Citrix Systems, Inc.
Q1 2010 Earnings Call Transcript

Published: 22 Apr 2010

[Operator:]

Good afternoon. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems first quarter 2010 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to introduce Mr. Eduardo Fleites, Senior Director of Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Casey. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix’s first quarter 2010 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 Systems Investor Relations website, and the slide presentation associated with the webcast will be posted immediately following the call. Before we begin to review our financial results, I want to state that we have posted product classification and historical revenue trends related to our product groupings to the Investor Relations page of our website. I’d like to remind you that today's conversation will include forward-looking statements made under the Safe Harbor provisions of the US Securities Laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties such as the impact of the global economic climate, uncertainty in the IT spending environment, risks associated with our products and competition. Obviously these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC, 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. Furthermore, we will discuss various non-GAAP financial measures as defined by the SEC’s Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today’s call can be found at the end of today's press release and on the Investor Relations page of our website. Now I 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. As you can see from the release, we are off to a strong start in 2010, delivering $414 million in total revenue, more than a three point increase in adjusted op margin, and $144 million in cash flow from operations, all driving adjusted earnings per share of $0.40, up 23% from last year. So coming off a record Q4, we entered 2010 cautiously optimistic. In Q1, while there were really only a handful of large transactions that closed, the demand environment continued to trend towards a more normalized seasonal spending cycle with EMEA still trailing the US, as expected. I’m very pleased with our execution in the field operationally and within our product divisions. So drilling into the different revenue line items in Q1, new sales were $123 million, up 10% from last year, driven by growth across both the desktop and data center businesses. License updates increased 10% from last year due to strong customer interest in the XenDesktop trade-up program. Technical services grew 18%, led by consulting and tech support, and online SaaS revenue was $85 million, up 18% year-on-year with web collaboration leading the way, up over 30%. From a geographic perspective, the Americas region continues to execute well, delivering a revenue growth of 14% from last year for a total of $178 million. And included in this total is product license growth of about 20% year-on-year. Internationally, EMEA showed slow by steady improvement in the business environment leading to $119 million in total revenue, up 6% from last year. And finally, revenue in Japan and the Pacific grew 13% to $32 million. So overall, a real solid quarter within a mixed economic environment. Customer interest in pipeline build are record levels, and we remain focused on delivering results while building momentum across the main product categories of desktops, data center and cloud, and online collaboration. So now I’d like to discuss the Q1 results within these three areas. First, our desktop business grew 9% over last year to $264 million The results in the quarter were highlighted by demand of our latest desktop virtualization product, XenDesktop 4, and the desktop trade-up program, which gives existing XenApp customers the opportunity to upgrade to the complete solution for delivering both apps and desktops on demand. In total, XenDesktop contributed $32 million of recognized revenue, with trade-up products adding another $14 million to the deferred revenue balance. And as a reminder, the accounting for trade-ups is largely ratable in nature, with revenue hitting the P&L of our future quarters. Also in the desktop business, there were a number of strong metrics in the quarter. In fact, four out of the five largest transactions across the company included XenDesktop. More than 10% of existing XenApp customers that were up for renewal in Q1 chose instead to trade up to XenDesktop. We also added several hundred brand new customers and partners to Citrix due to the increasing interest in desktop virtualization. So overall, really good momentum across the board. And as we review the past couple of quarters we will continue to call out certain metrics for the standalone products within the category, but they are clearly becoming less relevant as customers acquired the full desktop solution, which incorporates both the virtual app and virtual desktop capabilities. So net let’s review the data center and cloud business, which consists primarily of our app networking and server virtualization solutions. Led by NetScaler, revenue in this business was up 23% year-over-year to $61 million. Overall, the NetScaler product line continues to gain share in the enterprise market with two-thirds of the deals coming from this segment in Q1 and the number of unique customers growing by more than 40% from Q1 ’09. On a product basis, strength gained from the low-to-mid range MPX appliances and from the new VPX virtual appliances. While in the market only a short time, VPX is showing good early traction across several different verticals and geographies. The other key component in this business is XenServer, where you’ve seen significant growth in the number of downloads, activations, and unit market share, which Mark will address further in his comments. Finally, touching on our Software-as-a-Service business, revenue was up 18% from last year. The online services team continues to deliver solid execution with this segment now contributing over 20% of total Citrix revenue. The growth continues to be led by the collaboration products, including GoToMeeting, GoToWebinar, and the newly released GoToTraining. Customers continue to be focused on improving productivity while cutting costs and our easy-to-use purpose-built solutions allow them to do just that. By leveraging our GoTo services that can immediately reduce travel, training and support budgets, all while expanding customer reach. So turning to expenses and operations, in Q1, adjusted op margin was up over 3 percentage points from last year to 23%. This is a direct result of improving revenue performance and our continued focus on leverage. As I’ve said before, our initiatives have been centered not only on cost structure changes, but also in a broad reallocation of spending to materially increase focus on the areas of the business such as desktop, cloud, and SaaS in order to accelerate future growth opportunities. We increased the pace of hiring modestly in the first quarter, as the demand environment improved. And in total, we added 140 people with the largest increases coming in the SaaS business and in the field organization. I expect this pace to continue for the balance of the year. Now on the rest of the P&L, other income was up modestly due to the higher investment balances, and tax rate increased significantly both sequentially and year-over-year. Higher tax rate is really a function of the geographic mix of revenue in the period and because the federal R&D tax credit is yet to be extended for 2010. So looking at the balance sheet, cash and investments grew to a record $1.4 billion aided by very strong cash flow from operations of $144 million. Primary use of cash in Q1 was again for stock repurchase where we bought back 2 million shares at an average price of $44 a share. However, despite our continuing focus on share repurchase, weighted average shares outstanding increased by over 2 million shares last quarter due to the higher equity price and the volume of option exercises. Looking forward though, we remain very committed to buying back our own stock, and today we announced that the Board has approved an additional $400 million in share repurchase authorization, which brings the total amount available to approximately $460 million. Also, deferred revenue increased $17 million sequentially or 3%, now stands at a total of $636 million. And this is due to the XenDesktop trade-up program, strong subscription advantage renewals, and through customer agreements for our SaaS products. So finally I’d like to discuss our current outlook and expectations for Q2 and update the full year of 2010. We are executing on a business plan to continue to drive an expansion of op margins while strongly investing in the strategic area of the business and our ability to service customers around the globe. We are really encouraged by the improving spending dynamics we are seeing in most geos, our leadership position across desktop virtualization, continued gains in app networking and SaaS, and an opportunity pipeline that’s never been stronger. So balancing this optimism against a global economic recovery, it’s still uneven. We currently expect for the second quarter of 2010, total revenue to be in a range of $430 million to $440 million; adjusted operating margin of between 24.0% and 24.5%; adjusted tax rate of 23% to 24%; shares outstanding in a range of 190 million to 192 million; and adjusted EPS of $0.44 to $0.45 a share. And for the full year 2010, we are raising our outlook and currently expect that total revenue will be in a range of $1.765 billion to $1.78 billion. We expect adjusted operating margin to increase 100 basis points compared to 2009; average shares outstanding of 192 million to 194 million; and finally, adjusted EPS between $1.88 and $1.91 a share. So now I’d like to turn it over to Mark to give you additional details on the quarter’s performance and discuss our ongoing businesses. Mark?

[Mark Templeton:]

Excellent, David. I’m really pleased to be reporting solid Q1 results today and increasing traction across our core markets. Improvements in operational efficiency are allowing us to intensify our focus, our strategic initiatives, and deliver strong financial results. Double-digit increases in revenue, adjusted income, and EPS reflect the improving environment, disciplined expense management, and strengthening demand for our innovative solutions. We are off to a great start in 2010, and I’m really proud of the Citrix team. Citrix is born from the idea of changing the way IT and business can work, unlocking people from the office, applications from the desktop, computing from the data center, all with the power of virtual computing. This vision continues to define the three areas of our business that I’d like to focus on and highlight today; virtual desktops, virtual meetings, and virtual data centers. In Q1, our desktop virtualization business, including XenDesktop and XenApp, continued to build momentum coming off an amazing Q4 performance. Demand is being driven by a perfect storm of the desktop, migrating to Windows 7, assuring information security, managing the explosion of consumer devices, supporting the growing needs of virtual work styles, and extreme pressure to reduce IT costs. These factors drove unprecedented growth in our desktop virtualization pipeline during Q1. Our strategic platform delivers both desktops and apps as an on-demand service to every enterprise user, and at the same time, keeps them isolated and manage separately from maximum efficiency, security and agility. The desktop virtualization customer engagement really includes two conversations; desktops on demand with XenDesktop and applications on demand with XenApp. If you remember, we began shipping to industries first comprehensive desktop virtualization product, XenDesktop 4, going far beyond VDI-only products supporting all major virtual desktop models in one integrated solution. The Q4 uptick of XenDesktop was impressive. Q1 continued this very fast pace. We added over 700 new XenDesktop customers, many of them adopting the enterprise and platinum editions. We had over 20 deals ranging from 5,000 to 20,000 seats in Q1, with over 400 new channel partners completing their first XenDesktop sale in the quarter. In the VDI segment, XenDesktop VDI edition is winning the vast majority of competitive deals. We had more than 10,000 downloads of XenDesktop express and evaluations. Looking forward, the deal pipeline for XenDesktop continued to grow to a record level, including a win for a public sector customer in Europe for 140,000 seats. In the 18 weeks since the October announcement of XenDesktop 4, we’ve shipped over 1.5 million new XenDesktop licenses. We also work to further ramp up the market by joining forces with Microsoft with some groundbreaking announcements. First, as a part of a joint launch even with Citrix, Microsoft broadly endorsed desktop virtualization. And now it dramatically improved licensing for Windows virtual desktops. Beginning July 1, virtual desktops will become a core part of Windows client assay at no additional charge. This simplifies licensing for customers and opens the door for desktop virtualization to be used enterprise-wide as a mainstream solution. Next, Citrix and Microsoft jointly announced two go-to-market programs, the VDI Kick Start giving customers a deep discount on a complete VDI stack, both on Citrix and Microsoft. And the second is the Rescue for VMware VDI program, allowing customers to trade in 500 VMware View licenses. This is especially valuable in many cases where View has simply failed or where customers received free View licenses as part of the VMware Server ELA. The desktops are useless without apps. Apps-on-demand is at the core of a comprehensive approach to desktop virtualization. In Q1, we raised the bar again with the release of XenApp 6, offering major new enhancements across the board. Users will see enormous performance improvements; faster log-in, faster printing, faster across the board. And faster means better productivity. (inaudible) significant improvements in scalability, increasing users per server by 17% over XenApp 5. And greater user density means much better TCO. XenApp 6 also includes new ACX technologies that (inaudible) user experience with high fidelity support for video, Flash and USB devices, allowing customers to fully virtualize VoIP, video and Flash across PCs, Macs, laptops, thin clients, netbooks, and smartphones. Finally, XenApp 6 includes AppCenter, a powerful new tool that makes it far easier to centrally manage and deliver apps to any number of physical and virtual desktops across a fully distributed enterprise. And AppCenter also seamlessly integrates with Microsoft System Center and App-V. Apps-on-demand gets much more strategic from here, especially as the desktop evolves from device to service. Nothing illustrates this better than Citrix receiver for iPad, enabling Windows apps and desktops to go. It’s already the number one free iPad app for business and a great example of how we are extending the reach of desktop virtualization far beyond the walls of desktop PCs and thin clients. Net, we are very much on track in desktop virtualization, touching millions of users and devices, leveraging our 200,000 strong customer base, and setting the innovation pace by enabling virtual work styles that revolutionize desktop computing for IT and users. Every quarter we also make this vision a reality for millions of people via our web-based GoTo services. Growth in Q1 for Citrix online continues at an impressive pace positioning us as one of the world’s top five SaaS providers, fueled by demand for simple, easy to use virtual computing products with zero upfront capital required. There were a number of highlights during Q1. First, continued pressure on travel budgets and the growing popularity of both virtual meetings on the go drove record growth in our flagship GoToMeeting and GoToWebinar products. Online meeting attendance was up an incredible 43% over Q1 of last year. Attendees who experienced the GoToMeeting difference are much more likely to become paid subscribers themselves. This is a key part of our vital growth strategy. We also extended the reach of online meetings to an entirely new generation of devices with the introduction of GoToMeeting for iPad, making on-the-go meetings effortless and visually stunning. This gets Citrix our second iPad business app to hit the top five on the Apple App Store. GoToMyPC remote desktop sessions grew 7% sequentially to more than 23 million sessions, driven by the availability of a Mac addition and harsh winter weather that limited business travel in many of our key markets. And finally, our GoToAssist promotes support business double-digit growth driven by increased pressure on IT to reduce support costs coupled with the need to support an increasingly mobile workforce. In addition, we also launched two new products in Q1; GoToTraining and GoToManage. GoToTraining puts us in the virtual training market segment, estimated growth of 600 million last year to 1.6 billion in 2014. GoToTraining was designed from the ground up for training professionals, filling a market by offering an easy-to-user solution with predictable pricing that saves time and travel costs and gets business a rich interactive experience. During the quarter, we also acquired Paglo, a SaaS-based IT management solution for SMB [ph] customers. Now re-branded as GoToManage, this gives us an exciting new add-on service to offer our growing GoToAssist customer base, allowing them to monitor, control and support unattended or unattended IT infrastructure from anywhere. The market for SaaS-based virtual computing is global and rich with opportunities, driving core innovation to expand functionality geographically and into the Citrix customer base are all primary objectives. I’d like to close with some color around our virtual data center business. It’s quite clear data center is transforming, delivering new levels of economics and elasticity. The breadth of our networking and virtualization portfolio puts us in a unique position to meet these requirements. Growing 23% in Q1, we are building momentum in data center and cloud infrastructure, led by our NetScaler and XenServer product lines. NetScaler provides the high performance network that made virtual data centers fast, secure, and always available, kind of the front door to the virtual data center. With groundbreaking innovations like VPX virtual appliances and pay-as-you-go pricing, NetScaler continues to gain share in a market that’s increasingly strategic to the data center and cloud space. We now have the industry’s most comprehensive and cost-effective product lines from small, single application virtual appliances to massive, high-end systems designed to power the world’s busiest websites and data centers. This level of flexibility was one of the key reasons NetScaler was named number one in customer satisfaction in a recent survey of enterprise customers, decisively beating both F5 and Cisco. Incorporating the power virtualization into the heart of NetScaler has allowed us to rapidly accelerate the rate of innovation in this space. In Q1, we introduced a new line of MPX appliances that are 2X more efficient than competitors and what matters most to customers; power, footprint, and price performance. We also unveiled new NetScaler App Firewall appliances that double the throughput of the nearest competitor, setting a very high bar for web app, security, and both public and private clouds. And we completed our line of virtual networking appliances, shipping Branch Repeater VPX and Access Gateway VPX. We will have even more to show next week at Interop, launching some new super performance products designed specifically for our large scale e-business, cloud, and hosting customers. XenServer, our virtualization platform for private and public clouds is on a solid trajectory. Q1 markets one full year since we announced our strategy to accelerate XenServer market penetration by making the core products free and monetizing on the sale of add-on management capabilities. According to IDC, XenServer unit share grew from 3% in 2008 to 11% at the end of 2009. New activations for production use hit an all time record in Q1. In fact, we believe we are on track to nearly double our share by the end of 2010, increasing our strategic footprint in corporate data centers and within cloud service providers. We are now in beta test with the newest versions of XenServer and Essentials for Hyper-V, adding some amazing features for cloud providers and pushing the performance envelope for virtual networking, desktops and apps. We will have lots more to say about this at Synergy in a few weeks. The combined one (inaudible) of XenServer and Citrix Essentials for Hyper-V is clearly paying off, creating thousands of readymade sockets for XenDesktop, XenApp and our VPX line of virtual appliances, broadening our opportunity in a growing cloud market, and leveraging our 20-year partnership with Microsoft. We are ideally positioned to capitalize on the transformation of IT to an on-demand service. So in the coming months, you will see us accelerate spending on primary demand in desktop virtualization and SaaS. You will also see us expand our global brand awareness, increase our sales and services capacity, and invest in go-to-market initiatives with key partners like Microsoft and large system integrators. All designs will significantly expand our leverage and reach. Before I open it up for Q&A, there is one more thing. I’d like to personally invite you to our upcoming industry conference, Synergy 2010 at San Francisco’s Moscone Center from May 12 to 14. Synergy is designed around a holistic view of virtualization, networking, and cloud computing. We will be introducing the future with exciting announcements, breakthrough technologies, demonstrations, and new partnerships along with a few surprises. You can register at citrixsynergy.com, and I hope you will join us. I promise you won’t be disappointed. And now, I’d like to open it up for questions.

[Operator:]

(Operator instructions) Our first question will come from Sarah Friar from Goldman Sachs.

[Sarah Friar:]

– so much for taking my question, guys. I’d like to just get a little bit more color on the bookings side for XenDesktop. I know you gave out about $32 million in revenue. But I think last quarter you were willing to give us a bookings number and your deferred revenue was up so much. I just want to know what sort of impact VDI is having there.

[David Henshall:]

Sure, Sarah. It’s David. The easiest way to really get a good feel for the strength of the XenDesktop business is look at the change in deferred plus the recognized. So you add those two together and it gets you to about $50 million for the quarter.

[Sarah Friar:]

Okay. So about flat bookings quarter-over-quarter, but clearly Q1 comparing Q4 for bookings for XenDesktop. Correct?

[David Henshall:]

Correct. That was a great quarter in Q1, and we expect the trade-up program to continue to be strong this quarter as well.

[Sarah Friar:]

Got it. And then the cash flow number also kind of on a year-over-year basis incredibly strong. I’m assuming that even as the models shift more to bookings and deferred revenue, you’re still collecting that cash upfront. But was there anything out that drove particular strength on the cash flow this quarter?

[David Henshall:]

Yes, I think cash flow is pretty straightforward. It was just few normal items, including net income. We did have a pick up from receivables, and you see that in the DSOs that came down about eight days sequentially from Q4. And then really just the change in deferred revenue being the other big item.

[Sarah Friar:]

Got it. Okay, great. Thanks a lot. Good quarter.

[David Henshall:]

Thanks, Sarah.

[Operator:]

Our next question will come from Phil Winslow from Credit Suisse.

[Phil Winslow:]

Hi, guys. Just focusing back on the desktop virtualization side, just wondering if you could give us a sense for what you’re seeing as far as sales cycles? Are (inaudible) all extending? And then also, David, historically you used to give XenApp license growth year-over-year. I wonder if I could get a sense for what that was this quarter. And then I think last year you had $26 million in XenDesktop license revenue. Just curious what was it this quarter. Thanks.

[David Henshall:]

Thanks, Phil. As far as sales cycles, nothing is changing dramatically. Obviously trade-up sales cycles tend to be reasonably short, two quarters or less. And basically because those customers are already sort of thinking strategically about virtualization at the desktop and they understand the value proposition of XenDesktop 4 that includes desktops and apps-on-demand. But the POCs that we’ve been doing have continued to accelerate. And obviously more of those means faster sales cycles when it comes to re-orders. And we saw good traction in re-orders in the first quarter accounting for tremendous number of transactions and especially in the medium size area. So other than that, we don’t see any other material changes in sales cycles. And Phil, on the second part of your question, it’s certainly, as I pointed out, becoming less and less relevant to look at the individual pieces, certainly given the motion that we had in the field organization, our partners and with customers. But just for continuity, the desktop component – just pure standalone desktop was up about 700% year-on-year and represented $20 million of standalone product license revenue.

[Operator:]

Our next question will come from Robert Breza from RBC Capital Markets.

[Robert Breza:]

Hi, thanks for taking my questions. Mark, I was wondering, you talked about the pipeline building and obviously EMEA trailed a little bit. Can you tell us what you are seeing there from a pipeline perspective and possibly when you think Europe might start to catch back up? Thanks.

[Mark Templeton:]

Thanks, Robert. It feels like overall – and this is sort of internal and some of the external conversations that I’m involved and that EMEA feels one, two quarters behind the US in terms of overall recovery and competence in IT spending. Having said that, the pipeline build that we saw in – across the board in XenDesktop was geographic independent. EMEA kind of racked up a huge build in their XenDesktop pipeline. I think the way to think about this is, we made the XenDesktop 4 announcement, which really signaled for the first time that you could buy desktop virtualization simply with one license, early in October of last year. And so with the normal closed cycles in the business in Q4, a lot of the focus was just simply bringing the business in for the quarter, and a lot of the focus in Q1 went on really building the pipeline. And so I think you’d start to see results from that Q1 pipeline build start to really materialize in the back half of the year, some in Q3 perhaps, but mostly starting in Q4.

[Robert Breza:]

Maybe as a follow-up, Mark, as you talk about the XenDesktop and some of the changes you made there with the adoption of virtualization at the desktops, when do you – I mean, obviously it appears that most of the big, large Global 2000 organizations seem to be some of the people who can benefit the most from adopting a quicker. When does the inflection point start to move down into that upper tier of the mid-market, or how do you kind of think about the mid-market starting to get involved in adopting XenDesktop?

[Mark Templeton:]

Obviously I think the mid-market is already involved. And they are involved via the experience they have had with great products like XenApp and engagements with our partners where it’s a very easy conversation to have. So I would not think about this as a Global 2000 kind of market at this point in time. And then secondly, I think the Windows 7 migration and uptake is quite a catalyst. And I think most of the industry analysts that are watching customer intent et cetera feel like most of the investment there is going to be focused more in the back half of this year. And that should support our second half business very nicely as well. So – and that I think is broad-based medium and large enterprise on a global basis.

[Robert Breza:]

Perfect.

[David Henshall:]

Rob, this is David. I just had one more piece of contacts there is that if I look across the top ten XenDesktop deals in the quarter, it really was a good mix of different industry. And it’s not necessarily a who’s who of the Global 1000, including transactions with customers in the education vertical, government, hospitality, communications. And it’s pretty broad-based what we are seeing right now.

[Robert Breza:]

Perfect. Thank you, David.

[David Henshall:]

Operator, next question?

[Mark Templeton:]

Next question, operator?

[Operator:]

Our next question will come from Abhey Lamba.

[Abhey Lamba:]

The impact of XenDesktop adoption on your XenApp business, you’ve seen XenApp revenues kind of declining in low-single digits. So as the adoption of XenDesktop accelerates, can that stay in that low-single digit decline or could there be acceleration in that decline as well?

[David Henshall:]

Abhey, this is David. I mean, similar to the way I have been characterizing over the last couple of quarters, I really want to encourage people to look at this as the broader desktop business, because it’s not necessarily a one-for-one trade-off here. The idea in the motion around the strategy of moving people from, what I would call more of a tactical than absolution to a much more strategic desktop infrastructure solution, is about driving long-term penetration and share across these customers. So look at the two items combined and those are showing growth up, as I mentioned earlier, about 9% for the total business and mid-single digits from a license business. And so I think that you are going to continue to see the shift in the individual mix within that line, and it will certainly favor desktop. And if I look at the product pipeline, it’s going to be driving that over the next several quarters as well. So that’s not (inaudible).

[Abhey Lamba:]

Great, thanks. And really quickly, any update on Microsoft’s source code agreement that you just had? And secondly, on the R&D tax credit, is that baked into your guidance? And what would be the impact if it is not baked into your guidance, if it is flash?

[David Henshall:]

Let me take the second part of the question first. Regarding the R&D tax credit, this is a typical thing that’s happened, I think in the last 13 years or so, the federal government has left the R&D tax credit expire. And because of that, it made our tax rate – adjusted tax rate up by about 100 basis points last quarter and a similar amount in Q2. If it gets approved, which it usually does in the second half of the year, we would be able to essentially book those balances at that point in time. And in that quarter, we would have a – we would be picking up the benefit and it would certainly push down the tax rate in that period. But it’s in our guidance assuming that it does not get approved in Q2 – renewed in Q2, excuse me.

[Mark Templeton:]

And we have wrapped up our vision with Microsoft with no impact whatsoever, and as part of our agreement to incorporate remote effects into our HDX technologies and fully support Microsoft on that end, and so this would be sort of a non-issue now.

[Abhey Lamba:]

Thank you.

[Operator:]

Our next question will come from Bhavan Suri from William Blair & Company.

[Bhavan Suri:]

Hey, guys, good quarter. Just a couple of quick clarification questions if I go in. David, I thought you said that – my sense was that bookings with XenDesktop in the fourth quarter were 60 million, not 50 million. So I was surprised when you said it was flat quarter-over-quarter. I just want to make sure I was right or wrong on that, whichever way it was.

[David Henshall:]

I think from a bookings basis, it was down a little bit sequentially. On a recognized revenue basis, it was up – flat to up fractionally.

[Bhavan Suri:]

Right, okay. So bookings were down and then revenue was up to a nice $32 million I think it was. And then sort of on a more strategic basis, as you look at the XenDesktop opportunity out there, how often are you sort of running out and replacing VMware and how often is it kind of a Greenfield type of opportunity?

[Mark Templeton:]

We don’t plan on talking about those specific metrics. As I mentioned in the prepared comments, when we are in a competitive situation with VMware, it’s always going to be a VDI situation because that’s the only kind of solution they have. And we are winning the vast majority of those. And then a lot of those that they had seats that they had planted, (inaudible) they had planted, customers have done POCs and tried to make them work. And we are also doing a fair number of replacing those systems that just did not work in the conditions that the customer had to deploy. Then the Greenfield is really the overall desktop virtualization space, which is where we are being broadly successful without seeing VMware frankly a whole lot. In that space, customers are engaged in a higher level of conversation around both desktops and apps-on-demand, keeping them separate in terms of how they are managed, how they are rolled out, et cetera, but as a single solution for being able to touch every enterprise desktop. And I think the research would show that they are not – the customers have never had VDI in mind for a broad enterprise rollout. And desktop virtualization is what makes it different, and it’s really applicable to touch every single desktop where you’re going to deliver apps to physical or virtual desktops, or virtual desktops to any kind of a device. That’s the way to think about it.

[Bhavan Suri:]

And one follow-up to that, I guess, Mark, as you start deploying XenClient, have you guys got any sense of what that does to the ROI? Obviously it improves it, but any sort of metrics around that given that some of the pushback we’ve had from folks is there is an immediate sort of ROI around desktop virtualization.

[Mark Templeton:]

Well, there is an immediate ROI around desktop virtualization when you think of it in the way we do that involves multiple desktop delivery models that have very different ROI characteristics. Hosted desktop versus a VM desktop in the data center versus a stream desktop to a local – a mobile VDI desktop, all have different ROI characteristics. And it’s what makes our approach very unique in the marketplace. XenClient will have – yes, it will have a different ROI type model, and we are in a hosted VM, you are investing in the data center in terms of servers and data center infrastructure. And on the client side, you’re going to be investing in a laptop, let’s say, a laptop that has the great Intel VT technology, vPro technology. And with XenClient running on it, all of the mix and all the CPUs are going to be distributed out to the endpoint. And the ROI there is – it's a very different kind of model. I’d say, generally speaking, that VMs whether they are hosted in a data center or they are running out at the endpoint, the key focus that customers have starts with security, and then the second focus is – security is the first. Speed of delivery in terms of being able to turn on and turn off users very rapidly. And all the while it becomes a third level kind of priority for them. I think that will apply both to the XenClient side as well as to the data center side running on, say, XenServer.

[Bhavan Suri:]

Great. Thanks for taking my questions.

[David Henshall:]

Thank you.

[Mark Templeton:]

Welcome.

[Operator:]

Our next question will come from Rob Owens from Pacific Crest.

[Rob Owens:]

Great. Thank you very much. With regard to the margin guidance for the full year, I’m just curious whether there is not more margin lift in the second half of the year, especially given the performance in Q1 and the margin guidance for Q2.

[David Henshall:]

Yes, Rob, when we think about margin guidance right now, I mean, we’ve – last quarter we were talking about 75 to 100 basis point improvement over last year. Now I think we have essentially just collapsed the range and said 100 basis point improvement, and signaling that it’s moving in that direction. And the second answer is that we are three months into the year at this point in time, and we will continue to update the outlook as we move further. We are really excited about what we see in the opportunity pipeline and just the momentum around some of our markets as we get to the back half. And so we will play it by year and balance that against ht opportunities we have for investments that’s going to accelerate growth. And it’s really just a function of those variables.

[Rob Owens:]

That being said, is there anything on the horizon, either Q3 or Q4, that you would anticipate increasing investment for it? Was it just conservatism on your part?

[David Henshall:]

I’d say nothing specific at this point in time. I mean, we’ve talked about the areas that we’ve been investing in. We called out a number of them. And including the big ones like R&D, we think innovation is critically important to the long-term success. Our sales and services capacity to be able to meet customer needs around the world, our SaaS business, which just continues quarter-after-quarter to do really well. So it would be in those areas and just a continuation of what we are doing right now.

[Rob Owens:]

Great, thanks.

[David Henshall:]

You bet.

[Operator:]

Our next question will come from Steve Ashley from Robert W. Baird.

[Steve Ashley:]

If you could comment on the large deal activity, number of deals greater than $1 million in the first quarter of this year and maybe compared to a year ago?

[David Henshall:]

Yes, Steve. There were just – there were actually a very few number of large deals this quarter. It’s really made up of small and medium sized business to a large extent. I think that looking back, there may have been some large deals that fell into the fourth quarter, always hard to tell. There were five individual transactions, new license transactions that were greater than $1 million in Q1. And I think that’s roughly in line with where we were in Q1 of last year and certainly expect that number to increase into Q2, as we look at the pipeline in the forecast.

[Steve Ashley:]

Great. And then your trade-up program is scheduled to expire in June. What was the prospects of extending that given the success you’ve had with it?

[Mark Templeton:]

Steve, right now we are focused on Q2 and trade-up program and executing on it. And we – of course, when we put it in place, it was designed to really create urgency on the part of our field forces, our partners, and our customers who are the most strategic to have some urgency to actually start down the track to desktop virtualization to get that flywheel going. Once we close Q2, we will look at kind of all of the data and consider that again. I think that we are – if we do something to expand it, the economics will be different. We want to do something very aggressive to really start that flywheel going. And so we haven’t ruled it out, but the bold focus is on Q2.

[Steve Ashley:]

Perfect. Thank you.

[Operator:]

Our next question will come from Daniel Ives from FBR Capital Markets.

[Daniel Ives:]

Can you talk about just the adoption on XenDesktop? And is there any change anecdotally in regards to selling it in terms of customer familiarity adoption cycle, maybe an easier sell? Maybe if you could just walk us through being in those deals, any sort of change that you’ve seen over the last three to six months?

[Mark Templeton:]

Daniel, I think that we are seeing a marketplace that’s forming probably little more rapidly than I expected it to, personally. And that means that it does get easier. We are seeing more partners get certified. In fact, Q1 we had about 24%, 25% growth in the number of partners certified to sales in desktop. And we see a lot – a big increase in their demand generation activity in Q1. And that’s even flowing into our channel event, which is just prior to Synergy where we are seeing higher partner registrations. So what happens here is it sort of a self-reinforcing cycle when one partner is successful with a customer, others see and hear about it. Customers ask for it, which encourages the partner to invest in training. And so that’s where we get lots of leverage when a lot of partners act independently get certified, trained and are out generating demand, which then for us makes it feel like the market is easier to grow. And that’s what you get when you have an upward spiraling kind of marketplace that is built on strong value proposition around virtualization in general and the strong market forces and sort of catalyst that I mentioned in the prepared comments.

[Daniel Ives:]

Thanks.

[Mark Templeton:]

That’s how it feels.

[Daniel Ives:]

Thank you.

[Operator:]

Our next question will come from John DiFucci from JP Morgan.

[John DiFucci:]

A question for David. David, if the environment is trending towards normal, as you said, and you did put up normal seasonal patterns in the fourth quarter, why was license revenue down similar to last year when the economy was certainly declining, especially since it appears anyway that you are at the onset of a positive secular trend?

[David Henshall:]

I think product license, we still look at that on a year-over-year basis always, and that’s because of the way customers buy. It’s the way we set our comp plans et cetera. And our license revenue being up 10% in Q1 was a good result. I think as we go into the year, there is opportunities to accelerate that. We certainly see it in the pipeline. But right now, our forecast is going to point you to about 10% to 12% growth in total revenue, and then the mix of that will move around a little bit during the quarter.

[John DiFucci:]

Okay. So you don’t – you don’t – you are just looking at year-over-year and was that – do you think it was driven by the codes [ph] you set for the quarter for your sales force then mostly, because normally, I mean, we look year-over-year too. We all do, right? But at the same time, especially coming out of an economic environment where we’re coming out of, we tend to look more – or at least pay more attention to the seasonal patterns. And it’s just – these seasonal patterns although they were at the high end of your guidance, and that’s good, and I guess that’s what you said. But it’s actually below what you would expect from years other than last year. Last year, obviously, was a unique time though.

[David Henshall:]

Yes, last year was a unique time. If you remember, we had very strong growth into the fourth quarter, ahead of most normal years from a sequential basis, which would point to certainly a normal step-down into Q1, normal seasonality. I think on a sequential basis, we were down about 27%, I believe, on product license versus 35% a year ago and then somewhere in the 15%, 20% range in the years before that. So it’s kind of hard to compare 2009 to anything, given the unique shape of what that year looked like. And coming off of great Q4, which by the way was a record Q4 for Citrix in most dimensions, we are really happy with the Q1 result and look for continued growth throughout the year.

[John DiFucci:]

Okay, thanks.

[Operator:]

Our next question will come from Michael Turits from Raymond James.

[Michael Turits:]

Yes. On the $32 million for XenDesktop, you said you had a $14 million contribution to defer. But how much of the $32 million for XenDesktop was from trade-up?

[David Henshall:]

A relatively small component. I’d have to pull the numbers out. If you look at the trade-up, the way the trade-up offerings work, and there is a number of them, they are going to be deferred anywhere from about 50% to 100% deferred. So, on balance, I’d say, the way to think about it is three-quarters are related – three-quarters is related to – three-quarters of each new sale will be deferred on balance. If we look at the – how much of it actually flowed through the P&L, single-digit million – you know, mid-single digit million, and then the majority of it showing up in subsequent quarters as license update revenue.

[Michael Turits:]

Got it. And you did mid-single digit – mid-single digit desktop license growth in the quarter you said. Was that about the right trend for the year? I mean, part of the problem is that it’s hard to figure out what – because XenApp was down and not really recovered yet. So do you think that can accelerate during the year?

[David Henshall:]

Yes, actually I do. I think in Q2, the broad desktop license will accelerate from the year-over-year rate you saw in Q1.

[Michael Turits:]

Okay. And then just last question on the tax rate, any thoughts on what it should be for the full year?

[David Henshall:]

Yes. I included that in my prepared remarks. So I think for the full year right now, we are looking at a tax rate in the 23%, a maybe 23.5% range.

[Michael Turits:]

Okay. Must have missed it. Thanks very much.

[Operator:]

Our next question will come from Todd Raker from Deutsche Bank.

[Todd Raker:]

Hey, guys, two quick questions. First, on the trade-up program, can you give us any sense in terms of kind of the attach rate you are seeing into renewals of the installed base?

[David Henshall:]

Yes. What we’ve seen in – what we saw in Q1 was, a little over 10% of those XenApp customers that were coming up for renewal on their subscription advantage instead chose to upgrade to XenDesktop. And I think our expectation for Q2 at this point in time at least in our guidance is between 10% and 15% of the base in Q2 to choose to trade up.

[Todd Raker:]

And I just want to make sure I understand that a time a XenApp renewal customer, the reason I wouldn’t do the trade-ups economically is my VDI project is probably further than 12 to 18 months out.

[Mark Templeton:]

Well, I think it’s hard to really put all XenApp customers into a bucket. I mean, there is a lot that has a specific project that they have bought XenApp for in the past, and it’s working extremely well for them. And they are not looking at broader desktop virtualization at this point in time. And we will always have an upgrade path should their internal environment change and they are looking at this. And so when we talk about the XenApp installed base, it’s really kind of a mix between that project base, which I probably classify as tactical, and more strategic where they have actually used XenApp as a technology to deliver hosted virtual desktops over the years. So it’s really tough to put them all into one bucket.

[Todd Raker:]

Okay. And then my second question is, can you just walk through – the VDI Kick Start program, how does that – is that designed to penetrate customers who are not XenApp customers? What’s strategy behind that one?

[Mark Templeton:]

Yes. The Kick Start program is designed to basically allow Citrix and Microsoft partners and field teams to work together to move new customers into a Citrix-Microsoft VDI stack. It’s pretty much that.

[Todd Raker:]

Okay. If –

[Mark Templeton:]

– and making it really low cost for them to do. And by the way, there are also some incentives for the field and for channels to actually do those proof of concepts. So it’s sort of a fully integrated program.

[Todd Raker:]

Okay. So if I’m a XenApp customer, Kick Start does not apply to me then?

[Mark Templeton:]

That’s correct.

[Todd Raker:]

Okay. Thanks, guys.

[Mark Templeton:]

Thank you.

[Operator:]

Our next question will come from Ed Maguire from CLSA.

[Ed Maguire:]

Yes, good afternoon. Couple of questions. What impact does the pending XenClient and the Microsoft license changes have on your conversations this quarter around desktop?

[Mark Templeton:]

Well, it’s all easier is, I think, the net-net answer in that. If you are a client assay customer of Microsoft, you are going to be able to use virtual desktops, virtual machines, images of desktops in very, very flexible ways, whether they are hosted in the data center or they run down on a XenClient. So I just think it gets overall easier, and customers have lots of degrees of freedom to use Windows in a lot of different ways. I guess that’s the way to think of it.

[Ed Maguire:]

Okay. Just to follow up, kind of turning around Todd’s question, have you been able to track what the uptake would be of new licenses in the trade-up program if you move from concurrent in the end [ph] user, what is the – what is kind of the incremental ratio of sales that your customers are willing to commit that you are seeing?

[David Henshall:]

I don’t think we’ve got great data at this point in time, Ed, to be fair. I think what we have seen is a trend for customers that, let’s say, are renewing 1,000 licenses to actually use this as an opportunity to trade up those 1,000. And in some programs, they could actually trade up for 2,000 named – excuse me, user or device license and then buy another 1,000 XenDesktop on top of that. So the ratio is certainly greater than one-to-one at this point in time. It’s just – I don’t think we really have enough data points to call it a trend yet.

[Ed Maguire:]

Great. Thank you.

[Operator:]

Our next question will come from Israel Hernandez from Barclays Capital.

[Israel Hernandez:]

Good afternoon, guys. Mark, can you share us and give us a little bit of color on that 140,000 feet customer win I guess in the public sector in Europe? Can you talk about the competitive dynamics with Citrix, the incumbent? Was there already a large XenApp deployment in place? Could you just share a little bit color as to what was the tipping point that got you (inaudible)?

[Mark Templeton:]

Okay. Israel, the deal is actually laden by one of the large global SI partners that we have. And we are – XenDesktop is sort of a catalyst component of it, but by no means is it the entire deal. And obviously that still requires a lot of system integration work. The customer was not a large scale that have customer although they would have had found because it’s hard to find especially in Europe any significant government agencies that don’t have some XenApp product. And we believe that it will start to actually get implemented in the second half of the year. And obviously it’s the largest desktop virtualization deal reported at least in the public so far. And the interesting thing is that when we look at the pipeline and the opportunities, these deals are out there. They tend to be more government because they are not by many companies that have that kind of installed base, but they tend to be large scale government kind of opportunities whether they are in the US and internationally. So that’s the color that I can provide right now.

[David Henshall:]

Israel, I’d like to add just a couple of comments on that just because of the size of this specific transaction is that, there was nothing in our reported financials related to this deal at this point in time. And the way it’s going to flow through is we will book the POs as they are received and probably starting with the first and the second quarter of this year.

[Israel Hernandez:]

That was my follow-up question. Thank you.

[Operator:]

Our next question will come from Walter Pritchard from Citigroup.

[Walter Pritchard:]

David, I’m wondering if you could help us out with just – I know you guys take down revenue in US dollars and no major currency impact on top line. Any impact year-over-year from a currency perspective on the bottom line?

[David Henshall:]

Yes, a little bit. I mean, we had anywhere from six to 12 months forward. And so the way it impacts our expenses and we have, call it, 25% of our expenses denominated in Euro currencies right now. And so we are probably picking up couple million dollars on a translation basis versus where we’ve been a year ago.

[Walter Pritchard:]

Great. And then just relative to Europe, I’m wondering if you could just kind of help us out with some color in terms of across the territory. I mean, just in the news there is everything from Greece where – the country near bankruptcy to Germany, where things down pretty strong from a macro perspective. Could you help us out in term of understanding how homogenous the performance was across the territory for you and how you think it improves from here?

[Mark Templeton:]

Yes, Walter, I think mostly it tracks to Germany, UK, kind of in the lead in terms of coming back by far strength in Germany, and then with France behind and then Spain as a really big lagger. And Eastern Europe was also quite weak relative to where things looked even a year – five quarters ago. So I think that’s why I mentioned that. We think Europe is depending upon the area of – you are talking about geography. One to two quarters behind what it feels like in the US.

[Walter Pritchard:]

Got it. And just last question, hope I could explain it well, but I guess we are trying to understand in the channel, you were paying much more for trade-up activity versus what a normal maintenance renewal would be in a quarter that you didn’t have the promotion going on. And we’re trying to understand – was there a major impact on the top line from sort of the contract [ph] revenue or the card type activity that you did in the quarter to incent the channel to drive the trade-up program?

[Mark Templeton:]

In fact, we always have a number of different incentives going on with the channel related to COG bonuses and things like that. And the actual trade-up is not eligible for car bonus. It’s just eligible for a normal Citrix Advisor Reward payment. So I think it would be in line probably a little bit more than a renewal sale, but not materially.

[Walter Pritchard:]

Okay. Thanks very much.

[Operator:]

Our next question will come from Adam Holt from Morgan Stanley.

[Adam Holt:]

Thank you. A question on the XenDesktop, seats sold versus seats deployed, of the 1.5 million that you sold, do you have sense for how many are actually live? And do you feel like you’ve now got critical miles in terms of live customers to be able to go out and process ties to platform?

[Mark Templeton:]

Adam, the 1.5 million actually is from October through the end of Q1. Hard for us to know how many are actually in service at this point, especially with the strong Q1 that we had. So you’d have to be doing some estimates here, but my guess is that there is still plenty of absorption going on from Q4 purchases, which by the way is part of what causes the Q1 step-off in licensing typically with larger enterprise customers because they absorb in Q4 purchases and implementations. So if I had to guess, I’d say we are probably a third of the way into the 1.5 million in terms of in-service, but it’s completely a guess. And as far as being a critical mass, I think we are critical mass already to quote using your term, process that ties to the platform. And because – when you do any deals that are 5,000 seats, these are not proof of concepts. These are customers that have made a strategic decision to move. And they do that based upon a lot of things, not only their own testing, but customer references and listening to partners and industry analysts et cetera and really taking in the entire view. So I’d say we are already to that point, and now that there is a process of step and repeat and trying to amplify all the activities that we’ve talked about, whether it’s about proof of concepts, downloads (inaudible), doing things to encourage our partners to generate demand, encourage our partners to get trained, et cetera, engaging customers at higher levels, the XenDesktop – since we made the XenDesktop 4 announcement, it has given us a great platform to process those high to the CIO level because we have a very strategic story about desktop virtualization. It’s not just about VDI. So I guess I’ve tried to answer your question.

[Adam Holt:]

If I could ask just another one (inaudible), just a quick follow-up on the app networking business, which is finally below radar, but looks like it had a really good quarter. First of all, do you think that’s more about the market improving there or do you feel like you’ve got company-specific momentum? And as you look into the pipeline, do you think the kind of growth rates that you saw this quarter can continue to next several quarters?

[Mark Templeton:]

I think it’s both. I think first of all, the VPX line being a virtual appliance is giving us access to entirely new revenue, entirely new customers where you are putting a NetScaler in front of an application on a specific basis at a cost that users couldn’t justify and apply a physical appliance. And at the same time, the advances we’ve made on the MPX side are encouraging some existing customers to refresh hardware. And also many enterprise customers now set forward because the price performance (inaudible) some of the things I mentioned or have not been quite compelling. And from a competitiveness perspective, we really stepped up our competitive profile with the things that we’ve done in the past two quarters on both VPX and MPX. And as I mentioned in my prepared comments, we are going to basically set off another round of this in a week or so when we make some great announcements of the high end at Interop.

[David Henshall:]

This is David. I would also like to add that from a guidance standpoint, we are – embedded in our guidance is a deceleration of year-over-year growth rates in the broader A&G market. And that’s simply because we had a really good Q2 last year. If you remember, there was some large government transactions that popped. So while I do expect it to be up pretty sharply sequentially, I think the growth rate will decelerate from Q1 into Q2.

[Adam Holt:]

That’s very helpful. Thank you.

[Operator:]

And that appears to be all the time we have for questions.

[Mark Templeton:]

Well, once again, thank you very much for joining the call. Clearly we are at a great inflection point in the industry in the marketplace across an entire stack of virtual computing infrastructure. And we are grateful for your support. And we will see you in three months on our Q2 call. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. Thank you for your participation. You may now disconnect.