思杰系統 (CTXS) 2013 Q3 法說會逐字稿

Good afternoon, my name is Doris and I will be your conference facilitator today, At this time, I would like to welcome everyone to the Citrix Systems' third-quarter 2013 fiscal results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you,

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

Thank you, Doris.

Good afternoon, everyone, and thank you for joining us for today's third-quarter 2013 earnings presentation. Participating on the call will be David Henshall, Acting CEO 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 groupings 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 Relation 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 Acting CEO and Chief Financial Officer. David?

Thank you, Eduardo and welcome to everyone joining us here today.

As you can see from the release, overall results in Q3 were $713 million in total revenue, up 11% year on year; product license revenue up 3%; cash flow from operations up 23% year on year; and adjusted EPS of $0.70 a share. In addition, we closed 38 transactions greater than $1 million each, with relative strength coming from customers in the healthcare, retail and technology sectors. Geographically, we saw uneven conditions across our markets in Q3 as customers continued to be cautious with capital spending.

From a license revenue perspective, business was flat in the Americas region, slightly negative in the Pacific, while EMEA grew in the low double digits. Clearly we're disappointed with the financial results for Q3, coming up short of our guidance range for the first time in more than a decade. However, we remain as confident as ever in our long-term strategy and opportunity. In my comments I'll discuss the results in the context of our three primary markets, highlight the items that were below expectation in Q3, and how we're thinking about it going forward.

Let's look at the results within our three primary businesses. First, our mobile and desktop business grew 8% from last year to $381 million. This area continues to be in transition as we've been driving the strategic conversation with customers about transforming their businesses to enable mobile work styles. The introduction of XenMobile enterprise edition is a catalyst for these conversations, raising the bar in enterprise mobility market with MDM, secure mobile apps, virtual apps in desktops, secure docs and mobile support as the standard.

We've been leading with this solution which began shipping about three months ago. In Q3, over two-thirds of our mobile platform customers opted for this edition, while the majority of those customers were also net new to Citrix. We're seeing the XenMobile opportunity pipeline developing at an aggressive pace, and we're very comfortable with our full year goals for this solution and strong growth into 2014. We're also accelerating the pace of product innovation. We have an important new release of XenMobile shipping this quarter, further simplifying and enhancing the user experience, integrating productivity apps and extending our competitive differentiation in the market.

However, while the total business in mobile and desktop was up 8% in Q3, we also saw a 3% year on year decline in license revenue, and this was driven by two primary factors. First, our pivot to mobile, both in terms of marketing and sales team focus. Transformation is a powerful message, generating a tremendous amount of customer interest, but in this environment has negatively impacted our mid-sized transactional business for standalone desktop and app opportunities. And to address this, we're refocusing demand Gen on driving more project specific opportunities in Q4, realigning with customer budgets and emphasizing the key attributes that have made our app and desktop virtualization solutions market leaders. This is areas like data security, compliance, ROI and secure access.

The second item has been the release of XenDesktop 7 at the end of Q2. This is a major platform transition that includes a Cloud ready infrastructure for delivering Windows apps in desktops as a service from a single, easy to use console. We've materially reduced installation time, accelerated app migrations, streamlined operations management, and reduced the cost of ownership. But because XD7 is a new platform, I think we underestimated the impact that customer evaluations would have on our ongoing expansion business. Fortunately we believe there's a solid multi year product cycle ahead for customers of all sizes as they refresh their IT architecture to support enterprise mobility and leverage hybrid and public clouds. XD7 will help them transition and transform their infrastructure to create more business agility, security, and mobility. We also see XD7 further solidifying our key position in verticals like healthcare and financial services, while opening new opportunities in more specialized app markets such as CAD, engineering and others.

As far as early momentum, we had a record quarter for new trial downloads in Q3. At more than 30,000, and just for perspective, this is about double the rate of the last major release of XenDesktop. So we expect that XD7 will drive upgrade and expansion business in 2014.

As I noted, we're making tactical adjustments in the enterprise mobility business in Q4. We have tremendous conviction in our strategic approach here though, delivering a complete enterprise mobility solution that allows customers to bridge between the worlds of Windows and mobility, and to do it all in an integrated experience that sets Citrix apart.

Next, in our networking and cloud business, total revenue increased 15% in the quarter to $146 million, with product license revenue increasing by 10%. The NetScaler products were again the major driver for this business. And in Q3, NetScaler sales to enterprise customers were particularly strong, up about 30% year on year, while the cloud and Internet segment was slower than expected due to the timing of large orders and coming off such a strong growth quarter in June.

For a little more context on the networking business, let me touch on a few metrics from Q3. First, the cross-sell and desktop attach initiatives led to more than 500 virtualization orders that included NetScaler as part of the solution. This is up about 17% from a year ago. Also, we transacted with more than 2,100 different customers in the period, including more than 900 net new networking customers as we continue to expand the base. From a mix perspective, the NetScaler SDX platform represented approximately 20% of NetScaler license sales and increased well over 100% year on year.

And finally, the investments that we've been making in geographic coverage, in this case EMEA in particular, continuing to drive growth, leading to more than 30% year on year growth in EMEA alone. We remain bullish on the growth prospects for our Cloud networking business and we expect to continue to drive share gains. Our product innovation, growing sales capacity, solutions approach and relationships with key partners like Cisco all support our optimism.

So turning to the SaaS business, total revenue was up 14%. Our collaboration services remain the primary driver, growing 20% in Q3. We continue to innovate rapidly in this area. Last quarter we extended HD faces video support for webinars, we released GoToMeeting essentials for small group meetings, and we've added new capabilities for mobile devices like the ability to join a conference with just a single click. Additionally, ShareFile, our data sharing platform, continues to scale up nicely, up more than 70% from last year.

Looking forward, the opportunity for ShareFile's expanding as we've addressed more enterprise requirements through innovations like StorageZone connectors for SharePoint, network drives, Microsoft Dasher, as well as tight integrations with our enterprise mobility solutions. The early results here are strong. In fact, in Q3 alone, we closed 15 transactions for over 1,000 seats each.

Turning to operations. Adjusted gross margin in the quarter was 86%, down 1 point from a year ago as new product license revenue reflects higher mix of networking and SaaS. We expect this trend to continue for the remainder of the year. In Q3, we added about 300 new people to Citrix as we continue to focus on expanding go-to-market reach and customer direct touch, primarily around networking. And additionally, we're investing to expand our data sharing and mobile platform teams. We do expect growth in headcount will slow down in Q4. Finally, the adjusted tax rate in the period was 23%, up from 22% a year ago.

Looking at the balance sheet, cash and investments increased to $1.7 billion at the end of September, driven by cash flow from operations, which was over $223 million or an increase of 23% from last year. In the last period we repurchased 800,000 shares of stock, bringing the year-to-date total to just over 2.6 million shares. And given the current market conditions, we plan to significantly accelerate our share repurchase program in Q4. Today, we announced that the Board has authorized a $500 million increase to the program, and this is in addition to the nearly $180 million remaining under the prior authorization.

So turning to our current outlook and expectations for the fourth quarter 2013. Before I discuss our actual guidance for the quarter, I'd like to provide some context around our expectations. But first, we believe that it's reasonable to expect demand levels in capital spending to remain mixed across our various markets. And second, that we're using conservative assumptions on the timing of pipeline closure, assuming that many customers are still in the process of evaluating our new platform releases in the mobile and desktop business. We'll continue to focus on execution, and delivering financial results, while investing to expand our long-term capacity, innovation and competitive differentiation across the business. So for Q4, our expectations are total revenue in the range of $800 million to $810 million, and adjusted EPS of between $0.95 and $1 per share. With respect to next year, we're currently working on the 2014 plan, and given the environment, the product transitions in process, the fact that we're still in the middle of our planning cycle, we're going to wait until the next call to provide any specific financial outlook for 2014.

But before we take questions, I'd like to address a topic that I'm sure is on everyone's mind. That's Mark's temporary leave of absence and what it means for Citrix. The first thing I want to say is that the leave is unrelated to the business. As many of you know, Mark recently suffered a personal tragedy with the death of his son. It's obviously been extremely difficult and last week he decided he needs to step back from his executive responsibilities to be with his family and to give himself time to heal. All of us, the Board, management, employees are fully supportive of Mark and his decision, and we all want him to take the time that he needs. He'll continue to serve on the Board during his leave and we do expect him to return but there's no set schedule.

Beyond that, we won't comment really any further on this out of respect for the privacy of Mark and his family. But while Mark is on leave I'll be working closely with our management team to drive the business forward. It really has been and will continue to be our collective responsibility to execute on a day-to-day basis and I'm highly confident we have the experience, the team and the capabilities to do that. We intend to maintain a laser focus on customer needs. IT as we know it is being reshaped. Work is going mobile. Applications and services are being delivered from the cloud. This is really the future of IT. Citrix has the innovative products and solutions to meet the needs of our customers today and well into the future. This is how we'll capitalize on these better ways for people and IT to work, and this is why we're confident in our financial fiscal strategic plans.

As we open up the call for questions, I want to let you know that I'm joined here today by, Sudhakar Ramakrishna, Senior Vice President and General Manager of our Desktop and Cloud Division who will also be available to take your questions.

So now operator, we'll now open it up for Q&A.

(Operator Instructions)

Philip Winslow, Credit Suisse.

First, in terms of NetScaler, can you provide some more detail on some of the -- what caused the deceleration in growth this quarter and then as you think about your guidance for Q4, what are you sort of implying in there for NetScaler in that Cloud division? And then also, back towards XenMobile, you talked about a big release coming. I think you're calling it [Ardenes]. We've heard that it's focusing on a single server infrastructure MDN and mobile application management, some authentication changes too. Could you provide some more detail on that release and then how you think that's going to impact the business especially in 2014? Thanks.

Thanks, Phil. Let me talk first about networking and then ask to Rama to speak specifically to the XenMobile releases that are coming up. First off as I said in my prepared remarks, our business is really shaped into two primary areas, sales into the enterprise and sales into Cloud-centric or Internet-centric customers. That latter portion is the one that has been really driving that outsized growth over the last few quarters, showing north of 50% product license revenue for three straight quarters. The other area, the enterprise is really the place that we've been focused strategically for the last several years to really build out our capacities to service customers, that's really a coverage statement, our strategies around attach for some of our broader virtualization solutions, and then of course working with partners like Cisco on just core ADC opportunities. So it's the enterprise area that did really well in Q3.

I mentioned up about 30% year on year. We saw that across all primary verticals and really nothing beyond that. The attach motion to desktop as I said was up about 17% in terms of the volume, the actual dollars track more closely to the dollars in the underlying desktop business. So we're really happy with where we sit right now from a let's call it a product technology and competition standpoint, the breadth of the solution, and then coverage is one that we're still working on. I think we've got a long ways to go in terms of just being able to service customer requirements. A good example of that is what you're seeing in EMEA with EMEA being a more of a challenging Geo in the aggregate, it actually grew in the networking business north of 30% year on year just because we've been able to add more coverage. Rama do you want to talk about the XenMobile business.

Thanks, David. On the XenMobile release, it is really an extension of what we delivered last quarter as it relates to XenMobile enterprise. Our focus in the upcoming release is three-fold. One is to continue to work on simplifying end user experiences as it relates to setting up the formal applications, and leveraging mobile applications and mobile data. Specifically focused on mobile applications is how we integrate secure mail as an example. We've made significant strides in that application to significantly improve the performance of it, feature capabilities as well as set-up and performance.

We are also focused on integrating secure data applications for online and mobile editing of documentation and integrating productivity and collaboration capabilities. For instance, with one click you can join the GoToMeeting application from our calendar application, so our continued focus is in addition to MDN, traditional MDN, focusing on application management and information management through focus on which targeted applications like secure mail on one hand, and also to expand our ecosystem by providing the [ATI] required to continually add to our mobile ecosystem.

Next question.

Walter Pritchard, Citigroup.

Hi, guys, this is Ken Wong for Walter. On the NetScaler business again, you guys had -- I mean, typically Q4 is a pretty robust quarter for that -- for the Internet group. I mean, should we be expecting that you'll see that same kind of trend this coming Q4 or are you guys dialing down expectations there?

Yes, Ken, we're not breaking down expectations in our guidance by product for Q4, we just haven't done that in the last few quarters. The one thing to keep in mind, though, when you look at the individual pieces of the business, for example, the networking products were up just under 60% growth in product license a year ago, and nearly 30% sequential growth. So we had a really big Q4. As I mentioned earlier, that was the first of kind of three quarters that we received a large volume of orders for major cloud services build out. So they're there in the pipeline. I think we're very optimistic about our ability to continue to take share over the long term. But the timing of specifically when those close is harder to forecast. That's one of the reasons why we don't want to be breaking out at a product by product level.

Got you. And I guess in the quarter, did you guys see any weakness come from federal?

I think as everyone would expect, Fed was a little choppy. We had kept our expectations pretty much in check in that area. I'd say there's more -- probably more activity on the civilian side, while DOD and places like that were more focused on infrastructure and security and those types of initiatives.

Got it. Thanks a lot, guys.

Raimo Lenchow, Barclays.

I had a question on mobile. If I look, to me it seems there are two areas, there's your product and then there's the market. If I look out there, there's some other of your competitors who seem to have been slowing down again. Can you talk a little bit about customer behavior in terms of making tactical decisions on mobile versus strategic, and what do you think is needed to kind of turn it towards more a strategic decision making process, ie from your product as well but also from the market, setup and the market understanding? Thank you.

This is David. At a high level, the conversation really has changed. We're driving a lot of that, I think. Longer term, all CIOs recognize that it's going to be critically important to bring Windows, mobile and SaaS apps together alongside how they think about data, data security, profile management and doing that in a unified way so that it's a seamless experience, both for IT and of course for the end user. Strategically that direction absolutely resonates. I think that where we are from a market is working our way there, like a lot of transformations they happen fairly slowly. But customers are purchasing the longer term vision right now.

There's still a lot of people buying MDM and the number one app out there is really around secure mail. When you look at the focus areas that Rama talked about, the things that we're driving with releases this month and into next year, it's really about making that the best experience available. And that's our focus. At the same time, we're integrating with some of the other tools that we have, our broader solutions and then the ability over time to really bring those things together as I mentioned before. So that's probably the way I'd think about the market. From an opportunity point of view, our pipeline is now measured in the few hundreds of millions of dollars, so there's a tremendous amount of interest out there, and as we bring new solutions to market, we're very focused on closing that out. I think it will be a good year in 2014 from both a market point of view and of course from a XenMobile point of view.

Michael Curtis, Raymond James.

It's James Westman sitting in for Michael. We've been hopping on calls so I apologize if you guys covered this already. Can you tell us what the byte and Xen prize inorganic contribution was in the quarter?

James, we actually didn't break that out. As you know, it's pretty modest. These are both slow businesses that are ramping at this point in time.

Okay. And then second, can you just talk about a little bit of color with the integrated sales around XenDesktop and mobile, again, I apologize if you covered this earlier but just come color would be helpful.

Yes, James, I think that we did cover that in the remarks. I'm sure you'll see that in the transcript. But at a high level, the message around mobile and the strategic conversation is resonating quite well. I think that the pivot in this environment has had a bit of an impact on our ability to drive more short-term project-based desktop virtualization. It's one of the reasons why we are shifting a little bit of focus, demand Gen and sales effort towards those things that resonate with customer budgets that exist today, opportunities that we can close in Q4 and into next year, things like data security, secure remote access, et cetera.

Great. Thank you.

Steve Ashley, Robert W. Baird.

I'm going to circle back to the NetScaler business and just ask was the overall performance of that business consistent with your plan in the quarter?

Yes, Steve, I'd say it's roughly in line. It's from a year-to-date point of view, that business is up north of 30%. We are ahead of plan year-to-date. The timing of the large Cloud-based orders I'd say are the ones that are harder to forecast. That's why there's a little bit of variability quarter to quarter. That's why we've talked about that over the past couple of quarters, that's going to be a little bit lumpy because that's the shape of those transactions.

But if we look out longer term, what would you suggest we think about the growth rate of this business, maybe on a license basis, again longer term, smoothing out some of those larger deals, the timing on those deals?

I want to be careful not to give 2014 guidance at this point. We're specifically not doing that right now. When we look at what we've done from a market and a market SharePoint of view over the last few years, we think all those trends continue to be in place. The expansions we've made from a coverage standpoint, the very, very early stage of critical partnerships, like Cisco, the success we've had in Cloud service, these are all trends that are well entrenched right now, going into the back half of the year and next year. It's a way for me not to answer the question specifically. I think that we're certainly confident in our ability to continue to drive share over the future periods.

Would you say that the performance this quarter is not representative of what you would hope to see the business grow longer term?

Yes, I'd say that the only thing I'd say about that is that this quarter was one that we had some weakness. As I pointed out earlier in the Internet-centric and Cloud service provider sector. It's a big part of that business, harder to forecast. Feel very comfortable about the directional trend of that and so this quarter we may have wanted that to be stronger but overall, as I said, we're tracking extremely well year-to-date and we're optimistic looking forward.

Great. Thanks so much.

Kash Rangan, Merrill Lynch.

First off, best wishes to Mark if he's reading the transcript at some point in the future. With respect to the business, we hear that VDI, cost of VDI technology is starting to come down pretty significantly. Starting to make sense even to mainstream organizations plus you've got VMware that acquired [Touchstone]. You guys signed a large deal with a service provider previous quarter. So all indications are that the market is maybe is becoming more main stream, but much later than anybody thought.

So wondering how you guys are positioned. Do you first of all agree with my assertion? Maybe I'm completely off base. And secondly, how would you go to market next year in light of the mobile product acquisition? Do you foresee having two separate sales forces in order to get the best out of these two opportunities?

This is Sudhakar, let me comment on that and David can add on top of it. So first of all, I agree with the comments that you made in terms of the economics of VDI or desktop virtualization in general, working in the industry's favor, whether it be storage costs or computing power and cost. As you heard from David, customers are evaluating XenDesktop 7, in some cases that has protracted adoption. Plus the story has become larger as it relates to enterprise mobility and bringing together of mobile applications, mobile apps as well as Windows apps that are getting mobilized. Our focus is to continue to help customers accelerate their evaluations, continue the adoption and a great focus on XenDesktop 7 was simplicity, manageability, while continuing to deliver the security that we have come to be known for.

In regards to market expansion, the way we are looking at it as you mentioned. Frankly that we believe that is a validation of what we have seen in the market for the last three years. As you know, we have over 2,600 Citrix service provider partners, serving up desktops and applications using Cloud technology and we continue to accelerate and build momentum, using the same base technology, but Cloud-enabling it. In addition to that, we are expanding the market opportunity in terms of addressable desktops that we can capture through innovations within XenDesktop 7 as it relates to specific verticals in the engineering community or computer aided design and others which have a rich need or an expansive need for a graphics acceleration and graphics performance and interactivity.

So I agree with you. And based on our focus areas as we go forward. As it relates to XenMobile, we have a specialist sales team already in place. However, increasingly our customers who are our traditional XenDesktop, XenApp customers also tend to be our XenMobile customers. So our focus there is not only penetrating our installed base, but also expanding into new customers with mobility at the front end with expansion into the entire portfolio as we move forward.

And Kash I'd just add, the strategy of course is striking the right balance between the long-term strategic vision for the most advanced mature customers, and of course addressing and servicing more project-based opportunities that exist out there right now.

Great. Just finally, if I could, on the networking business it's rare that you have missed numbers in the Internet vertical. Is there any pause going on there, competitive share, or execution, a combination of those? That's it from me.

Kash, I wouldn't say we missed numbers because we hadn't guided to that specifically. But I would say if you remember, we've had really large quarters over the past nine months, Q2 was particularly strong in that area. We talked about that last quarter, being up 54%, being driven a lot by some of these large transactions coming out of the Cloud area and that the timing of those was inherently difficult to forecast. So feel good about it long term and this is just the way everybody should think about it is that segment of the business has historically been and will continue to be a little bit lumpy from a timing standpoint. Next question, operator.

Kirk Materne, Evercore.

David, sort of understanding that the sales process might have gotten a little bit delayed through more customers evaluating desktop 7 and sort of the shift around the mobile narrative. I guess where do you think you are in terms of that process, meaning how far along are we in terms of the evaluations versus them getting back on schedule where the pipeline was originally set? And I guess as it relates to your fourth quarter guidance, I guess what have you done differently given that it has been more choppy in terms of the conversion rates on pipeline, because it sounds like you guys are still very positive on the overall pipeline. I guess what are you doing in terms of the conversion rate assumptions to try to I guess de-risk some of that lumpiness for investors? Thanks.

Sure, Kirk. You're absolutely right on the desktop piece. We feel that this is a really powerful platform that came out with XenDesktop 7. We're bringing together for the first time a new architecture around app and desktops, the ability to deliver those seamlessly from one console, we're more kind of a cloud focused architecture if you will. But it's a challenging upgrade for customers. Existing customers that have large farms right now are going to go through a thoughtful process on how to do that. And for a typical customer, there's very few that are wall to wall desktop virtualization. Most of them are in some phase of projects that expand on a ordinary course of business. And that's been a land and expand strategy for 20 years now and when they go through the evaluation of a new platform, that expansion business is the part that's probably most impacted.

At the same time, we have release 7.1 coming out this quarter which actually supports R2 of Windows Server 2012. That's important. Because it historically is a point where a lot of customers upgrade their underlying server OS and so that's how we're thinking about it on that front. As far as the other part about the message and whatnot, the message remains the same. However, it's as I said earlier, it's not an either, or when it comes to dealing with the more specific requirements like data security or BYO or secure remote access. It's both. And so that's why we're transferring a little bit of focus back in Q4 and into next year on those areas so we don't lose sight of that. As far as the guidance and what's in there, we haven't given specific numbers out around how we think about overall pipeline and pipeline coverage and closed ratios, but I will say we are in general consistent with my comments, being more conservative on those assumptions based on the choppiness that we've seen over the last couple of quarters. And that is most specifically around the desktop business.

John DiFucci, JPMorgan.

It's Darren Jeong on for John. David, in the desktop segment, you referred to the pivots mobile and the XenDesktops 7 transition as impacting growth in that business, but I just wanted to ask if there was anything your competitors did in the quarter that may have also impacted that business at all?

No Darren, nothing I can think of. This is a market that's always been competitive. No change on that front.

Okay. And then just a question about cash flow. It looked like collections drove a lot of the growth in the quarter. Was there anything unusual going on there? And I suppose should we assume that there's going to be a headwind created by that next quarter?

I don't really look for headwinds as much as cash flow was strong. It was up -- I managed earlier it was up 23% year on year. Last quarter I believe it was up 25% year on year. So trailing 12 months is probably about 20%. It has been a focus as I mentioned several quarters ago to keep cash flow growing faster than revenue and net income. It is one of our focus areas. So we're very fortunate to have a business with a high degree of recurring revenue, good visibility into cash flow, and a very solid and clean balance sheet.

Okay. Thank you.

Abhey Lamba, Mizuho Securities.

David, just following up on your recent comments you mentioned that XenDesktop 7 is a challenging upgrade for customers. What is the chance for competition to try and displace you there? In other words, is it challenging enough for customers to look at other alternatives as they go through the upgrade process?

This is Sudhakar, I'll address that. XenDesktop 7 is actually one of the -- I would say a ground-breaking release in terms of simplicity and manageability while maintaining all of the benefits and in fact, we've simplified the architecture greatly by combining it for desktops and apps. So in that sense, it's actually a highly competitive and very easy installation process. In fact, we can get customers serving up desktops within a matter of minutes. The point that David was highlighting was about these large customers that have actually multiple releases of XenDesktop and XenApp in the same network across (inaudible). Graduating them to XenDesktop 7 is actually a slow process. Because they have to not only qualify XenDesktop 7, but actually go through the migration of several discrete farms and that's what actually results in some retraction for existing customers.

Thanks Sudhakar just a quick follow-up. Can you talk about what's causing the slow uptake of mobility solutions if you can talk about the customer decision process, do you normally have to replace somebody there? How long do you think some of these proof of concept evaluations are going to go on before we start seeing meaningful uptake of those solutions? That's it for me.

In terms of displacing others, we take a lot of pride in actually working with the installed base of the customer. To the degree that they have [seen the units]. Many of the prior customers have a small number of MDM seats and so on and so forth. We're not really expecting them to change out or swap out those. We co-exist with them and we help expand them. The message that is really resonating with our customers as it relates to mobility is not just about MDM as much as mobile application management and information management.

Co-resident with mobilizing Windows applications themselves. When they look at an enterprise-wide strategy, they're not looking at it from a XenDesktop, XenApp or VDI perspective alone, but broadly speaking enterprise mobility management in total. And so that's really what's getting customers excited about our strategy and that's also what's contributing let's say to some of these evaluation cycles that David mentioned.

Abhey, I'd just mention on top of that this business is ramping ahead of the expectations that we had laid out originally. So we're comfortable with where we are. We always like to go faster. I think that because we're on such a rapid pace of innovation there and bringing new releases to market every few months, this helps address whatever customer issues there are out there that are slowing things down. So we feel good about where we are and certainly going into 2014.

Rob Owens, Pacific Crest.

On the software side of the business, as you specifically look at Byte mobile, are you seeing much pull-through there relative to NetScaler and just how is Byte mobile transitioning over? How should we think about that in what historically I think is a strong fourth quarter for that business unit?

Let me start out, then I'll ask Sudhakar to follow on here. So I'd say just in general, the Byte mobile business is maybe on track to what we had thought in terms of dollar contribution, we're probably a little bit behind in building out the go-to-market motion from where we'd like to be. As you know, selling into a carrier is a different beast. It's a longer sales cycle. The deals are large. The deals are infrequent and they tend to be multi-year in nature. But we've got a good pipeline opportunity of what we call new logos, the timing of course is very hard to predict but they're out there.

We're ramping well. As far as Byte mobile as a product, we have a new release called 7 which Byte mobile 7 which is shipping this quarter, enables mobile operators to really differentiate service by managing things like Internet radio traffic and user experience indexing and some pretty cool features there that will add value to their networks. It's early for us. It's an early segment and one that I think that we'll keep focusing on into next year.

I'll add a couple comments to that. Release 7 actually has a lot of features that continue to expand what I call the wireless spectrum efficiency and optimization that we've been delivering in the Byte mobile context to our customers. We also added capabilities to help them meter and rate their users more effectively, thereby enabling them to deliver differentiated business models. So that's on the Byte mobile stuff. There is a level of NetScaler attach related to Byte mobile deployments.

However, the main focus on NetScaler is call it supporting telco data centers which typically tends to be different buyers within the same telco but we're using our Byte mobile presence, Byte mobile sales teams and the broader proposition that we're delivering to gain additional traction on the broader NetScaler portfolio itself. So there's some limited attach as it relates to Byte mobile. And then there is also a focus on expanding into their data centers.

And then Sudhakar on the mobile and desktop side, Citrix is relatively broad portfolio which you're newer to the Company, is there the natural synergies there that we think and are there further steps that you really need to take to do more integration to make it more consumable and improve velocity or are they playing out to be more discrete categories that end customers are looking at? Thanks.

That's actually an excellent question. This is a focus area for us as we bring to bear not only Windows apps and mobile apps but also SaaS applications in the future. While we made our mark with serving up desktops and applications in a Windows environment, we are quickly integrating and expanding to mobile applications as well as SaaS through common and unified architectures and experiences.

Heather Bellini, Goldman Sachs.

The first one was how do you guys see the R2 release of Windows Server impacting your sale cycles if at all, if it had an impact this past quarter? There's a lot of concern in the market that this is also going to impact your growth going forward as well. I'm just wondering if you guys could share your thoughts there. And then I guess David, for you, the guide I think I'm getting asked a lot, the guide's a little bit higher than what we normally see in terms of the sequential growth for a Q4. Can you talk about your confidence level and how your conversations with customers might be changing versus say four to six weeks ago when they were more cautious?

Sure. Let me take the second part of that first. In terms of sequential modeling and whatnot, we are as we always have, we focus on more of a bottom's up approach to guidance and pipelines and forecasts and whatnot. That's just because the nature of the business is changing. I think last year on sequential total revenue we were up 15%, I believe, maybe 16%. Our current guidance would be more like 12% to 14%.

You really beat last year, right, in Q4? I think that's the question I'm getting. You guys ended up crushing your guidance. So usually you guys guide a little bit more conservatively.

Well, we felt like this is a conservative guide, Heather.

That's perfect.

Based on where we are.

Thank you. And then the first question?

Sure. In terms of R2, the important thing to remember is that Microsoft has been a terrific partner for 20 years and a lot of what we do on the app and desktop side is embrace and extend the platform. Server 2012 being a powerful platform, a lot of companies are either eval or starting to adopt. And it's usually -- looking back historically, it's usually the R2 release of a server OS that has accelerated adoption over many generations. And so there's no reason for us to expect that it's any different now. And that's also based on customer conversations.

Thank you.

Brent Thill, UBS.

Thanks. David, I just want to go back, and not to dwell on Q3, but from a pipeline did you see those deals that slipped, those were late stage deals, are you anticipating those to come back into Q4? I know you mentioned kind of the desktop and mobile but any color as it relates to the geography, where you saw those deals slip? Is it across the board or centered in one region?

Sure, Brent. Deal slippage is one of those things that we always want to be a little hesitant with when we talk about it. Opportunities do move in and out of every quarter. I'd say from a market standpoint, it was a fairly challenging environment in many markets. I think customers have been more focused on tactical projects. Fairly similar to last quarter, but very similar to a year ago, Q3. If I start breaking it down by regions, EMEA was mixed by subregion, relatively weaker in Western and Northern areas. However, NetScaler as I mentioned before, doing really well, up more than 30% year on year as we just have been increasing investments there.

A good proof point we've got a lot of runway. APAC, more emerging markets where I'd say most challenging that was across the board. And in the US, Fed as we've talked about briefly, Latin America, so in the broader Americas region and then the Western area. That was probably the most impacted. I'd say if I had to characterize Q3, it was one where there was probably a fall-off in expectation, very late in the quarter and it was just focused on a lack of urgency for customers to initiate capital spending. That's the cleanest definition. And as far as opportunities coming back in, sure, there are at least a handful of $1 million opportunities that slipped that have closed already. But that isn't too dissimilar to a normal quarter. So I'd be careful just reading too much into that.

Just one clarification on mobile. I believe you gave some high level expectations you thought for the year. Can you just update us on your financial expectation for the mobile business for this fiscal year?

We did. We said the contribution from the mobile platforms would be at least $30 million of total revenue and we feel very comfortable with that number at this point.

Great. Thank you, David.

Keith Weiss, Morgan Stanley.

Back on the networking side of the business, I was sort of curious. I don't think you guys talked much about the virtual appliance in your prepared remarks. Just wondering if could update us on the kind of traction you're seeing with that. I know a lot of the partners that we speak to are excited about but I also know that some of your traditional competitors are also beginning to invest a lot more and so if you could maybe give us a little bit of an update on what you're seeing in that part of the business, that would be great?

I think the virtual appliances are doing extremely well. I didn't break it out in prepared remarks but in terms of bookings dollars, it's still a smallest of the three major areas but it was up north of 40% year on year. The great thing about the virtual appliances, just provides so much more flexibility for customers to utilize those types of capabilities at different parts of the app stack. Think about it as almost creating more of an app fabric to be able to integrate with our more hardware based appliances. The other thing that we haven't talked about is the release of Citrix NetScaler 1000V by Cisco which is a virtual appliance and that's an OEM arrangement. That just went live in the last couple of weeks. Just getting more and broader market coverage and more opportunity to get that technology into more customers. Anything you would add on that?

I think you covered it all. We are quite excited about Cisco's release of Cisco NetScaler 1000V as well and it's a continuation of our focus on virtualization and providing customers options, be it 100% software only as well as in some cases hardware based solutions or appliance based solutions, I should say.

Great. Maybe just talking to some of those larger Internet and cloud deals that you talked about maybe being pushed out a little bit, were there any that were lost to competitors or are those all still in the pipeline and just a matter of timing and when some of those might come back in?

There was nothing from a competitive standpoint that's changed. It's just timing. It's simply focused on when a lot of these big companies need incremental capacity and remember, we had really strong growth coming out of the last three quarters in a row from this vertical. So for it to come back a little bit, just on timing is not a big deal in our minds.

Great. Thanks a lot.

Gregg Moskowitz, Cowen.

Thank you. Good afternoon, guys. A little bit of a follow-up to Kash's question on the refocusing on demand Gen. How quickly David do you think you pivot and start seeing some positive results from this? And also do you view this as more of a temporary or permanent shift in go-to-market?

Two things. One the strategic direction, we have absolute confidence in that and probably more confidence than ever based on customer conversations about the need to really bring together apps of all types, data, security profiles, et cetera. That's just the way people are going to need to consume applications downstream. So we feel good there. The challenge for us, as a Company of course, is just making sure that it's not an either, or. So, when we talk about re-vectoring some demand Gen and focus, that's beginning late last quarter, continue through this quarter and into next year. So we can certainly have a modest impact in Q4. But really just setting us up more as we start thinking about the first half of next year.

Okay. And then you also talked about the 1000V. I wanted to ask about that. I also saw the SKU has been live for a couple weeks now. Can you talk about your expectations particularly for 2014, just given the recent enhancements on the technical integration side as well as go-to-market as well?

Actually, we really can't talk about expectations for next year. We haven't given anything for next year right now. But as Sudhakar mentioned there's a lot of great things going on with partners like Cisco, not just on the 1000V, but some of the tight integrations that we have with nexus 7000, we haven't talked about but continue to do great joint business with desktop virtualization on UCS. Now that we're part of a component of Cisco Validated designs, that helps a lot with customers when we're talking about ADC migration opportunities. So it's multifaceted and a lot of good things going on.

Okay. Thank you.

Daniel Ives, FBR Capital Markets.

With mobile and desktop, could you just talk about where the sales force is in terms of capacity? It seems that you have the right guys in the right places, just talk about where they are in the ramping process, given the product transition?

I think we're relatively early on. I mean, for our internal teams as Sudhakar mentioned we do have specialists that are very focused on mobile but it's also a highly related sale to our generalist teams. So I think we've got good leverage there and that will keep getting better all the time. From a partnership or partner contribution, traditional resellers, it's ramping. I don't have the numbers in front of me specifically how many partners are certified but it is a nice related sale to those that have the skills to sell virtualization already. So I'd say it's a work in process, like every new product and market launch for us. But it's getting progressively stronger each and every quarter.

Just to add to that, not only is it in terms of pure heads but we are also focused intensely on readiness and training, both of our internal sales teams as well as our partners, just to help to scale better and more effectively going forward.

Got you. Thanks.

Mark Moerdler, Sanford Bernstein.

Two questions. The first one is given your tight relationship with Microsoft, how do you see clients moving to Azure having effect? Historically, the certain new version of the server has helped you. Do you think moving to Azure has a similar type of lift effect to you?

As you mentioned, we are close partners with Microsoft and we've been working on delivery of desktops and applications from -- in the Azure architecture with Microsoft. I'll say it's fairly early days in terms of actually defining the architecture, much less actually talking about a roll-out plan and such. But my belief is that our continued partnership will help us leverage the cloud as another delivery vehicle to expand overall addressable market for us.

Excellent. And then the mobile side, relating to partners, et cetera, do you see that you have the right fit or do you feel you're going to need to significantly change or expand the partners that are going to drive the newer mobile offerings?

We feel good about the level of partnerships that we have and the partners that we have. As you mentioned, it's a fairly new product to the Company and to the market. And the proposition that we have is truly unique and differentiated. So there's a lot of focus on readiness and training as I mentioned and helping our sales teams as well as our partners scale more effectively.

So you see there's going to be a lot more ramping that you're still going to have to do but the clients are the right guys?

This is going to be an ongoing process because we continue to expand our ecosystem as well. But we feel good about where we are as David highlighted. We feel good about the results in 2013 as well as our continued prospects into 2014. It's not so much a ground-up effort as much as an expansion and an extension effort.

Perfect. Thank you.

Scott Zeller, Needham & Company.

I wanted to go back to NetScaler and just ask a housekeeping. I know we were told that license for the networking cloud was up 10% year on year. Should we assume the NetScaler license was roughly the same performance? I don't believe it was called out.

Yes, I said license was up 10% year on year.

For NetScaler as well?

Yes.

I'll try again on calendar '14. I know you're not offering official guidance but how should we think about the investments and the change in sales strategy for mobile versus margins for next year?

I'll tell you what. Like I said earlier, we are in the middle of our planning cycle right now. We've got new leadership across the product businesses. We're very confident that we'll have a really complete plan going into next year and one that strikes the right balance between both long and shorter term strategic initiatives. I think we really like our markets, our competitive position and our focus but it's just not appropriate to provide specific guidance until we get further along in the process. As we exit next quarter we'll be able to lay that out with a lot of specificity.

Thank you.

Rick Sherlund, Nomura.

If you could just comment on the size of the deals you're experiencing on the mobile side, are they tending to be smaller in size, suggesting perhaps you're maybe seeding the market now and maybe you've got an opportunity for more follow-on larger deals next year? And also F5 just commented they saw a win rate of about 90% and no pricing pressure. I'm just curious whether you saw anything? I think I heard you Dave say earlier say no change in the competitive environment, but specifically on the NetScaler side, is there any change in the dynamics you're seeing in the market there?

Rick, let me start with the latter part. I can't really speak to the win, loss rate. I'd say that from a numbers point of view, our business in what would be traditional ADC, load balancing is doing extremely well. That's the enterprise side. That's the part that was up 30% year on year last quarter. So I think we're positioned really well competitively and as we have more and more coverage we have the ability to engage in that many more conversations with customers. And then of course, partnerships and others help aid that at the same time.

I will say that it's been a highly price competitive market over the last several quarters from a number of vendors and that is -- we should expect that to continue into the future. We differentiate based on our architecture, our approach to pay grow and other more call it enterprise friendly features and then of course with platforms is being able to bring forth both the core MDX, virtual, MPX and SDX which is the big consolidation opportunity. So that's how I'd think about the NetScaler component of the business. In terms of mobile, one thing for everybody to keep in mind is that we've been in the market now for only three months with a enterprise edition of XenMobile, really changing the whole story in the MDM, kind of in the MDM space. It is very early days at this point.

I think most of the opportunities we're seeing and we're closing tend to be smaller in nature. These are customers that are rolling out 100, 500, maybe 1,000 seats at the high end. And so we're just getting started there. From an ASP standpoint as you'd imagine, this is a smaller sale than a broad desktop virtualization sale. But the strategy longer term of course is how we bring these things together, how important it is to support Windows, mobile, SaaS and other apps together in one unified solution that has the context around data, data security, profile management, et cetera. And so longer term, that's exactly the direction we're going.

Thank you.

Ed Maguire, CLSA.

I was wondering if you could just discuss the long tail aspect of the desktop business. It's been now well over through like three and a half years since we've seen this broad Windows 7 upgrade and that's starting to tail off. Windows 8 has not lived up to a lot of expectations. I was wondering if you could comment on what impact you've seen that sort of that broad shift having on your business and whether some of the confusion I think that's been in the market around the enterprise adoption of Windows 8 is also having an impact on your desktop business? Thank you.

So I wouldn't categorize it necessarily as a long tail as much as our ability to support opportunity even from a Windows release standpoint. As you know there's still a huge installed base of XP out there in the marketplace, and we make our mark by supporting and providing support for multiple releases of Windows, multiple versions of Windows and applications. However, the conversations are shifting more towards mobilizing Windows apps, regardless of the release, as well as enterprise mobility at large, including our XenMobile, mobile application management and information management. So that's really where we see the opportunity, in addition to expanding the footprint by providing different delivery mechanisms such as the cloud and also different application possibilities which expand our addressable market. Going back to the reference I made about engineering and CAD related applications. So that's how we're seeing the market evolution, from an overall opportunity size standpoint.

Ross MacMillan, Jefferies.

David, I actually had a couple of financial questions. The first is when you think about Q3 and the shortfall relative to your plan, would you describe it all as a product shortfall and the reason I ask is that we've seen some deceleration in license updates and maintenance which had been growing sequentially very rapidly. And I was just curious as to whether something's changed there apart from the sort of knock-on effect from lower product and license growth?

Ross, your last comment's exactly right. It's simply just a relationship of lower product sales in that area over a period of time. So as that catches up, we've seen the deceleration license updates and maintenance and that should be expected. I will say that underneath that we're doing some things to continue to increase the value we're providing to customers and hence, say, the ASP of those trying to move them to more of an integrated solution for maintenance and staying closer to customers so we have a much more direct touch. The other area that gets impacted when new license sales are a bit muted is professional services. PS was only up 9% year on year in Q3.

That's a direct reflection of two things. One is the mobile and desktop well mostly the desktop business being a little slower than we like and also systems integrator's. We had great contribution from SIs last quarter. They were 15% to 20% of total product bookings, up more than 25% year on year, and they're driving a lot of the traditional integration and PS work at the same time. So partners like IBM, HP, Fujitsu, dimension data, these are all driving some of the very large strategic transactions.

And then just one follow-up, thank you. On the OpEx, it was down 5% sequentially. Were there some adjustments, some accrual reversals for the reduction in the top line guidance or any other items in there that would have driven that larger than seasonal decline? Thanks.

Yes, Ross. No accrual adjustments per se. What you see going into Q3 is usually a lack of period costs, Q2 tends to be highlighted by some of our major events like Synergy and Summit. Those are not necessarily there and then of course the related travel and entertainment that goes along with that. Q3 tends to be a vacation quarter. So maybe the vacation accrual comes down a little bit and also just variable selling costs. Those types of things that are variable with revenue and bookings do come down. But in the aggregate we've been very focused on cost management, on profitability and we want to keep an eye on margins of course going forward as we transition through a number of these businesses.

Maybe if I could squeeze one last one in, just on --

sure.

Desktop as a service, what do you think are the barriers to broader adoption of desktop as a service? Because it strikes me that the service provider market has the opportunity to really drive down cost per unit or cost per desktop because they have the scale economies across multiple customers. What are the hurdles to desktop as a service being more broadly adopted? Thanks.

First of all, that's exactly our perspective, that is service providers both Citrix service providers and larger telcos, for instance, can be excellent vehicles to deliver desktops as a service and our estimation is that it will be at least a $600 million market by itself in the next few years. As it relates to barriers to entry, we believe we have overcome or circumvented a lot of the traditional barriers to entry for this. For instance we have cloud enabled our platforms, we have created multi-tenancy capabilities, simplified installation experiences and provided our customers the business tools necessary to both deploy, as well as monitor, manage and charge their customers. The industry at large is in fairly early stages as it relates to delivering these capabilities as a service and we were one of the first ones to start it. We did it around 2009 and we have a significant traction in that space as well as continue to extend our lead with capabilities like the ones that we added to XenDesktop 7 and on a go-forward basis. And as you noticed, our competition is coming into the space as well, further validating the market potential. But it's not so much a barrier to entry as much as the technology has been at rest and it's now a matter of scaling the market and maturing the market to realize its full potential.

Thank you.

Richard Williams, Cross Research.

I wonder if you could just talk about the differences between the SaaS business in Europe and Asia compared to the US markets? Thanks.

The SaaS business is largely US-based at this point in time. That's just a historical basis. And so 80% plus is being driven out of North America. That's fairly consistent. We have had a focus to drive more of an international expansion over the past couple of years, but it's really a US-based business. No discernable trends across the market I'd really point out. For us, SaaS is about two primary markets, it's about collaboration, where we're doing really well.

We're driving north of 20% growth, in every [current] item, and in data sharing, both in terms of a product and as a platform. I'd mentioned earlier the ShareFile is growing north of 70% year on year. We're expanding opportunities. We're doing some really cool things with integrations across the rest of our products and frankly other solutions to allow customers to think about data in a secure but cloud-based way. So excited about what we have going on there.

Okay. Thanks.

So I think that's all the time we have for questions today. As I said earlier, we're really excited about the future. We think we've got a tremendous set of products, solutions, as we enter 2014. I want to use this opportunity to really thank the Citrix teams around the world, our partners, and our customers. And thanks again for everyone joining the call today. Good-bye.

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.