思杰系統 (CTXS) 2013 Q1 法說會逐字稿

Good afternoon. My name is Jared, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems First Quarter 2013 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period.

(Operator Instructions)

Thank you. I would now like to introduce Mr. Eduardo Fleites, Vice President of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Jared. Good afternoon everyone, and thank you for joining us for today's First Quarter 2013 Earnings Presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Executive Vice President, Operations, and Chief Financial Officer. This call is being webcast on Citrix Systems' Investor Relations website. The webcast will be posted immediately following the call.

Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product grouping to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the US securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. 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. Copies are available from the SEC or on the Company's Investor Relations website.

Furthermore, we will discuss various non-GAAP financial measures as defined by 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'd like to turn it over to David Henshall, our Executive Vice President, Operations, and Chief Financial Officer. David?

Thanks Eduardo, and welcome to everyone joining us today. As you can see from the release, Q1 results included $673 million in total revenue, up 14%; 25% year-on-year growth in deferred revenue; $249 million in cash flow from ops; and adjusted EPS of $0.62 a share. In Q1, we closed 41 transactions greater than $1 million each, with relative strength coming from businesses in the technology, health care, and financial services sectors. Strategically important to us is the fact that more than 25% of these orders included multiple products, continuing to demonstrate the value that customers see in the integrated solutions we can deliver.

Geographically, Q1 demand patterns were uneven across all of our markets, with business in the Americas geo generally solid throughout the quarter, leading to revenue growth of 17% from last year. However, internationally, performance at the regional level was impacted by a number of different market forces, resulted in delays in closing identified opportunities. In total, EMEA posted a revenue increase of 9%, while Pacific and Japan region was up 15% from a year ago.

So now let's look at the Q1 results within our three primary businesses. First, our desktop and mobile business grew 5% from last year to $358 million. Included in this number was a 13% decline in new license revenue, albeit off a strong quarter a year ago. In Q1, we began expanding the focus of this business to give CIOs the solutions to enable mobile work styles -- mobilizing apps, data, desktops and people. The addition of our new XenMobile product line will help customers embrace mobility, drive true business value, and leverage our base as they bridge the worlds between Windows and mobility. Since XenMobile was just launched, the financial impact was immaterial for the period, but given the early results and a rapid growth and pipeline, we're on track to achieve our full-year goals.

For context on the overall mobile and desktop business, there are a few metrics I think really demonstrate the breadth of adoption we continue to see from customers. In Q1, there were 22 $1-million plus transactions for the mobile and desktop products, representing customers in technology, health care, financial services, education, and other verticals. In total, more than 2,800 unique customers purchased XenDesktop, including more than 100 transactions for more than 1,000 seats each, 25 orders greater than 5,000 seats, and 14 that were over 10,000 seats. Finally, over $20 million of the sequential increase in deferred revenue was related to XenDesktop and XenMobile.

Examples of how customers are utilizing these technologies as a way to accelerate their business imperatives included a public school system initiated a multi-million dollar BYO project that leverages XenDesktop and NetScaler products, alongside those technologies from our partners Microsoft and Cisco, to build an overall best-in-class solution; or a retail chain, expanding a XenDesktop deployment for in-store use, while initiating XenMobile and NetScaler to also deliver secure mobile access to their line of business apps, mail, and intranet; or a global pharmaceuticals company, leveraging XenApp, XenMobile, and ShareFile in a project that included moving 2,000 field sales reps off of laptops and onto iPads as their primary device, with a goal of cost savings and greater mobility. We're increasingly talking to customers about business enablement, reducing the cost of their app and desktop infrastructure, and increasing productivity by enabling enterprise mobility options.

Next, in our Networking and Cloud business, total revenue increased by 47% in the quarter, to $147 million, with product license revenue increasing 50% from last year. The NetScaler family was again the major driver of growth in the quarter, and we continue to execute against the strategies to leverage NetScaler as part of delivering integrated solutions to customers, as well as broadening go-to-market coverage. For example, in our enterprise accounts, the cross-sell and attach motions drove over 480 desktop orders during Q1 that included NetScaler as part of the solution.

Our NetScaler VPX appliances were up 63% year on year, contributing about 5% out of NetScaler license revenue; and the NetScaler SDX platform, designed to enable full multi-tenancy and consolidation within the virtual data center, continues to gain momentum with both service providers and large enterprise, growing over 70% from last year, and representing nearly 20% of NetScaler license. SDX, which runs over 40 independent NetScaler instances on a single appliance, is also open for third-party vendors, giving customers the flexibility to bring together best-in-class networking services in a single consolidated footprint.

Finally in this business, ByteMobile solutions contributed just a few million dollars of product revenue in Q1. We remain confident in the outlook for the full year, but as we've discussed previously a few times, the timing of closing large engagements, as well as the specific contract terms of those deals, will cause the recognition of revenue to be uneven throughout the year.

Next, within our Collaboration and Sharing business, SaaS revenue was up 14% to $138 million, and the GoToMeeting family continues to be the primary driver here, growing 22% in Q1. ShareFile, our data sharing service and platform, is also ramping nicely, up more than 75% from the first quarter of last year.

Turning to operations. Adjusted gross margin in the quarter was 87%, down about a 1.5 points from a year ago. The driver behind this is simply the mix of revenue, as we've been very successful growing our networking and SaaS businesses. We expect this trend to continue over the next few quarters, leading to adjusted gross margin for the full year of between 86% and 87%.

During Q1, we added 258 new people to Citrix, including roughly 160 that joined the Company through the acquisition of Zenprise. The other additions were focused on expanding go-to-market reach and customer direct touch, primarily around network gains, where we're still capacity constrained in a number of different markets, as well as just overall growth in our data-sharing treatment. Finally, the adjusted tax rate -- 14.2% in the quarter, down from 22% last year, reflecting the anticipated impact of reinstating the 2012 federal R&D tax credit.

Looking at the balance sheet, cash and investments totaled $1.4 billion at the end of the quarter, with the decrease from Q4 coming from the funding of the Zenprise acquisition, and the repurchase of 1.2 million shares of stock, offset by nearly $250 million in cash flow from operations. Also deferred revenue, as I mentioned earlier, increased to over $1.2 billion in Q1, growing $33 million sequentially, and up over 25% from a year ago. Importantly in there is long-term deferred balance, which increased 53%, reflecting the continued evolution in customer engagements to a more strategic level, which more often include multi-year commitments that are going to be recognized ratably over the term of the agreement.

Turning to our current outlook and expectations for 2013. Overall, we executed well in Q1 within the context of an uneven environment for technology spending. Though it's reasonable to expect that demand levels to remain mixed across geographic regions, our pipeline growth, new POCs, and customer activity metrics have remained very strong. We're very confident in our core business strategies and in the investments we're making in enterprise mobility, data sharing, and networking. We'll continue to focus on delivering financial results, while investing to expand our long-term capacity and differentiation across these areas.

For the full year 2013, we're maintaining our expectations for total revenue, while slightly adjusting EPS due to the expected mix of revenue and lower interest and other income. Total expectations are now total revenue in a range of $2.95 billion to $2.98 billion; adjusted gross margin between 86% and 87%, other income of approximately $4 million; and adjusted tax rate between 21% and 22%; and adjusted EPS between $3.08 a share and $3.11 a share. For the second quarter 2013, currently expect total revenue in a range of $705 million to $715 million, other income of approximately $1 million, adjusted tax rate of 22% to 23%, and adjusted EPS of $0.62 to $0.63 per share.

Before I turn it over to Mark to discuss our ongoing businesses, I'd like to invite all of you to attend our financial analyst meeting being held on the 22nd of May during our Annual Synergy Conference. Please reach out to our Investor Relations team for information on how to register for this event. Mark?

Thanks, David. Good afternoon everyone. We executed well in Q1, despite uncertainties in the overall IT market. While macro head winds pushed some larger desktop deals out of the quarter, we're entering Q2 with great enthusiasm about our market position and growth prospects. The performance of our new mobile platforms business was especially encouraging, growing the demand pipeline faster than expected. I was extremely pleased to see another solid quarter of over-performance in cloud networking, where we continue to take share in both enterprise and provider markets. We also saw continued growth in our web collaboration and data sharing services, key cloud-based businesses that will play an increasingly important role in our mobile work style strategy.

Looking forward, we really like the macro trends fueling our business. Work is no longer a place, meetings are mobile, and desktops, once considered devices, are increasingly delivered as services from the cloud, giving employees easy, secure access to apps and data from any laptop, smartphone or tablet.

The dynamics of IT are also changing. Simplicity is disrupting complexity. The focus on building and operating computing systems is rapidly shifting to aggregating and delivering services from a wide range of sources. No matter where those services are coming from, they require a new generation of networking that delivers far more intelligent app layer security, visibility, and performance. These forces are driving demand across our three major businesses, and growing our estimated total available market to $16 billion by 2015.

Next I'd like to address each of these market opportunities, beginning with mobile and desktop. Our mobile and desktop business had a strong finish last year. In Q1, we quickly integrated the Zenprise team and launched an exciting new product, Citrix XenMobile, with an overall strategy to lead enterprise mobility with completeness of vision, technology, and product offerings. We're offering the six core components for delivering enterprise mobility. First, mobile device configuration and security. Second, secure mobile e-mail and Intranet. Third, native mobile app delivery and control. Fourth, mobile content delivery and sharing with ShareFile. Fifth secure mobile collaboration with GoToMeeting. Of course, sixth, the mobilization of Windows apps and desktops through XenDesktop and XenApp.

Beginning in Q1, major Citrix partners, including HP, CSC, Atos, and Fujitsu began rolling out new solutions based on Citrix XenMobile, increasing our market reach in the fast-emerging enterprise mobility space. Customers around the world are going mobile. As they do, they have a clear choice -- deploy a myriad of point products from multiple vendors, or standardize on a consolidated solution from Citrix. By definition, this drives multi-product deals, significant competitive advantage, and we think growth.

A key aspect of winning these mobility deals is our integration with XenDesktop and XenApp, leveraging the inherent mobility value proposition of desktop virtualization. The mobile era is shifting the lens through which customers see desktop virtualization, from basic cost savings to part of a broader enterprise mobility strategy. The business case happens to be quite compelling. Virtual apps and desktops are mobile by definition. They're the fastest path to mobile ROI, because making your existing Windows available on any device with XenApp and XenDesktop gets you there. Virtual apps are secure by design, giving end users the freedom to use any mix of devices, while keeping sensitive Company information secure at all times. Virtual apps are economical, by extending the life of end points, reducing the cost of administration, and speeding the provisioning of apps to new users and devices.

While hard to quantify, recasting desktop virtualization in this broader context, the context of enterprise mobility, contributed to the delay of some Q1 desktop deals. Some customers and partners paused to consider the combined value of XenDesktop and XenMobile. While this created some downward pressure on Q1, we believe the overall strategic impact for Citrix will be a clear net positive. The combination is a differentiator for both product lines. The total value proposition will only get stronger as we deliver more native mobile and cloud technology with Project Avalon. We'll have a lot more to say about that next month at Synergy, so stay tuned.

We like our position in mobile and desktops to deliver a complete enterprise mobility solution across devices, apps, and data to leverage our base as they bridge between the worlds of Windows and mobility, and to do it all with a beautiful, consumer-like experience that sets Citrix apart.

Next, I'd like to talk about our collaboration and data-sharing business. Our focus on mobile collaboration has been a clear success, with the percentage of mobile attendees in GoToMeeting increasing 2X over the past year. We're also continuing to drive innovation across the product family, including the addition of HD video in GoToWebinar, and HD video in GoToTraining. In addition, we just launched a brand-new webcast product announced last week. So from small group meetings in classrooms to auditorium-filled seminars, we're extending our reach and competitive position in collaboration.

Our mobile work style strategy is also driving growth in our ShareFile business, enabling secure data sharing across people and devices as a key component for BYO and mobility initiatives. In Q1, Gartner gave ShareFile their highest possible rating, highlighting our strong track record with regulating and security-conscious customer segments. Enterprise was the fastest-growing ShareFile segment in Q1, as customers embraced additional IT policy controls, and security enhancements to our mobile tools, as well as the recent release of our StorageZones technology. ShareFile with StorageZones lets enterprise customers choose where to store data based on their security, compliance, and performance requirements.

The nature of work is changing, becoming less about location, and more about how effectively you work, making collaboration and data sharing increasingly important to all customer segments.

Finally, I'd like the to turn to our Networking and Cloud business. As David noted, the strongest performance of the quarter came from NetScaler. Three drivers are fueling growth -- First, the build-out of public and private clouds; second, growing demand for mobile work force security; and third, the rise of next-generation services like video, rich media, and big data. These powerful market forces require an entirely new approach to the networking that goes well beyond the capabilities of traditional solutions, and plays perfectly to our competitive advantages. Customers who choose NetScaler in head-to-head competition increasingly cite our superior architecture, better price performance, and innovative technologies like PayGrow that let them buy only the capacity they need, and scale up seamlessly as their demand increases.

Q1 also saw the debut of NetScaler integration with XenMobile, giving us the only enterprise mobility solution with built-in controls for network security and performance. A highlight of the quarter was the high attach rate of NetScaler as part of the XenMobile solution. This combination gives XenMobile a significant advantage over stand-alone MDM players, and the growth of XenMobile will further accelerate our NetScaler business.

Mobile is also driving networking revenue on the telco side through our new ByteMobile product line. The combination of NetScaler and ByteMobile gives mobile operators a powerful consolidated solution for optimizing video traffic on their 3G and LTE networks. Once again, product integrations are differentiating our solution, giving customers greater value.

We're seeing promising traction from the networking partnership we announced with Cisco in Q4 of last year. This relationship, building on our strong existing partnership in desktop virtualization, is driving new opportunities as Cisco recommends NetScaler for customers who need more advanced app delivery network services. I'm really pleased with our execution in cloud networking through product integrations, go-to-market investment, and fundamental technical innovation.

Consumer innovation is driving the shift from the PC as the singular platform for work to a vast array of devices, apps, and data. More than ever, IT decision-making is being shaped by the forces of BYO, personal cloud services, and a millennial generation with new ideas about where, when, and how work is done. We're feeling confident in our strategy to provide powerful cloud infrastructure that enables mobile work styles, helping our customers embrace rapid change in the work force, in the work place, and in how services are delivered. The macro-economic environment hasn't changed our view of the market opportunity. We're going into Q2 and the second half of the year with confidence in our strategy, execution, and competitive position. Now, I'd like to open it up for questions. Jared?

(Operator Instructions)

You have a question from Phil Winslow with Credit Suisse.

Just wanted some more color on your commentary about some push-outs of some desktop deals from Q1, and just kind of how you expect to see these come back on line over the course of the year, and if there are any particular sort of drivers with that? Also, wondering if you could also just give a little more color on how you think actually the acquisition of Zenprise and putting XenMobile MDM together with CloudGateway, just sort of affected clients and their perception of your mobile offerings? Thanks.

Sure, Phil, it's David. Let me take the first part of that and then ask Mark to contribute. Overall, as we've talked about, I'd say there was a fairly uneven environment in a lot of markets around the globe; and obviously, the desktop virtualization business tends to be the most volatile for a couple of reasons. One of those is the fact that it is still a very powerful set of technologies, which lends itself to a level of complexity. The businesses that are driving strong ROI and business value out of the deployments tend to be larger, more mature organizations. So a lot of the focus from a product development standpoint this year is in the set of Avalon technologies we've talked about a couple of times over the last few quarters, really focused on bringing down some of those barriers to adoption, making it easier for customers to acquire scale and manage virtualization on a broad basis. Those will be rolling out later in the year.

As far as the individual transactions, yes, I would agree there's definitely some level of let's call it distraction that came from rolling out the XenMobile business, as customers do tend to think about enterprise mobility as everything from the individual device, all the way up through being able to mobilize their line of business applications, core Windows, et cetera. So bringing that together has caused a tremendous amount of interest from customers, and the teams are driving lots of proof of concepts, lots of conversations around where we're going with that. As Mark described, very excited about the overall level of pipeline build in this area.

Some individual transactions they are just being influenced by the macro. There's certain transactions that closed this quarter already, for example, that came out of Q1. I think I'd describe the overall environment as one where it felt like CIOs were absorbing Q4 purchases, kind of laying out budgets and plans for the year, so overall vibrancy was not really strong. But overall, feel very good about the level of total pipeline; and as we look into Q2, expect to see the mobile and desktop business actually up in the -- let's call it double, low-double digits from a new license standpoint.

Thanks, guys. Then on the mobile side?

Yes, Phil, the response and reaction from partners and customers has been -- actually exceeded our expectations in terms of the value they see in integrating the Zenprise technology and the CloudGateway technology. Obviously, we're going to have some more announcements at Synergy next month, but if you think about it, we closed the deal on January 2; in 45 days we've released XenMobile MDM edition, we trained our field teams and partners, and began to fire up a lot of POCs that included both XenMobile MDM as well as CloudGateway; and built a pipeline double the expectation that we had in the quarter.

Our partners and field teams very excited, and see this as an opportunity to actually sell a more strategic deal to a customer and to reinforce the value of desktop virtualization around mobility, around security, and economics. They're seeing this as a major inflection point, I think, and really having a conversation with customers about business impact, as opposed to a technology solution. So that's what we saw in the quarter and are being very aggressive about it, as you can tell.

By the way, in the quarter we also had HP, CSC, Atos, and other partners step up and either commit to or actually release solutions based on XenMobile and MDM edition as well as CloudGateway technology. So great quarter for the strong motion we have toward bringing mobile and desktop together in a market place that we think is emerging really quickly, and that we have an incredible set of assets, and that leverages our base and what we've stood for as a Company since the beginning, and so the great opportunity's ahead.

Great. Thanks, guys.

Your next question comes from Bhavan Suri with William Blair.

Thanks. I wanted to focus on the online services group here, the SaaS group, which seemed to have a step down in growth rate there. If I look at it even sequentially and I back out maybe ShareFile, it feels like it was flattish to down. So just any color on what's going on there, and is it sort of a competitive thing? Because that business has been a pretty steady-Eddie grower for you, and it seems to have ticked down quite a bit and obviously impacting margins,

Sure, Bhavan, it's David again. The overall SaaS business for just everyone, it's made up of four major pieces. The major strategic focus areas are collaboration and data sharing, both of which I talked about earlier -- collaboration's up north of 20%; data sharing, albeit off a small base, is up north of 75%. Both of those are growing very rapidly. The other line items in there are IT services and remote access. Remote access is the business that's actually declining year on year; it's just a very mature, highly fragmented market. The product there is GoToMyPC. Still a very important part of our business, but one that just the market has matured.

I'd say there's also some level of impact from the environment that we did see in Q1. We saw that a little bit on new sales into the enterprise, and also in renewal or renewal rates in the enterprise, as well. So there's some changes going on internally that we're working through, whether it's program in process items in the sales organization, so expect a few of those things to bounce back in Q2; and for the full year our SaaS businesses ought to grow in the -- our guidance would point to a range up 1 or 2 percentage points from what we saw in Q1.

Got it, that's helpful, thanks David. When you look at ShareFile and storage, help us understand there's a part of it that's SaaS. Do you charge for a portion of that as license, and where does that fit in, in the segment structure?

Sure. The vast majority of revenue related to ShareFile will be in SaaS, will be in the SaaS line. There will occasionally be some that is on [pramf], may show up in product license, but that would be the small minority.

Thanks for taking my questions, guys.

Your next question comes from Abhey Lamba with Mizuho Securities.

If I heard you right on Phil's question, I think you hinted about some shift in sales cycles due to the combination of mobility and desktops. How are they shifting, and when do you think they would normalize? Mark, if you could talk a little bit about the mobile applications in terms of -- is the product ready for the market, and where are we in terms of getting the channel and sales force ready to ramp it up?

Yes, I think the sales cycle point would be more one of having a longer cycle with customers that want to -- that are looking at desktop virtualization and the value proposition of XenApp and XenDesktop more as part of a mobility solution. We don't see any change in sales cycles in the customers that are looking at XenApp and XenDesktop for desktop replacement, or for deployment of apps like ERP, CRM, medical record apps, imaging apps.

We don't see any change in those sales cycles coming, but more in the larger, strategic sales cycles we'll see a little bit of lengthening. Certainly as we get people trained in our own field as well as our partners, and certainly as we make some additional announcements and enhancements to the products that actually integrate them better; so they're actually simpler to implement and even more powerful in how they're integrated. That will be a key topic of Synergy. In terms of mobile apps, I'm not sure what your question's about. Maybe you should reframe that for me.

I just want to know, is the product fully there where it needs to be for customer adoption, and when do you think you'll have the whole channel and sales force fully ramped up to sell that product?

We'll have a lot to say about that at Synergy. I'd say that right now the way the product is packaged is there's XenMobile MDM edition, it's ready for market, customers are buying and implementing it. We have over a million devices under management through XenMobile MDM, so it's ready. CloudGateway has a base of customers. It's ready as well. In Q1, we actually created something called a mobile solutions bundle that made it easy for customers to buy both of them together.

One of the big things that we'll do is make that bundle and how these products inter-operate and are integrated much smoother and more powerful so that we'll gain momentum there, not only with the customer base, but with the partner base. So this will be a several-step sort of process through the year that will have milestones around product releases and announcements that we want to -- don't want to pre-announce here; but we feel really good about the road map, the strategy, and how we're executing on it from the inside pointing out toward the future.

Thank you.

Your next question comes from Steve Ashley with Robert W. Baird.

-- clarify that David's comments to Phil's first question that you're looking for license revenue in the desktop solution and mobile to be up double digit, low double digits in the second quarter. Can you confirm that? Then number two, you had originally, David, said for the full year you had hoped that license in that division might be up mid-single digits. Is there any update to that earlier comment?

Yes, Steve. What I said about Q2 is correct. I do expect that the year-on-year growth in product license for the mobile and desktop business will be up low double digits in Q2. That's a function of what we've talked about already on the call about specific transactions that may have slipped, pipeline, pipeline coverage, as well as starting to get contribution from the XenMobile business. So that's what's driving Q2.

I think given the performance in Q1, the full year right now probably goes from mid-single digits to low single digits would be the expectation embedded in our guidance, and that's just a function of what we saw in Q1 right now. No change in the overall optimism of the business or the outlook, just a simple math exercise. Offsetting that of course is just the outstanding performance that's coming out of our cloud and networking business. We talked about that a lot, with that going up 50% year on year. So expect that to contribute about -- let's call it high 20%s to as much as 30% growth year on year in product license. So our total product for the full fiscal year '13 should be up in the low double digits, between 12%, 13%, roughly in line with where we had laid out last quarter, but just a slight change in the overall mix of revenue.

Very helpful. Then on the data center and networking business, you mentioned that ByteMobile revenue was just a few million dollars. I wonder if we could get maybe a better quantification of what exactly that might have been? I think what we're all trying to dig for is what the organic license growth would have been in that networking business, and if you have a comment on that? Thanks.

Yes, sure, Steve. Yes, it actually was just a few million dollars of product license, and that's a business that for the last couple of quarters we've talked about being very uneven, simply due to the timing of large deals. They tend to be large, low volume of large transactions; and therefore, the timing of those specific ones could hit one quarter versus the other. Then on a contract-by-contract basis, there tends to be some unique terms such as the case in Q1 where orders were actually booked, but are going to be recognized later in the year as we meet certain deliverables. So still on track from a byte business to contribute the $50 million guidance number that we had put out there for 2013. Still feel very good about that, but the expectation should be that it will be a bit lumpy.

In terms of the other line items inside of our Networking and Cloud business, the NetScaler family was the big stand-out. NetScaler stand-alone product license was up north of 60% year on year, and really being driven by a lot of the factors that we talked about. We're doing very well on cross-sell and attach motions as we drive more into the enterprise. We continue to do very well with the build-out of Internet-centric and cloud service providers. We are expanding the breadth of the product solution with the virtual appliances, to allow people that level of flexibility on both from a fabric point of view, cloud, and other applications. Then on the SDX side, just the economic benefits of consolidation, married with the power and flexibility of being able to consolidate multiple different network services on to a single platform is just resonating very well with customers.

You put all those together with the fact that we're still capacity-constrained in a number of markets, and we're optimistic about that business. I wouldn't expect this level of growth to continue, of course, as the numbers get larger. But it is one of our primary investments as we look into the balance of the year, to be able to add capacity so that we can actually service customers in all the geos that we're under-represented right now.

Thanks so much.

Your next question comes from Kash Rangan, Bank of America.

It looks like the networking business is doing really superb, so I don't have any questions there. Pardon my stream of consciousness -- with respect to the XenDesktop deals, Mark, is it fair to characterize these deals as being just put in a bit of a suspension, or either been frozen, or the customers have cancelled projects? Can you just give us a little bit more color as to what confidence level you have in the deals that have slipped? Also, if you could talk to how the linearity of the quarter progressed? Did you see a pause just ahead of sequester and things, did things bounce back a little bit in March, but maybe not quick enough to offset the weakness you probably saw at the beginning part of the quarter? Last, sorry again, if you don't have the time that's okay we don't need to answer this question, any current thoughts on where do we stand with the ROI of desktop virtualization? Thank you very much.

Okay, Kash, thanks for the questions. So first, there were no competitive changes in Q1 vis-a-vis desktop virtualization. Basically, the forces that moved things out were two -- First were the sequester, and we had lots of external force of the sequester, what was happening in Europe; and as David mentioned, most of the impact was on the international front. Then the second piece was some pause with some more strategic customers, which would be larger engagements to consider the value proposition of XenMobile with XenDesktop. So that's why we're feeling great about the pipeline. We're feeling great about the POCs, all of those metrics continue to be strong and good. Just consider this a pause, one caused by the introduction of an exciting new product and greater value for us to offer, and the other caused by the external forces that I think impacted a lot of our colleagues in the industry.

There's also one more thing that I think is in the day-to-day conversation with the more strategic customer, and that is considering Avalon and the feature set that we're bringing to market with that product. Again, it's impossible to quantify the impact of each of these things, but you get those -- the confluence of those three things going together, with the one of them being outside of our control, and that's what we saw in the quarter. But no impact on pipeline and our outlook in terms of the value proposition in desktop virtualization.

If anything, the relevance in values going up as customers re-think how they want to deliver Windows apps and desktops in a world gone mobile, a world gone heterogeneous in terms of devices and network-types of connections, which is creating lots of adjacent opportunity and cross-sell, as you can tell from the report in our networking business. So that's how we'd frame out what happened in the desktop business and the outlook.

Then on the ROI front, the fact is virtual apps -- and the ROI on virtual apps and hosted desktops are -- have classically and always been very strong. In fact, pay-backs within six months oftentimes on the deployment and delivery of a hosted virtual desktop or a hosted Windows app. The ROI conversation is really a conversation focused around hosted virtual VDI-types of desktops where there are huge amounts of storage and issues around storage performance -- all of which, by the way, are receiving a tremendous amount of invention and innovation from us, from Microsoft, and from a number of our other Citrix-ready ecosystem partners.

So that will actually continue to get better and better across the year as these storage solutions actually change the ROI economics on VDI. But the overall ROI on desktop virtualization as a whole, and specifically on virtual Windows apps and virtual hosted desktops continues to be very strong, and one of the value propositions that goes back to the very beginning.

Got it. Thank you very much.

You have a question from Walter Pritchard with Citigroup.

I wonder if you could talk about -- it seems like in the desktop and mobile space the market has really come to you with things like BYO and mobility. But it seems like at the same time your performance in this area has been worse than it was back when I think all of us questioned whether or not there was real demand for these products, and you were doing things like trade-up and things like that to kind of jump-start demand. I'm wondering if part of what's going on here may be that you pre-sold capacity or gave away a lot of the value in the prior sales during the trade-up period. I'm wondering is that an issue here? Are you contending with customers that are in the midst of deployment -- they've already bought and therefore not coming back to buy more?

Walter, it's David. I don't think that's the case. When customers are trading up from virtual apps to kind of a super-set of virtual desktops, it was more just broadening the capability of the solution, and giving them the opportunity to really use it on a more strategic basis -- moving from tactical-use cases, projects, et cetera, to something a bit more infrastructure-like. We've always sold on a -- really on a per-user, or maybe in some cases a per-concurrent user basis, and had penetration that is roughly in that 10% to 15% range. So I don't think that's the case at all. I think what's going on right now is just making sure that we've got the complete solution that is packaged and interoperable in a way that really solves all these problems for customers in a simple, elegant, powerful way.

One of the things we've talked about around desktop virtualization for several quarters now is just the flip side of being a broad, powerful solution is that it is inherently complex. The things we can do as a vendor to really bring down that level of complexity, or frankly, abstract it away from customers, so that they can go faster, so that they can adopt, scale and manage these technologies without a broad level of skill set or outside assistance. That's really what I think is probably the primary barrier to much broader-scale adoption.

That's what we've really been talking about in the context of Avalon for quite some time now. As those releases hit the market later this year, that's a primary focal point. Then in the back half of the year as we start to bring together some of our cloud assets with desktop virtualization, just further making it easier for customers to turn virtual desktops into a delivered service, whether that's something they acquire externally through a service provider, or really put up in their own data centers for just easier management. We need to keep providing those tools. I think that's probably a much bigger deal than anything that has to do with prior sales of the business.

Great. Then David, just on the guidance, I think Q1 you obviously had some things change in the quarter, environment got worse, but it is probably the first quarter I can remember where you were in the low end of your guidance range. I'm wondering if you could just talk about the Q2 guidance in that context. Are you being more conservative than you were into Q1, or any color on the assumptions you're applying versus what you've done in the past?

Sure, Walter. I mean, it's tough for us to measure things on the spectrum of aggressive versus conservative, but I will say that guidance is always influenced by the period that you're just exiting. So there is a level of hesitation that comes starting from the field organization, up through sales management, and as we think about guidance, and wanting to make sure we're being appropriately prudent and conservative there. You offset that with the level of pipeline coverage, the certainty around any identified transactions that might have slipped out of a prior period and what-not. So yes, we've got a number of those factors in play that are certainly influencing our guidance for Q2 and the balance of the year.

I will say that versus maybe a Q4 time frame, the environment hasn't been as certainly vibrant or robust as it was at that point in time. Frankly, all of our field teams are feeling modestly better about Q2; and of course that's backed up by the pipeline. As I said earlier, this period felt like CIOs really absorbing Q4 purchases, laying down budgets for the balance of the year, really planning out the new projects that they're willing to initiate; and I think that our solutions are playing really well into that outlook.

Great. Thanks for that.

You have a question from Israel Hernandez with MKM Partners.

For Dave on the Q2 EPS guidance, which was materially below where the consensus was, can you just kind of talk about what were some of the drivers impacting Q2 in EPS guidance, because it seems pretty off. I think that's one of the reasons why the stock is getting smoked in the after market, besides the fact that desktop business tailed off. But also, could you also comment on the relationship with Cisco and the progress being made there, as well as any impact from sequestration in the federal vertical? Thanks, guys.

Sure. Let me start with the federal and kind of work my way through those questions. Some impact, of course. I think in the US Fed -- actually the Americas geo, to start there, actually had a very good quarter, and pretty linear quarter; so the teams delivered strong across all product areas. The US Fed, as you would expect, low growth year on year with most of the impact coming from the desktop products.

Flip side of that is we saw professional services up about 30% year on year in US Fed as they're working through implementations, proof of concepts on new solutions; and we saw NetScaler up sharply, albeit off a small base, but we're starting to get traction across US Fed and agencies there. I think the priorities in Fed are going to be around data center consolidation, cyber security and mobility -- those are probably the big three. So a lot of our projects will be focused on those areas going forward. I would expect that to continue to be issues around individual budgets for projects for the next couple of quarters, certainly as we get through Q3.

I'll take the Cisco question. So Israel, the relationship there, I mentioned it in the prepared comments; and so first step is this recommendation of NetScaler to customers who need more advanced app delivery services beyond Ace. We saw some good pipeline build, some good deals and traction -- a handful, about a dozen really good deals in the quarter, and we expect that to continue forward as we continue to build those relationships in the field and with specific customers. The second area of focus that's going quite well is the technical integrations that we're doing between NetScaler and Cisco, various pieces of the Cisco platform. So we recently demonstrated NetScaler VPX running on Nexus; and received with great enthusiasm by the Cisco field. So that gives us more momentum and more mind share with them, and helps build the relationship.

Then the next big milestone will be the much deeper integrations that we're doing where we haven't announced anything on those yet and how we'll go to market together, but obviously the purpose of doing them on both the Cisco and the Citrix side is to deliver a beautifully integrated application delivery network solution on top of Cisco's intelligent network platform. So that's to come, and think of that more as a second half phenomenon.

Last question Israel, just specifically about EPS guidance. I would point out that this is the first time we have provided guidance for Q2, so that we hadn't said anything about that previously. We're not necessarily changing guidance. However, the shape of the year is different than the way most people have modeled it. Our full-year guidance, we are confirming the top line on the total revenue basis -- albeit with some mix across the individual product areas. On the bottom line we tweaked that a little bit, but really just to align other interest income where most people had modeled that far in excess of what's available in the market right now. The year is going to be shaped more back-ended, but that's what you would expect as we're starting to ramp two new businesses around XenMobile and ByteMobile. So really, nothing beyond that to consider.

Okay, thank you guys.

Operator, next question.

Your next question comes from Heather Bellini with Goldman Sachs.

Thank you and good afternoon. I had a couple of quick questions. One, David, I wanted to know if you're still expecting $30 million from Zenprise for the year? If you could give us a sense of how much of that is license, just so we can think back with the comments you made before? Then can you also share with us how you see NetScaler helping to pull along ByteMobile sales, and how often are these being pitched together, and the opportunity to do that going forward? Then I guess the last thing I would ask would just be if you could characterize the competitive environment with F5? Thank you.

Heather, on the first question around Zenprise, yes, still expect $30 million in revenue contribution this year, and probably two-thirds of that being in product license, and the balance being in subscriptions, SaaS, or technical services. In terms of ByteMobile pulling -- or NetScaler pulling through ByteMobile -- in fact, it's usually the other way around. What we've seen early on is that for a large ByteMobile deployment, there's generally some functionality that's provided by a NetScaler, whether it's load balancing or other activities. While it's early days, the ratio is about 15%, or 10% to 15%. So for every dollar of ByteMobile sale, there's an opportunity to pull through about $0.10 to $0.15 of NetScaler. That's what we've seen so far. That's certainly in line with the strategic rationale behind this opportunity really opening up the broader telco segment for us, which we hadn't participated in the past.

As far as competition, specific competition with F5, I'd say it's unchanged. They continue to be highly competitive in a number of cases, and our growth is not necessarily all head to head with them. It's simply we're participating in a broader segment of opportunities than we had historically. We talked about a lot of those. On a pure feature function product to product level, I think versus the rest of the industry, we just have a great breadth of solutions right now, providing good price performance mix for customers, but ultimately just great flexibility as they think about this evolution from what used to be load balancing through application delivery, through managing the virtual data center going forward. I hope that answers your questions.

Thank you very much.

Your next question comes from Keith Weiss with Morgan Stanley.

I was wondering if we could talk a little about the competitive environment in the desktop mobility solutions. It seems to me that within desktop you guys had -- or virtual desktop, in particular -- you guys had a pretty well-defined set of competitors there. When we move into a broader mobility solution, mobility means a lot of things to a lot of different people. It seems that there's a lot of players in that space. Is there any aspect of maybe confusion in the market place or maybe people trying to seek some kind of better idea of what types of solutions they want? Who are the competitors in that space that you guys have to work through as you kind of shift the value proposition or shift the positioning of that overall business?

Yes, Keith, I'll take that on the front end. The way to think about this is kind of from the top down, right? There's an overall space that we call enterprise mobility management. (Inaudible - technical difficulty) is comprised of a number of segments around the delivery of mobile apps, mobile data, mobile mail, mobile intranet, and the security and device management required to support all of that. So that's the big uber-market.

With our strategy around XenMobile and XenDesktop together, we think we have an unbeatable combination to answer that, because we have best of breed in all those categories, and we add the ability to virtualize every Windows app and desktop in the world as part of that. That's the uber-EMM. When you talk to a CIO, you talk to the senior-most IT leadership, you talk to line-of-business leaders, that's the kind of solution they're looking for. There's really no confusion there. By the way, in Q1 a number of the big wins in desktop and mobile were all about EMM and really this sort of complete solution.

The next level -- actually, at the other end of the spectrum -- as part of EMM is MDM, the mobile device management. In that market place, reasonably fragmented, a lot of players. We have an upper-quartile Gartner Magic Quadrant solution in the form of the product that we -- the Zenprise that we acquired and the XenMobile MDM edition that we released. We regularly are beating those competitors like MobileIron and [AirWatts], are stand-out segment-specific competitors. It is quite fragmented. I don't think there's any confusion there, because the buyers are typically the buyer that's been running the BlackBerry infrastructure, and specifically responsible for mobile security.

In between those is a space that we've been focused on for a little over a year now, and that's through our CloudGateway product, and that's the mobile app management space. This is a space that is going to be battleground where in this space it's about delivering native mobile apps -- iOS, Android, Windows Phone, et cetera -- combined with all the policy controls and security you need to do that in the context of BYO and even corporate-owned devices.

In that space, what we're seeing is more and more of those kind of decisions are being pushed up the stack to the decision makers that are responsible for desktops, app infrastructure, networking infrastructure, and they're becoming more and more of a strategic conversation. That's the clear trend line. There, the competition is -- it's not a clear market yet. We're actually working hard to define that market through the work that we've done with CloudGateway and what we'll be announcing next month; and so I don't think there's confusion there. In fact, we see ourselves as being the leader in that segment, and have the ability to actually steer this market place from that segment on up.

Excellent. That was very helpful. Maybe if I could sneak in one tactical modeling question. Professional services was off pretty sharply sequentially from 4Q, and pretty low growth there. I'm assuming that's probably a function of some of the desktop products coming in weaker than expected. Should we expect that to bounce back in a big way as we look into 2Q, and do we expect growth to resume in the back half of the year?

Yes, I think it's a function of what the teams are working on, utilization, and our ability to actually recognize contracts. So from a year-on-year basis, I would expect that growth to bounce in Q2 back up closer to 20% or more.

Excellent. Thank you very much, guys.

Your next question comes from Derrick Wood with Susquehanna International.

As you look at your pipeline and expectations of improved activity in Q2 on desktop, I'd be curious what your assumptions are in terms of where the demand level as you're coming back? Is it a function of some of the thawed deals in the US maybe hitting in Q2? Are you seeing some better stability in Europe and maybe is financial services looking better? Maybe some color on vertical and geographic perspectives. The second question is on CloudStack. There's been a lot of discussion on Openstack. CloudStack doesn't get the same amount of buzz in the press, but certainly it does in the industry. So I'd just be curious how you guys may benefit from success on the CloudStack side. Thanks.

Yes, let me take the first part of that question and turn it over to Mark. In terms of the overall demand environment for Q2, like we've said a few times, mostly it's just based specifically on identified transactions, identified opportunities, and pipeline coverage, which is much stronger in Q2 than it was in Q1. So from an environment standpoint, all of our teams are feeling -- this is true throughout the world -- all of our teams are feeling much more optimistic about Q2 than they were in Q1. That's a function of those things -- not necessarily the environment getting materially better, just a matter of specific pipeline and opportunity. So that's how we think about it. I wouldn't say that it's really a vertical issue, but it is true across all geos.

Derek, on your question on CloudStack, so it's still a PO versus PR battle. Openstack is definitely winning the PR battle, continues to win, and CloudStack continues to win the PO battle in terms of real implementations driving real revenue. In the last few months we've seen a couple of things -- First of all, the community size has grown enormously; and as everyone knows, CloudStack is an open-source project. About a month ago, Apache Software Foundation promoted CloudStack to first-level project within the foundation, and is now the largest project within the Apache Software Foundation. We're also seeing that a number of ecosystem and community members in Openstack have also begun to join the CloudStack community, as well.

In some ways, when it comes to some of the underlying and additional value-adds around in the open source community, some of the lines are getting blurred between Openstack and CloudStack when it comes to the open source community.

Of course, our strategy is pretty simple. We are contributing in an aggressive way to CloudStack and making it part of our CloudPlatform commercial product that also includes XenServer technology and interfaces and integrations with NetScaler. Those couple of other factors are the reason we think that we're winning the PO battle, including some of the things that we've done above the stack, above CloudPlatform, with our CloudPortal product that again runs at an even higher layer to orchestrate services across clouds; and we continue to see opportunity to monetize both CloudPlatform and CloudPortal into the future.

Great. Thank you.

I think that's our last question. I'd like to in closing thank everyone for joining today and invite all of you to Synergy, which is in Los Angeles from May 22 to 24. We've got a really exciting conference planned. It will be another sell-out. We really hope you'll join us. As we look forward and anticipating what customers want and need, we see a really rapidly evolving world where we can be a key player in enabling mobile work styles, powered by Citrix cloud infrastructure and services. So thanks again for joining, and we'll see you soon.

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