Citrix Systems, Inc.
Q3 2008 Earnings Call Transcript
Published:
- Operator:
- Good afternoon. My name is Kayla and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period. (Operator instructions) I would now like to introduce Mr. Eduardo Fleites, Director of Investor Relations. Mr. Fleites, you may begin your conference.
- Eduardo Fleites:
- Thank you, Kayla. Good afternoon everyone and thank you for joining us for today’s call, where we will be discussing Citrix’s third quarter 2008 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Senior Vice President and Chief Financial Officer. This call is being webcast with a slide presentation on the Citrix System’s Investor Relations website and the slide presentation associated with the webcast will be posted immediately following the call. Before we begin the review of our financial results, I want to state that we have posted product classification and historical revenue trends related to our four products groupings to the Investor Relations page of our website. As we get started, I want to emphasize that some of the information discussed on this call maybe characterized as forward-looking statements made pursuant to the Safe Harbor Provisions of the US Securities Laws. These statements involve a number of factors that could cause actual results to differ materially from the statements made today, including risks associated with the uncertainty in the IT spending environment and the risk of further downturn economic conditions generally, our product concentration and our ability to develop commercialize new products and services, the impairment of the value of the company’s assets and competition and risk associated with markets our products. Additional information concerning these and other factors is highlighted in today’s press release and in the company’s filings with the SEC including the risk factor disclosure contained in our most recent annual report on Form 10-K which is available from the SEC or on the company’s Investor Relations website. Additionally, during this call, we will discuss various non-GAAP financial measures as defined by the SEC’s Reg-G. A reconciliation of the differences between the 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 would like to turn it over to David Henshall, our Chief Financial Officer; David.
- David Henshall:
- Thanks, Eduardo, and welcome to everyone joining us this afternoon. Today, Citrix reports another solid quarter with revenue growing 14% year-over-year to $399 million and adjusted EPS of $0.43 and adjusted operating margin of 24%. From a geographic perspective our international business are executing well with EMEA growing 21% and Pacific up 11%. EMEA continues to show strong returns from last years go to market investments and other initiatives targeted towards building a more global footprint, product line breadth and business model diversity are serving us well. In the Americas, revenue was up 9% with steady demand across vertical markets in spite of the challenging IT spending environment seen in most regions, so overall good execution. Now I would like to review the main product areas and the trends in those businesses. First, our App virtualization business was strong increasing 12% year-on-year to 273 million with new licenses up over 10%. One of the major drivers was the XenApp Platinum addition, which contributed over 30% of the mix generating five deals greater than $1 million dollars and demonstrating the strategic value that customers see with this solution. Looking forward we believe XenApp license growth in Q4 will be flat to up modestly when compared to last year due to macro headwinds an d a difficult comparison from a year ago. Second, in our App networking business, revenue was 47 million basically flat year-on-year. Overall results were somewhat disappointing due to the continued weakness in internet-centric customers. Revenue in this segment was down from last year as our businesses have been impacted by slower e-commerce sales and web traffic growth; however, we are still seeing increasing traction with enterprise customers. In Q3 the number of new enterprise customers increased by more than 75% and the Platinum addition of NetScaler, a system targeted towards delivering enterprise apps with a high level of performance, security and manageability contributed roughly 30% of license. Going forward we expect to see muted growth within App networking due to the uncertainty that remains in the landscape. The third area I would like to discuss is our business and server and desktop virtualization. In Q3 XenServer and XenDesktop revenue was $7 million up about 100% sequentially. The majority of this growth has been driven by our traditional channel. We exited the quarter with over 3300 partners authorized to sell XenServer, but more importantly the number repeat resellers nearly quadrupled during the quarter. So with the channel metrics continuing to grow and the opportunity pipeline at record levels, we believe that we are on pace to achieve our target of $25 million for the year and provide momentum as we enter 2009. Finally, touching on our software as service business revenue was up 17% during Q3 to $65 million led by the collaboration products of the GoToMeeting family which grew over 40% and now represent more than a third of total online services revenue. However, the overall growth rate of the business was slightly impacted in the period by the migration of certain GoToAssist corporate customers to the lower price to express version as well as a small increase in deferrals in connection with service activation fees. We expect that revenue growth rate will be up a few percentage points in Q4. Now, I’d like to turn to expenses in operations. Adjusted operating expense was $274 million, a decline of about $4 million from Q2 and contributing to the 300 basis point sequential improvement in the adjusted operating margin. As I stated last quarter, we are very focused on delivering operational efficiencies by reprioritizing certain investments, accelerating the integration of acquired businesses and addressing opportunities to precision the cost structure for long-term leverage. One primary outcome of this has been our headcount growth, where we added less than 40 people in Q3, our slowest pace in over three years. We’re focusing the hiring priorities on quota carrying personnel as well as our India based development teams for the highest leverage. I expect similar trends in hiring for the reminder of 2008 and the next year. On the balance sheet, we currently have $830 million in cash and investment. Cash generation during the period was very strong, increasing to a record $115 million in cash flow from operations and bringing the trailing 12 month total to over $400 million. Our primary use of cash in Q3 was for our ongoing stock buyback program, where we repurchased $2.4 million shares. Year-to-date we’ve repurchased almost $9 million shares or about 5% of our total shares outstanding. Entering Q4, we have over a $100 million authorized in the repurchase program and I expect they will continue to be active in this market. On other balance sheet accounts, I wanted to point out two unique items. First, with the volatility in the financial and credit markets over the past several quarters, we’ve been proactively taking steps to limit any potential impact to the company. While the effects of the Citrix have been pretty minimal during Q3, we record of the temporary impairment of about $20 million to the balance sheet related to investments that were issued by AIG. These securities are still performing as expected, but due to the concerns around the issuer we are going to be evaluating these on the monthly basis. Second, we made the decision to purchase two buildings in our Fort Lauderdale campus that are currently held under a synthetic lease. The transaction will be neutral to our liquidity position as the purchase value has been segregated as restricted cash over the past several years. Additionally, this purchase will be neutral to the P&L for Q4 in 2009. So overall looking at the results, I’m pleased with Q3 financial performance. We’ve continued to execute against our strategy, while delivering sold growth and operating leverage. Finally, I’d like to discuss our current outlook and expectations for the fourth quarter, but before I review numbers, let me provide you with some context around our forward look. We continue to see solid demand in many areas of the business and remain optimistic about the long-term market opportunity. We also believe that our solutions are becoming even more relevant for customers; any the investments we’ve made will help further strength in our competitive advantage. Not withstanding these factors, with the current economic climate is impact in our customers buying behaviors and will continue to impact visibility into the specific timing of purchases. Despite the uncertainty in the marketplace, we are committed to accelerating the development of our strategic products, enhancing our GoToMarket reach while maintaining a plan that show continued expansion of off leverage. So turning back to the numbers, we currently expect for the fourth quarter of 2008, total revenue in the range of $425 million to $440 million; interest income of $6 million; adjusted tax rate of 21% and adjusted EPS in a range of $0.46 to $0.48 a share. So including Q4, this now brings our expectation for the full-year of 2008 to total revenue in the range of $1.59 billion to $1.61 billion, adjusted operating margin of 22% and adjusted EPS of $1.61 to $1.63 per share. With respect to 2009, we’re committed to making further progress on expanding operating leverage through both short-term and long-term changes to our cost structure. Therefore our current expectation is to deliver at least 100 basis point expansion to adjusted operating margins for next year. As we obtain more visibility into our customers ’09 budget process over the next few months we’ll update you on our expectations for business trends and a revenue outlook on our fourth quarter conference call. Ultimately our confidence in our long-term ability to drive growth and improve margins remains unchanged. Now I would like to turn it over to Mark to give you additional details on the quarter’s performance and discuss our ongoing businesses; Mark.
- Mark Templeton:
- Thanks, David. We are reporting great results today; another quarter of double-digit revenue growth up 14% from last year and up 18% year-to-date. As we mentioned last quarter, we anticipate of the economic downturn affecting the text sector today. So, in July we took early and decisive actions to hold operating expenses flat, to closely given an non-critical projects, to introduce new cost efficiency programs and to smartly invest in customer facing headcount. As we now enter Q4, we’re better prepared to drive profitable growth with operations getting more efficient and a sharp focus on Citrix customer value that rises above market noise. During Q3 we made some really exciting announcements. First, we introduced XenApp 5, a ground breaking new release that raises the bar in performance, user experience and TCO, designed to accelerate the mainstream adoption of App virtualization. Secondly, we announced an OEM agreement with HP, allowing them to offer a full DDI solution from Thin Client to server based on Citrix XenDesktop. Third, we launched version 5 of XenServer, a significant milestone, delivering enterprise ready server virtualization that’s set a new standard for simple powerful and open. Four, we released new versions of GoToMeeting and GoToWebinar integrating VoIP, phone and Web conferencing for both Mac and PC users and fifth, we unveiled C3, Citrix Cloud Center; a new featuring for Cloud services provider that integrates our virtualization and App networking products. I’m very pleased with our Q3 results, especially in this business climate and I’m really proud of the response of this Citrix team. As customers adjust to new spending levels in the coming quarters, every text sector will face market uncertainty. So, the rest of my comments will address three topics. First, how we see the IT environment in the quarter’s ahead. Secondly, our product strategy for delivering customer value and third our gain plan for leveraging this kind environment. As we listen to the market, many customers have been cutting big ticket investment and low value projects, but they’re continuing to fund existing projects with tangible ROI. While this gives us confidence in our near-term pipeline; the fact is, there is uncertainty about the shape, size and timing of our 2009 opportunity. As I’ve talked with many CIO’s and integration partners, it’s clear that already tight IT budgets are getting even tighter. Creating a bright spotlight on the real problem, distributed computing. The complexity, cost and inflexibility of distributed computing has never been more exposed and the need for a simpler way has never been greater. Clearly this environment will favor mature our proven vendors, who deliver tangible cost savings. Winning vendors will be those who help customers reduce their spend in areas like T&E, merger integration, data center and site consolidation in desktop management. Forces like these will drive customers to a tipping point to consider a whole new way to deliver IT Services; a way to centralize, optimize and virtualized complexity. So what’s distributed as pure as simplicity. This radically simple approach is what we offer and has been our driving vision from the beginning. Our products simplify IT with centralized management of apps and desktops to dramatically reduce TCO. They optimize that delivery across locations, users and devices to provide the best user experience and they accelerate business with a single efficient infrastructure that can rapidly respond to change. This creates a timely opportunity for Citrix, that capture greater minds here and to exhibit downturn with even greater strategic momentum. We’re executing well on our strategy to deliver tangible and compelling customer value across three product families
- Operator:
- (Operator instructions) Your first question will come from the line of Adam Holt with Morgan Stanley.
- Adam Holt:
- I was going to ask about a few details on the actual third quarter; number one, can you talk about some of the vertical markets in particular touch on the Federal in the financial services verticals and then secondly, you had a number of changes in the quarter, can you touch on any impact you saw from the shift to Ingram as a preferred distributor and the price changes in the quarter? Thank you.
- David Henshall:
- Sure, Adam, this is David. I’ll take all of those questions and then ask Mark to add on as well. I’ll start with the change that Ingram. I think it’s too early to tell if we saw any significant positive movement at this point of time, but we certainly didn’t see any negative impact in the quarter. The great news is that we’re able to streamline a lot of our back office operations, improve our efficiencies, in fact several partners have actually commented on the ease of working with Citrix and how it’s improved during the period. So, overtime, we’ll be able to kick-off a number of strategic initiatives with Ingram that will be focused on improving the reach of recruitment on new partners, channel readiness and the type of activities it will ultimately improve our ability to drive long-term customer success, higher revenue etc, so all good news on that front. As far as that price increase is concerned, let me just start by framing that out for everyone who maybe doesn’t have all the background. So September 1, we instituted an international price increase of about 10% for all of our international markets and we did that because historically we have priced in dollars and had local currency expenses. So, as the dollar has essentially weakened progressively over the last several years, our cost of business has gone up substantially. So, this was a first step towards probably a longer plan to have a multi-currency approach. I think the impact during the quarter; it did help to improve linearity. We had a very good middle of the quarter in all of our international markets and we probably moved a little bit of business from September into that July-August timeframe, but we believe that it’s all contained within the period. Obviously, with the dollar strengthening substantially since that time we’ll continue to evaluate this on an ongoing basis and see if we need to make adjustments.
- Adam Holt:
- And if I could just ask a follow-up on the margin guidance for next year, obviously you are not giving revenue guidance, but should we will be thinking about the 100 basis points of expansion, tied to a particular revenue level or if the revenue is volatile say gets worse than you think, you’ll be more aggressive on the cost savings to preserve that 100 basis points? Thanks.
- David Henshall:
- Yes and I think more of the latter. I mean right now that’s the one thing that we can control as our cost structure efficiencies and one of the programs that Mark referred to, things that we are driving right now let me accelerated into next year. Off short-term and long-terms changes to our cost structure, so that’s our position right now as to show the sequential improvements regardless of the environment.
- Adam Holt:
- Thanks again.
- Operator:
- Your next question comes from the line of Michael Turits with Raymond James.
- Michael Turits:
- It looks like some of the best performance in the quarter was out of XenApp and especially on XenApp license, which was what was surprisingly weak in prior quarter because really done this back. One, if you could give us any granularity on and are there any particular verticals, any particular GO’s where it was strongest and two, how much of it was due to a reacceleration of unit sales and how much is from ASPs?
- David Henshall:
- Okay, Michael. Good news is that, we have very strong business across both the Americas region as well as EMEA. From a vertical standpoint, we have a broad diversification; obviously, people are concerned about financial services and for us it represents anywhere from 10% to 13% of revenue in any given quarter. We actually closed a lot of fairly significant deals there, so we haven’t seen a material change mostly because those types of customers are focused on the type of value proposition the products provide; TCO, rapid return on investment, off shoring, cost cutting initiatives etc., so good diversification, being a Q3 we did see a strong Federal sector, like the Federal team has really executed over the last 12 months to 18 months and continue to see return there.
- Michael Turits:
- So, again a little bit more specific on XenApp. I had a concern about it was hiring slowing. I was concerned that we might see, less concurrent user licenses, so my question was what happened with unit sales? Did they accelerate as well or was it more driven by ASP’s on the XenApp license side?
- David Henshall:
- Our ASP’s were reasonably flat, so it was predominantly a unit growth.
- Michael Turits:
- Okay. Thanks very much guys.
- Operator:
- Your next question will come from the line of Bhavan Suri with William Blair & Company.
- Bhavan Suri:
- Congratulations on the quarter. Just a couple of quick questions just pigging backing of the previous question the Federal business, any color around application networking sales in the quarter. I know last quarter we’ve said there was a few in a pipeline, did any of those close this quarter and can you provide a little more color about that?
- David Henshall:
- Sure, App networking continues to be a little more volatile that any of the other lines. Federal we did have, one deal that was of size and it was in that kind of $1 to $2 million range. As far as the very, very large deals nothing booked this period continues to be a lot of opportunity in the pipeline especially around WANScaler some of those technologies as I mentioned last quarter there are several very large opportunities and just wait and see how those close over the next several quarters.
- Bhavan Suri:
- Sure and then turning to XenDesktop could you find little more color on the adoption XenDesktop, what made the pipeline for the product look like in 2009, sort of more in comparison basis; how is pipeline and which you said was solid look like compare to what you thought it might look like a three months ago.
- Mark Templeton:
- This is Mark. So, I’d say that consistent with the comments we made XenDesktop continues to surprise us in a good way on the upside when it comes to what our expectations were and I don’t think anything reflects that better than the pipeline. I’d say the pipeline is probably, 3X larger than we expect it to be and I think that there are probably two fundamental reasons. The first one is that, the market has been stimulated for quite a while by various competitors in the market with first-generation VDI products really capturing the imagination of customers, but not being able to deliver on providing a real solution networks. The second reason is that, so many of our partners are so experienced in this sort of end-user computing and virtualizing the end-user computing environment through their years of work with XenApp and so it’s a very natural conversation for them to have. So if you put those two things together along with an industry leading product like XenDesktop that’s got a great platform to build-off of with a really strong roadmap its, I guess, we shouldn’t be too surprised. I think we’re still warning to be cautious going into 2009 around what’s possible there, but the early indications are really good, the pilots are numerous and many are going to production and as I mentioned in my prepared comments we had a couple of deals over our 100K and we’re starting to see a number of implementations in the 1000C and higher sort of range. So overall, a really good quarter performance there, outperforming our expectations.
- Bhavan Suri:
- Thanks guys.
- Operator:
- Your next question will come from the line of Kirk Materne with Banc of America.
- Kirk Materne:
- Mark or David, could one you guys just talk a little bit about as you look out for the fourth quarter in terms of your guidance, clearly your Asia-Pacific business and the EMEA had strong growth this quarter. As we ahead into the fourth quarter, is your expectation that those businesses just sort of trend back down to be a little bit more inline with the U.S. or do you sort of expect all three geographies just sort of be impacted somewhat equally above the over of macro ranks?
- Mark Templeton:
- Kirk, I think that what you should here in our guidance is that, while we have these amazing pipelines of identified opportunities and projects on a worldwide basis, we have to assume that the kind of muted effect that we’ve seen in the U.S. over the last three quarters is going to have that kind of effect on a worldwide basis, and we need to do that from a planning assumption point of view without respect to what our kind of radar systems actually tell us. So, it’s a bit sort of two minds when we look at the opportunity and across geographies and even across time in market segment, it all looks great, but to the overhang of this kind of environment is creating so much uncertainty that Cascades the customers and then they can’t nail them down as to when they are actually going to spend the money and that will be a worldwide phenomenon is what we are assuming and to the degree that we are wrong that will be a fantastic thing and we will see incredible growth in margin expansion at the same time.
- Kirk Materne:
- That would definitely be nice; and maybe just one other one, you guys talked a little about the NetScaler business being impacted by sort of the end market, another business of your Citrix Online’s had phenomenal growth over the past few years and that’s a little bit of different sort of customer set to a certain degree and so the SOHO market. Could you just talk a little bit about your thoughts there? It sounds like you had a good quarter with the expectation and some of the GoToAssist translations, I guess over to a lower price point. Could you just talk about, it sounds like it’s going to bounce back in the fourth quarter, but have you seen sort of different customer behavior from that part of your business?
- David Henshall:
- Actually, we haven’t and at this point that the SMB customers that we serve. These products save them a lot of money, give them market reach and it do a lot of really core and positive things for their business that’s very efficient and if you look at churn rates and so forth in the business they’ve actually been really good, very solid in terms of retention in so forth. So, we think that business is going to actually have a lots of head room going forward and as David mentioned, we are still getting through this transition moving GoToAssist customers to the rightsizing them to GoToAssist Express. In the prosumer area, where something like GoToMyPc could be a little bit more of a discretionary item backs up anyone’s guess at this point. We are not seeing anything there, we will continue to invest, we will be bringing out Macintosh capabilities next year etc., but if anyone’s guess how the consumer will behave, I think that’s probably get true statement across many, many product lines.
- Kirk Materne:
- Great, I’ll leave it there. Thanks very much.
- Operator:
- Your next question comes from Charles Di Bona with Sanford Bernstein.
- Charles Di Bona:
- Yes, in desktop pipeline I’m just curious about the impact of the macro environment on if the sales cycle generally, but is there any impact on the initiation of trials around the conversion of trials to production in the near term here and sort of how do you see that unfolding over the course of the next 6 months to 12 months.
- David Henshall:
- Yes, Charley I think that’s sort of the essence of why we wanted to keep our expectations managed because the fact is that a VDI solution of any flavor requires a significant investment in datacenter infrastructure, as in server hardware and at this point, we have the best platform for doing that IE requiring the least amount of datacenter infrastructure because of how we handle desktop images, the density that we can get on a physical server etc, etc but it still a lot to stomach at a time when enterprises are looking to reduce datacenter footprints and managing the that the capital going to IT, at sort of the macro level, so that will naturally put longer decision cycles in place to move to production. I don’t think that the pilot programs will slowdown because it’s a very simple product to pilot and there are many datacenters that will have idle or last generation servers that you can do very adequate pilots on. What we’re going to be doing here going forward is releasing some additional technologies that will allow some breakthrough’s in this area and allow them the mix that a virtual desktop infrastructure solution requires to be sort of distributed not only into the datacenter, but all the way out to the endpoint to the desktop itself and will give IT that choice of being to able dial it up and down and back and forth. That should help our XenDesktop product line and one of things that we’re excited about, as we get that technology released.
- Charles Di Bona:
- Thank you.
- Operator:
- Your next question will come from the line of Phil Winslow with Credit Suisse.
- Phil Winslow:
- Hi guys, good quarter. Most of my questions have been answered, but I just wanted to touch briefly on NetScaler. You guys mentioned some weakness in the internet-centric accounts, but when you do look at that business heading into Q4 and then into the next year, have you generally think about the growth rate of NetScaler? It seems to be normalizing down a bit obviously just with the macro economy and then on the flip side of that when you start to look forward on XenDesktop, when you start to talk to customers right now obviously pressure on IT, but how is that affecting your sort of the expected deal sizes on XenDesktop?
- Mark Templeton:
- Phil, I’ll take the XenDesktop questions first and then David I can talk to you about NetScaler, so honestly its hard to know the one of the reasons the pipeline so big is that customers have very high expectations, I mean a 40% savings on desktop management is a huge number when you roll it out within an organization it has thousands of employees. So the savings opportunity and the promise of this technology is enormous. I just think that, as we look at the realities of the capital availability environment, the realities of what it takes in the datacenter that, we should just expect a more moderate approach in 2009, I mean I just think that’s the prudent sort of planning assumption to be working under.
- David Henshall:
- Phil, let me, a couple of comments about the App networking business, like I said before I think it is going to be a much more volatile results probably in any given quarter. Just given the capital required on some of these purchases it’s pretty big ticket item. We’ve been growing the enterprise business substantially faster than overall market growth. In fact, total license in areas up over 20% kind of a year-to-date versus our prior year, which in retrospect will probably end up being faster than the market, is growing. So anyhow as we keep targeting the enterprise, many more and more features strengthening the Citrix Delivery Center, I think we’ve got a huge opportunity there, but its going to be probably less visible from an external standpoint over the next two or three quarters. So I am little hesitant to make an ’09 statement, but our plan is still to continue to grow faster than overall market growth, and the things that we have talked about in both the enterprise as well as some of the cloud initiatives will help us drive in.
- Mark Templeton:
- Yes, I think the only thing that I’d add on that Phil is that the MPX platform in terms of, what it can what its footprint and its horsepower will be a very natural purchase for internet-centric customers as they want to reduce power, increase performance and replace the NetScaler 12,000 series footprint that they already have, so with MPX a 12% of the mix in this first quarter out, actually more than we expected and to the degree that it can actually deliver on those PCO, green computing and web 2.0 initiatives. We think that there is an opportunity there, but sort of pinpointing what quarter, what part of next year back and starts to kick in is what David is talking about.
- Phil Winslow:
- One quick follow-up from a M&A standpoint, just how comfortable do you feel with your current product portfolio, and if you do feel reasonably stable there, you’ve talked about 400 million share repurchase, how should we think about the share account over the next several quarters?
- Mark Templeton:
- Well, I will David take the share account question, but we’ve done some great acquisitions over the last few years and we are absorbing and beginning to really exploit the technologies and leverage the product lines that we brought in. So, I think the message in terms of sort of the big strategic one, we think we have the right mix of strategic components at that level. Now, we continue to do tuck-in acquisitions for time to market domain expertise etc. and they are being absorbed by the op expense, the operating budgets and we want slowdown there, if anything will speed up because it’s a buyers market and there is some great technologies and teams out there that are struggling to productize their technology, so that’s how we are thinking about M&A remember it’s a tool for us.
- David Henshall:
- And Phil regarding share account, I think that share repurchase is going to continue to be our largest use of free cash flow. As I said in my remarks, we’ve repurchased about 9 million shares to-date and brought down total share account by 4% to 5% from last year and I think that right we will continue to keep it flat to modestly down into Q4 and into next year at this point.
- Operator:
- And your next question will come from the line of Sarah Friar with Goldman Sachs.
- Sarah Friar:
- Can I, comeback to 2009 thoughts it sounds us; you are definitely assuming more of a global recession type scenario as you think about the business. A question I get asked a lot is, what’s differences in turnaround versus a 2002? the last year that you saw your business actually shrink, so I am wondering Mark, really how different is the business how do we think about things like maintenance streams and their stickiness [ph] even when times get tough?
- Mark Templeton:
- Well, okay so from an outside a macro perspective things I think are very different and the impact on IT could be similar however, given that so much of the cost of computing it happens to be fixed cost most organizations when they look at their IT budgets they are look at 70%, 80% fixed costs. So, the discretionary spending they have is not that huge begin with, but as we sort of look at our sales in this kind of environment, Sarah I would say there are a lot of things that are different. First of all we have lots of revenue stream diversity where we have way larger ratable and differed revenue stream than we had back in ’02. Secondly in ’02, we had the expiration of Microsoft royalties being paid to us, which contributed to the downturn in our top-line revenue. Third, we were a single product company and in a marketplace that was growing historically very nicely, but followed the downturn, today we are a multiproduct company that has new entries in desktop and server virtualization that produced very tangible high ROI kinds of returns for customers and with lots of white space ahead of us there. So, I think that’s very different and obviously we have the Online Services business that has a whole different kind of subscription based revenue kind of pattern. So, I think it’s very, very different at this time around, but when we look at the kind of things that we saw on the business in 2002. We’re being really cautious because here is basically the short version of the story after 09, ‘011 our business was growing great guns. We had a great Q3 in 2001. We have an excellent Q4 and we had a big plan for 2002, and then it turned south very rapidly starting in Q1 at the bottom end of the business, the run rate part of the business where we had a lot shrink wrap back in those days. So by the time we got to the mid years, the first half was very weak and that’s when we took some pretty serious actions to bring the cost structure and line taking $5 million of spending out of our OP expenses in one quarter. So, we went from a $97 million to $92 million in Q3 of 2002. You can tell that… I don’t have to look at upon the spread sheet, okay and so what we’re doing is we are saying to ourselves you know we don’t want to do that again. So we’re better off sort erring on the down side here undershooting even if we give up some market share and doing that because we can always add back at a very high speed and so that’s how we’re thinking about ’09 and how we position the company going in and we talked about all the internal operating efficiencies in the process of doing that.
- Sarah Friar:
- And maybe if kind of answer the question and I guess it appears always, when you give a guidance of 100 basis point margin improvement that funds great expect as the top line starts coming down faster than you expect. It’s hard for companies to catch up. When you think about now your cost going into ’09 are you running that off of more of a fixed base in ’08, so not really thinking too strongly about what the growth rate will be in ’09 on the top line, if you know what I mean?
- Mark Templeton:
- Yes, I think it’s a great question Sarah, and frankly what Mark said earlier about, expect the best prepare for the worst, is just our normal prudent approach and so that’s our approach in our cost structure right now. We’re assuming that it’s going to be a challenging environment in the market and then if it proves to be more constructive then we can add back and I think it’s much easier that way and just to add a couple of comments on the prior question, to put some numbers around it. In 2002, we had about 20% of our business coming from recurring revenue sources, high visibility subscription base. Today we’ve got well over 50% and we’ve also moved from one product and with the high market share in one market two, four much, much broader markets and plenty of cases where we are not the market leaders. So, we’ve got room to grow just by share of wallet market share etc.
- Sarah Friar:
- And just one final one at this shorter one tax rate, so your tax rate in ’08 will be running more or around 20% and I think previously you had guided us that would come up to more or like the 24% type of level. How should we be thinking about it for 2009?
- David Henshall:
- Right now I’d expect it to be a maybe a couple 100 basis points.
- Sarah Friar:
- Got it, okay.
- David Henshall:
- We will give you more clarity on that next quarter.
- Operator:
- Your next question will come from the line of Rob Owens with Pacific Crest.
- Rob Owens:
- Did you guys quantify the total number of deals over $1 million in the quarter?
- David Henshall:
- We didn’t, but I think it was $11 or $12.
- Rob Owens:
- Okay and if those related to XenApp, or any of those carryovers from Q2 any push outs that you got closed in Q3?
- David Henshall:
- I’d have to go back and look it’s a tough question because there is transactions that always move between quarters. So, I can’t remember anything specifically that was pushed out of Q2 that we closed in Q3.
- Rob Owens:
- And then with regard to the price increase internationally, do you think there was any pull forward demand as a result. You mentioned better linearity in the quarter, but anything that maybe have closed in Q4, fell into Q3 instead?
- David Henshall:
- We’ve talked to the all the teams and we don’t think so, we certainly haven’t identified anything in this point in time.
- Operator:
- Your next question comes from Israel Hernandez with Barclays Capital.
- Israel Hernandez:
- Mark, a question for you on XenServer. You talked about a couple of wins with Tesco and SAP. You talked about XenServer 5 as a potential catalyst, do you think this is the release that final gets server moving and also it related to the SAP transaction and that was a XenApp type server consolidation deal, can you talk about and the opportunity in that market moving forward?
- Mark Templeton:
- So, yes the answer is absolutely yes. We think XenServer 5 hit that inflection point release that will catalyze our participation with the market especially in the enterprise and it comes not only with HA, DR and a lot of enhancements around performance and manageability, etc. It also comes with some great new extensions and being able to plug into the storage infrastructure that customers already own. So, I think it is that inflection point release, we’ve got another one on the drawing board here that’s coming sooner rather than later to keep the momentum up in that space. In the meantime we are intersecting very nicely with a channel population that’s now above 3300 that have been certified, the trainings continue to go extremely well. David mentioned the same resellers sales continuing to go up, we saw our quadrupling in Q3 there and so the metrics are all really looking the way that we want them to look and that all of that intersects with this great inflection point release. As far as the SAP deal, it is a great way to see our opportunity to open the door an enterprise accounts that we already know. So, XenServer has this incredibly low overhead when it comes to server virtualization. So, when you put a workload on it, you get to tap almost all of the power of bare metal and our XenApp really needs this kind of capability in order to be virtualized in any kind of cost effective high performance way. So great bake off at SAP, we won and we are seeing in this sort of XenApp on XenServer sort of trend in a number of places in the world, so you will see us actually promote that in terms of our go to marketplace in Q4 and beyond into 2009. So, it’s a great opportunity to show to really showcase the performance ease of use of manageability and all of the HA, DR and all of the great advanced features like motion etc. of XenServer running on bare metal.
- Israel Hernandez:
- Just a follow-up, could you just give us an update as to progress report on XenServer with some of your OEM partners and how should we thinking about that over the course of the next few quarters?
- Mark Templeton:
- Yes, actually the Tesco deal was really initiated and closed by HP, okay and so one of the things I should actually distinguish in this area is in terms of OEM, there is the OEM piece that comes from embedding and sort of upgrading off of momentum around embedded servers. I think that sort of embedded server market really hasn’t taken off, then there is the OEM sort of piece where these same companies HP, Dell etc., our resellers was got integration partners for our XenServer and that’s starting get traction and which you need to start that is a few significant strategic customer wins that our references in Tesco certainly serves that purpose in the HP services world.
- Operator:
- Your next question comes from the line of Abhey Lamba with UBS.
- Abhey Lamba:
- David, if you look at the currency today that a loan could give you a margin benefit next year, which could exceed that 100 to 200 bps, you’re talking about. What are the currency assumptions you have in your margin expansion for next year?
- David Henshall:
- Sure, I mean basically it’s a flat planning rate from 2008 to 2009 and when I say that the way we do hedging is forward anywhere from six months to 12-months. So, there is definitely a lag effect that occurs, so we try to plan around a constant rate and in the past several years that rates been going up each year. This year, since we’ve seen a pretty strong appreciation in the second-half of this year, we’re looking at it to be flat on a year-over-year basis. So at the highest level that’s the only we are really calling out right now and again as we get through Q4 give more granularity on the thoughts around ’09.
- Abhey Lamba:
- So just to be clear it’s flat with today’s rate or flat where, I mean you’re not assuming anything from currency?
- David Henshall:
- It's flat within called an average rate for ’09 to ’08 to ’09.
- Abhey Lamba:
- And lastly about XenApp Platinum version, now it’s traction in this quarter seem to relatively inline with second quarter after it was accelerating [Inaudible] year now, how should we expect churn, its traction in Q4 and beyond? Should it accelerate from here, or should it we expected to kind of stay around 30%?
- David Henshall:
- Well I said in prior quarters and I think it could be as much as a third exiting this year and I still think that’s possible. I would expect to be the mix to probably be a little higher in the fourth quarter than we’ve seen in this third or second quarter and that’s generally because, Platinum tends to be viewed as more strategic has a little bit larger deal SOHO etcetera and there will be more large transactions in the fourth quarter more so than other any other period.
- Operator:
- Your next question will come from the line of John DiFucci with JPMorgan.
- John DiFucci:
- Mark, it’s nice to see expense focus as one of the you five strategic messages and it looks like you did get ahead of it here and they really showed the numbers this quarter, but there is something as you point out, I think David point out you can’t control, you want to focus on what you can control, but can you estimate how much of your Application Virtualization business, your core business is really small business when we get into, if we ahead it tough and things get tougher like the market seems to appear to think it’s going to be?
- Mark Templeton:
- Yes, well it’s a great question. Certainly maps to kind of the commentary made about 2002, and I think we need to assume that we’re looking that probably around 20% of the business in that area and that small transactions and small projects, okay. So, don’t think if it is much as SMB as just small things and when it’s like any business I mean when you are looking at things to cut the two obvious one’s to focus on or the huge line items, okay you get big movements there and then the small very, very small ones that don’t move the needle per se and I think that’s why in 2002 we saw weakness in that run rate business where your selling 5 to 50 licenses at a time and while in 2002 by the way we saw continued strength in the enterprise business that XenApp was in the middle of in that year. So, we need to probably think about 20% at this point.
- John DiFucci:
- And just a quick follow-up, on EMEA was real strong this quarter and you had the price increase, but you announced at the beginning of the quarter and as you point out you guys get linearity, when you don’t think you pulled anything into the third quarter from the fourth quarter, but you are still looking at that, but essentially your EMEA customers just because of the strengthening dollar had a price hike and then you increased that price by another 10% on top of that and if we were headed into difficult period worldwide you sort of run the risk of sort of choking off demand, if there is any price elasticity which there is got to be some in these products. I’m just curious as that how you’ll plan to deal with that, I mean David and I think mentioned that you will keep an eye on it, but lets assume if there is something like that would happen how would do you deal with it?
- David Henshall:
- Yes, it’s a good question and as I said it’s one of those things we’re keeping an eye on as the dollar moves up and down. We do have a process in place already and we have for sometime to deal with price exceptions and we’re not losing business due to price in the APP virtualization world. So, we’ll continue to monitor if the dollar continues to strengthen materially, we could revisit it and we’ll cross that bridge when we get there.
- Mark Templeton:
- Yes, I think John the other thing is for everyone to remember is that, this is really the first step to really solving the issue and the problem here and that is to get to local currency price list et cetera. So that we don’t have this issue on an ongoing basis and customers aren’t face with this issue, because no one likes the issue, customers don’t it, we don’t like it. So, we’ll do the right teams better kind of on the front lines, understand how to work with exceptions that make sure we don’t lose business just because of currency fluctuations.
- Operator:
- Your next question comes from Walter Pritchard with Cowen.
- Walter Pritchard:
- Just two questions around at the spending on, I guess one of you Mark, you guys have spent quite aggressively over the last several years and a lot of that are in customer facing good market stuff and I’m just trying to get a sense of how sensitivity we should expect your top line growth rate to be to that cut in spending? I mean it sounds like you got multiple factors here with macro also potentially hurting things, but if you could try to isolate just the impact of lower spending on your top line, how would you helps us think about that?
- Mark Templeton:
- Well Walter, I think the way to think about this is in kind of maybe two pieces. So the first piece is, over the course of the last four years, we have done enough acquisitions to where there is enough sort of redundancy in systems and even some teams why they are not merge together into maybe a single or centralized organization and so there are a number of things that we can do to ring cost out just on the basis of getting more efficient around the things that we’re already doing and so some of that money get can then go to margin expansion and some of it can go to the funding the second area and that is investing in development and in the customer facing activities that we’re talking about ranging from a number of new things we’ll be doing in field marketing as well as specifically customer facing people. So we’re trying to make sure that we don’t starve sort of hot hands, is what we like to call them in the company and that will be basically in product organizations and in geographic sales organizations and also not overspend in markets especially in the sales area where the market just isn’t there at this point to be attacked. So, it’s kind of a balance act and that’s why you see a lot of focus here and comments from David around really managing the company especially through this kind of cycle around more than op margin story and taking all the growth we can get by investing what we can say through efficiency. So, that’s the way to kind of understand our mindset in the dynamics here.
- Walter Pritchard:
- And then maybe question for David. Just this may sound like somehow the presidential debate here, but you guys are short cutting budget in a sense and you’ve talked about pretty more money on customer facing activities where our areas, it sounds like maybe on the product side, where you’re defocusing or you’re going to pullback from spending maybe linked out product cycles and so fourth is, it seems like you can’t do everything with less, I’m just trying to get a sense of where that maybe?
- David Henshall:
- That’s right Walter, so what you’re see as doing is, really taking the strategic products that we have that really makeup point of the sphere XenApp, XenDesktop, XenServer, NetScaler, GoToMeeting and Webinar alright and I’m really focusing there. Okay and prioritizing the innovation and development cycles on those products up while been taking smaller products that actually are designed to really amplify one or more of those products and moving them down to stack and focusing of the development activities and priorities there around the kinds of features and capabilities that amplify to point of the sphere and so for example, direct example would be in the WAN optimizations marketplace, investing more in branch for Peter in its ability to actually deliver desktops and apps, so branches and less in the general purpose of WAN optimization space. So there is a very specific example. There are also a number of others, we have obviously a very rich portfolio projects and we are lengthening some. One of them that we are going to move out one year is our product that named Virtual Designed Studio, which is basically our solutions for virtualizing, open GL, 3D kinds of graphics apps and we’ll make some trade offs there and take those resources and put them more towards the fund and point of the sphere. Hopefully that is…
- Operator:
- Your next questions comes from Brent Thill with Citi
- Brent Thill:
- A quick question just on your pipeline close rates we’ve heard a number of tech companies in moving up there pipeline to close ratios from three to four to five to or five to one. Can you just give us a sense of quantify kind of how you’re managing the close rates and I guess as you give it at a very high level where do you engage your close rates today versus what you seen in the last three, four years?
- David Henshall:
- Sure, Brent. This is David. We’ve definitely made a change to all of our rate hour systems as we call it around the pipeline in customer close rates et cetera, two just being much more thoughtful around the current environment. It’s also forced us to add a couple of new layers of discussions to make we really understand what’s going on from a customer standpoint their prioritization and also influencing our messaging around the things that are going to stay top of list regardless of what happens in their budgets etc so our pipeline coverage ratios have definitely going up and we think that’s prudent in this point time. So, we have got a pretty good feel for the last several quarters and what is required to close the quarter and business over the line and also as I said much closer to the conversation that we probably been in the last couple of years so I feel pretty good on that front
- Brent Thill:
- Okay, we will all been used to budget flush in Q4 last few years I guess you you’re taking that of table as well.
- David Henshall:
- I just thinks it’ prudent at this point to assume its going to be more muted. And if it happens great but in this type of environment I think there is just budgets do lag but I do think that it will be more muted than we seen in the prior periods.
- Brent Thill:
- Thanks
- Operator:
- Ladies and gentlemen, we have reached the allotted time for question-and-answers. I will now turn the call back over to management for closing comments.
- Mark Templeton:
- Thank you, everyone, we’re facing challenging, exciting and uncertain times. Paraphrasing words of Jeff Bezos of Amazon, true for gallery drivers innovation just like other can strength to innovation don’t always required big budgets they required powerfulness and focus on the customer. The winners will always put the customers first and you can count on Citrix to do that. Thanks very much will see in three months.
- Operator:
- Thank you for participating in today’s Citrix conference call. You may now disconnect.
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