Citrix Systems, Inc.
Q2 2010 Earnings Call Transcript

Published: 29 Jul 2010

[Operator:]

Good afternoon. My name is Sirona [ph] (8

[Eduardo Fleites:]

Thank you, Sirona [ph] (9

[David Henshall:]

Thanks, Eduardo, and welcome to everyone joining us this afternoon. As you can see from the release, we had strong business momentum in Q2, delivering $458 million in total revenue, an increase of 370 basis points and adjusted op [operating] margin, more than $100 million in cash flow from operations and deferred revenue up $50 million sequentially. These results drove adjusted EPS of $0.41, which includes the one-time tax charge of approximately $0.07 that we announced last month. We saw record results from many of our products, led by XenDesktop, NetScaler and Online Collaboration. We closed 18 transactions over $1 million each, including several deals over $5 million, as customers are looking to Citrix as a strategic vendor to help re-architect their IT infrastructure. I'm very pleased with the execution of field, operationally and within our products’ organizations. So drilling down into the different revenue lines for Q2. New license sales were $149 million, up 15% from last year, driven by growth in both the Desktop and Data Center businesses. License updates increased 13% due to strong customer interest in the XenDesktop Trade-up program. Tech Services grew 35% from record consulting utilization and have networking maintenance. And our Online SaaS revenue was $89 million, up 18% year-on-year with Web Collaboration leading the way, up over 35%. From a geographic perspective, the Americas region continues to perform well, growing 17% from last year. Internationally, though, despite an uneven economic climate, EMEA posted stable growth , up 11% year-on-year, and revenue in Japan and Pacific grew 31% driven by increasing demands for our Data Center solutions. So overall, really a solid quarter. Customer interest, pipeline build continue to be at record levels, and we remain focused on delivering results while building growth across our main product categories of Desktop, Data Center and Cloud and Online Collaboration. So now I'd like to discuss the Q3 results within these three areas. First, our Desktop business, which grew 15% over last year to $290 million, including product license growth of 16%. Results were highlighted by the accelerating demand we saw in XenDesktop and for the XenDesktop 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, we recognize more than $60 million of XenDesktop revenue with XenDesktop Trade-up products adding another $30-plus million to deferred revenue. So within this business, there's actually a few metrics I'd like to highlight to demonstrate the breadth of adoption we're seeing and the strategic value that customers are placing on desktop virtualization within their infrastructure. So first, 13 of the $18 million-plus transactions in the quarter included XenDesktop, five of which were existing XenApp customers, upgrading to XenDesktop through the Trade-up program. Second, more than 3,500 customers bought XenDesktop in Q2, including more than 1,000 net new. Third, the average deal size from desktop orders was more than 3x what we've seen from XenApp. And finally, more than 20% of the XenApp licenses that were eligible for subscription renewal in Q2 instead were traded up to XenDesktop, and this compares to about 10% of the mix that we saw in Q1. So regarding the Trade-up program, we previously said that promotional pricing would end on June 30. So in early June, we announced to our channel partners that for the second half of the year, we'd be increasing prices by approximately 25%. And we'll take another look at pricing again near the end of the year. So overall, the Trade-up program has been extremely successful so far. Not only does it give our existing customers an easy upgrade path, but it also gives our field organization and partners an opportunity to engage in a strategic conversation with customers about their entire desktop infrastructure. And both of these items are critical to create a base for driving greater account penetration in the future while blocking out competitive solutions. So next, let's review the Data Center and Cloud business, which consists primarily of our app networking and server virtualization solutions. Here, led by NetScaler, revenue in the business was up 20% year-on-year to $74 million. The NetScaler products continue to do well in the enterprise market with 2/3 of bookings coming from this segment and the number of unique customers growing more than 50% from Q2 of last year. We're seeing a platform transition to the highest end MPX appliances that were introduced in Q1, and we're also driving new revenue streams with the VPX virtual appliances, which continue to gain good traction across several different verticals and geography, in fact, growing over 75% sequentially for the third straight period. Branch Repeater, our WAN optimization product, again had a really good quarter, led by a couple of large deals in the U.S. Federal sector, and separately, our standalone SSL VPN appliances actually showed a small decline year-on-year, as more customers are now purchasing the higher-end NetScalers, which incorporate this functionality, and as a result of our successful cross-selling motion of selling NetScaler into our existing customer base. So finally, touching on our Software-as-a-Service business. Revenue is up 18% from last year with SaaS now contributing nearly 20% of total Citrix revenue. Growth here, as I mentioned, continues to be led by the Collaboration products, including GoToMeeting and GoToWebinar. Our customers are focused on improving productivity while cutting costs and the purpose…

[Eduardo Fleites:]

Apparently, David Henshall’s line has been disconnected. He is dialing in back right now. So we apologize for any inconvenience.

[David Henshall:]

Sorry about that. This is David Henshall. Looks like we were cut off from the call a few minutes ago. So let me just start back up in talking about our Data Center and Cloud business. I believe that's where we dropped off. So within this business, led by NetScaler, revenue was up 20% year-on-year to $74 million. The NetScaler products continue to do really well in the enterprise market with 2/3 of bookings coming from this segment and the number of unique customers growing more than 50% from Q2 of last year. What we're seeing is a platform transition to the highest-end MPX appliances that we introduced in Q1, and we’re also driving new revenue streams with the VPX virtual appliances, which continue to gain traction across several verticals and geographies, growing at over 75% sequentially for the third straight period. Branch Repeater, our WAN optimization product, again had a really good quarter led by a couple of large deals in the U.S. Federal sector. And separately, just to point out, our standalone SSL VPN appliances actually showed a decline year-on-year as more customers are now purchasing the higher-end NetScalers, which incorporate this functionality, and as a result of the successful cross-selling motion we have in place to sell NetScalers into our customer base. So finally, touching our Software-as-a-Service business. Revenue is up 18% from last year with SaaS now contributing nearly 20% of total Citrix revenue. The growth here, as I mentioned earlier, continues to be led by the Collaboration products of GoToMeeting and GoToWebinar. Here our customers are focused on improving productivity while cutting costs, and our purpose-built GoTo solutions allow them to do just that. By leveraging these products, they can immediately reduce travel, training and support budgets while expanding customer reach. So our GoTo business, with a run rate of more than $350 million, represents one of the largest, probably the top five largest SaaS companies in the world and likely one of the most profitable. As we look forward, we’re pursuing a number of different initiatives to maintain and possibly accelerate the long-term growth rate, and included in this is international expansion, video, IT management and mobile solutions. So we'll ramp investments accordingly to sustain our market-leading position as well as grow share in some of these new areas. So turning to expenses and operations. In Q1, adjusted op [operating] margin was up over three percentage points from last year to 26%. This is due to the revenue acceleration and our continued focus on op [operating] leverage. Now as I've said many times in the past, we targeted both cost structure changes and a broad reallocation of spending to materially increase focus on Desktop, Cloud and SaaS, plus our ability to service customers around the world. And as we see demand improving, we'll continue to invest in order to accelerate future growth opportunities and to expand our competitive advantage. The primary investment will come in the form of headcount with a focus on enterprise account managers, consulting and selected R&D areas. In the second quarter, we added 135 people, and I'd expect this pace to accelerate modestly, really, in the second half of the year. On the rest of the P&L, other income was down mostly due to foreign exchange remeasurement items, and the tax rate, as I mentioned earlier, was materially higher than normal in the period as a result of a $13 million income tax settlement -- really, a settlement in principal with the IRS. This settlement is equal to about $0.07 of EPS and was not originally anticipated in our Q2 guidance. So looking at the balance sheet now, deferred revenue increased $50 million sequentially to a total of $686 million. This is a record increase for Q2 and, really, a result of two factors

[Mark Templeton:]

Thanks a lot, David. Of course, we're very proud of our Q2 performance and really optimistic about our growth opportunity in our three focal markets

[Operator:]

[Operator Instructions] Your first question will come from Philip Winslow of Crédit Suisse.

[Philip Winslow:]

Obviously, you saw very good strength in large deals during the quarter. I'm wondering if you can give a sense of if you saw any verticals in particular, that were really buying in, in XenDesktop. And then also just from a geographic perspective, I'm wondering if you could give us a sense of where those big deals came from.

[David Henshall:]

Phil, it’s David. There's actually a real good balance across geographies in terms of where we saw those, including a couple out of the Pacific region as well. Verticals, again, a nice mix. There are some that came from financial services, others that are government-related -- both the U.S. and international government -- healthcare, education, really a good, broad adoption across large deals.

[Operator:]

Your next question will come from Todd Raker, Deutsche Bank.

[Todd Raker:]

If I look at the Desktop market -- and you clearly have talked to a lot of the CIOs, Mark -- and it’s becoming strategic. How do you view it in terms of discretionary? If the economy weakens and we get a double dip, are CIOs going to put this on hold? And how are they looking at kind of the TCO analysis in terms of the investment upfront needed to really move this forward?

[Mark Templeton:]

Todd, it’s hard to say hypothetically what they'll do. Clearly, I’d say that first of all, there’s clarity around the value of virtualization in the broadest sense in terms of TCO, ROI and flexibility and security. So when you take all of those together and they come in the form of one kind of investment, it would take a pretty strong downturn for them to deprioritize. It just touches too many kinds of priorities that they have and they will have, even in a different kind of economic environment. And remember, when it comes to desktop virtualization, a lot of the drive ends up coming from business initiatives that are about opening or closing offices, moving to an office hoteling and flex-desking model, doing more off-shoring and outsourcing, maybe some M&A types of things. So a lot of the momentum here is really coming from business initiatives, even though we like to talk a whole lot about technology initiatives in a lot of the discourse.

[Todd Raker:]

1,300 new customers -- that’s a very nice kind of incremental uptick. Can you talk about the investment on the sales force and where you kind of stand in terms of productivity and plans in the back half of the year?

[Mark Templeton:]

Yes. I mean, as far as overall productivity, I mean, we've seen a real nice growth in channel vibrancy. On a quarterly basis, we are up nearly 30%, and that's as big a bump as we've ever seen. And a lot of it is just because we've got technologies and solutions that are top-of-line [ph] (45

[Operator:]

Your next question will come from Steve Ashley, Robert W. Baird.

[Steven Ashley:]

Around Desktop, you mentioned that $60 million in revenue. Could you provide any -- maybe breakdown of how much of that was licensed? And then how much of that revenue might have been driven by the Trade-up program? And I know you mentioned that $30 million went to deferred revenue, but did any of the $60 million that was actually revenue come from the Trade-up program?

[David Henshall:]

Sure, Steve. Of the $60 million, $40 million of that was licensed -- actually, more than $40 million. And of that, more than half came from new license and part of that came from Trade-up. And then the balance was simply Trade-up license being recognized, either from an early quarter sale or from prior periods.

[Steven Ashley:]

Sure. And I'm just wondering qualitatively if you could talk about how broadly the XenDesktop product is getting traction within the reseller network. If we look at maybe your Platinum and Gold resellers, what percentage of them today do you think are engaged with doing pilots and involved in discussions?

[David Henshall:]

Well, as far as percent, it's obviously coming up rapidly right now. We've had, let's see, I’d say half the partner network has transacted at some level across XenDesktop. I don't have the data handy to know whether that is POC or a more substantial transaction, but it's a big amount. So fortunately, this is something that’s right in their power alley in terms of having worked at the application virtualization for a number of years, understand the challenges around that and can apply that knowledge directly to a broader desktop conversation.

[Mark Templeton:]

Steve, what I would add is that what we do track is transacting partners. And year-over-year, that's up 24% in Q2. And then we also track partner productivity, and that was up 30% year-over-year. So basically, more partners selling bigger deals is the way to read that, and we put a lot of emphasis on partners getting more engaged, selling more individual products, and that metric is quite impressive as well where partners get measured on how many individual product lines they sell, so XenDesktop, XenApp, NetScaler, et cetera. And that metric is also very positive, and so the vibrancy here is really on a good upswing.

[Operator:]

Your next question will come from Adam Holt, Morgan Stanley.

[Adam Holt:]

I had two questions on the XenDesktop side. The first is you've seen obviously a significant acceleration in licenses sold over the last few quarters. Can you talk a little bit about where you are in terms of getting those licenses live, particularly some of the larger installations? And then secondly, as we look forward, there's been some question about whether or not you all had a pull-forward impact on some of the Trade-up. Talk to us about the pipeline for the third quarter on the Desktop side in general. And do you think that you can continue to grow Desktop license revenue in the mid-teens in the back half?

[David Henshall:]

Let me take the first part of that question in terms of where customers are in implementation. And I think it varies. I mean, there's customers that have rolled out thousands and thousands of seats and others that are in fairly early stages. Just as an example, this quarter, we did take down the first large order against the very big U.K. government deal that was talked about at our Synergy conference a couple of months ago. And that is, they're taking it down because they're rolling out deployment. We've got large financial services that are in the thousands of seats and rolling out another couple thousand per quarter. And we've got a reorder rate -- is probably a pretty good way to think about it, and in terms of people that have taken an initial order, and right now, that reorder rate is up about 5x. And the reorder volume is about 5x. So on an initial order, that's what we're seeing at this point in time. So as far as the numbers are concerned, I think our services capacity as I mentioned before, I mean, is really a good indicator. Consulting has been extremely high as people have been doing early proof of concepts, early implementations. And a lot of that capacity will be going in Q3 and Q4, probably towards helping drive a broad expansion of some of those licenses. So because of that, I would expect our services revenue to actually come down on a sequential basis into Q3. As far as pull-in from the Trade-up program, I'm sure we saw some. I mean, you always see some pull-ins from these types of things, but most of it’s deferred anyway, so not a material impact on the quarter. We also know of a number of large Trade-up transactions that were pushed into Q3, so largely a wash in the aggregate. I think from a pipeline standpoint, we definitely are entering the quarter with record pipeline and think that growth rates are certainly going to be pretty healthy in Q3, and we'll update Q4 at the end of the period.

[Operator:]

Your next question will come from Heather Bellini, ISI.

[Heather Bellini:]

I was wondering if you could talk to us a little bit about the change in customer behavior you've seen about desktop virtualization adoption from the beginning of the year until now. And kind of what are the kind of top three things you’ve noticed that have changed when you're speaking to customers?

[Mark Templeton:]

I'd say that the main change is that there's much more consideration of a rather strategic conversation, probably a little bit less focus on ROI and more focus on how does this help me across multiple fronts on the technology side and on the business side. And that's kind of CIO conversation. So that's one change. I think the second change is clearly coming from the momentum, excitement, hype, whatever you want to call it, around iPad. And it’s something that has far exceeded our expectations. But the size of the screen, the level of connectivity, the interactivity of it, the battery life, kind of all these things are really perfect for becoming a new device for driving workforce productivity and especially, at the higher end of organizations where people are more consumption-oriented when it comes to IT and information systems and less sort of creation-oriented. And so I think that's a big change in the conversation. And then I think the third is mindshare. We've done a lot in the first half to improve our mindshare. There's a lot more to do, but if you look at the things we've done, for example, in collaboration with Microsoft around Worldwide Road Show and 7,000 attendees, one of the things that was very remarkable about the Road Show is the titles of the attendees. We actually expected more admins and fewer IT execs, and actually, we had the opposite. And obviously, that was our goal, and that was the design of the program, but it actually came through, which -- it’s giving us a lot more visibility in this marketplace, which is great. Being on the radar screen is the first step toward being considered and a POC in a deal. So I'd say that's what we're seeing kind of over the course of the first half. And then of course, the Windows 7 and hardware refresh cycle is helping that quarter after quarter because there’s more and more pressure to act on these fronts. So I'd say that's sort of the impression that I get from my time in the field with the customers.

[Operator:]

Your next question will come from Brad Whitt, Gleacher & Company.

[Bradley Whitt:]

Turning to the NetScaler business, up 20% year-over-year. Just curious as to whether you think you're outgrowing the market there and actually taking market share? And if so, who do you particularly see yourselves competing strongly against?

[Mark Templeton:]

Yes, I think the marketplace, it all gets down to definition, and NetScaler, our head-to-head competitor is F5. And I think we continue to dominate the Internet-centric segment, so I think we're still winning and if anything gaining share there. And in the enterprise, our growth rates are I think quite strong, and I think we are gaining share there. I think when it comes to telcos and service providers, that's been their bastion for a long time and we're making progress in that market. But we're, by no means, winning in that space vis a vis F5. And I think when you sort of zoom out on the marketplace for service delivery controllers is what we actually like to call them, you come to one conclusion and that, it's a two-horse race, it's F5 and NetScaler, and that we're both taking share from everyone else. And there are a range of players in the L4-L7 market as you know, and our strategy is pretty clear. Amongst all the players, including F5, our approach is to take this as a software business and to ride Moore's Curve, Moore's Law, so every time there's a platform release we get faster, we get stronger without doing any incremental work, and we focus entirely on the software, adding new features, capabilities so that we can continue to grow as the front door to the private and public cloud. So that's how we think about the business in Q2.

[David Henshall:]

And Brad, I would just add one comment, that NetScaler is certainly the fastest growing part of the data center cloud business right now. And I talked about a couple of moving parts in my script but we've got some drive with the stand-alone [ph] SSONVPN (57

[Operator:]

Your next question will come from Sarah Friar at Goldman Sachs.

[Sarah Friar:]

If I could go back, a few quick questions on the XenDesktop piece. Simplistically, if I think about your $90 million in bookings with 2 million licenses sold, you're at a [indiscernible] (58

[David Henshall:]

Yes, I think that's the short answer. The price point's actually a little bit higher than that. We're rounding numbers here a bit. But right now, you've got the trade-up, especially the 2-for-1 trade-up, which is the lowest ASP as you can imagine, and that's running somewhere in the $40 range on the 2-for-1, all the way up through new licenses on the Platinum, which will be $100 to $150 probably once you include all channel discounts, et cetera. So that's how to think about them. I do believe that the ASPs will continue to move up as we go through the quarters and the only anomaly will be in extremely large transactions.

[Sarah Friar:]

And then, David, I don't know if you can give it or it would make sense but you gave that $60 million in revenue for the quarter for XenDesktop and $30 million going to the third. Of that $60 million, how much is license versus maintenance? I'm assuming it skews sharp [indiscernible] (1

[David Henshall:]

I did give that, actually. $40 million is coming from just brand new licenses and then the other $20 million is coming from license updates, which is how we recognize the majority of the trade-up license …

[Sarah Friar:]

And one final one for you. Now that you're building that very nice base of deferred revenue, how is that changing your visibility into the upcoming quarters, because I presume you're now pulling more and more from the balance sheet every quarter?

[David Henshall:]

Yes, it certainly improves it. I mean if you look across our business, we have a very high level of visibility because of the deferred revenue that's bleeding back in. We have the Citrix Online, our SaaS business, which is now as I mentioned up to 20% of the total. It's all ratable, highly visible, and a lot of our services are also, our text services are also ratable, or with very high visibility based on work schedules. So we've got well over half the business coming on recurring revenue sources, giving us a pretty low volatility of returns when it comes to revenue.

[Operator:]

Your next question will come from Israel Hernandez, Barclays Capital.

[Israel Hernandez:]

Question for Mark. Mark, as you look at the market opportunity unfold, do you think we're at the point where you can declare the market at an inflection point? Or is this just something that is specific to what Citrix has done in building the product portfolio rather than the overall market. Because we've got a lot of questions around, is this going to be a big market going forward, is Citrix just pulling in business. Maybe you can just comment a little bit about the inflection opportunity here?

[Mark Templeton:]

So first thing, maybe to start with the word inflection. I mean that's in the eye of the beholder in terms of the angle and the vertex. So instead of thinking about inflection, I think we ought to think about here a market that's in acceleration in a fast ramp mode. And just to remind, we've got to be realistic about this if you, again, zoom out, let's say we move somewhere close to 10 million licenses of XenDesktop this year, hypothetically. I mean that's going to pale in comparison to the number of enterprise laptops and desktops that get sold in the year. And so we ought to keep that in perspective, and at the same time look at the momentum being created, what's driving it, and the outlook for those drivers in the future. So that's why we're so optimistic but we're also realistic in thinking about the marketplace and how it shapes out. And this is all by the way within a, let's face it, the worldwide economic environment isn't the rosiest yet. So in a slightly better environment with these sort of drivers for the marketplace, I think we can continue to see this kind of fast ramp and acceleration to continue, and I'd like to basically downplay the notion of inflection, which sort of promotes the idea of a vertex and some uncontrollable rocketship into outer space. So that's the way we're looking at it and remember, we're three quarters now into it, and another quarter will get us [ph] a lot (1

[Israel Hernandez:]

Could you just comment on the contribution that the SIs are making to the [ph] fixed drive demand (1

[Mark Templeton:]

The SIs we've focused on, namely CSC and Fujitsu, are doing tremendous, and tremendously well. And they're beating their competition, which is driving their competitors to us, which is a good dynamic. The other thing that's happening in SIs, Isreal, that many of them are better at responding to customer demand than creating it. And some of them are coming to us, really as a result of customers asking for a desktop virtualization strategy, or architecture, briefing, whatever it happens to be and those engagements are going quite well. So David talked a little bit about hiring and where we're investing in the field organization, one of those areas is in really strengthening our SI-specific team in the field that spends 100% of their time training, supporting, educating, et cetera, our SI partners. So we like where that's going. There's lots more to do to ramp it.

[Operator:]

Your next question will come from Bhavan Suri, William Blair.

[Bhavan Suri:]

Just a follow on [ph] Isy's (1

[Mark Templeton:]

We've been actually navigating this quite successfully for quite a long time and the way we do it is, first of all, the first thing is, to always be clear with your channel partners around, where the sweet spot for opportunity and where our programs are designed for them. And we tell them, you're really focused on -- our partnership with you is really around a mid-market kind of opportunity. When there's an SI involved and there are services required and there's a specialty required around Citrix products, we have a really great program that allows our channel partners to work under contract either for us or for our SI partners. So they actually become an extension of the SI organization on a particular customer engagement. So that's how we keep them engaged but focused and avoid conflict and at the same time, allow SIs to benefit from the expertise that many of our Platinum partners have developed over quite a few years.

[Bhavan Suri:]

So adding to that, you've also seen a shift in the direct sales involvement. So just a sense of sort of how many of the deals, especially the larger ones, were direct, and then how do you get the direct guys to select or work with the smaller partners given kind of that overlap there?

[Mark Templeton:]

Well, okay. So when we think about direct in our engagement, we're talking about a strategic conversation and relationship with the customer. When the deals are large, we are always involved. And so when I say large, I'd say, a deal that's starting at let's say 100K, or 200K on up, we're going to be involved, we're going to be touching the customer in collaboration with the partner, or separate from the partner but when it comes to fulfilling, licenses, services, doing integration, we're very much pushing partners forward and that's their role. Now David talked about our technical services performance in Q2. Our team there is doing a fantastic job. They're completely oversubscribed. We need a lot more technical services capacity because the market is exhibiting some organic elements. So we're doing some of that and as a reminder, what we do when we have a technical services engagement, we engage with the customer, it's usually a three-month or less-type of project, and then we take everything that we learned and we document it and we give that documentation in the form of a white paper, a knowledgebase article, or whatever, back to our partner network so that we're not reinventing the wheel when it comes to a lot of the things that happen in a technical services engagement. So that's the way those dynamics work and there's more to do to invest in the technical services motion than being able to touch customers before the sale and after the sale in conjunction with our partners.

[Bhavan Suri:]

And then just one quick question on competition on the desktop virtualization side -- and I'm not even going to talk about [indiscernible] (1

[Mark Templeton:]

Well, first of all, I don't have total visibility, and with that as a caveat, I'd say anecdotally, Quest gets considered in some cases but they get eliminated very early on. And I'd say when it comes to the strategic conversations, as they go up to the executive suite and these conversations are really about the kinds of business initiatives I talked about, technology things and some of the things I said in the prepared comments. Quickly, everyone drops out because this full range of virtual app models and virtual desktop models are really required to end up with a strategic kind of engagement with the customer. So that's how the competitives look and our win-loss rate is remarkable on the win side, in the high-90s, 90 percentile, and the losses are miniscule.

[Operator:]

Your next question will come from Brent Williams, Benchmark Capital.

[Brent Williams:]

I think I wanted to sort of build on the last question. Is there any particular changes in the behaviors of others in the space that maybe make them a little less channel-friendly as they're working to fuel revenue growth themselves? And then relatedly, on the Microsoft partnership, has there been any change in the number of direct bodies that are supporting your relationship, in other words, people whose job responsibility is to help build that relationship that are on the Microsoft payroll?

[Mark Templeton:]

Let me take the last part of that question and have Mark talk about the dynamics. As far as folks that are on the Microsoft payroll, I'd say no. The way we think about that is, we've hired a few dozen people that work the Microsoft relationship in the field and the engagement to ensure alignment and those exist in really every geography. And they just work hand in hand with our channel teams, our direct teams and the Microsoft teams. And then Microsoft has been hiring up on their side to essentially mirror what we're doing to make sure that we keep the engagement as, call it easy and profitable as possible.

[Mark Templeton:]

Just adding to that, we work with the EPG side of Microsoft now, which very much the enterprise motion in the field. And we have actually matched sort of head for head people who are working together to identify account opportunities, organize partners, as well as our own field teams, get them to approach the customers collaboratively and in fact, in the quarter, we had five significant wins via that motion and it's reasonably new. I mean these people that have come on, on both sides are on board for less than two quarters at this point. And we had a significant competitive takeaway with a big European telco. So we like the way that's coming together in terms of matching up with counterparts on the Microsoft side and the results that we're starting to see. We have another interesting metric is that we measure these teams by the POC's they put in place and that's a metric that we both look at, Microsoft looks at it, we look at it, and we now have about 100 of those that are in place, and so further evidence of the sort of momentum building there in working with Microsoft. As far as channel behavior and competitors, et cetera, I don't think there's anything new going on there. I think that we have a long-standing reputation of being very clear, very synergistic with channels. And others tend to fall short in that area, optimizing around kind of their own agenda in any given quarter or any given transaction. So I don't think there's any new behavior there. I think it's just all the same.

[Operator:]

Your next question will come from Curtis Shauger, Caris & Company.

[Curtis Shauger:]

Dave, as you think about the solution moving from tactical to strategic, could you, (1) give us an update on what renewal rates are looking like right now and also, (2) about prospectively what they could move to in the future in the context of I guess more strategic enterprise vendors kind of seeing the low 90s, mid-90s?

[David Henshall:]

Yes, Curtis. I think I'd answer that in two ways. I mean when we think back to kind of the historical XenApp business, and that was overgeneralized but characterize it as fairly tactical project-based sale. And with that, we had historically seen renewal rates that moved up from the mid-70s, up to kind of the low 80s and stabilize in that area. I do completely agree that a XenDesktop sale is much more architectural or strategic in nature when thinking about a customer's IT infrastructure, and because of that should have a much higher renewal rate attached to it. You know we don't have enough history yet to say what that is going to be but I would certainly expect it to be north of the low- to mid-80s that we've seen over the years in XenApp.

[Operator:]

Your next question will come from [ph] Tim Clausel (1

[Unidentified Analyst:]

This is [ph] Jormaine Dryer (1

[David Henshall:]

Yes, Jormaine, I think in the short term, we're assuming it's about stable from where it is. And that's really just lack of a better data point at this point in time. I do think that we, as Mark mentioned, we've got a 10 million or 15 million population that we think is a kind of a hard target to be able to upgrade to XenDesktop, and we'll be working those over the next couple of years. How quickly that happens is still a little bit of a TBD. Based on the pipeline and the activities I think that we can go north fairly quickly from where we are in terms of a mix percentage. But it's just a tough one to nail down, so we're not guiding specifically to that number yet. It's going to be one that will be just a bit more meaningful with the benefit of hindsight.

[Unidentified Analyst:]

And then my follow-up question kind of touches on that 10 million to 15 million. If I recall, does that number include folks that aren't on SA? What kind of traction have you seen thus far for folks that aren't necessarily engaged in being able to go back and kind of bring them back into the fold and get them to adopt the trade-up offer?

[David Henshall:]

No, I think is the right answer, that it doesn't include really, the entire install base. We do think that there is going to be millions of licenses out there that customers are using for project-based type of solutions that XenApp is the right product for them and they're just really not looking at a broader desktop virtualization solution at this point in time. So we think that 10 million or 15 million is more of a served available market than the TAM, and that's what we'd be chasing over the time frame that I mentioned before. As far as getting folks back engaged in the program, the trade-up and just XenDesktop overall, gives our field and our channel a great entrée to have a strategic conversation with them and reengage something that I might call a dormant customer. And so we're just getting that going right now. We'll generate a couple million of bookings from that each quarter and I think that number has the potential to go a lot higher in the future.

[Operator:]

Your next question will come from [ph] Kirk Materne (1

[Unidentified Analyst:]

I don't know if you guys can give this but when you look at the $90 million in bookings for XenDesktop, is there a sweet spot from a [ph] seat (1

[Mark Templeton:]

Kirk, this is Mark, I'll try to take your question. I think the source of your question reminds me of what we hear a lot when people are asking about how big do you need to be before VDI makes sense. And in the numbers and sort of report you see that really the VDI-only sales that we have are very small, and it's because when a customer is looking at the benefits of virtualization at the desktop and of choosing XenDesktop, Enterprise or Platinum, in the overwhelming majority of cases -- and that includes virtual apps and virtual desktops and gives them seven different delivery methodologies across both of those. And so frankly, there is sort of no [indiscernible] (1

[Operator:]

Your next question will come from [ph] Shel Silverano, Vision (1

[Unidentified Analyst:]

I had a quick question. I was wondering what your strategy was in regards to the recent '01 litigation?

[Mark Templeton:]

Let me take that and give a little bit of context for folks on the call. There's an IP case that's been going on for a few years now, and it's just unfortunate reality of being in the tech industry and I think it's probably been three years or so. And up to this point, there's been a couple of decisions back and forth that really hinge on the patentability of certain technologies. That's really all we've been discussing at this point in time. There was a decision that came out just recently that got a little bit of press I think the next phase of that is, we disagree. So we'll appeal that and I don't know if that process takes another two or three years. We'll see. But at that point in time and really only after we conclude that will we address any of the allegations around infringement, which we absolutely disagree with, and then we'll pursue that at that point. So I guess the short answer is that it's been going on a few years, it'll probably go on another few more and if anything material comes up, we'll update you as needed.

[Operator:]

Your next question will come from [ph] Gary Spivak, Noble Financial Group (1

[Unidentified Analyst:]

I wanted to dig into Q3, the guidance. It's atypical for Citrix not to grow in Q3, the midpoint of your guidance is actually down. It is typical for Citrix to be cautious in a difficult environment. So I just kind of want to dig in a little bit on what your thought process is there, how scared should we be about the macro environment? And if indeed, if I go back to Adam's question, you did see perhaps some pull in Q2 that may have been considered a Q3 deal when the quarter started.

[David Henshall:]

Yes, Gary, I wouldn't read too much into the guidance at this point in time. And we are taking out the revenue guidance for Q3 and pretty materially for the full year from where we had previously been. A couple of normal cautionary items that we have for a summer quarter. The plus, just the choppiness in EMEA, which is a little bit of an unknown, and some of the public comments the U.S. Fed has been making around IT spending. Those are really our caution areas more than anything else. As far as the individual line items, it would point to product license being up in the low double digits, low teens, and overall revenue being up in the kind of low- to mid-teens. So nothing unusual from that front. We're usually fairly flat from a Q2 to Q3, and I think that's the way to think about it right now. The only line item that I would expect to be a little bit -- well, let's just say Q2 was a little bit anomalous for tech services, as I mentioned earlier, which had a really big spike; I'd expect that one to come back to probably 10% growth on a year-over-year basis, and then everything else to settle out from there.

[Unidentified Analyst:]

And then finally, the price increase after this initial trade-up program, have you gotten any feedback from the channel on that? I know it's early, but any qualitative discussions at this point?

[Mark Templeton:]

Hi Gary, it's Mark. I'd say the feedback is good, that the 25% increase in the trade-up premium is absorbable, and we think that customers will continue to be excited about really using their existing XenApp investments as currency toward moving into the future, toward a full desktop virtualization solution. So, so far the anecdotes and all the commentary I've heard have been positive and good with none on the negative side.

[Operator:]

Your next question will come from Edward Maguire, CLSA. Edward Maguire - Credit Agricole Securities (USA) Inc. Just had a question on the strength of NetScaler. I was just curious if you could share a bit of color in terms of the characteristics of who's buying, whether this is cloud service providers or enterprises. Clearly, we're starting to hear a lot of evidence that there's a pretty aggressive capital build-out of cloud infrastructure and would love any color you could provide.

[David Henshall:]

Sure, Ed, this is David. As far as the cloud side, it is the smallest of our three, and our three being cloud, telco as one, enterprise as the other, and then what we call Internet-centric. I think in Q2, the places that we had the largest uptick was around the enterprise. It's been a focal area of ours for several quarters now to cross-sell the products and we've got huge growth in the amount of customers that have actually purchased multiple products. For example, NetScaler sitting in front of a XenApper's [ph] in-desktop form (1

[Operator:]

Your next question will come from Brent Thill, UBS.

[Brent Thill:]

Mark, there's been some concern that desktop virtualizations contain the four big verticals that everyone talks about and I was just curious if you could give us your assessment about what's happening now in terms of this broad-based adoption. It seems like it's happening and correct me if I'm wrong. And then, second, if you could just comment a little bit about Europe. A couple years ago, you were one of the first in tech to accurately predict Europe was going to turn over and just curious in terms of your macroeconomic outlook considering you were dead right the last time?

[Mark Templeton:]

Regarding the verticals, so first of all, the metrics as David said, are broad-based. So we're seeing proof of POCs and implementations across all the sectors and it's not a big four. Where this can get confused is the big four will tend to be the early adopters of technology when it's going to move the needle both strategically and economically. And so I think that's where the confusion may come in. And so it is broad-based, and it's broad-based not only in the top deals but it's broad-based in the entire transaction base, which we saw quite an uptick in the number of transactions in the quarter. Regarding Europe, in fact I traditionally spend the month of June in Europe with our teams there, customers and partners, and this year was no different. I probably saw in the hundreds all partners and customers through the month of June throughout the continent and as I sort of flew out of there and thought back on it, I think sort of a tale of two economies. The stronger ones, the sentiment was stability, all right? Not buoyancy but stability, and that stability translates into confidence in making investments. So that felt good. On the other hand, the other economies were still on the decline or very volatile and uncertain and all of our metrics suggest that, but also customers in those economies were saying those things, making them less confident to make those investments. So that's why I think Europe as a whole is about nine months behind what it feels like here in the U.S. And the only thing that can accelerate that is with those economies that are still in the volatile state. And I'm not sure what the catalysts are for change there other than time. So that's part of the caution you hear in our guidance. And just trying to be smart about this, but not be overly dour about it given that when you go to the U.K., when you go to the Nordics, when you go to Germany, and parts of the Benelux region, you believe with reason to feel good. But then when you get outside of those regions and you're in more Southern Europe and Eastern Europe, it's hard to feel nearly as good. So that's the call.

[Operator:]

We will take the next question of John DiFucci, JPMorgan.

[Unidentified Analyst:]

This is [indiscernible] (1

[David Henshall:]

Yes. Right now, this was a $13 million settlement in principal to close out prior disputes around a number of tax years, transfer price in IP, all of those items that we previously disclosed, and we're real happy with the way this ended up with the service. As far as when it comes time to actually write a check, then we'll look across the other tax attributes that are out there, tax credits, et cetera. And so I would expect, if and when there is a cash payment, it will be less than $13 million.

[Unidentified Analyst:]

And the second question I have is, I know, Mark, you actually talked about the whole instead of calling it XenDesktop cannibalization, we should look at it as XenDesktop migration. Just want to get your thoughts on -- I mean, is there a point in the company's strategy where you actually are going to focus more on selling XenDesktop as against the XenApp? And [indiscernible] (1

[Mark Templeton:]

So the first point is that a XenDesktop sale is a desktop virtualization sale, and a desktop virtualization sale is a discussion about virtual apps and virtual desktops. That's why when our field teams are out there and our partners are out there, we have been leading with XenDesktop that conversation and a conversation around desktop virtualization. And then a key piece of the sales process is to qualify the customer, really understand their needs. And you always try to sell a customer what's right for them, and when a customer has more of a project-oriented mindset where they’re have problem apps, they have problem users, they have remote operations, where they're trying to deliver a particular app suite, et cetera, oftentimes that leads to a very nice and robust conversation about XenApp, and that's the sale. It's a more project type of sale, and our own field teams are incentivized and encouraged to do the right thing for the customer. And by the way, it's something that they know how to do -- they've been doing for a long, long time. At the same time, they’re looking for greater seat penetration, greater relevance with the customer. And so it's greatly in their interest to talk about desktop virtualization in a more holistic way. Because as you've heard in some of the examples I gave, the economics are really attractive for them and for us, and the customer gets a better solution. So that's why we don't worry too much about this notion of what a customer buys. We want them to buy what's best for them, and we benefit either way, whether it's a XenApp or a XenDesktop sale. And if they buy XenDesktop, Enterprise or Platinum, they get XenApp as part of the package, which is what makes the seat penetration go up and the customer satisfaction, we think, go up at the same time. So that's why we think of this as a migration program. And when you have a higher value product that includes a lower value product to a customer, then you let the customer decide on what the right mix is, and you don't fight that. And that's why we focus on the desktop virtualization metrics as an overall business. And we've been saying that the line between XenApp, XenDesktop gets more blurred, et cetera, et cetera. And so looking at these individual elements is really not a great way to figure out the progress we're making and what the opportunity is, et cetera, around the desktop virtualization opportunity. So hopefully that answers your question.

[Unidentified Analyst:]

I know that the XenClient is actually coming out soon. Have you seen any impact of the XenClient, the Type 2 Hypervisor, on the sales cycle or customers wanting to wait to get on the XenDesktop?

[Mark Templeton:]

None whatsoever. But the Type 2 Hypervisor Technology has been around for a long time, and so customers that think they could use that kind of technology are, in many cases, they're already trying it or using it. But our experience is that it's not in use strategically. And the issues there are around security, management, mobility and performance, which is why we're real excited about XenClient, which is a bare metal hypervisor for client platforms. And the kinds of things that we see customers wanting to do with this technology by combining and putting multiple desktop VMs that are virtual on, let's say, a laptop -- so you can put like personal and corporate desktops together, but they're fully isolated. And so there's no security issue between the two, or like in a mixed security environment, we see a lot of governments pretty excited about this because they’ll have a classified, non-classified. In an office environment today, they actually have three machines doing that to keep the security working and keep these machines on separate networks and hardware, et cetera. So there's a lot of enthusiasm there. And then there's a lot of enthusiasm about the kind of performance that a bare metal client hypervisor can provide so that when you want to consolidate workstations for engineers that have multiple workstations, or you want to create solutions that have application-specific VMs that are high horsepower apps like, you find like CAD and visualization applications you find in geophysical kinds of labs, et cetera. Those kinds of things are all really, require the horsepower and the security and the manageability of a bare metal hypervisor on the client. And so there's tremendous enthusiasm about that, and stay tuned.

[Operator:]

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to management for closing remarks.

[Mark Templeton:]

Thanks again for joining us today. Clearly, we're at the epicenter of quite a remarkable set of transformations in both business and IT. We really like our position, and we're out there executing and delivering results. So thanks again for your confidence, and we'll see you in three months on our next report. Thank you.

[Operator:]

Thank you for participating in today's Citrix conference call. You may now disconnect.