your expectations when you looked at Q4 and what's implied in the guidance there and for next year. Obviously, you talked about the license line being down a little bit. That's not necessarily shocking given the tough comp, but just what trends are you seeing there? And then, as you do think about the guidance, how should we think about sort of the license revenue growth for that, Q4, and the next year also? And obviously, in the context of what is still a good license update line?

Sure, Phil. In terms of forward-looking guidance, we haven't broke out individual products, and I don't think it makes sense to do that right now. There's going to be some give and take, given the breadth of our product portfolio. And so, within this environment, we're going to just stick to a pretty high level of guidance and then describe the actual dynamics of the business in much more detail when we have actuals. That's kind of what I would say about guidance.

In terms of the overall trends, we talked about a few of them earlier. There's really nothing going on from a market or competitive dynamic standpoint that's worth noting, and we are still -- when we look at our CRM system, we're still winning the exact same amount of transactions. We're engaged now with, I believe it's just over 80% of the Fortune 100 at some level with XenDesktop as an individual product, and the number of new POCs and opportunities continue to be very, very strong. The dynamic, though, that I talked about earlier was this whole deals getting resized, deals getting pushed, deals getting split. And, I think that the expectation should be that we'll see that in Q4 again, and we're planning accordingly for that.

Got it. Thanks.

You bet.

Your next question comes from Walter Pritchard with Citigroup.

Hi, Mark. I wanted to ask -- just understanding the macro, but I think the minus 1 for example on the desktop was probably worse than we expected, even understanding the macro was pretty bad. I'm wondering, from an execution perspective, is there anything, any story in the numbers around execution in any changes you've made in the organization or otherwise to compensate for that going forward?

Yes, Walter, actually if you look at the performances across all the geos, you see a lot of consistency and how people reacted to head winds and the impact on their businesses. So actually, it gives us a lot of confidence in kind of where we are in both execution and people, and so there's no abnormal set of issues around any particular part of the business. We're always up-leveling, upgrading, working on the bottlenecks, et cetera, and there's nothing unusual there when it comes to in-market, go-to-market execution.

And then, David, on the 14% preliminary growth for next year. Is that a number that doesn't assume any M&A that hasn't happened already? Or, how are you considering M&A in the number? I know this year actually M&A did have somewhat of an impact.

That's just with what we have today.

Okay, great. Thanks a lot.

You bet.

Your next question comes from John DiFucci with JPMorgan.

Hi. It's actually Darren Jue on for John. I wanted to follow up on Phil's question about M&A. If you could give us an idea of how much of the growth in the quarter -- in the current quarter -- came from acquisitions? And, what is implied in the guidance for next year?

Well, let me talk about next year first. So, when you think about 2013, even though we're not breaking out any of the individual pieces, he only acquisition that we've done in 2012 that really had an ongoing revenue stream is ByteMobile. Everything else is looking back into 2011, and to a large extent, we were acquiring technologies. New things that we were integrating and starting to grow and expand. So, when I look at it that way, I would say everything except ByteMobile is organic going into 2013. And, while we haven't called out the individual components, I think Byte as a stand-alone should be at least $50 million of revenue. It's a really interesting market addressing the cellular networks and the explosive growth that you seeing right now across just -- well, call it consumerization, but it's largely in video multimedia traffic across these networks. And so, the number is still in process as we work through our 2013 plans, and I'll get more specificity after the end of this quarter. At a high level, that's how I think about it.

Okay, great. And, one other question, David. You mentioned that part of the reason for the operating margin increase this quarter was related to cost controls. And, I wonder if you could just discuss what some of those controls were?

It's just the normal things you see, Darren, in this type of an environment. When you've got a little less certainty externally you pull on the levers that tend to be variable in nature. While we did expand head count in a fairly material way, a large part of that was through acquisition and college hires that we've already committed to and things like that. We look at the other discretionary line items, whether that is travel or external consultants or things like that, that we always dial back when the environment is less certain. So, you should expect that to be the case in Q4 as well.

Okay. Thanks, David.

Your next question is from Mark Moerdler with Sanford Bernstein.

Thank you. I appreciate it. Got two questions for you. The first one is, how do you see the attach to the Windows 7 desktop refresh? We've seen about 50% has moved to Windows 7. Is the sense, expectation that the second half will have more desktop virtualization because of the nature of the PCs? And then I've got a second question to follow up.

Hey, Mark. So, the Windows 7 impact is really all about an OS migration that then opens the overall question with customers and consideration with customers around thinking about virtualization at the desktop -- virtual apps or full virtual desktops, whether they are a VDI style, or what I think of as a VDI light, which is more of a server-hosted version of a Windows 7 desktop. So, that's the effect of the Windows 7 motion that's in the marketplace. Not specifically around the refreshing of devices, okay.

So, we see that continue, and we're halfway through the physical migration to Windows 7 as measured by devices, but I would say that we're not nearly halfway through in terms of potential for virtualizing Windows desktops -- Windows 7-style desktops for, let's say, new Windows 8-style devices or Windows 7-style applications which tend to be built on the Win 32 architecture and virtualizing them to deliver them to a full range of devices, including the new Windows 8-style devices. So, that's how we think about Win 7, and not as much around attach, but around consideration rate for desktop virtualization as a new way of delivering the Windows experience.

Perfect. The second quick question was through the quarter, some people have commented that September was showing more weakness than the rest of the quarter. Was there any sense that there was a slowdown, and that break-apart that were occurring at deals was accelerating at the end of the quarter?

Yes. I think that's absolutely what we saw.

Thank you.

Our next question will be from Gregg Moskowitz with Cowen.

Okay, thank you. David, just a quick clarification. The amount of desktop business that is sitting in deferred revenue as of September 30, is it fair to say that that went up on a sequential basis?

Yes, it did go up on a sequential basis.

Okay, perfect. And then, I know you said that operating margins will expand by a minimum of 50 basis points in 2013, so it's not necessarily a feeling. But, just wondering if you could perhaps walk through some of the assumptions behind the 50-basis points improvement? Because unless we were to see another sizable acquisition like ByteMobile, I probably would have thought that we would see a little bit more expansion in the out-year.

Yes, right now, this is at this stage in the planning cycle, what you would expect. It's more of a directional indicator, the way we're thinking about constructing the business plan for 2013. You spend most of the time at this point looking at the individual markets. How products are going to continue to evolve and develop, market share assumptions, et cetera. And then, we kind of flow that down the P&L through the rest of the operating line items.

And so, when I say that it's more of a commitment to driving op margin up, and that's how it should be interpreted. Because at this point in time, we're still working through our business plan. Want to make sure that we're investing for long-term growth, long-term profitability, long-term success, et cetera. But, doing that in the context of improving op margins overall. So, I wouldn't get too much into the detail until we get into probably the end of this quarter, and we can talk more specifically about the business. And that is -- it's not anticipating large dilutive acquisitions as part of your question. This is just as we see the business right now going into 2013. Should we do anything material, we would come back and talk about that if that were to ever happen.

Perfect. Thanks, David.

Our next question will be from Kirk Materne with Evercore Partners.

Hi. It's Matt Williams in for Kirk. Thanks for taking the question. Just curious if you could speak to some of the trends around ShareFile? And, if the enterprise reps are now selling ShareFile? Or, just some general commentary around that business. Thanks. Yes, we're really pleased with the growth of the ShareFile, now one year into the acquisition and integration process. So, we're growing on three dimensions, in the SMB market where we have had a focus with SMB customers for professional file sharing and including VDR services and that continues to do quite well. Secondly, is in verticals. So, taking ShareFile in some key verticals that we focus on, and that growth has been excellent. And then, the third has been enterprise, which has exceeded our expectations in terms of the interest, customers -- so the pull. The engagement of our enterprise sales force, as well as partners, and the product team that's actually done a lot of things to innovate to make ShareFile enterprise scale and ready.

So last week, we announced, for example, the availability of a new capability called storage zones, which allows enterprise customers to choose where documents and files are stored. So, yes, they can choose zones in the Cloud, but also, they can create their own zones in their private Cloud or data center. This helps, especially in industries and enterprises that have -- that are under heavy government regulation, et cetera, and knowing exactly the physical location of files and where they are stored and how they are transited is key to compliance and governance.

We just released that capability. We have some exciting plans around storage zones, and I think that will bode well for growth into 2013 and beyond, especially as we make ShareFile more and more integrated with all of our end user facing capabilities, whether it's GoToMeeting or Podio within the receiver infrastructure itself. And, the team has doubled, more than doubled, so we have about 200 people on the team now in Raleigh, and we're expanding the facilities there. And, we're really delighted with the progress we're making there. Great, thanks. And if I may, just a quick follow-up, you touched on it in another question. Is there any more color you could provide on the federal business? It sounded like it came in considerably weaker than maybe you were expecting. Just any more color around that business would be helpful? Thanks again.

Yes, I would say it was one where probably more pronounced than any other individual area, individual transactions pushed. And, it also has the added phenomenon of in many cases we are part of the larger opportunity that a systems integrator, for example, is working on, and there is a number of them that I could -- at least a few that I can think of off the top of my head, large scale transactions that have actually -- the order's been placed through the government to the SI. But, the project itself will not roll out for the next couple of quarters. For us, we don't take revenue, or we actually don't take a booking until we get that from the SI. So, it's real business that will come through in the next couple of quarters, but just not in the timeframe that we would have expected it to.

Great. That's helpful. Thanks.

Thank you.

Thank you. Our next question will be from Raimo Lenschow with Barclays.

(No audio) -- increasing adoption of tablets in the enterprise, and what does it do to that licensing model there? Thank you.

Raimo, can you repeat the question? Actually, the first half of it was cut off.

Yes, I was saying that you don't really break out XenApps and Desktop in detail anymore, but qualitatively, can you talk about what you see with XenApp at the moment, especially as we see increasing adoption of iPads in the enterprise. And, what does it do to part of the licensing model?

Yes, I think we continue to see XenApp seeking its own level in terms of the mix vis-a-vis XenDesktop. I would say if anything, we would expect more of a renewed interest in XenApp itself, given that the virtualizing apps is kind of what it's all about. It's why we call it XenApp. It also includes the VDI light kind of flex cast delivery model, which is also very economical and very powerful.

So, as we've said pretty consistently, I would say, is that we leave these decisions to customers. We show them kind of how the incremental capabilities of XenDesktop, which incorporates XenApp, can be valuable. I would say XenDesktop tends more toward the strategic kind of infrastructure buyer and XenApp will tend more toward more of a project-oriented buyer that's TCO and security and access control kind of focus. But, I think it gives us basically two entries in the marketplace that can respond to customers as the environment dictates, and that's a good problem to have.

Okay. Thank you.

Our next question will be from Kash Rangan with Merrill Lynch.

Hi, thank you very much for taking my question. Mark, I just wanted to understand a little bit more about the macro comment you made. I think we all tend to lump everything into the macro category, but I'm wondering if you could tell me, what are customers exactly saying when they say macro, probably? They don't even say macro, but are you hearing fiscal [close] as a source of the uncertainty? Is it US customers, European businesses, and the unpredictability of that that is the source of uncertainty? Or, is it just election cycle?

Looks like this has been a very interesting reporting season, the pace of deceleration, not just for your Company, but across the group, has been pretty significant. I'm wondering if it's not just concern about macro, but something even deeper than that? Or maybe there isn't? I'm just making it up. But, I just wanted to get your thoughts, what exactly on customers' minds when they explain to you why they split up a transaction or pushing something out? Thank you.

Kash, great question. First of all, I'm not an economist, and I'm not going to pretend to be one. But, I would say your list of possible sort of causes and concerns that customers have is a long one. And, it's all of the above, and that's the issue. It's the length of the list probably more so than any one single thing.

And then, when you look across geographies, obviously thinking about an election cycle, et cetera, there's no way to sort of map those things across geographies. But, we saw the phenomenon as I mentioned earlier on a global basis, and I think other companies and peers that have reported have reported similar customer behaviors. So, I think it's kind of all those things. And, when people feel like there's -- they can't count on the future, and it gets even more ambiguous, they pull back. And, we saw this going into the recession. There was a pullback where customers had to reconsider their investments and which way they were going to go, and that can be a couple quarter cycle before they decide, okay, these are the things that we do want to invest in. And, these are the things that we push below the line. And, I think we probably are in the midst of that, and unfortunately also in an environment where no one sees a catalyst that will change things in any material way.

So, I would say, that's it. We see acknowledgement of the value proposition, et cetera. The customers have already tipped over strategically with desktop virtualization. They continue to go because they actually yield both the cost savings and the speed and agility capabilities that it promises and delivers. But, I think it's -- in our business, there is a bigger impact on customers that have yet to get to that point, and a lot of our growth relies on tipping customers over from that sort of project-oriented thinking about desktop virtualization to more strategic thinking about it. And then, jumping in and doing it.

So, that's why we see these phenomenon. Late in the quarter, customers holding decisions till late, and then deciding to push. Or, if they go, resizing in some way. Either splitting or deciding that we're going to buy fewer -- lesser quantity and buy more in concert with what we can consume, let's say, next quarter.

Got it, got it.

I think that's what everyone -- I think that's a pretty natural consumption behavior.

Do we get a budget flush after the elections, or not, from why your perspective?

Well, I mean, this is David. I think we've always been under the belief that there's not really such thing as a budget flush, and that's because customers tend to spend and buy what they need. I will say that Q4 always is the largest quarter of the year, and some of that is due to -- a large part, let's say, is due to business models, the way they are built, and compensation plans. Lot of opportunities get queued up to close in Q4. We'll take it if it comes, but we've certainly never modeled one or expected it.

I would say certainly that if one factor around uncertainty is settled, then that could be -- that would be a positive thing. But, I don't think it changes kind of all the other things that are on everyone's mind in terms of global growth and the financial markets and kind of where things are -- looking for that catalyst. And so, I think we are assuming that now after a couple of years of, I think, moving sideways in terms of the US economy -- my point of view. That we're probably looking at the same going forward, where there is a tremendous focus on productivity and this thing we call the efficient frontier, which it doesn't produce jobs, but it does produce projects that create productivity, create opportunities like what we are doing in mobile and Windows as a Cloud service and some of the other areas around Cloud infrastructure, around collaboration services. So, I think that's what we're looking at.

Thanks. Thanks, Mark. You have become the economist. Thank you. (laughter)

Our next question will be from Steve Ashley with Robert W. Baird.

(No audio) -- OS migration, actually just kind of a variation of a question that's been asked. Mark, you've been clear there are many drivers, and this is maybe just one of them. My question relates to Windows XP, and as we approach the end of life, do you think 2013 will be a more active year to see Windows XP migrations than we saw in 2012?

Steve, no -- absolutely no doubt. And, we'll line up a number of our products and technologies to help customers deal with that as they get to kind of the point of no return where they will have to decide to move forward. And, we'll do the -- we'll line up the things we're doing with the Excalibur release of Avalon. Plus our app DNA migration infrastructure plus the professional services scale-up that we're doing ourselves and through our partners. Plus some of the things that we're doing programmatically through something we call the accelerator program. So, we'll line all of those up so that we'll simplify it as much as possible for customers to move forward from XP to a Windows 7 environment is most likely in enterprise. Because I think most people are expecting that the Windows 8 phenomenon will be much more of a consumer phenomenon when it comes to apps and desktops, and -- I mean devices and that sort of the apps and desktops world will be more driven by Windows 7.

Thanks so much.

I would now like to turn the call back over to CEO Mark Templeton for closing comments.

Thank you. Thanks again for joining the call today. We are facing an environment of uncertainty, and I can assure you, you can count on us to face this environment with a healthy mix of caution, focus, but also aggressiveness. So, we'll see you next quarter on our Q4 report in about three months. Thanks, and have a great quarter.

This now concludes today's conference call. You may now disconnect. Have a great evening.