思杰系統 (CTXS) 2015 Q1 法說會逐字稿

Good afternoon. My name is Kyle, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Citrix Systems' first-quarter 2015 financial results conference call.

(Operator Instructions)

Thank you. Mr. Fleites, you may begin your conference.

Thank you, Kyle. Good afternoon, everyone, and thank you for joining us for today's first-quarter 2015 earnings presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer, and David Henshall, Chief Operating Officer 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 can 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.

As you can see from the release, total revenue was $761 million; adjusted operating margin was about 19.5%, consistent with expectations; adjusted EPS was $0.65 a share; and we generated record cash flow from ops of $292 million.

In Q1, we closed 39 $1-million-plus transactions. Over half of these deals came from the workspace services business, with the remaining in delivery networking.

The significant increase in FX volatility this year impacted results, as well as customer buying behavior. We saw a number of cases where decisions were delayed; where the value of the opportunity had decreased due to pricing or budgets.

Despite these issues, total revenue in EMEA still increased 1%, including six of the $1-million-plus transactions. Within the Americas, revenue was down 1%, with the team closing 30 large transactions in the quarter.

As we highlighted with our preliminary earnings announcement, we're disappointed with the financial results for the quarter. We experienced a greater-than-anticipated impact due to our restructuring, org and leadership evolution, and changes to our field and channel strategies.

As a reminder, let me briefly cover the breadth of change that we initiated over the past couple of months, as well as the current status in each area. First, we announced the elimination of roughly 700 full-time positions around the world. This has been completed in the US, and will be substantially completed internationally during Q2.

Second, we began the consolidation of more than 15% of our leased facilities to improve utilization and density. So far, six offices have been closed, and we've reduced space in five others. By Q2, we expect to complete projects in six other locations, plus a few more complex initiatives in the second half of the year.

Third, in the Americas sales geo, we reorganized from a simple regional segmentation to one focused on customer market segments. And in EMEA, we consolidated one of the major areas into existing territories, while evolving the channel engagement model. These processes are now complete.

Next, we continue the rationalization of our product portfolio, a process which we expect to continue through 2015. And, finally, we've been aggressively evolving the leadership team with new appointments in sales, sales operations, marketing, strategy, and product development. These are all important initiatives, and while disruptive, are necessary to ready the Company for the next phase of profitable growth.

Next, looking at the Q1 results within our three primary businesses, our workspace services business grew 2% year on year to $391 million. We're continuing to drive a broader conversation with customers about transforming their delivery of IT services to enable mobile work styles securely and efficiently.

Mobility has been the primary catalyst for these conversations. Our solutions in this area continue to grow nicely, up nearly 50% year on year in Q1. Our strategy in mobility is to expand on simple device management, and allow customers to take a holistic approach to solving more important issues, like data and application security.

The enterprise edition of XenMobile addresses these needs, and includes a range of productivity tools, all in a single solution. In fact, about two-thirds of our mobile platform customers opted for the complete EMM edition in Q1, showing the value of our integrated offerings versus stand-alone MDM technologies.

In Windows app delivery, we continue to work on addressing lingering challenges where new license revenue declined year on year. Within this market, we're performing well in large, strategic projects for our customers with the most complex environments. This is evidenced by the number of $1 million-plus transactions.

However, a larger-than-normal volume of these opportunities did push out of Q1 due to a range of factors, including the impact on pricing from currency, generally extended approval cycles, as well as our own execution. We'll be working with customers to try and close this business later in the year.

Additional softness in Q1 came primarily from customers seeking project-specific solutions, where the average transaction size was down year on year, and an increasing number of these licenses are moving to subscription- or term-based structure. Some of these opportunities, though, are being served by our CSP business, where partners utilize XenApp and XenDesktop subscriptions to deliver as-a-service offerings to their customers. This program represented more than 10% of Windows app delivery license revenue in Q1, while growing more than 40% year on year.

So, overall, we're innovating rapidly across this business to focus on adding value for both new and existing customers, easing platform migration, delivering life cycle management tools for faster deployments, and introducing new technologies like the WorkspacePod, designed to reduce costs and complexity around VDI deployments.

Next, in delivery networking, total revenue decreased 3% in the quarter to $161 million. For more context, let me touch on a new networking metrics from Q1. First, solution sales led to over 530 virtualization orders that included networking as part of the overall transaction. This is roughly an 8% attach rate, which is an increase from the contribution a year ago.

We sold almost 2,200 unique customers in the period, compared with 1,900 last year, as we continue to expand the base. And from a mix perspective, both the NetScaler SDX platform and the VPX family of virtual appliances grew 15% year on year. And together, these two platforms represent a little over 20% of the NetScaler mix.

The decline in total networking revenue came from our telco-focused Bytemobile business, and from the cloud service segment served by NetScaler. In Q1, we restructured our telco initiatives, centralizing the entire Bytemobile team, realigning account coverage and strategy. The goal here is to reduce cost and improve focus within this segment. Unfortunately, these changes contributed to a significant year-over-year decline in Q1 bookings, as well as performance against targets.

Within the cloud services segment, the concentration with a small number of customers creates volatility in the timing of purchase orders quarter to quarter. As you know, we had several very large transactions close in the first half of last year, creating very difficult comps early in 2015. We do expect this segment to be much stronger comparatively in the second half of the year.

And, finally, revenue from our mobility apps business grew 8% to $169 million. The communications cloud remains the largest part of this business, contributing over 60% of the mix, and growing 8%.

Our secure data platform, ShareFile, was up more than 35%, and now includes 55,000 customers and over 12 million paid users. A majority of the growth here in this business continues to come from document-centric verticals, enterprise customers, and from the tight integration with our mobile and Windows app delivery solutions.

Turning to operations, as I said earlier, we're working through a restructuring and realignment that we announced last quarter. And while disruptive in the short term, this will ultimately allow the Company to operate with more focus and efficiency, and deliver against the goals that we laid out last quarter.

One of those goals is to drive the expansion of adjusted operating margin, including by more than 100 basis points in 2015. In Q1, op margin was 19.5%, in line with expectations, and forecasted to improve sequentially throughout the year. Adjusted gross margin in the quarter was about 85%, up 40 basis points from Q4.

As you know, our gross margin has been declining for a few years due to the mix of revenue coming from our different businesses. But consistent with our prior statements, we expect this decline to level off this year in the range of 84% to 85%. Our cash flow from operations was strong at $292 million in the quarter, and $850 million for the trailing 12 months, which represents about $5.25 a share.

Finally, the significant FX volatility in Q1, particularly in the euro and Swiss franc, drove $8 million of expense that was included in other income. This is due to the settlements and re-measurement of foreign currency transactions.

On the balance sheet, cash and investments was just under $2 billion at the end of the quarter, up primarily due to cash flow from ops. Deferred revenue decreased $42 million sequentially to $1.52 billion, reflecting the overall bookings weakness in the quarter. However, in our installed base, current-period retention rates for maintenance and subscriptions increased slightly on a year-over-year basis.

And, finally, we repurchased 2.4 million shares of our own stock at an average price of $63. This leaves approximately $165 million remaining under the current buy-back program.

Turning to our current outlook and expectations for Q2 and 2015, I'd like to first provide some context around our guidance. In the first half, we'll continue to optimize the business model by taking the actions necessary to drive our targets: streamlining the Organization, initiating a multi-year expansion of margins, and simplifying focus across our core growth markets.

Our guidance for Q2 is intended to account for continuing impact to execution from the restructuring, a volatile FX environment, and a slightly higher-than-normal deferral rate on customer bookings. From a strategic perspective, we'll continue to invest in our emerging high-growth businesses, as well as future initiatives like the Workspace Cloud, which will be an important element in our evolution towards a greater mix of subscription businesses in 2016 and beyond.

For 2015, our full-year expectations are for total revenue in the range of $3.22 billion to $3.25 billion; adjusted operating margin improvement of more than 100 basis points from last year; tax rate between 23% and 24%; and adjusted EPS of between $3.55 and $3.60 per share. For Q2 2015, our expectations are for total revenue growth in the range of $785 million to $795 million; tax rate of 23% to 24%; and adjusted EPS of between $0.80 and $0.83 per share.

Now I'd like to turn it over to Mark to give you additional details around the quarter and our ongoing businesses. Mark?

Thanks, David. Welcome, everyone.

While I'm disappointed in our first-quarter results, we're taking on exactly the right decisions: to streamline, restructure, and reorganize, and to deliver on the financial goals we discussed over the past quarters. Absorbing and adjusting to these very important changes is having greater near-term impact on our execution than anticipated. And, as David said, we expect it will continue through Q2, improving in the second half.

At the same time, we're excited about the pipeline of innovations across our core products to increase customer value, competitiveness, and market reach. The message we hear from our customers is clear. Work environments are changing, IT must enable that change, and our software-defined workplace strategy meets the challenges they face. Workforces, apps and devices are becoming more diverse every day, and the information security mandate reigns supreme.

This is the market context we're built for, so our fundamental goals are not changing. First, to lead in secure workspace delivery across any device, application, and cloud. Secondly, to organize around three business units, each independently leading in its segment, and together delivering greater combined value. And third, to continue to drive profitable growth with expanded margins.

We're helping customers in a world where apps, devices and services don't conveniently live in one perfect technology framework or another. Instead, they are unmistakably hybrid, a trend we see accelerating long into the future.

Any has been a defining idea for us. In a hybrid hyper-connected IT world, any is fundamental -- any app, any device, any cloud, anywhere.

Ten years ago, the cover of our Annual Report carried a simple narrative. It said -- over the next decade, delivering applications to people wherever they work and play will become a defining issue for IT. Why? Because applications are the language of business.

Winners will be fluent with application delivery. Others will lag behind, struggling with the pace of change in an increasingly dynamic world.

We had it right then, and this is even truer today. Our customers have hundreds, and, in many cases, even thousands of active apps that are the backbone of their business. Those customers represent many of the biggest sectors in the economy -- healthcare and pharma, engineering and manufacturing, financial services and banking, government and education.

The workspaces they need include Windows, Linux, web, and mobile apps. They have serious security requirements to protect apps, data, and usage. They have the most heterogeneous set of people, devices, and locations to serve than ever before. And they represent huge market segments where security, experience, and flexibility in app delivery are must-haves.

We're mobilizing a host of new solutions for those major market sectors -- customers with legacy apps and devices; dealing with significant security and compliance requirements; serving large groups of remote workers, contractors, and branches; and dealing with the profound challenges of consumerization, mobility and cloud.

For simpler app delivery solutions, our investments are in the cloud. Our work with service providers and our cloud-based offerings in XenApp and XenMobile are how we're meeting these needs, with subscription-based service for delivering apps from Windows to web to mobile and, soon, to Linux.

At the same time, we have seen significant unmet needs in the middle market for VDI, and we'll be much more aggressive in pursuing it. Our new Sanbolic technology gives us the core storage virtualization we need to enable best price performance VDI solutions, and to do so with a unique approach to hybrid storage zones that promote security, ease-of-use, and geoclustering.

This is why we're excited about the future, and why we're gearing up to deliver the most impactful set of messaging, solutions, and inspiration in Citrix history at the upcoming Synergy 2015. This year's conference will be the biggest Synergy ever. And we're opening up more live, online access to meet increased demand.

Personally, I'm really thrilled about showing customers how to address important near-term challenges, while building a lasting vision for the software-defined era. I really hope you'll be joining us. This is where you'll see the future of the workplace -- secure, delightful, flexible, automated, and available on demand.

I'm also excited about the Citrix ecosystem of partners who will be joining us at Synergy. We'll be featuring new innovations from across this community, and showing how our partners play a significant role in our next phase of growth.

Since our founding 26 years ago, Citrix has been a visionary and leader in the software industry. We've grown through multiple industry cycles, delivered valuable customer solutions, and stayed out in front as one of the world's largest software innovators. So, we're working from a strong foundation.

We're driving multi-year margin expansion through better execution and business simplification. We're strengthening the leadership team to take on the task of efficiently scaling the Business. We're enhancing the programs that serve our community of channel and alliance partners. And we're opening new markets and opportunities through innovation.

The challenges our customers face are an opportunity for us, both from the perspective of individual market-leading products, and for combining them to deliver even more valuable business outcomes. We've been reshaping Citrix over the last two quarters to deliver on this opportunity, and that will continue. These processes are difficult, and, as hard as they are to take on, I'm extremely proud of how our team is responding.

So, now I'd like to open it up for questions. Thank you.

(Operator Instructions)

Your first question comes from the line of Philip Winslow from Credit Suisse.

Hi, thanks, guys. Just looking at your performance this quarter versus the guidance and then just your change in the full year, it's implying that some of these issues get rolled forward and some of them get resolved. And it seems like there's distinct ones that are in the US and in Europe. The question is, as you contemplate your forward guidance, whether it be Q2 or the full year, what are the things that are in your control that are fixable and how do you incorporate those? And the ones, such as the euro, and the purchasing power in local currencies that you price in dollars, how did you figure that in? And maybe also a little more clarity on how that second part there affected Q1?

Sure, Phil, it's David. Let me take the financial part of that question. In terms of currency overall, a couple of things. We are USD functional in most areas and we price in USD in the majority of our business. We do have certain elements, whether it's our service providers, our mobility apps, and we give the channel partners the option of selecting local currency in parts of EMEA.

There's a number of moving parts. The net is that impact to revenue was between a $5 million and $10 million top-line hit. And then on the actual P&L, I called out an $8 million translation and transactional adjustment in other income. I don't anticipate that to be repeated in the future. There's a few moving parts within that but you should think about that second piece as a one-time event.

Phil, in terms of some of the other things, I think the word fix is really not a good operative word, from my point of view. It's really about absorbing the kind of change that we are driving in the Company, both at the top of the Company in terms of stronger, more capable, more experienced, broader leadership. That, going down a couple of layers. We're being very proactive about that. As well as some of the absorption of delayering, which means certain teams get new sets of priorities, they get new management and new structure. It takes just some time for people to reorient themselves to these things.

Overall the response internally to the decisions we've made in terms of people, talent, leadership, priorities, and direction have been extremely well received. And now we're going about the process of making the appropriate absorption moves around change management, et cetera.

We're being prudent about guidance and expecting that this takes a little bit longer to absorb than we originally anticipated. And that on top of the really exciting announcements we have to make, and releases to show, at Synergy has really got this team very energized from within.

Got it. And then just one quick follow-up to all of that. Obviously one of the themes of last year was the product and getting back to par with XenApp and XenDesktop 7.6 and then also the XenMobile releases. In your conversations with clients, Q4, Q1, where are on, just at the very least, getting back to par, let alone getting below par, so to speak, on the product side? And that's it for me, thanks.

On the XenMobile side, you see the uptake there doing well. And I think the full impact of the latest release, the XenMobile, has not been fully contemplated by the market yet. And we'll show some of that, the simplicity of standing up a XenMobile solution from device security to app security to app delivery to our application suite at Synergy. So, we're excited about what we're going to be showing there.

Secondly, in XenApp we've come a long way. We did make a feature pack release on XenApp, 7.6. If you look at the leading indicators around downloads and pilots and intention to migrate, they're all profoundly up from where they were. We have some more to do. And, once again, we're not going to make any pre-announcements here ahead of the conference but it's a huge area of focus for us

Your next question comes from the line of Keith Weiss from Morgan Stanley.

Excellent. Thank you guys and thank you for taking the question. As we're going through this restructuring effort, it seems like it's mostly focused on streamlining the organization and cutting out some layers of middle management. Is there any broader strategic review of potential product lines? you called out ByteMobile as a recently acquired asset that might not be working as well as expected. Or even broader, like the rumors that we're hearing in the press potentially looking at whole divisions being spun out of the Company. Are those strategic conversations taking place? Is there something in the purview?

Keith, let me address the last part first. I'd say that, consistent with our past practices, we're never going to speculate on any rumors that are in the market. But I'd say, more importantly, when we think about the restructuring and all of the things that I highlighted in my overall prepared remarks, it's focused on people, structure, strategy and portfolio. And there's initiatives going on across each one of those, and then sub initiatives like the way we engage with our channel to make sure we're driving clarity and value for them, the way we're organized around customer segments, et cetera.

This is a tremendous amount of change within just a few months. But as both Mark and I said, really focused on emerging in a much stronger place, much more efficient, et cetera. We are continuing to work through refining the product portfolio. I mentioned that we've done some things so far this year and we expect that process to continue through the balance of this year. That's probably what I'd say about that.

And then maybe if I can sneak in one follow-up. In terms of Network Delivery segment in particular, will you give us the actual decline in NetScaler versus how much the overall business was pulled down by mobile?

Let me talk specifically about NetScaler and just frame it out for everyone so you understand the pieces or the market segments. There's really three areas that we have talked about historically -- the one that we call cloud service providers, that's a small handful of the largest major cloud delivery providers out there; what we call attach, and that is selling a solution that is mobile or virtualization in conjunction with NetScaler; and the third is just core enterprise ADC.

If I talk about each one of those independently, the attach business was flat year on year. And that is a reflection of a decline in virtualization but an increasing attach rate. So, we're doing much better selling solutions but it's offset by the fact that those new opportunities were down, as we talked about earlier.

The cloud service provider business is this segment that is most volatile, very lumpy and tends to move quarter to quarter. I called out last year the first half of the year we had tremendous strength in that business, drove a lot of growth in overall NetScaler, but those transactions are harder to forecast. And that business was down by about 25% year on year. It's a timing statement.

And then core enterprise ADC, where we've really been focused on driving growth through either product strategy, account coverage, and other areas, just the breadth, that business was actually up about 20% year on year. There's three different pieces there but I think it gives you a much better overall perspective. And then the standalone by mobile business was down about 50% year on year.

Got it. That's very helpful, thank you.

Your next question comes from the line of Matt Hedberg from RBC Capital Markets.

Thanks a lot for taking my question. I want to circle back on the currency issue. David, I would imagine there was a higher level of discounting this quarter. Are there any short- to medium-term changes that you're making to maintenance pricing to help offset what's going now on in the currency markets?

We're not making any short-term changes there. There's a little bit more discounting from US dollar transactions. That was single-digit percentage but we did see it. We're getting more pushback from customers on pricing because in a lot of cases they set their budgets before the end of the year and you saw a 20% change in dollar-euro over that period of time.

We'll manage that in real time as needed. Prices don't go up when the currency moves the other direction, in general terms. We're not making any programmatic changes but we are working with both customers and partners to look at the larger issue, to make sure that we're addressing it proactively.

Got it, that's helpful. And maybe one follow-up. One of your mobility peers tonight offered some lower numbers. I'm wondering, is there something broader going on in that marketplace right now, be it pricing, increased competition, that you're seeing there?

I'd say it continues to be a highly competitive area, more so down low at the MDM part of the market versus the way we describe EMM. EMM is the broader solution where we are bringing together both device management, data and app security, productivity apps, et cetera. And that's about more than two-thirds of our business mix, actually.

The ASPs in that area have been reasonably flat, actually, over the last six quarters. They move up and down just a few dollars per seat per quarter. But overall it continues to be a very competitive space.

Got it. Thanks a lot, David.

Your next question comes from the line of Steve Ashley from Robert W. Baird.

I'd just like to ask about the channel program. I know you are in the midst of doing some evolution and change there at Citrix specialization. Can you just give us an update on where we are in transitioning the channel?

Sure, hi Steve. At our summit conference in January, we introduced the specialization program, both specialization in terms of markets and product, as well as specialization lining all that up with our organization design. A key piece of what we did is actually take a good part of our field organization in the Americas and aligned them with partner -led, partner-driven markets and business models so that they get up every day and they're not thinking about named accounts, they are thinking only about partner-led business, and working collaboratively with partners to, A, develop the joint go-to market plan, and, B, make sure they have a specialization that cater to the kind of business that they've built.

Clearly, we have partners that have built their businesses around app delivery at the Windows and high level. We have other partners that have joined in through the networking set of products that we've offered. So, that's another specialization. And then mobility is yet a third that we're seeing more and more partners step up to both networking partners, as well as more of the classic partner.

We're a quarter in. The response to the specialization program has been really good. And it's the kind of thing that probably takes a couple quarters to start to show specific traction. But basically the idea is pretty simple, and that is helping specialization, which is about driving competencies, and where partners believe that they have a strong value proposition to offer. And we're just making sure our organization is aligned to that from a people, structure and program point of view.

Great. Thanks so much.

Your next question comes from the line of Ed Maguire from CLSA.

Hi, good afternoon. I'd like to ask about the sales reorg. A lot of times when you have a shift in the change of the sales structure, customer touch points get changed and there's always the risk that opportunities that might have been in process don't make it through the hand off. How are you managing the process to ensure that opportunities that were in process will not be disrupted? And does this create new processes, from your perspective, for sourcing and building out new pipeline?

Ed, this is at the core of absorbing these adjustments. And the answer to your question will range from the internal systems we use so that the hand off and the knowledge on an account basis is documented and transferred through systems. And then at the next level, the leadership of the organization at the vice president level has really been very stable. So it's the same team at that layer, they've just taken on different sectors and segments of the business. So, they will have different field sales management, enterprise relationship management leaders to work with.

When we make the change and design the new model, we tried to do everything we could to minimize the hand-off issues. But invariably that's the challenge of making these changes. There's no great time to do them. There's only whether to do them for the right reasons or not. And I think we've done them for the right reasons, which will give us greater partner engagement and focus on partner-led deals, and then separate out the small named account types of business that tend to be more high touch, and where we're taking a much bigger role and working with, let's say, a partner or a set of partners that the customer wants.

Just a quick follow-up -- as you're moving toward more of a solutions approach, what's your thought process regarding more vertical specialization? I'm thinking specifically of some of the healthcare work that you guys are doing. Are you going to bundle more solutions into vertical-specific approaches?

The answer is yes. And the starting point is we have huge bases of business and practices in healthcare and pharma, government and education, manufacturing and engineering, and financial services. And when you look at the reference customers, reference architectures, the hero apps and hero devices that are focused on those segments, as well as all of the case studies, et cetera, we are aligning all of those, I think in a really powerful way, with then the partners who then choose to specialize in those segments, because, in fact, many of our partners do specialize in segments and leverage the knowledge that they accumulate, let's say, in a healthcare rollout with electronic medical records, clinical systems, et cetera, and they're able to replicate that competency over and over again.

We just have not been organized to really help them amplify that competency. And that's a key part of our go forward, including how all of that impacts our road map in terms of invention and innovation underneath.

Great, thank you very much.

Your next question comes from the line of Heather Bellini from Goldman Sachs.

Hi, thanks. This is Nicole Hayashi in for Heather. Just first, given what's happened in the quarter and your calendar 2015 guidance, what gives you confidence that the worst is behind you?

And, secondly, now that you've completed the 700 headcount cuts how much more is needed, either restructuring or operationally, for you to reach those operating margin targets? Or do we just need to see those costs roll through? Thanks.

Nicole, let me take the second part of that question and then Mark will address the first part. In terms of overall operating margin, we're comfortable with the guidance that we've laid out. We're comfortable with our stated objectives of increasing op margin more than 100 bps on a year-on-year basis, and beginning a multi-year expansion of margins that over the next two or three gets us back to 25%, and eventually toward our longer-term goals in the mid to high 20%s.

In terms of where we are in the restructuring, as I said in my prepared remarks, we're through most of that in the US and we'll be substantially completed internationally at the end of Q2. There's a number of things going on on the infrastructure side, whether that is just system consolidation, real estate consolidation, delayering, all of the things we have talked about. Most of those will be completed throughout the first half of the year. That's what's represented in our guidance right now.

And I think the vast majority of the disruption caused by that is already out there and known. We're on the downhill side of working through that. It doesn't just happen one day and the next day it's perfect. It is a process and I feel good about where we are right now.

Yes, Nicole, I would just add to that that prospectively we have significant releases of our existing products, as well as the whole move to a cloud-based control plain for workspaces. I think we'll wait for Synergy to show all of that and talk about all of that, but that's ahead.

And there will be some markets and market opportunities that open up because of these new releases, especially when you look at our ability to deliver Linux desktops and apps, Windows desktops and apps, web desktops and apps, mobile apps on a secure data fabric, and to do that in a premise-based or cloud-based model, and to do it across a wide universe of partners, some of which add value at the higher layers of the stack and don't want to configure infrastructure. So, workspace cloud will definitely help those partners be more productive and really play to their competencies. And, as well, we'll have tools and capabilities for the more classic partners that like to work from the bare metal up.

I'd say those things that are prospective really are designed to increase our market reach, simplify the consumability of our products for partners in the full range. And then obviously we are more and more leaning into the subscription based business model space, which we like a lot.

We have well over 1 million users of XenApp on a monthly basis, and growing very nicely, that are doing it through service providers, so that evolution is ahead of us, as well. I think it all portends for faster sales cycles, lower selling costs, lower friction routes to market, and, in the end, I think very special solutions that we're pretty excited to be rolling out and showing pretty soon.

Great, thank you.

Your next question comes from the line of Kash Rangan from Merrill Lynch.

Hey, guys, thanks for taking my question. I think a couple years back, or maybe three or four years back at Synergy, you talked about rebalancing more on the direct side, and now it feel like you're rebalancing more on the channel side. Just wondering why the change.

And also, secondly, any thoughts on the competition, especially with AWS getting into the market, and VMware also more talking up other market share gains. Thank you.

I'm not sure that we are rebalancing on the channel side as much as we're organizing in a way that is more focused around channel-led business and partner-led business. And it's really reflective of the mix that we have had in the marketplace in terms of energy but organized or much more focused so that, for example, you don't have someone that's leading geographic area that is responsible for the named account and partner-led account and service provider account and telco account.

Through the specialization we're able to get more focus, obviously incentives that align better, and products that align better. I think it's much more focus, then refocus, than rebalance.

The market environment regarding AWS and VMware?

Oh, I'm sorry. Yes, the competitive environment, I'd say, hasn't materially changed. The way we look at it is, when it comes to like a XenApp and XenDesktop world, is there's small, medium and large. Think of it that way,

In the small end of the market it has gotten more competitive with simple types of solutions that are available from competitors like AWS. Our answer there, obviously, is our service provider business, which we feel pretty good about how we're competing there because our service providers, I think, are closer to the customer and able to deliver a more complete solution than a simple remote access solution that you can get from Amazon Workspaces.

On the large end, jumping to the other end, this is where I think we've had a dominant share, and believe we're maintaining that share. You see that in the number of large deals, the strength of renewals in that area of the business, and obviously, the major commitment that so many of these sectors that I talked about have to XenApp and XenDesktop due to the security, experience and flexibility characteristics.

I think the area that is more competitive and where we've been investing a lot of energy is in the middle market. That's typically driven by projects, and specifically VDI projects, where we haven't been as aggressive as I think we could be. And with our new Sanbolic storage virtualization technology, along with an announcement we made to our partners earlier this year around Workspace Pod, we'll be able to be much more aggressive in the middle market with our VDI specific types of solutions, as well as the investments we've made in the core of XenApp around improving security, improving migration capabilities, and improving client list types of access that really bring on new use cases, as well as introducing Linux support that expands the primary market there, as well.

So, that's what to expect. We like competition and we will compete through innovation invention. And we love the opportunity that we're going to be able to show there.

Your next question comes from the line of Abhey Lamba from Mizuho Securities.

Yes, thanks, thanks for taking my question. Mark, as we take a step back, the desktop slowdown has taken a long time. As you reflect on what has happened over the last few years, why has it taken so long? And what are you doing differently now that gives you confidence that these new measures would work?

I think, Abhey, that, certainly over the past few years, there have been a number of headwind forces, some of which go on, I think, everyone to understand that the Windows 32 environment, whether that be a desktop as an app or an app itself, is a long tail type of environment that, where on a horizontal basis, probably has less opportunity going forward. And where the opportunity is, is in penetration where the long tail will have its longest run, and that is in the sectors that have massive investments in custom apps and off-the-shelf apps that require the kind of security, centralized manageability, and device flexibility that a XenApp can offer.

We've been working our way through that secular evolution, both in terms of the product itself, as well as the business model in terms of moving to more and more of a service provider model there. And those things will continue.

At the same time, these same customers want to have a mobility conversation. And I think that we introduce some of the most visionary and powerful mobility solutions, maybe ahead of market readiness but it has put us in a leading position when it comes to mobile app security and delivery.

We've never been that interested in mobile device management. And, to be honest, we believe mobile device management and device management itself belongs to the device operating system providers. And you see that more and more. Certainly, everyone that carries a tablet or a smartphone knows that Google or Apple or Samsung is doing a good job of managing it. And I think the same thing is going for the Windows environment more and more, and why we haven't invested a lot of energy in device management.

Our energy has been focused on managing apps, data, access, and obviously the security of all of that, and doing that as a service. That's been our mantra and we're working through the market evolution in the mix of types of apps that customers have to deliver. Looking back, Windows was the complete center of all enterprise computing. Looking forward, it's an important piece of enterprise computing but so are mobile apps, and so are web apps.

We have great products in NetScaler and XenMobile to help customers deliver them high performance, security, access control, encryption, and so forth. Yes, it is taking time. And I'd say that in my 20 years with the Company, this is the third major evolution of the Company, and each one of them has taken several years. There's no doubt about that.

Thanks, very helpful.

Your next question comes from the line of Mark Moerdler from Sanford Bernstein.

Thanks for taking the question. Two questions. The first one, is we saw a year-over-year decrease in professional services. How much of this is driven by the reorg versus Citrix-driven versus customer demand-driven?

Mark, short answer is a lot of it was driven by the reorg.

Okay, that makes that easy. Second follow-up on it -- you had in the expenses, you had the euro weakness increasing expenses. Can you give us a little more detail on exactly how the weakness in the euro would drive an increase in expenses?

Weakness in euro, for our euro-denominated expenses -- and just to keep in mind, we do business in 39 countries, I believe, right now, so there's a lot of different currencies moving different directions -- the two biggest ones being euro and Swiss franc in EMEA and those actually moved in opposite directions during the period.

On core expenses that are just denominated in local currency that actually helps the expense line a little bit, a few million dollars there in a quarter. The below-the-line items are balance sheet remeasurement, largely, and in settlements of actual transactions and what-not.

So, there's a fair bit of one-time in there related to year-end entries, volatility in unhedged currencies, as well as just the normal noise and cost of a program. I'd expect other income to go back to that negative $1 million, maybe $2 million in Q2, Q3, Q4.

Perfect, thank you. I appreciate it.

Your next question comes from the line of Walter Pritchard from Citi.

Great, thanks very much. This is actually Tyler Radtke in for Walter. If I go back to the Q4 call when you laid out the reorg plan, you guys seemed pretty confident it wouldn't really have a huge impact. Can you provide some more specifics on what factors of the restructuring caused weakness and maybe whether it was by a specific product line or specific region?

Tyler, I'd say in Q4 we definitely expected it to have an impact. It's impossible to do a major reorg without that. However, obviously, we underestimated that impact.

I think that we probably took on more than we had laid out at that point in time. We've been aggressively tackling all of these things at once. It's much easier to just take the pain, get it over with and then build back over the course of a couple of quarters than to piecemeal these things out over a year or two. So, that's the approach we've taken.

With that I'd say, you look at the results. We had similar challenges across every geo when it came to execution related items, when it came to just the impact from the restructuring on reporting structures, on sales process, on a number of these factors. But, fortunately, I think we're largely through that.

I mentioned that the restructuring in EMEA will be substantially completed this quarter and that will be it. We'll get the people solidified, everybody understands their new reporting structures, processes, et cetera. We will start working through that and expect slight improvement in Q2. We want to be pretty cautious, obviously, coming off a challenging Q1, but gradual improvement as we go into the back part of the year.

Great. And then if I think about sales and marketing as a percent of revenue, it declined for the first time in awhile in 2014 on a year-over-year basis, and it looked like it continued that trend here in Q1. If you think about your long-term target of getting to a mid to high 20%s operating margin, where do you think that can head over time? Maybe if there's more cuts to be done on the OpEx side, what category would you think they'd mainly come from?

Yes, when you say OpEx cuts, I just want to be careful that everybody understands what to expect from a restructuring standpoint. As far as the people impacted restructuring on a large scale, that will be substantially completed in Q2, as I said before. However, there's always ongoing optimizations that we're working on -- rebalancing in places, reallocating, et cetera.

The idea is to drive more productivity and leverage out of the base that you have. And you do that in conjunction with more modest or minor expense rebalancing and then just cost containment across the board.

Sales and marketing has been one of those lines where we've been looking to drive greater efficiencies over the last couple of years. It was running north of 40% of revenue for several years. I believe last year it was just under that at 39%. And this year, we haven't given that granular of a guidance, but it will be down as a percent of revenue. And that's been a core focus area.

And as Mark mentioned, a lot of the restructuring is not pure cost related but focused on driving greater efficiencies and productivity going forward, both through our direct teams, channel support teems and through our indirect channel partners themselves. And that's where you'll start to see much greater leverage going forward.

So, net it all out, we still expect to continue to grow expenses slower than we're growing revenue. There are places where expenses, of course, are coming down on a year-on-year basis and will continue to. I hope that answered your question, Tyler.

Yes, thank you very much.

Your next question comes from the line of John DiFucci from Jefferies.

Thank you. I've got a question that's coming at it from just the opposite angle of a couple of earlier questions. David or Mark maybe can answer this. When I look at -- and I see what happened this quarter -- the deal slippage and the restructuring disruption were the primary issues for the miss this quarter, which is about $25 million on the revenue side. Why doesn't it get a lot better from here? When deals slip, they slip into next quarter. And if you figure it out, the restructuring disruption. I guess what I mean is, you're lowering annual revenue guidance by $70 million to 80 million after this $25 million miss, which doesn't imply a whole lot of improvement from here relative to what you thought you'd do when you last gave guidance.

John, this is David. Let me answer that for you. When transactions push, you always raise the question of why they pushed, and whether that is related to a market issue, an execution issue, product issue, et cetera. And, so, you took a different lens on your certainty around those.

In this case, I would say the answer is probably all of the above. We want to take the position at this point in the year that we're not going to see material improvement in Q2, and planning and guiding around that. And until we start seeing that execution improve and some of the new initiatives really taking hold, I'd much rather be in this position, That's the simple answer to the question, John.

Okay, that's logical. I appreciate it. If I could ask a more thematic question, too, of Mark. As you guys know, there's all kinds of speculation out there in the market, and there recently has been around Citrix stock and around the assets that you hold, and how some might make sense if they were just separate entities. But I just think it's probably a good time for Mark to remind us of your vision of how all these assets come together, and whether you think at this time that it makes any sense to look at perhaps separating some of them.

Yes, John, obviously, we've seen the rumors. This is a question that, by the way, has been an ongoing question from investors and questions we ask ourselves, because it's just good business to always be asking these fundamental questions.

The answer is that we feel better than ever, actually, about the portfolio and the rationality of how all these pieces fit together. And it is rather simple, and it's something that we've talked about for quite some time. But when you look at the whole notion of delivering a workspace, we used to talk about a desktop but, let's face it, desktops are dead. Workspace is really about the digital world that people live in to collaborate and accomplish tasks. We've always stood for the notion of delivering those. And in the process of delivering them you need several pieces.

The first core piece you need is this thing that we put on every end point that's like a browser. It's a universal client that we call receiver. The second piece is you need to control the network connection at the application layers. That's why we compete in layer 4 through 7 networking. And it's where we're able to actually control and deliver a high-quality experience through acceleration and optimization, but also all of the dimensions of encryption, of data in transit, as well as access control. So, it makes our networking business extremely important.

Third is the piece that sits in the middle, where it gives you the ability to handle all of the interactive media types that we like to call apps and data. Some of them are Windows-based, some of them are legacy Windows, some of them are the newest Windows. Some of them are apps, some of them are desktops. Same thing goes for web. Same thing goes for mobile. That workspace services part of our business is core to being able to handle all of those,

And then our mobility apps business, which is where we build our secure data fabric, share file, our collaboration tools, our communication tools, et cetera, these are the products that, in their own right, have markets that we, I think, have done a great job of attacking. And they are the differentiators when it comes to winning deals in medium and large enterprises when those enterprises want the core mobility apps that their people need. And they want them in a package that is easy to use, intuitive, consumer-like in its experience, integrated nicely together, and have a security model that meets the regulatory and IP protection requirements that they have.

So, that's our business. Those are our three business units. That's how it works. I think, actually, how they work together is better than ever. And I think you'll see the integration of these things to actually improve orders of magnitude as we go forward here because we're reaching that level of maturity in the sense of the platform that's underneath all of them, and the ability to consume that platform across our products through APIs.

That's a reminder of the vision and also admission that we definitely have done a lot of portfolio rationalization over the last, I'd say, year. We've de-emphasized or eliminated products where we were over-investing, not getting an ROI, and believe that those products are either markets that we don't want to serve or we can better serve them through other channels.

An easy example is VDI in a box. VDI in a box has been replaced by things that we've done to XenApp and XenDesktop to make them simpler, and all the work we've done with service providers that are standing up XenApp and XenMobile environments that actually deliver those types of solutions to that type of smaller customer segment. There's just a constant set of work that we're doing here to optimize and to rationalize across the portfolio.

Mark, I really appreciate that and it actually all makes sense to me anyway, but I'd be remiss not to mention one last thing because otherwise you're just going to get a lot of speculation. You didn't mention the SaaS business. Is it fair to say that that SaaS business tries to do everything you just mentioned but do it for a customer that can't implement all that technology to reach down into a smaller customer? And it's a bigger customer at times, too. Or was there some other purpose for the SaaS business?

John, I should have mentioned. We are on a course, as are many software companies, to be entirely a SaaS business. In the reorganization we changed how we refer to what we used to call our SaaS business to our Mobility Apps business. And so GoToMeeting, ShareFile, GoToAssist, RightSignature -- these products are our Mobility Apps.

The way to think about it is, we offer them directly to segments, SMB segments, and we offer them to enterprise, medium and large enterprise, through our workspace services delivery infrastructure. Our SaaS business figures hugely into this and it's the third major piece. So, it's Delivery Networking as a business unit to handle all of the secure delivery at workspaces over public networks. Secondly, our Workspace Services business unit that incorporates all of our windows, Linux, mobile and web app delivery. And then our Mobility Apps business unit that builds all of our mobility apps and the platforms that they run on in the cloud.

Those are the three pieces. Around here internally we talk about the business units being independent because they have independent segments, like Enterprise ADC is a segment, as well as what I like to refer to as WDC, workspace delivery controllers. And David mentioned that this is the attach type business that we get from NetScaler. So, really, there's independence and interdependence, and the interdependence is how we compete in medium and large business and deliver simpler end-to-end solutions.

Thank you very much Mark. That's really helpful. Thank you.

Your next question comes from the line of Derrick Wood from Susquehanna.

Thanks. Staying on that last topic, the SaaS business growth 8% in the quarter, it's been coming down for awhile now. Can you just talk about the puts and takes in this unit and why it's come down so much and what's a reasonable expectation for growth at this point?

Yes, Derrick it's David. High level is there's a little bit of one-time in Q1 results. And that was impacted about 1% on the growth rate.

But if you take a big step back and you think about what we talked about over the last year, 2014 I'd characterize as really an internal focus. We were focused on rebuilding the underlying platform, which we did, focused on lots of new product innovation and areas like that, with the overall goal of increasing retention rates on the install base, improving customer MPS, et cetera. And we're doing really well on those things. In fact, retention is up nearly 10% from where we would have been a year ago.

And the plan for 2015 was about a reaccelerating the go-to-market net new spend around new customer generation and what-not. That's moving in the right direction, as well. Net new customer growth is at its highest pace of where we were probably over the last three or four years -- I'd have to go way back. So, happy with that. And I think the expectation ought to be that growth rate starts to slowly tick up from here measured on a year-over-year basis.

Last point is just to remind everybody of the various pieces across the communications cloud, which I mentioned earlier represents about 60% of the business, and is growing just under 10%. The documents cloud business, largely there's a share file platform, continues to grow nicely. I talked about that earlier in my script. Up about 40% on a year-on-year basis, and now representing a north of 10% of the overall mix.

And those are offset a little bit by just legacy remote access. Still about 15% but it's been declining at 5% to 10% per year for the last couple of years. And that trajectory likely won't change, just a mature market in secular decline. There's a lot of puts and takes, but I think that's the way to think about the Mobility Apps business.

Okay, thanks for that color. And then I was just hoping you could drill a little bit more into the current state of the NetScaler business with cloud providers. Are you expecting these slip deals to close some time this year? Have any closed or any lost competitors? Maybe if you could just give a little more color as to what your assumptions are in this business for the rest of the year.

Yes let me be clear. It wasn't slipped business in terms of the cloud providers or competitive losses. I think we still maintain an extremely high market share there. It's just that the timing of these tend to be very lumpy. It's a combination of buildout and scale up, if you put it in those terms.

If you think back the first half of last year where we had tens of millions of dollars coming from this segment because there were major buildouts going on across, really, in that case, three large infrastructure players, and those will come back. We have an annual picture where we are working with these customers in terms of what we expect the demand to look like. It's just nailing it down to a specific quarter.

So, that's the simple way. Nothing changing on the competitive front. Really nothing changing overall from what we're delivering. It's just the timing of that. There will likely be quarters in the next few quarters where we have a large uptick in that business, and we'll explain that on the upside when that happens, as well.

Great. Thank you.

With no more questions, let me just thank everyone again for joining the call today. I'd like to invite you to join us at Synergy and our annual Analyst Day in Orlando in May. Please visit our website for more detailed information about the event and we really look forward to seeing everyone there. Thank you and good day.