思杰系統 (CTXS) 2014 Q2 法說會逐字稿

Good afternoon. My name is Kyle and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems second quarter 2014 financial results conference call.

(Operator Instructions).

Thank you. I'd now like to turn the call over to Mr. Eduardo Fleites, VP of Investor Relations. Sir you may begin your conference.

Thank you, Kyle. Good afternoon, everyone and thank you for joining us for today's second quarter 2014 earnings presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer; David Henshall, Chief Operating Officer and Chief Financial Officer and Sudhakar Ramakrishna, Senior Vice President and general manager of our enterprise and service provider division.

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 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 Chief Operating Officer and Chief Financial Officer. David.

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

Throughout the first half of the year, we continued our pivot towards mobile, recognizing that customers are looking for better ways to embrace mobility and leverage the full power of cloud infrastructure. In Q2 we hosted our annual Citrix Synergy event bringing together our worldwide customers, sales teams and partners, demonstrating unique innovations and the breadth of our technologies for mobile workspace infrastructure and apps.

We introduced several new products including the Citrix Workspace Suite delivering apps, desktops, data and services under one easy to adopt licensing structure, improving integrations and creating new opportunities for upgrades as well as the basis for our new customer conversations. We're also taking direct actions to improve operating efficiencies and return capital to the shareholders. This includes refinements to the portfolio, real estate, de-layering and others; initiatives that will continue into the second half.

I'm very proud of the Citrix team and our partners whose hard work has been critical as we continue to drive the transition to mobile and cloud. So let's review the specifics for the quarter.

As you can see from the release, total revenue increased 7% year-on-year to $782 million. Product license grew 2% off a difficult comp from a year ago. We generated cash flow from operations of over $200 million and adjusted EPS was up sharply to $0.83 through a combination of improved leverage, our accelerated share repurchase and a lower tax rate.

In Q2 we closed 47 transactions greater than $1 million each, up slightly from last year. Roughly half of these came from the mobile and desktop business with four that included XenMobile as a large part of the solution. Additionally, there was one significant sale that was for the new Workspace Suite released just in the last couple weeks of the quarter to an existing XenApp customer looking to adopt the complete infrastructure.

Geographically, the EMEA region continues to deliver steady growth and execution increasing total revenue 8% year-on-year and driving $9 million plus transactions. In the Americas, total revenue was up 4% year on year including 33 big deals and the Pacific, Japan region grew 8% including five large transactions. So next let's look at the Q2 results within our three primary businesses.

First, our mobile and desktop business grew 4% from last year to $396 million. We've been driving a broader conversation with customers about transforming the delivery of IT services to enable mobile work styles securely and efficiently. The XenMobile product is proving to be a catalyst in these conversations and we continue to set the bar in the enterprise mobility market with MDM, mobile productivity apps, virtual apps and data in a unified, secure solution -- a product that was again recognized last quarter in the leaders' quadrant by industry analysts.

Similar to the last few quarters, 80% of our mobile platforms customers have opted for this complete solution, demonstrating the value of our integrated offerings versus standalone MDM technologies. In the aggregate, I'd say we're still very pleased with our revenue and pipeline momentum, and while still a relatively small component of overall revenue, mobile platforms grew more than 50% year-on-year in Q2.

The release of XenMobile 9 at the end of last quarter really raises the bar for complete end-user experience in this category and we'll continue to improve our competitive differentiation as well as pipeline closure rates going into the second half.

We're also working to address the issues that have impacted overall revenue growth within the desktop and apps part of this business. For the largest, most demanding transformation projects we continue to execute very well. In this segment we're winning most every competitive opportunity due to the unmatched breadth and performance of XenDesktop.

To address the broad project specific segment of this market, we've re-emphasized app virtualization shipping XenApp 7.5 with innovation such as hybrid cloud provisioning. Where customers are now able to provision and deliver desktops and applications from the cloud, increasing data center flexibility, disaster recovery, burst capacity and many other business imperatives. This is in addition to continuing to provide the best application delivery system on the market, as XenApp has always done. We're also accelerating the tools necessary to accelerate customer adoption and migrations in the second half.

For our customer segment that is looking to consume as a service, XenApp is the foundational technology being leveraged by the Citrix service providers to deliver apps and desktops. This subscription business, which is now serving over 400,000 users, again grew more than 50% year-on-year and now represents about 8% of our app and desktop license mix. So we're delivering a complete enterprise mobility solution, allowing customers of all sizes to bridge between the worlds of Windows and mobility on premise or service-based and to do it all in a people centric experience that only Citrix can provide.

So next, in our networking and cloud business, total revenue increased by 9% in the quarter to $179 million. The NetScaler products were again the major driver of this business with balanced growth between both enterprise customers as well as cloud service providers. For a little more context, let me touch on a few metrics from Q2.

First, the cross-sell and attach initiatives led to over 550 virtualization orders that included NetScaler as part of the solution. We transacted with approximately 2,100 different customers in the period compared to about 1,900 last year as we continued to expand our base.

From a mix perspective, the NetScaler SDX platform represented 17% of NetScaler license sales, while virtual appliances were 8% of the mix growing about 28% year-on-year. And finally, the investments that we've been making in go-to-market coverage, especially in EMEA, continue to bear fruit leading to an 11% growth in that geo off a really tough comparison from a year ago.

We are driving innovation in the data center with our unique technologies across both physical and software defined networking platforms, powering some of the world's largest clouds and giving enterprises the capabilities to combine best in class app networking services on a single consolidated footprint. And finally within our SaaS business, revenue was up 12% to $161 million.

While overall revenue growth has slowed modestly due to secular pressures in specific markets like remote access, we're encouraged by the success of many of our new initiatives. For example, our mobile first development focus accelerating product innovation and strategic packaging decisions have all led to a significant increase in year-over-year retention rates for the key products as well as higher Net Promoter scores.

These are examples of some of the foundational improvements that we've been focused on that are really necessary to maximize go-to-market effectiveness and accelerate future revenue growth rates. The communications cloud, which contains services like GoToMeeting, remains the largest part of our SaaS business. This contributed over 60% of SaaS revenue and grew 14% year-on-year.

Our documents cloud, which is led by ShareFile, the data platform that enables robust sharing in sync services really meets the mobility and collaboration needs of users and the data security requirements of IT. This business continues to scale up well. In Q2, up 60% from last year and representing 9% of overall SaaS mix.

And strategically, we're leveraging individual app services across the enterprise solutions to both expand reach as well as differentiation. For example, XenMobile contains an integrated data fabric powered by ShareFile to increase the value of the total solution while giving enterprises the option of leveraging both on-prem and cloud storage platforms to meet their business and security needs.

So let's turn to operations. Adjusted gross margin in the quarter was 85%, down 130 basis points from a year ago as the mix of revenue reflects greater growth in networking and SaaS. Gross margins were roughly flat sequentially, and as I mentioned previously, we continue to expect this trend to level off as we move into 2015.

Our adjusted op margin was 22% in Q2, ahead of expectations due to actions to rebalance resources directly against our most strategic imperatives, refinements to the structure, as well as targeted cost actions.

Looking at the balance sheet, cash investments totaled $1.8 billion at the end of the quarter, up primarily due to cash flow from operations. As we've discussed previously, we've initiated new programs to better optimize our cap structure and programmatically return capital to shareholders.

In Q2 we successfully completed the issuance of $1.4 billion in convertible securities while simultaneously initiating a $1.5 billion share repurchase program. This allowed us to buy back an initial 21 million shares of our own stock last quarter and we still have over $400 million remaining under the current authorization. And finally, deferred revenue increased to over $1.4 billion in Q2, growing $19 million sequentially and up over 12% year-on-year.

So turning to our current outlook and expectations for 2014, I'd like to first provide some context around our guidance. We expect to see the strongest forward growth coming from our networking, mobile platforms and data sharing businesses.

The strength in networking, as we saw this quarter, will continue to pressure gross margins when compared year-over-year, which ultimately impacts operating margin. But overall, I'm very happy with the first half results and the improving execution we're seeing across many parts of the business. We will be investing in the areas necessary to re-ignite license growth, but with a focus on continuing to optimize our business model and margin profile.

We're going to maintain our current full-year expectations for total revenue growth, but feel confident in raising our estimate for EPS to reflect expense and capital structure initiatives. So for FY14, our expectations are now for total revenue growth in the range of 8.5% to 10%, adjusted gross margin in the range of 84% to 85%, adjusted tax rate between 22% and 22.5% and adjusted EPS of between $3.20 and $3.25 per share. With respect to Q3, we expect total revenue in a range of $765 million to $775 million, adjusted gross margin between 84% and 85% and adjusted EPS of between $0.70 and $0.73 a share.

So now I'd like to turn it over to Mark to give you additional details on the quarter's performance and discuss our ongoing businesses. Mark.

Thanks, David. Good afternoon, everyone.

I'm really pleased with our performance and results for Q2 and really proud to deliver operating efficiencies while driving our very strategic and significant pivot to mobility. As we move into the second half, we'll continue operational refinements while staying aggressive with our solutions for customers' business mobility needs.

The sum of our innovations from workspace delivery infrastructure to business mobility apps is our engine for delivering customer value, competitive differentiation and profitable growth.

In the last month I began my 20th year on the Citrix team and I'm truly excited to continue that amazing journey. My passion for our team, our partners and our mobile workspace vision is unwavering. And my conviction to the Citrix belief that work is not a place is stronger than ever. On a personal level, I'm thrilled, energized and looking forward to the years ahead.

Today I'd like to highlight just a few areas where we're especially focused with our mobile workspace strategy. The first is in virtual desktops and apps, where we recently took a number of important steps to extend our Windows app delivery leadership and to accelerate XenApp upgrade value. Attendees of Synergy loved the new security, performance, management and mobile experience capabilities they saw. At the same time, we've seen excellent response to the preview of the migration toolkit that gives customers a smooth path to the new XenApp.

We're continuing to expand on virtualization use cases to include cloud enabling of the world's most compute, graphics and storage intensive apps. This is called RaaS, rich apps as a service, and an area we've been pioneering for some time with Nvidia, a longtime partner of ours. We're also working closely with some other partners, Intel and HP.

Recently, we debuted some breakthrough price-performance for rich apps delivered by HP's new Moonshot platform, the new XenApp and Citrix HDS technology. So we're continuing to lead the virtual apps market with a unified, scalable architecture that provides the most high fidelity user experience, that delivers the broadest range of Windows virtualization solutions and runs on premise, in public clouds or in both. This gives customers the breadth of solutions they need, avoids the cost and pain of lock-ins and harnesses the flexibility, elasticity and economics of local, regional and mega clouds.

Next is enterprise mobility, an emerging, fast-growing market where our pace of innovation has produced seven XenMobile releases in the last six quarters. XenMobile 9, launched in May, is the first to bring the core elements of enterprise mobility together: device and app security, cross-platform app delivery and mobile productivity apps all in a unified platform that works seamlessly with XenApp and XenDesktop.

XenMobile leverages our SaaS app products, our mobile app platform and our delivery networking infrastructure. Together they provide a differentiated, complete solution for our customers.

XenMobile 9 is a fantastic release that includes beautiful Citrix mobility productivity apps, seamless XenApp and XenDesktop integration and an expanding number of apps from our ecosystem partners. Early this year we began offering XenMobile cloud edition and from here you can expect us to continue the fast-paced innovation, integration and simplification that will give us broader reach with our channel partners and deeper adoption with enterprise accounts.

The last highlight is Citrix workplace services which we previewed at Synergy. CWS is a set of cloud services we'll be delivering over the coming quarters. It's our platform for partners and customers to deliver mobile workspaces on any cloud.

It's built to speed customer adoption by reducing on-premise complexity, leveraging the simplicity of cloud services and enabling the aggregation of mobile, windows and web-based workspace apps. This announcement continues our history of setting the workplace virtualization agenda for the industry, delivering in customer centric, simpler ways and leveraging both in place and new infrastructure from premise to cloud.

Looking forward, I'm very positive on the trends influencing our business. As we look to the second half and through 2016, we're focused on six priorities.

First is to leverage and grow our virtualization business with a strong focus on upgrading customers, innovations for new use cases, partnering with Microsoft and cross-selling our new mobile and cloud offerings. Second is to innovate and capture share in enterprise mobility, a growth market where we have momentum, significant differentiation and technology leverage in mobile apps, secure data, delivery networking and end-point security.

Third is to expand our SaaS portfolio of apps and platforms where we can leverage our SMB base, offer great value in business workflows, further address vertical markets and leverage our enterprise customer base. Fourth is to invest in our delivery networking footprint where we can leverage significant competitive advantages and expanding partnership with Cisco and proven ROI in filling go-to-market coverage gaps.

Fifth is to accelerate our focus on service provider partners who are already using our infrastructure to deliver over 1.5 million business ready desktops and apps as a service and will serve as a thriving route to customers in the new mobile and cloud era. Sixth is to begin the delivery of our workspace services cloud that packs technology, talent and integrations across all of Citrix, enabling new offerings for delivering infrastructure and workspace apps, and serving as a foundation for predictable recurring revenue streams.

So this is how we'll exceed expectations of investors, partners, customers and from within. It's how we'll reinforce our belief in the employee value of a great place to work, the customer value of beautifully useful products, the shareholder value of profitable growth and the deep felt pride in helping people work better and live better. I'm thrilled to continue the journey.

I'd like to close by reiterating our commitment to operational efficiencies and portfolio optimization and to accelerating growth in margins over the long-term. Now, I'd like to open it up for questions.

Operator? Okay to open it up for questions now.

(Operator Instructions).

Heather Bellini, Goldman Sachs

Hey guys, this is Justin on for Heather. Just wanted to ask a question on your MDM strategy and what are the key differentiators there what and what conversations are you guys having with the sales force? How are they kind of prioritizing this with other offerings? That would be helpful. Thanks.

This is Sudhakar. I'll take that question and David and Mark will add to my comments as they see fit. First we look at the world as being much broader than MDM. Obviously, we believe we have best-in-class MDM capabilities, but increasingly we believe MDM is a feature sometimes embedded within the devices themselves by the device manufacturers and oftentimes by vendors such as us.

Our portfolio strategy on mobility spans much further than MDM. First I want to highlight that when we talk about mobility, we talk about the mobility of Windows applications as well in the context of XenApp and XenDesktop. So for us, mobility is a much broader place than simply MDM.

But coming to our XenMobile product specifically, we are focused intensely on what we call secure productivity applications. In other words, enabling our customers to enjoy as Mark put it, beautiful experiences, at the same time incredibly secure applications that enable productivity. Many of the applications are also written by our partners and we look at MDM plus application management plus content management with the deep integration of ShareFile.

So that is where our differentiation comes about, which is the completeness of vision and our ability to bring all of our products together into integrated solutions for our customers in a secure fashion delivering mobile experiences all throughout.

Thank you. I appreciate it.

Steve Ashley, Robert W. Baird

Great. You guys referred to operating efficiencies, trying to drive that and you talked a little bit about rebalancing the portfolio. I was just wondering if you could give us more color on those initiatives?

Yes, Steve. It's David. In terms of operating efficiencies, this has obviously been a topic that's been in the middle of the conversation for a long time and we've talked about our longer term goals and where we'd like to see op margins run on a continuous basis across the Company. And then on more of a short-term point of view, our guidance would imply probably a 25% to 50% increase in adjusted operating margin from where it was as of last quarter and how we're getting there is a number of different vectors.

One of them is overall, let's call it cost focus and discipline that all companies go through. Another one has been in specific de-layering activities. In some cases we've been optimizing locations and facilities to be able to bring down the overall physical footprint while increasing density. But probably most importantly is a general rebalancing behind the scenes to make sure that we've got the people really focused on the most strategic initiatives across the Company.

Mark mentioned the priorities in some of his prepared remarks, but really focused on re-accelerating app and desktop business, growing and leveraging enterprise mobility, expanding our SaaS portfolio and apps as they cut across all of the enterprise solutions and then of course continuing the success we've seen in our application delivery network. So those are really the big, big areas and there's no one initiative, but it's a broad focus and a high priority for us as the management team.

Terrific and then just a quick follow-up. The XenMobile, in the past you had talked about maybe hoping to double that business during 2014. I don't know if that was a formal kind of guidance or something that was just less formal, but is that still something that's possible this year with that business?

Yes, I think so. That's still our goal. When we talked about the numbers, that was on a product license basis. On a bookings basis, including all elements, it actually grew significantly faster than that. So overall the business is moving in the direction we'd like it to. The pace of product innovation that we've been on has been very intentional.

We have been focused on a lot of the things that we've discussed over the last few quarters to drive deep integrations and really the differentiated approach to enterprise mobility versus simple MDM that tends to exist in the rest of the marketplace. So that was Phase 1.

Phase 2 was about really focusing on end user requirements and end security I'd say, to make sure that we have the best end user experience out there. That's been one of the things that allowed us to increase pipeline closure rates and continue the efficiencies.

The last thing that is work in process right now is really on the what I call the back-end components to make the ability to drive leverage across our broader field organization and our channel organization much more efficiently, let's say. And those are the big three areas we've been on and all three of those have helped us yield a better pipeline closure rate and accelerate the business overall. We're on that continuum, we're moving fast and expect us to continue to deliver a lot of innovation on this front.

Great. Thanks so much.

Edward McGuire, CLSA

Good afternoon. I was wondering if you could discuss how the conversations you're having with partners and customers are changing as you make the move from selling discrete products to workspaces and as this is involving much more of a business case, how does that change your go-to-market?

Yes, Ed, great question. I'd say first of all, it's an extension of the strategic desktop virtualization conversation that we built a go-to-market and high touch capability around for the last several years. Because the focus of most large organizations is around the security and enablement that comes from mobility. And so our SI partners, certain ones like Wipro, like IBM, like Accenture and others are certainly helping us in that conversation, both on the strategic end and on the implementation front.

And then obviously we've invested pretty heavily in being able to have that conversation with customers ranging from our field force and training and so forth and how we're organized there, but also in the investments we've made in briefing centers and staffing there. We've had another record half in terms of growth of strategic briefings.

Those conversations are really about mobility as Rama referred to in the more general sense and they're less about technical solutions and more about business solutions and value that are related to facilities and redesigning physical workplaces for greater density. They're conversations about globalization and taking advantage of workforces that are in different places around the world for economy or being closer to customers.

They are conversations about employee retention and engagement, especially with the digital generation making such an impact now in terms of the employee populations, and mobility is a key aspect of engagement and retention there and recruiting. I could go on, but it's those kind of conversations that we're having with customers that a more holistic around mobility. Our products and our end to end focus and perspective and experience in terms of mobile going back to when the company was really about remote access really makes us the trusted, most logical partner to talk to about this.

And then obviously we're extending that through partners, and then the way it will play out is that our service provider partners will become a much more important part of this motion in 2015 as we cloudify the end to end capabilities as well as many of our Citrix solution advisors are already service providers and we'll do that on much more of a localized basis. So it will shift more and more to service providers and a broader conversation.

Great. And it's great to hear you're staying on board, Mark. Thank you.

Thank you, Ed. I appreciate it so much.

Raimo Lenschow, Barclays

Thank you and congrats on a great quarter. Can you talk a little bit about the linearity you saw in the quarter in terms of the geographies or just maybe talk about broader trends you see there? I saw Europe had the strongest growth. America was okay I guess against [the comps]. A lot of people struggled in Asia, but you were okay. Just help us understand how it feels out there. Thank you.

Sure, Raimo. It's David. Let me characterize it in a couple of ways. One, in terms of individual products, I'd say that the business around networking was actually fairly linear, and more linear than anything else.

We had a large volume of orders come in early in the quarter. Some of those were through the large cloud service providers that are out there that tend to order in small frequency but large size. I'd say the large transactions for desktop and mobile, those look like they would in any quarter, tend to be more back-end loaded into the third month and that's cutting across all geos.

More specifically, just to get down one level I'd say that overall desktop and mobile had good quarters for desktop solutions in both EMEA and APAC. Mobile platforms, as I mentioned earlier, drove revenue up north of 50% year on year. Networking and cloud, pretty good quarters everywhere, especially in US and EMEA.

So the one thing I pointed out just briefly in my prepared comments is that we actually had a large transaction come in for the complete suite, which is interesting because we just released that in the last few days of the quarter and that is an interesting early opportunity as we look at the install base and customers are looking to adopt the broader solution.

So what that was, was actually a renewal of subscription advantage that instead of just doing a simple XenApp renewal, the customer decided to go a much broader deployment of multiple technologies and decided to upgrade or trade-up, as we call it, to the full workspace suite. So that will be a motion that we push more in the back half of the year and the impact will be obviously uplifting overall ASP to customers, driving broader set of products out there and providing overall uplift long-term to the license update and subscription line as well.

Thank you.

Phil Winslow, Credit Suisse

Congrats on a great quarter. Just have a couple questions on the product, the features side and just road map here. Obviously you had the Nike and then the Artemis releases over the past six months on the XenMobile side and Artemis being XenMobile 9 late this quarter. Wondering if you could talk about the impact that you believe you've seen from these releases and where you are in terms of your feature inclusion versus the competition, maybe versus where you were a year ago? And then I have one follow up beyond that.

Sure. I'll address the product aspect of XenMobile. As you mentioned, XenMobile 9, which was code-named Artemis, we just released it a few weeks ago. We included a number of extensions to existing applications, like for instance I believe we're getting to be close to best-in-class from a mail application, for instance, but at the same time it has expanded the portfolio of applications as well, but increasing these desktops are security capabilities.

As you know, with mobility, security becomes even more important especially with some of our larger customers where the boundaries of the enterprise are becoming increasingly blurred. So there's an intense focus on adding security capabilities while maintaining great user experiences. We don't want to stifle users just because we have security capabilities so that's been a key area of focus.

The third aspect of it, while expanding our user experience capability, has also been around simplicity of setup and administration. So those are all factors that we have adapted to and implemented with a great amount of speed as Mark and David mentioned in the XenMobile line portfolio.

The early feedback I'd say has been extremely positive and encouraging. In fact, one of our Fortune 100 customers who has deployed the Artemis release has given us their internal experience as exceeding any that they have had with any enterprise IT software. So while it's still very early days, we're incredibly encouraged by the differentiation, the innovation and the customer adoption to our particular product line here on XenMobile 9.

Going forward, a lot of the focus is going to be on simplifying administrative experiences, cloud enabling our XenMobile product where we are seeing much further and faster progress in terms of adoption, as well as increasingly making it channel and partner friendly such that our penetration into all five enterprises continues to grow.

Got it. Just as a guy whose IT shop pushed out Artemis to him, it definitely does seem to be night and day versus Nike, so thanks for that. And then a follow-up I have is on XenApp and XenDesktop 7.6. We have XenMobile 9 out, and XenApp and XenDesktop 7.6, you guys talked about at Synergy coming out Q3. Just wondering if you can provide us an update on that? And Mark, maybe you could give us your thoughts on the impact of those as we go into the second half. Thanks.

Yes, at this point we're not making any product launch announcements on any new versions of XenApp or XenDesktop, but it's very clear that we've talked about where we're headed at Synergy, Phil, and we got incredibly strong feedback from customers at Synergy including feedback on the preview of the migration tools.

As I said a little earlier, we think the next release is the tipping point release for XenApp for many customers that were looking for feature parity and then some of the new capabilities that they've seen in XenDesktop around the back-end components as well as hybrid provisioning as well as additional security, end point capabilities around let's say Chrome OS, Chromebooks, et cetera and kind of a good list of things that they're actually looking forward to.

I think this next release will have a big impact because I think there's a lot of pent-up demand, if you will, for moving forward in a big part of the customer base and partner base with XenApp and to do that with this incredible migration toolkit that we've put together, as well as some of the things that we've showed that will change the price performance dynamics around XenApp in particular, infrastructure that we demonstrated on the HP Moonshot platform.

I think there's goodness ahead and it is a catalyst. I think when we'll start to actually see that in the bookings and all, I would imagine we'd start to see it pretty quickly after we get the product in the marketplace. So stay tuned.

Great. Thanks, guys.

Karl Keirstead, Deutsche Bank

Thank you. This question is for David. Just wondering if you could provide a bridge for the non-GAAP EPS performance of $0.83, which is appreciably above the guide that you offered at the May analyst day. I know there were a number of moving factors, maybe the buyback impact, taxes, perhaps the cost reduction initiatives in 2Q were a little bit more than you were anticipating in May.

But maybe you could just provide a bridge for us and it looks as if the magnitude of the beat is not getting translated into a full-year non-GAAP EPS lift, so maybe you sort of front-end loaded some of those cost initiatives in 2Q. Perhaps you could just comment on that. Thanks.

Sure. Just to bridge it back to our prior guidance, because it was a pretty material upside. About $0.04 of that would be attributable to tax items and those items were not included on our guidance. So, of the delta I'd put about $0.04 into tax, but the large majority of it was due to outperformance at the operating income line, which is of course where you'd like it.

That was a combination of more -- higher performance on revenue, so more upside on the top line and then specific action we've been taking, and some of which I touched on at a very high level, around costs. It is a large focus of not so much cost as making sure that investments are targeted towards the right areas where we are driving the most efficiencies out of those. That's probably the way I would characterize it.

The work that we're doing below the line on capital structure, returning more shares in the second quarter. So as far as overall guidance, we're uplifting the EPS on the full-year, largely due to the operating performance you saw in Q2. We're maintaining the topline revenue growth and we are going to take a conservative posture into the back half. That hasn't changed from where we were the last couple of quarters.

I think it's appropriate given that we are still ramping several new initiatives right now. And we had a challenging second half last year and until we have many more quarters of continued, sustained performance, I think maintaining the conservative bias is the place we'd like to be. So that's the way to bridge the guidance from March and the outperformance you saw, or excuse me the guidance in May and the outperformance you saw in the actuals.

Okay. That makes sense. If I can just ask a follow-up and I think you may have just answered it, if we look at your revenue guidance for 3Q, it implies about the same 7%-ish growth that you just posted in 2Q. 2Q was an awfully tough comp, so you did well this quarter, so the growth is staying the same in 3Q. Is the explanation for that, despite the easier comp that you are taking this conservative posture with respect to the revenue guidance as well?

Yes, our guidance would point to roughly 7% to 10% growth in revenue in Q3 measured year on year and yes, I think Q3 was a challenging quarter last quarter. It is the summer quarter in EMEA and other places in the world so we want to maintain the conservative bias. Nothing more to read into it besides that.

Got it. Thank you so much.

Walter Pritchard, Citigroup

Hi, thanks. Mark, great to have you back as CEO permanently and I think nobody could envision a Synergy without you up there on stage. I guess what I wanted to get a sense of is, you've had some time to reflect and come back and we've gotten to know your management style pretty well, but I'm wondering how we should expect things may change with you having stepped back and come back in as CEO. Should we expect there to be any different way that you run the business or think about decisions to make for the business?

Thanks, Walter. Thanks for the kind words. I appreciate them. So yes, you know the perspective of the personal leave has had a number of impacts on me and how I've looked at things. And mainly through the lens of how I can be much more active and a catalyst on making sure we make trade-offs and set priorities and speed up some of the decision-making processes internally.

If you go back to the list of priorities, the six priorities I talked about, what you find behind them is much better alignment into the organization around these that lets us make decisions around investments flowing between products and go-to-market teams, et cetera and pretty deep in the organization, looking at organization, talent, investments we want to make that we haven't been able to make because of opportunity cost and by refocusing, we're able to make them.

So a lot of that perspective coming back in, but still I'm the same person and still here to steward the Company through, I think, another pivot. We've, in the last 20 years, stewarded the Company through several and this is another, and I think this is the most exciting one of all. We have the most broad portfolio, by far the most talented team we've ever had on a relative basis. So that's sort of what's different, but most of it is the same with the perspective of having been on leave for some months.

And then David, just a quick one for you on the trade up program. We saw a number of years ago you ran a trade-up which was really effective in jumpstarting XenDesktop there for a while. I think your channel knows how to work with that sales motion. Can you talk about impact you saw here in Q2? It might have been kind of early, but what we should expect during Q3, Q4 as that trade-up gains some steam?

Sure, Walt. It was very little in the quarter because we had just released the products within the last few days of the quarter when they started shipping. I did call out one large transaction, the customer that had been XenApp customer for a long time and they knew the products well and they used this as an opportunity to embrace a broader technology stack, most specifically mobile.

So I think the motion's going to serve a couple of purposes. One, it allows us to uplift ASP so it drives license revenue. B, it allows us to drive a larger subscription stream over long term because the annual ARR is not only larger based on the size of the ASP, but it's also larger because it's a complete maintenance offering versus standalone subscription advantage. And then lastly, it's a great way for customers that have thought about app or desktop virtualization strategically already to extend that into the context of mobile.

So I do think it will be helpful in the second half. We're not going to talk about specific expectations yet, but I think of many of the tactical activities, this is an important one going into the back half.

Great. Thank you.

Rob Owens, Pacific Crest Securities

Great, thank you very much. I wanted to focus a little bit on the desktop solutions number in the quarter. If I just look at the year-over-year growth, it's been the slowest it's been in quite some years.

I realize there was a tougher comp, but with you no longer giving the different components and talking about the success you're seeing in XenMobile, maybe some color from 30,000 feet. You've got a competitor in that space, obviously, that's making a lot of noise so maybe help us out in terms of the competitive environment, what you're seeing at this point and where customers are. Thanks.

I'll take a crack at it. In terms of the competitive environment, I presume you are referring to some of the more recent releases, such as Horizon 6 from the competition. I would say that while we see VMware in a lot of circumstances and situations, as we do our win-loss analysis, we're really not getting displaced or won against by VMware.

And as it relates to Horizon 6 specifically, it's early days. We haven't really seen a lot of it in action, but what little we have seen, I don't believe we have really lost to them in any major deal or getting displaced. Our focus has been on doing certain fundamental things that, in some cases, have not done a very good job.

For instance, in the past we have highlighted that we are re-invigorating XenApp and bringing that back into focus. So we came out with our XenApp 7.5 release earlier this year and we continue to build on it because we made our mark with application virtualization and also built a significant strength in desktop virtualization.

What we're observing now is increasingly, we have to expand the market in certain segments as well as be much more focused in the use cases that we deliver. For instance, security continues to be a significant use case that we deliver with these solutions and that has been an area of focus for us.

The next big use case is in the broader context of mobility. If you think about our receiver portfolio, we've significantly expanded the receivable portfolio both organically and working with partners such as Google and that has opened up additional applications for us, specifically in the retail sector.

Mark made the reference to RaaS, which admittedly was not something that we could have supported in the past due to technology limitations, but those have all been overcome now and we are much more focused on verticalizing XenApp and XenDesktop and attacking some of the vertical markets that are opening up opportunities.

Together with product improvements that I just outlined as well as new markets and segments that we are penetrating to expand the overall opportunity base and integrating XenApp and XenDesktop with the broader portfolio of XenMobile and our cloud networking portfolio and delivering more integrated solutions, we believe we can recover growth and have meaningful growth in the segment.

Great. Thank you.

Kash Rangan, Merrill Lynch

Hi, thank you. Let me rattle off a few questions very quickly and feel free to prioritize them way you see it fit. One is, Mark and team, are you content with your current growth rate? And if not, and if the Company were to hypothetically accelerate its growth rate next year, what do you think would be the driving factors for that acceleration?

And secondly, with respect to the DaaS business, I think you mentioned 400,000 desktops, that's up incrementally and sequentially from 360,000 desktops. That alone, in my rough estimation probably drained away 5 to 6 points of license growth, maybe 4 to 6 points of license growth. Can you talk a little bit more about the transformation that's happening there and if you believe we should not be looking at your reported revenue growth because it may be misstating the true impact of that subscription transformation?

And finally, your thoughts on the VMware Safe Passage program for Citrix customers. Thank you very much.

Sure, Kash. Let me take the DaaS question and then ask Mark and Rama to talk about Safe Passage and the overall growth rate. So specific to DaaS, which is not the term we really use, but we talk about apps and desktops being delivered by our CSP partners. We have 2,000 partners that are engaged now with over 400,000 end users and probably the best way for us to think about that is not so much a replacement of an existing XenApp, but really a market expansion play.

We don't have perfect information to say that it would have been or would not have been a perpetual-based sale, but I think the motion that is being addressed right now, is that for a large segment of the population, abstracting away the complexity of on-prem infrastructure and being able to consume what we refer to as finished goods, whether that is a complete desktop with a set of thin verticalized apps, tends to be what we see in many cases. Now that allows customers to simply consume what they need, so lots of SMB, lots of prosumers, that type of customer. That's definitely a growth focus of ours going forward. I mentioned that it's approaching 10% of the license mix, still high single digits, but growing substantially.

Over time I would expect more and more of that revenue to continue to migrate more towards recurring sources. I think not so much in 2014, but as we go into the next couple of years and workspace services become another way to, again, abstract away complexity from customers, easing adoption, easing expansion and the things that really hold back technologies like this from going broad-based.

So stay tuned on that front, but really an important segment of the market, but hard for us to say whether it is cannibalizing others or not. I think it's more of a market expansion. Rama, do you want to talk about Safe Passage?

Sure. Let me provide some context, Kash, on that. First, as customers deploy XenApp and XenDesktop, they are focusing on some business critical imperatives that they have, for instance security, productivity of their users, developing great experiences in fixed and mobile use cases and so on. While cost is important, I wouldn't place that at the top of the list as it relates to considerations when they deploy app and desktop virtualization.

When the competition talks about Safe Passage, I would humbly submit I'm not so sure it is safe for customers, because many times when they talk about migration, there's really no real migration tools that are being offered. It's a cap and grow or rip and replace, in many cases. That really causes more harm to the customers' install base and the experiences and productivity of their users than getting some near-term financial benefit for an expense that they've already incurred, for the most part.

So it's unclear from me from a business value standpoint if there's anything material for customers through a program such as this and I'd look at it as another form of discounting and nothing more. Our focus is truly to continue to drive innovation in XenApp and XenDesktop and focus on the security, the mobility as well as the productivity dimensions that customers care about and give them options both on-premise and off-premise and give them flexibility of both cost and deployment model that way as opposed to, I would say marketing ploys like this.

Kash, your last question about growth rate, so no, we're not satisfied with our growth rate. We are committed to re-accelerating our growth rate and where that could come from next year, in your somewhat theoretical question, I'd say it would be in where there's leverage that's natural in the business. So the first leverage is in channels.

To the degree that our CSA partners and the CSP partners actually are able to be more effective and more efficient in going to market with our SPLA licensing around XenApp and the new XenApp and XenDesktop, to the degree they get some early traction with CWS. And to the degree that they take on board the XenMobile product line in a deeper, broader way which are all clearly our strategies and game plan, those things are designed to give us leverage which gives us growth and it gives us margin.

The other natural leverage is in the customer base and that's the customer base in a general sense; the customer base on the enterprise side and the customer base on the SMB side of the business. To the degree that we are offering valuable enhancements that either increase retention, increase NPF, encourage customers to do their migrations to Windows server 2012 and build on some of the newest converged infrastructure, for example, that we'll see a lot of next year, I think those are some good catalysts for improving our growth rate and where a number of these business priorities that I outlined are focused, actually.

Great. Look forward to it. Thank you.

Thanks, Kash.

Keith Weiss, Morgan Stanley

Excellent, thank you for fitting me in, guys. Obviously a lot more focus from you guys, both at the analyst day and in the most recent quarter, on the margin side of the story. Dave, you've given us some high-level targets of where you think margins should go, but there's still a little lack of clarity in terms of exactly how we get there.

I was wondering, is there any chance that you'll give us sort of targets in terms of the pace of improvement that we could expect in operating margins over the next couple of years, or is there anything programmatic that you expect to go on? Maybe a formal restructuring or reorganization to sort of better focus the organization on the key growth areas that could give us some guidance into how efficiencies come into the model over time?

Sure, Keith. As far specifics, we'll give a little bit more directional guidance coming out of this quarter's earnings call when we will talk about how we're thinking about the business model for 2015 and beyond. I think that's the appropriate time to do it. In the short-term we're focused on tactical things that we've talked about as well as structural things that will be important longer-term.

Just to highlight something that we've all talked about many times, is the impact of gross margins on the overall margin structure. That's been about a 500 basis point decline over the last few years as we've been ramping up networking and SaaS and some of these other areas very aggressively. I do continue to believe that that will plateau out as we go into the back half of this year and into next year and so that stops becoming a headwind to all the activities that we've been driving to improve efficiencies, let's say.

If you take a step back on a micro level and look at operating expenses as a percent of revenue, for example, they declined about 130 basis points year over year in Q2. And the biggest change coming from sales and marketing which went from 41% of revenue down to almost exactly 39% I believe, so about 200 basis points there. A lot of the actions we're taking show up there.

I'd also say that as we look at ramping some of the newer businesses, things that have been highly dilutive to both our go-to-market costs as well as our focus, those continue to get more and more scale as time goes by. For example, mobility.

And so it's really tough to look at the individual pieces, but when you look and analyze the overall motion, we've been pretty consistent on this front. And as the new businesses grow, we'll be able to grow into some of that expense that already exists and overlay teams and things like that, that are fairly unique investments can be absorbed into a broader motion that can be leveraged more effectively. So fairly long answer, but there's a number of different vectors that we're pushing on right now and we'll be prepared to give more specifics as we go into next year and subsequent periods.

Excellent, and if I could sneak in one follow up, gross margins obviously have been definitely a headwind over the past couple of years for the overall operating margin profile. I would say that one of the other ones is a pretty steady pace of acquisitions that you guys do to expand into new technologies and bring new technologies on board. Does the renewed focus or tighter focus on operating margins, is that going to change at all your M&A strategy or make the bar for when you actually go out there and do M&A a little bit higher than it's been in the past?

I'd say our M&A over the last 12 to 18 months has really been focused on smaller, tactical acquisitions, things really to either bring unique capabilities to market, which is more of a build-buy conversation or just accelerate something that we have to drive for competitive or differentiation purposes. And I think that's been our bias and that will continue to be our bias in the short-term.

We're still ramping new businesses in a couple of areas. We are happy with the progress they are making, but we have to continue to maintain that maniacal focus on driving those to where we'd really like them to be. So not a lot of change in the short-term. But pretty similar to where we've been, I'd say, looking backwards over the last several quarters.

Got it. Excellent. Thank you.

Rick Sherlund, Nomura

Thanks and congratulation on your plan to get more leverage out of the business. I'm curious to follow-up on that issue of leverage. If we look at XenMobile for example, can you give us a sense of how much of that is being leveraged and pulled along with other products? And maybe just some sense for the dynamics there as well in terms of to what degree are you starting to see more traction in terms of larger deployments, larger deal sizes, maybe how much of this is being sold into the installed base as repeat business versus new? Any metrics you can offer us on that front? Thanks.

Sure, Rick. Let me throw out a couple of metrics. At a high-level about half the customers are new in Q2 and it's been roughly what it's been running at for the past couple of quarters. As far as leveraging into others, we're still in an early nascent phase of this business. We're ramping pretty aggressively.

I think the place that I'd say install base customers will have the opportunity to participate more aggressively is around probably the Workspace Suite as a good first pass. Then of course we've got a huge install base of folks that have already thought about mobility and virtualization and security in a different way so that will be obviously one of the primary target areas for our teams to go after as well.

As far as large transactions, we had about four last quarter that were in that $1 million plus range that included XenMobile as the primary component of that transaction. So we're starting to deploy on a larger and larger scale. Like with any new product, those ramp and so I would expect to see that trajectory continue and potentially accelerate, especially as XenMobile 9 which addresses many of the security concerns or other issues that a large, complex organization is going to have as a checklist item.

Once those things are now checked off, I think we also have the opportunity to really accelerate on those big scale deployments as well. We're optimistic about the second half of the year in that regard.

Just to follow-up on that, it would seem that the market is just kind of slightly penetrated if you look beyond MDM to the broader app and content management space. Do you think the market's going to ripen looking for broader solutions and I'm curious why we haven't seen broader deployments to date?

Well, I'd say a couple of things. One, yes I agree that the market is moving beyond simple MDM and the ability to just control a device is interesting but not strategic. And to enable more productivity in use cases, controlling broader end of the stack is important. Content, data is a really, really important element of that.

I think we've got a huge differentiation with the level of integrations that we can drive with our ShareFile platform. In fact, I think we're the only vendor in the world that shows up in the leaders quadrant in both enterprise sync and share as well as enterprise mobility and we're leveraging that in important ways right now. So we're on a pretty fast ramp and I think those will continue to be the strategic level of conversation that the customers want to have going forward.

Rick, the thing that I would add on the ripening dimension is that I think first of all, we're focused on business mobility versus the consumer side of things and what will ripen business mobility around will be a greater velocity of business built apps that are either coming out of the mobile enterprise app platform space, coming out of some of the service providers that are specializing on that. So to the degree that there's an acceleration there, I think that will cause the EMM space to ripen at a much faster pace.

We're obviously trying to get ourselves in a great position with an integrated solution that takes advantage of everything we know about security at rest and in transit on the network, everything we know about aggregating services of dissimilar types, whether they're Windows, web or mobile, everything that we know about mobile apps themselves.

Obviously things like GoToMeeting and ShareFile have underlying platforms that we're monetizing with the Worx Suite so this is giving us critical mass in terms of the core mobile apps we think enterprises, especially those that are in highly -- either regulatory areas or have very dispersed workforces in geographies that are believed to be dangerous in terms of from a security perspective, so that's what we're preparing for. And then the apps, once they flow, I think it will ripen the space much more rapidly.

Thank you.

Abhey Lamba, Mizuho Securities

Thanks. Mark, just following up on one of the earlier questions. How should we think about the impact of retirement of Windows server 2003? How is that going to impact you as an app business? What percent of your XenApp customers are currently on Windows 2003 and will the upcoming release be sufficient to get them over to the next release?

Great question. First of all, it will be a catalyst for pushing customers forward and especially next year, when I think some of the new converged infrastructure platforms that will be introduced will give customers an incentive for sort of the hardware end of that conversation. So between those two phenomenons, I think there will be -- obviously they will have to move and with the reinvention of the XenApp product line, especially with the migration tools et cetera, I think it will be definitely one of the catalysts for growth in XenApp.

I think the same thing goes for Windows server 2008, unless applications are hardcoded to it in some compatibility way, but Windows server 2012 is the gold standard at this point and that's where we see most customers wanting to go and wanting us to help them get there as quickly and efficiently as possible.

Thanks and, David, if you can talk about how do some of the acquisitions like ScaleXtreme and Framehawk fit into the product portfolio and if there was any kind of noticeable impact this quarter from some of those acquisitions. Thank you.

As far as those acquisitions, those are technology acquisitions, not revenue-generating, so there's no actual revenue that's coming with either one of those. We'll be talking more specifically about those in the future as their really unique and really cool technologies are delivered in product form. So we'll hold off on that for now, but no revenue contribution from those in Q2.

Thank you.

We're taking no further questions at this time. I'll turn the call back to management.

Okay. Thanks, everyone. We're clearly encouraged by be the momentum that's building in several parts of our business and we're confident we have the right strategies, solutions and focus for the rest of 2014. Thanks again for everyone joining the call today and we look forward to speaking to you again soon.

That does conclude today's conference call. You may now disconnect.