Citrix Systems, Inc.
Q1 2006 Earnings Call Transcript
Published:
- Operator:
- Good afternoon ladies and gentlemen, my name is Brian and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer period. If you would like to ask a question during that time please press “*�? then the number “1�? on your telephone keypad. To withdraw your question, press “*�? then the number “2�?. Thank you. I would now like to introduce Mr. Jeff Lilly, Senior Manager of Investor Relations. Mr. Lilly, you may begin your conference.
- Jeff Lilly:
- Thank you Brian. Good afternoon everyone and thank you for joining us. In this call today, we will be discussing Citrix’s first quarter 2006 financial results. This call is being webcast with a slide presentation on the Citrix Investor Relations website and a slide presentation associated with webcast will be posted immediately following the call. Participating in the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Senior Vice President and Chief Financial Officer. Before we get started, I want to emphasize that some of the information discussed in this call maybe characterized as forward-looking statements made pursuant to the Safe Harbor provisions of Section 21E of the Securities Exchange Act of 1934. These statements involve a number of factors that could cause actual results to differ materially including risks associated with the company’s business which involve the company’s revenue growth, products and their development, distribution, product demand in pipeline, economic and competitive factors, the company’s key strategic relationships, the effect of new accounting pronouncements on revenue and expense recognition including the effects of SFAS 123(NYSE
- David Henshall:
- Thank you, Jeff and good afternoon. Today, I am pleased to report strong first quarter results for the company, demonstrating really outstanding execution across all aspects of the business and growing customer demand for access products. In addition to providing you with some commentary on the first quarter results, I will discuss the current trends in our business and provide you with our outlook for the second quarter and full year 2006. Beginning with our financial results, I should note that certain numbers discussed are adjusted figures. Please refer to the press release and our Investor Relations website for a full reconciliation of adjusted figures to US GAAP figures. So, let’s take a look at the Q1 highlights. Total revenue was $260 million, an increase of 29% over the last year. Our GAAP EPS was $0.24 compared to $0.22 last year. Our adjusted EPS was $0.33 compared to $0.24 last year, an increase of 37%. Adjusted operating margin was 28% and cash flow from operations was a record $95 million. So, across the board really a solid quarter. Now, I would like to discuss our revenue by product mix and geography as well as a few operating metrics. In the first quarter, product license revenue was over $114 million, representing 27% year-over-year growth. This number best demonstrates better than expected growth across all of our product lines. One of the areas I’d like to highlight is the performance that we saw from our access management products, which I will discuss more in a moment. Of the total license amount, our NetScaler products contributed almost $13 million. This was an increase of over 16% sequentially and over 100% year-over-year driven by continued strength in U.S. market. Total NetScaler revenue for the quarter was over 16 million. On a go-forward basis, we were reporting NetScaler products revenue as part of consolidated application networking products, which will comprise the NetScaler app delivery products, the app firewall products, plus our SSL VPN solutions. Look at our online services. It generated nearly $32 million in Q1. This is an increase of 55% over the last year. The strength in this business was driven by rapid customer adoption across each of our GoTo products
- Mark Templeton:
- Thanks a lot David. And thanks everyone for joining us today. Our game plan for 2006 is about building momentum, generating growth from new product cycles and multiple markets. Our strong Q1 results in revenue, EPS and cash flow are direct measures of momentum. The result of building and tuning our product and go to market engine over the past few years. Right now, all I can say is we are hitting on all cylinders. Our app virtualization business driven by Presentation Server 4, our license update and technical services continue to show strength. Our online services business with award-winning products and flawless execution is setting the pace for web-based collaboration. Our app networking products continuing to exceed our expectations are really just beginning to see leverage from our channel and customer base. In fact, we saw excellent growth across every product, service and sales geography. Our Q1 performance shows we’re on track with our access infrastructure strategy and our aggressive growth objectives, it was a great start for the year. Our annual sales and partner kick-off in late January summit 2006 brought nearly 3,000 of our customer facing employees and partners to Orlando, another attendance record impressive consist with the first year we charged the conference fee. The primary objective was to build partner competencies, getting trained and certified to effectively sell our radically expanding product offering in specific access infrastructure markets. We are offering four competencies for access, security and control, for application delivery, for real time collaboration and for small businesses, all built around 10 Citrix product lines all No.1 in their market for a fast rising start. Summit was a content rich week of training, education and getting excited about our markets, our new products and growth opportunity for all of us. The enthusiasm was great and I believe a positive leading indicator of partner focus on our products going forward. Now, I would like to discuss a few Q1 business highlights. First, our app virtualization business. Clearly, this business is benefiting from the pressure on IT that has better control. Control over information security, over TCL, over regulatory compliance, over business disruption and better control of the users access experience. All very important value points that only server based application virtualization can deliver. First quarter revenue for Presentation Server geared the momentum we saw in the fourth quarter. We are continuing to see an excellent response to PS4. In addition to a small boost from the end of sale for MetaFrame XP and 1.x. Existing customer were seeing the economic benefits, application compatibility and scalability of PS4 as enablers of new projects as well as just of expansions. This is driving new licenses, strong subscription renewals and continued success of our getCurrent program. This is the power and promise of PS4 for our customers. But app virtualization isn’t only for the larger enterprise anymore. After a full two quarters of availability, we are pleased with the ramp-up of Access Essentials, our new app virtualization solution designed specifically for small business customers and our SMB focus partners. Our customer base doubled in Q1 exceeding 2000 installation and Access Essentials was named the best mobile solution finalist for the prestigious CODiE Award. Recently, we shipped version 1.5 of Access Essentials and we’ve also made the product available in shrink-wrap packaging in North America and European market in response to customer demand. Packaging, pricing, positioning and promoting our technologies, purpose-built for small business partners and customers is an exciting growth opportunity for us. So, stay tuned for more in this space. Overall, we’re really bullish on the app virtualization market and so our customers. Like the County Council in the UK that’s saving 2 billion pounds sterling in a year. The Petroleum Company in Africa that cut hardware costs by 2/3. The Indian auto manufacturers saving 35 to 40% on communication costs. The Canadian Bank cutting IT costs in half and saving more than $40 million over five years. The availability of PS4 will further enhance the benefits and efficiency and agility that are making these customers and many, many others like them more competitive. Last year, we made a strategic movement to the adjacent high growth Application Networking market with the acquisition of NetScaler. Application Networking is about providing the best performance, security and costs for application delivery, especially web apps over the network. The integration process is on-track. Through the end of 2005, we maintain separate sales teams while we prepare for a smooth transition to specialize product base sales approach metrics with our geographic sales groups. In Q1, we completed this transition. Now, product specialist and ERM are both compensated on NetScaler sales and NetScaler products are now also a part of all Citrix channel incentive programs like Advisor Rewards. At summit, we officially introduced the NetScaler product line to our partners. All of the NetScaler training sessions were sold out, standing were mainly. In fact, NetScaler’s sessions were the most heavily attended at the conference. We now have over 200 NetScaler authorized channel partners worldwide including many that received their first training at Summit. And they are already getting results. Nearly 10% of Netscaler bookings in Q1 came from partners who had never sold NetScaler prior to this year. In December, our app networking team acquired web app firewall leader
- David Henshall:
- Thanks Mark. I would like to take this opportunity to recognize and thank Jeff Lilly, Citrix Director of Investor Relations. Recently IR magazine gave their annual rewards recognizing the best rated companies for shareholder communication. Citrix under Jeff’s excellent leadership is nominated for top awards in three categories and winning in two. First was best overall IR program, mid-cap company. Second was best use of conferencing for earnings calls, mid to large-cap company and also the 2,400 voters chose Jeff as the runner-up for best IR officer in mid to large-cap company. Obviously, Citrix is unanimously No. 1 so, congrats Jeff. Now let’s open it up for some questions.
- Operator:
- Operator Instructions Your first question comes from the line of Adam Holt with JP Morgan.
- Adam Holt:
- Good afternoon and congratulations on the quarter. First couple of questions are about the strength in Presentation Server. I was wondering if you could talk a little bit about where you think we are in the Ford Auto (phonetic) upgrade, what kind of experience you are having with customers that are upgrading, are you seeing some expansions etc., and what do you think the growth of that product can be in 2006?
- Mark Templeton:
- Thanks Adam. So, let me first start by reminding everyone that we’ve really built the Presentation Server franchise as an infrastructure product on a subscription licensing model. And the purpose of that kind of licensing model is to allow customers to move from generation to generation the release of product at their convenience on their timing. A key piece of the reason here is because as an infrastructure product, when it’s not broken they don’t want to fix it, and secondly, remind everyone that Presentation Server typically in a system it’s only 15% maybe 20% even including the services that deliver of the total systems. So, there are lot of other decisions around hardware and applications that get made at the same time and that’s why we really were one of the first software companies to offer a subscription type model to license updates. So, that allows customers to move at their own pace. So, what we focused on is just continuing to build the best technology to drive the economics and the compatibility and applicability of Presentation Server on a whole app virtualization product line. And encourage customers to move at the pace that makes sense for them. So, what’s happening here is there is a natural cycle I think that’s occurring around hardware upgrades, at which time customers are moving to Windows 2003 Server, that then they make a decision then to migrate and use their subscriptions to move forward with PS4. And then obviously it does affect the economics because there is an instant ROI on moving to PS4, given the kind of other investment in the form of hardware end. So, I think those are the dynamics that we see and we think that we’re on a couple of years cycle here being driven by sort of a major, new set of capabilities in PS4, not only in the 32-bit environment but in the 64-bit environment, that really changed the kind of economics, the performance and the compatibility with applications and devices.
- Adam Holt:
- And just one question if I could for David on the operating margin guidance, obviously 28% is a great start to the year. Can you talk about where you see areas that you need to invest this year and is there any reason we shouldn’t expect to see the margin continue to increase from that base line on a sequential basis throughout the year?
- David Henshall:
- Okay, so I think if you look at their guidance in your run, topline or bottomline, it’s going to shake out somewhere in the 27%, 28% range for Q2, and upper 20s for the full year. And when I mentioned in my private previous comments about headcount growth, I mean we are investing the places that makes sense for each business, whether it’s enhance our GoToMarket capabilities around the world, more specifically into something like the NetScaler product specialist. We are also investing pretty heavily in product development. So, the technologies you have seen coming forward whether it’s Access Essentials or Constellation or other things we haven’t talked about yet, and continue to invest pretty rapidly in those. So, I think it’s pretty much across the board, and as we said before, we are very focused on driving the best solution possible for our customers over the long period of time. While we are continuing to execute in the high 20’s revenue growth and actually 30 something percent growth on the bottom line, that we think it’s plenty of opportunity to continue to invest to sustain growth into the future.
- Adam Holt:
- Terrific, thank you.
- Operator:
- Our next question comes from the line of Bill Winslow with Credit Suisse.
- Bill Winslow:
- Hi guys, obviously NetScaler had a great quarter sequentially and I am just sort of congratulate you on here over the past several quarters. I wonder if you give us a sense for just where the possibility of it look like in Q1 here but actually cross over and actually start to contribute or if still like a loss making division and then just another question on just the core license, I am wondering if you can give us a sense for what you believe was the initial help provided by the end of lifecycle that’s in the process right now for XP, and sort of how you see it just having the right process end of sale and then end of life at the year end contributing over the course of the year?
- Mark Templeton:
- Sure, you bet Bill. First on the NetScaler question. When we originally announced the transaction, we talked about 1 to 2 penny EPS solution would be our expectations in the first quarter, I think that we were still diluted but it’s the bottom end of that range, just given the great execution we saw across the team. Still expect this business to be break-even in the next quarter and profitable in the third and fourth quarter this year. So, great trajectory that we are seeing right now and we are very happy with the execution there. As far as really quantifying the benefits achieved from the end of sale and end of life opportunities that Mark was talking about, it’s up to quantify with any real specifics. I think that we want to continue to be prudent and thoughtful about guidance going forward and understanding that there certainly was some benefit in the fourth quarter in EMEA related to the end of sale of XP and maybe some in the first quarter in the America-Pacific region, which is one piece of anecdotal evidence is that coming out of Q1, EMEA had a fantastic quarter on the heals of what was a great Q4 so, I think we were just going to continue to take prudent stance and look at this across a multi quarter period.
- Bill Winslow:
- And also just one quick follow-up on in the Gateway provision as we saw can I just curious how that grew sequentially here in Q1?
- Jeff Lilly:
- In Q1, I think it was up about 10% sequentially.
- Bill Winslow:
- Great thanks.
- Operator:
- Our next question comes from the line of Steve Ashley with Robert Baird.
- Steve Ashley:
- Hi, I would like to add my congratulations on the quarter as well. I wonder if you could talk about $1million deals, how many you might have had and how many of those might have broken down between the app virtualization business and maybe some of the Gateway businesses?
- David Henshall:
- Sure, it actually was in the quarter with a lot of million dollar deals, the business was spread very evenly across customer size and transaction. There were a few large deals on a recognized revenue basis and then there was also and specifically to the NetScaler business, there was a few customers that aggregate up to over seven figures in this quarter, and no individual transactions that was at high. So, not a big quarter for big deals just a good balance across the spectrum.
- Jeff Lilly:
- Steve, I’d also add that that’s not unusual for Q1.
- Steve Ashley:
- Okay, great, with respect to NetScaler, if you had any ability to assess whether the buyer of that product is indeed similar to the same buyer who may have been buying MPS historically?
- Mark Templeton:
- Yes, we do believe that on the enterprise side, it is a similar kind of buyer, especially at the stage we are at with many of our enterprise customers. We had a long relationship with enterprise customer starting from the bottom up. Today, those relationships are, you know, they can be at the CIL level but they are often at the VP of IP level where this kind of IT officer has a view across the infrastructure, the networking, the apps, etc., all pieces of the business, and therefore we get a look at their app delivery requirement for a web application and where they are going with the application infrastructure. I think the message around application delivery, around virtualizing client server apps, around optimizing web apps and coming screening desktop application is resonating extremely well within.
- Steve Ashley:
- And just lastly, NetScaler, the mix of business how much that might have been the traditional enterprise type product versus the newer standard edition that you introduced into the channel? Thank you.
- Mark Templeton:
- The standard edition is just getting its start, I think I mentioned we’ve just started training partners on the product line, and so, it was just a very small component of the Q1 results, but notably in Q1 with the NetScaler product line, over 60% of the business was with the classical enterprise type customer with enterprise web application. We still saw a great growth in the medium metrics marketplace, which is where the company obviously started and we have such an incredible reputation sitting in front of great websites like Google and Yahoo and MSN but we are really going feeling good about the growth on the enterprise side of that business, really sort of giving us the validation on our strategy around putting a web apps delivery system in front of enterprise web application.
- Steve Ashley:
- Great thanks.
- Operator:
- Our next question comes from the line of Ed Maguire with Merrill Lynch.
- Ed Maguire:
- Yes, good afternoon, could you talk about some of your efforts to strengthen competencies across the different types of partners, and then talk about the type of newer partners you had come on board, and their progress in learning to cross sell some of the different products?
- Mark Templeton:
- Sure, so we are offering actually a self-selection kind of process to the incumbent channel partners. So at Summit, we actually laid out all the competencies, what they are about, the kinds of skills etc., and ask partners to choose from those competencies where they were most comfortable and felt that they fit best. And I think that was a very successful sort of way to present it to them. On the proactive sort of recruiting side, it’s a little bit different. We have been actively recruiting for example, SMB focused partners, we recruited about a 1000 new ones in Q1 that are SMB focused, and with not only Access Essentials but some of the other things that we are bringing forward will add more and more products for them to focus on as in the form of solutions and tie that back to the whole competency model that is about, training and selling demand generation as well as obviously all the technical certifications on the product. The same thing goes for recruiting partners to focus on application networking or access security itself, and again the profiles are little bit different in terms of who we are out recruiting but the skill sets whether we are recruiting you or you are an incumbent partner that we are communicating and targeting are the same and we just try to make sure that people don’t that are historical partners don’t bite off more than they can chew, and then also obviously make sure that we are filling the pipeline with the kind of partners that we need to continue the kind of growth rates we have in some of the new product areas.
- Ed Maguire:
- Also, could you talk about what you are seeing competitively in the application networking space, whether you have seen any changes in the nine months since you announced the NetScaler acquisition?
- Jeff Lilly:
- I think on the competitive front, we have seen some change in that especially in the advance sort of app delivery market, it’s kind of become a two horse race between Citrix and F5. That’s a change and I think that nine months ago, and certainly as we went into the acquisition, there were a number of other players and I think that we are seeing they are falling behind and we are certainly keeping the heat on our execution in this area, not only on the technical front but on the GoToMarket front. I think recently Cisco announced their new application control and genesis a change in the marketplace as well that we just recently see. And we are taking fundamentally different approach. It is more of a component base approach offering customers a blade that sort of there’s a component part for chassis and where you have to actually assemble multiple blades and do the integration yourself. Our customers, we believe not only preferred demand, an integrated multifunction kind of solution that defined in our web app delivery system and it’s simpler to configure, to own and operate etc., and obviously I think we have a huge technical beat at this point. But, Cisco always helps stir up the market, stir up interest in the market, increase the primary demand and that’s actually a good thing when you have a tremendous solution like we do.
- Ed Maguire:
- Terrific, thanks very much.
- Operator:
- Our next question comes from the line of John Rizzuto with Lazard & Co.
- John Rizzuto:
- Good afternoon everyone and congratulations on the quarter. Mark, if you could just follow-up on the competitive landscape and talk a little bit about pricing and what you are seeing in pricing, and what I am hearing here from some of your competition is that you are little bit more aggressive, let’s say more value for pricing, and just characterize what is happening as far as the amount of dollars you are getting for your product?
- Mark Templeton:
- John, are you talking which one…?
- John Rizzuto:
- NetScaler versus…
- Mark Templeton:
- Okay, got it, so, we really haven’t seen any material changes in that area of the business in terms of ASP. We actually have -- our solutions are more efficient from a hardware perspective, so often times it’ll look like we are going into lower price and actually we are competing, our mid range is competing with the high end range of the competitor, so it looks like we’ve actually, kind of cut the price and in fact we haven’t. We are competing with - we are able to beat the high end of their line with the mid range of ours. So, I think we are on track on sort of the op margins and on the gross margins in the business, maybe David want to say a couple of words about that.
- David Henshall:
- Yes, John, I’ll just add that gross margin is in the 70’s as we would expect for this product line at this point in time, so nothing unique on the pricing side.
- John Rizzuto:
- Okay, great and Mark you talk a lot about application virtualization, you know technically the way Citrix does it and now virtualization is getting a lot of mind share, we have server virtualization, we have what VMware does, you can virtualize multiple operating systems on a box and then what Softricity does, you can build a virtualization around an application, and then you have like what Thin & Sals (phonetic) doing for you as a partner in virtualizing something on a little USB device. What is the difference with Citrix is doing and how I could contrast what you are calling virtualization versus that virtualization is you need to get into that business and you know just kind of so we can, just - with the confusion.
- Mark Templeton:
- Yes, so John, I will say in this way that some of those examples are true virtualization solutions and some are examples of companies running rough shot over an idea that seems to be hot and jumping on the band wagon. So, first of all, we had a great partnership with VMware and they virtualize machines, so our software works very nicely with their virtual machine, and it’s a very different type of solutions use for very different types of customer benefits, specially around total consolidation flexibility in the date center etc., We run on half of machines whether they are virtual or they are physical. And what we do is virtualize the desktop or virtualize the application itself at the user tier. And that is unique to what we do, we separate where the application user tier executes and from where its physically it is used. Now other types of solutions that isolate application components from the environment that they are installed in, we do not believe our virtualization solutions, they are isolation solutions. And they have their great value and it’s nothing minimize their value, it’s just confuses customers in the marketplace. And there so, we have a product that uses isolation as a means of streaming applications to desktop, and it’s the streaming and the ability to actually on the fly on demand, allow someone to use that application without stepping on other local resources by having a great isolation capability is what that type of technology is about and it’s being confused with sort of the technologies that sort of physically separate the logical from the physical. So, that’s how to think about it, it’s a longer topic, I will say this that when you look at the first mile of computing in all of the stack, we have more virtualization solutions than anyone, we virtualize desktops both as a service and as a present state solutions, we virtualize applications of any kind, we also virtualize identity to our passport manager product. We virtualize the network itself by allowing you to have your own private network over the public infrastructure, and that’s a virtual, that’s what VPN is, and so that’s where we fit in the virtualization stack relative to others that are focused on virtual machine and you know all the new Hypervisor technologies and things that are actually going down into the device. And you know we are excited about it, because it actually gives us more opportunities on the partner enhance.
- John Rizzuto:
- Okay, so it sounds like you don’t need to get into but that may say the isolation business?
- Mark Templeton:
- Well, we already have very powerful isolation technologies in PS4, you will see there’s a next generation coming and what that does is for the applications that run in the server, it helps again isolate them from each other, so that the servers perform better and that the applications when they are installed are more compatible with the server environment, and then you will see that we will be leveraging that through our project Tarpon on the desktop and really helping us with our application streaming technology.
- John Rizzuto:
- Perfect, great. Congratulations again.
- Mark Templeton:
- Thanks.
- Operator:
- Our next question comes from the line of Israel Hernandez with Lehman Brothers.
- Israel Hernandez:
- Hi, good afternoon everyone and congratulations on a great quarter. As you look out over the next couple of years with the launch of Vista server, can you provide us an update with some of the collaborative efforts that’s going on right now between you and Microsoft, and what kind of innovation can we expect to see at a terminal services into Next-Generation and what type of impact do you think that will have in the overall competitive marketplace for Presentation Server?
- Mark Templeton:
- Israel, let’s see. So, we are working hard on the Longhorn Server products and we have been actually demonstrating some of the early technologies at our Summit and our iForum conference last October in Las Vegas. And so we are marching on this one. It’s a huge platform transition for us and that means that we are moving the Presentation Server, technical platform upscale to the Longhorn Server operating systems and in conjunction with that, we are adding some innovations in some of the areas we talked about around our project Constellation and we talked about how we are working in the areas of making server forms much more resilient to the kinds of glitches that they actually go through on an unified unit basis, we talked about optimizing for open GL and highly graphical kinds of applications, we talked about addressing real time user experience modest range of measurement. We talked about a whole range of other things that were at the conference, the ability to record sessions and so forth and again trying to build many more technologies that our customers have asked for as they want to get more control over security, over costs, over business disruptions, and over regulatory compliance. These are the kind of the focal areas that we think are driving the app virtualization business in general. So, we are working very closely with Microsoft, couple of years ago, we signed the five-year JCA with them, working very closely with them, and the data of Longhorn Server will be out at the end of the May and to serve a limited number of customers, and we are working very closely with Microsoft on that and we will begin the process of now educating partners, our own field people around what to expect as Longhorn Server begins to go into more public data as well as you know our products going into for public data as well. So, I think we are doing well on that front, and it’s growing as planned. The Vista release for us is very positive, we think that we had a great opportunity there, we already have on our website the Vista clients for Presentation Server, and we think that there is a huge opportunity as customers want to move to Vista and have some of the application compatibility concerns or they don’t want to go around and install lot of that, we think there is a huge opportunity there as customers move to Vista over the next couple of years in the enterprise.
- Israel Hernandez:
- Thank you.
- Operator:
- Our next question comes from the line of Kirk Materne with Banc of America Securities.
- Kirk Materne:
- Thanks very much, and I offer my congrats as well on the quarter. Mark or David, can you just take a stab at obviously I realized that you guys are getting some benefits from the migration of PS4? Can you also talk about some of the efforts that been made around getting the tax rate on the Access we hired and how that’s doing and perhaps just how your sales guys are doing at selling at a higher level within the customer base, are these Presentation Server wins becoming more say strategic and larger, have you seen that happen as well?
- Jeff Lilly:
- I will take that Kirk so, thank you for your kind comments. We saw another quarter of growth on the Access Suite, it was up year-over-year about 50% and I think the way to think about the Access Suite is, it is a strategic sales to customers. And it’s strategic sale that’s really built on the Presentation Server or if you will on app virtualization base, longer sales cycle requires the collaboration of multiple groups within the organization and therefore requires calling on the customers at the higher level with a much more strategic message about moving from sort of this piece part approach to providing access to really a more holistic approach around having a long-term strategy for the infrastructure we used to provide secure on-demand Access. So, we are pleased I think with the progress we made there both in terms of the revenue and growth as well as the capabilities that we are seeing in some of our more strategic if you will, channel partners and our ERMs and their ability to actually take a customer through this kind of a conversation.
- Kirk Materne:
- Okay great, and then just one last question. In terms of NetScaler, the partner uptake there, I think you noticed that there is about 200 partners working with NetScaler now, giving set number in mind for to end the year on and, can you give us an idea how the partner uptakes been in place such as EMEA and Asia-Pac or perhaps that is very few partners initially? Thanks.
- Jeff Lilly:
- Okay, I think the numbers is a little over 225 actually as we closed our Q1. I think the goal for the year is somewhere around doubling that number. So, think between 4 and 500. But concentration right now of course is in North America followed by EMEA and then the Pacific. Latin America also has a couple of partners as well. I think what to expect is that in the Pacific and Latin America, we will focus on value-added distribution partners that both sell-through retailers but they also sell directly to some of the larger enterprises. This is reasonably customary in many markets. So, for example, in Japan, we are working with Net One, they are the largest networking provider in Japan and they have a practice that allows them to do both sell to and customers’ enterprises as well as through partners in terms of training them and supporting them. In Europe, we are doing a combination of what we are doing here, and that is going after higher end partners as well as bringing some of our more classical value-added distributors online. And I think we had under 50 partners in EMEA, which is actually a good progress and hope we will see able to more than double that number by the end of the year.
- Kirk Materne:
- Super, thanks very much.
- Operator:
- Our next question comes from the line of Todd Raker with Deutsche.
- Todd Raker:
- Hey guys, two quick questions. Again nice quarter. First, the update line of 94 million was the fastest growth we have seen in four quarters, can you guys give us any feel for the organic growth profile, is there versus the getCurrent component, and just any insight in terms of how much impact getCurrent have this quarter?
- Mark Templeton:
- Sure, I will take that one. So, we have talked through several quarters now about just increasing benefit we have seen from getCurrent and attributed that to better programs, more geo coverage and also just the continuing migration evolution towards Ford Auto. Last year and middle last year, we were seeing getCurrent a couple of million dollars a quarter and that ramps throughout the year. And this period in Q1, you know, it’s well over $5 million worth of activity. And I will caution you on that not all that shows up in revenue. There is, part of it goes into deferred, part of it goes shows up in current trade revenue. So, it’s certainly contributing and we are just getting better and better execution across the board right now in terms of the subscription advantage programs and debt currents as a whole. So, I mean I hope that helps.
- Todd Raker:
- Yeah very useful. Thank you and then the second question is, you guys talked about how having a shrink-wrap version of Access Essentials in Europe I believe. Can you talk about the revenue recognition policies around that product?
- Mark Templeton:
- Yeah, revenue was recognized selling into the channel but I will say that on an inventory basis, we maintain extremely small amount of inventory around the world and did not build materially in any quarter over last several.
- Todd Raker:
- And you foresee taking that policy into other geographies or is it just in Europe say?
- Jeff Lilly:
- I think it’s really driven just based on customer demand and what is most consumable for the customers and the channel partners in those regions. So, it will be driven by that.
- Todd Raker:
- Okay, thanks guys.
- Operator:
- Our next question comes from the line Dino Diana with UBS.
- Dino Diana:
- Hi guys, nice quarter. In terms of NetScaler, you mentioned the 10% of booking coming from, you told that it never sold the products before, can you just give us a sense whether some of these initial successes are with entirely new retailers or is it more kind of your legacy for our channel that’s really going out there and that’s why we are seeing a success?
- Mark Templeton:
- Most of those successes Dino are with partners that have been Citrix partners for some time. And the other piece of this is in Q1 where people are just starting to ramp-up and their training both in the selling and on the technical side. A lot of those deals are sort of driven by the partner through the relationship they have with the customer, and it’s a typical process of you know, sort of staying close to them while take the customer through a pilot and the evaluation, the technical and the business kind of selling process, and then, with enough of those transaction, they can do them on their own. And I say that we had in the first quarter some benefit from having worked with especially some of those in around San Francisco and in the New York area, starting back when we actually announced the acquisition are to intend to acquire NetScaler back in early June of last year. So, some of these partners have gotten on board kind of on their own early on, and begun to ramp up, so it’s really that kind of phenomenon that we saw in Q1.
- Dino Diana:
- Okay and just two questions probably for David. Very impressive quarter especially at booking, can we see – and you don’t give guidance on deferred or any kind to back on but just looking directionally, can you give us a sense for whether you get acceleration off of the 21% bookings you booked in ‘05?
- David:
- Yeah, I mean, like you said, we just don’t give granular forward-looking booking statements, because there are so many factors that plays into that but I think that if you look at the overall revenue guidance we have given, which now takes a range up to about 18 to 20% year-over-year growth from previous range, last quarter that was an average of 15%. So, we are certainly feeling better about the business overall. As far as deferred revenue component that, we have been growing deferred revenue in each and every quarter for the last several years, and I expect it to grow this year as well. It’s just a matter of timing of the subscription of entry renewals, when those are coming due, our success in getCurrent and the individual profile of large transactions, many of which might have, large to grow component it has to. So, there is just a lot of things plan into that.
- Dino Diana:
- Okay thanks guys.
- Operator:
- Our question comes from the line of Walter Pritchard with Cowen & Co.
- Walter Pritchard:
- Hi, thanks. Just David a couple of questions on margins. Looks like sales and marketing just have been pretty steady from what was in Q4 as a percentage, and I am wondering just typically if you come up in Q1, I am wondering was it various engine out there, or was it marketing spend that was down, was it sales commissions that were over pit out in Q4, if you could just maybe walk us through sort of how to think about what it was in Q1 and how that progresses throughout the year?
- David:
- I think just overall if you look at kind of the percentage break out in Q1 across the various operating line, obviously sales and marketing has impacted most by commissions payments, and we do see a skew there, but as far as the relative contribution in Q1, I think you should expect that over the next couple of quarters, and then sales and marketing usually takes up a larger component as we go into the back of the year and the teams get more into accelerators and those types of activities.
- Walter Pritchard:
- Just on headcount, do you see any sort of headcount plans for the year, how many people you are looking to hire in?
- Mark Templeton:
- Well I wouldn’t say there are specific number targets, but we are focused on right now as far as the head count growth, I mentioned that we added about 73 people, that’s exactly 73 people in the first quarter, and so, I was behind our initial head count plans. And we are focused on hiring in all parts of the world, really across all product lines and operating grooves. So, I think that 2-3% growth over the next few quarters should be reasonable, and it’s just it’s all predicated our ability to find and track the best talent out there.
- Walter Pritchard:
- Great, thanks a lot guys.
- Operator:
- Our next question comes from the line of Brent Williams with Keybanc Capital Markets.
- Brent Williams:
- Hi, my congratulations certainly on the quarter but also to Jeff, hopefully though he has not become too much of a prima donna or difficult to live without a thousand words.
- Mark Templeton:
- No more than he normally is.
- Brent Williams:
- Some reassuring yet despite in. In the app networking market, NetScaler and so forth, AJAX is the technology that’s really come up even just sense you announced the acquisition less than a year ago and it has different characteristics of how it behaves, runs the browser and so forth and so forth. Has that been something that’s got up on your radar screen is and people are scratching their heads and saying Jesus, this is going to do be something differently maybe like NetScaler which is the non-issue at this point, do you think if it is a non-issue, it becomes important?
- Mark Templeton:
- Oh, no, it’s not a non-issue by any means. It’s very important. Everything going on in the user tier of computing is extremely important to Citrix. So, where AJAX has actually lead the way in terms of the utilization is on the web, and many of the web sites that NetScaler sit in front up, and so, we are getting lots of experience in accelerating the kinds of content that AJAX is all about. And certainly you know, enterprises are starting to build applications on the front end with AJAX tools and we expect that to accelerate over the next couple of years and we are going to be ready for that.
- Brent Williams:
- Great, is there anything in particular -- is it more – are people thinking about security or just about who put this getting it all to go?
- David:
- First, AJAX app is again is not a panacea, it’s a component part in a big picture in a big puzzle and there are security issues, there are delivery issues, and performance issues and certainly a lot of the technologies that you find in our NetScaler infrastructure address those things, and we think there is actually a lot we can do in that stage and we are not talking about it a lot right now.
- Brent Williams:
- Okay, secondly and lastly, the timing of Tarpon, has that changed, or is it still tracking from what you said last quarter?
- Mark Templeton:
- Well, we didn’t - what we said last quarter is that we have a product this year, and that we would this quarter have a technical preview and we are on track for that.
- Brent Williams:
- Great, thank you.
- Mark Templeton:
- Thanks Brent.
- Operator:
- Our next question comes from the line of Rob Owens with Pacific Crest.
- Rob Owens:
- Great, thanks. Maybe little more color on the Gateway business, given some of the weakness we have seen in the overall security market, I think you talked about it being up 10% sequentially, understanding it’s smaller numbers but are there a lot of competitive displacements going on or can you just give us some color there?
- Mark Templeton:
- Rob, I think first of all, we are tapping two big sort of markets here. First of all, an unserved market in the mid-market companies that are putting remote access and want to use the internet to reduce communication costs and also to provide additional flexibility for their remote workers, we are getting that business, and that’s an unserved market. In the more competitive market where we are head to head with either in an incumbent IPsec VPN or we are head to head with some of the other players in the marketplace, we are winning, I think more often, our fair share of that as evidenced by some of the market stacks that few of the analysts have put together, unfortunately the stacks for Q1 are not available, we have them but we are not able to talk about publicly at this point. We’ve continued to accelerate in the space where we are competing head to head with companies like for example Juniper, and we are winning those deals and we are winning those deals with our enterprise division in terms of its scalability and ability to handle the complexity of an enterprise environment, and we are showing those customers how the Access experience on the user end can be very very simple, easy and almost invisible for the user. I think we are changing the game and that kind of other situation. So, that’s the color I can give you right now, but I think you can expect that we will continue to lead in unit volumes because we are serving a pretty broad market and that our ASPs will continue to increase as we see customers add more licenses to their entry level solutions and as we win with the enterprise edition in some of the larger scale deals that we are working on.
- Rob Owens:
- Great, thank you.
- Operator:
- Our final question for the day comes from the line of Robert Breza with RBC Capital Markets.
- Robert Breza:
- Thank you. Congratulations on a great quarter. Mark, can you help us understand maybe how much of Access Essentials really contributed in the quarter I know you talked about the installation doubling in and if you don’t want to quantify, could you talk about what we could expect from a growth rate and then, one question for you David, could you help us out, I know you gave us a trailing 12-month number for cash flow, could you maybe bracketise or put in the range of what you think cash flow could grow for the year?
- A –David:
- I will take the second part of the question first. The short answer is no. Actually we don’t forecast cash flow externally, just because there is so many factors that move into it, move in and out of the cash lines but I will say over the last several quarters, you have seen it move up from, you know, $50-60 million range to plus 70 over the last couple and now we are in the 95 million. So, we are obviously focusing on the efficiency of the balance sheet and the various line items there as well as the things that drive cash flow, it’s an important metric for us internally, we are watching very closely and we will stay very focused on that.
- Mark Templeton:
- Rob, this is Mark. So, on Access Essentials, the revenue is small. And the important thing about Access Essentials is two sort of things here. The revenue will get much larger and become significant, we believe, but the two important things to watch here is that first of all, it’s a sort of leading indicator of our strategy around taking this broad technical platform that we have for app virtualization and actually packaging it in a special purpose way for specific kinds of customer segments. So, it’s just the first one of these types of product moves that we’ve made and so, there will be others. Secondly, the important thing is that we are serving the customer here that we haven’t actually had in the past. Many of these customers are including app servers that have in the range of 10 to 25 users using them for very specific app virtualization and app delivery kind of solutions. And they are first generation types of installation that our partners are doing. And so the thing to keep an eye on is the leading indicators here and that usually is around sort of product releases and how the products looking in conjunction with the kind of development we are doing in terms of adding partners. And as I mentioned, we had almost direct just under 1,000 new partners recruited and certified in Q1 on Access Essentials itself and so, that’s the way to think about the importance of Access Essentials you know to the company at this point.
- Robert Breza:
- Great, thank you very much.
- Operator:
- Ladies and gentlemen, we reached the end of the allotted time for questions and answers. I would now turn the call back over to management for closing remarks.
- Mark Templeton:
- Once again, tremendous quarter, we are excited about where we are in our evolution and that we thank you for your confidence and for joining us today on the call. We will see you in three months.
- Operator:
- Ladies and gentlemen, thank you for participating in today’s Citrix conference call. You may now disconnect.
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