Citrix Systems, Inc.
Q2 2011 Earnings Call Transcript

Published: 28 Jul 2011

[Operator:]

Good afternoon. My name is Chuck, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Second Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to introduce Mr. Eduardo Fleites, Vice President of Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Chuck. Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix's second quarter 2011 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 the review of 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 would like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provisions of the U.S. 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, acquisitions 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 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. In Q2, we delivered a record $531 million in total revenue, adjusted EPS of $0.57 and $162 million in cash flow from operations. We're continuing to drive leadership across Desktop Virtualization, delivering significant new technologies in cloud networking and expanding the capabilities and footprint in our SaaS business, trends that can be clearly seen in our business results. So looking at the second quarter, revenue from new license sales was $171 million, up 15% from last year. License update revenue increased 9%. Technical services increased 33%, led by record consulting demand and support agreements. And our SaaS revenue was $106 million, up 19%. From a geographic perspective, the Americas region continues to execute really well, delivering revenue up 16% from last year to $235 million. Included in this number are 17 individual transactions greater than $1 million each. In EMEA, revenue was up 9% to $136 million. And similar to Q1, demand was uneven across the region, particularly within the public sector as many countries as still working through budgetary constraints and capital project prioritization. And finally, revenue in Japan and Pacific continues to grow very significantly, posting the combined growth of 31% from last year. So overall, a really solid quarter. As we start the second half of 2011, customer activity metrics and pipeline are record levels. We remained committed to delivering strong results, integrating our recent acquisitions and expanding our competitive position across our main product groupings. So, now let's look at the Q2 results within these 3 businesses. First, overall, Desktop solutions grew 9% from last year to nearly $305 million, including product license revenue growth of 10%. So for the first half of 2011, license revenue in this business is up 15%. And consistent with my prior comments, we do anticipate accelerating year-over-year growth in the back half, which should lead to 16% to 18% product license increase for the full year. Our license growth here continues to be led by the strength in XenDesktop. During Q2, sales of XenApp products were flat year-on-year, while XenDesktop license was up more than 20%. And as you recall, in Q2 of last year, we had a really successful desktop Trade-up promotion that skewed the year-over-year license comps. So if you look at the individual sales motions, license revenue coming through the desktop Trade-up was down about 1/3 from last year, while revenue generated from new XD licenses grew by over 65% in the period. For a little more context on the Desktop solutions business in Q2, there's a few metrics that really demonstrate the breadth of adoption we're seeing and the strategic value that customers are placing on Desktop Virtualization within their infrastructure. In fact, there were 10 $1 million plus deals in Q2 for XenDesktop, representing customers from multiple industries, including telecommunications, media, government, education and services with a few of these customers actually choosing to engage on the basis of a multiyear site license. In total, there were over 2,800 different customers that purchased XenDesktop in the period, including 163 transactions for more than 1,000 seats each and 19 deals for over 5,000 seats each. And we exit in Q2 with a record pipeline in total and for those deals over $1 million. So next, in our Data Center and Cloud business. Total revenue was over $90 million, up 32% in the quarter with new product revenue increasing 26%. Growth in this business was led by the NetScaler product line with license revenue up 90% year-on-year. And the strength in NetScaler in Q2 is really coming from a number of different areas. First, we continue to see traction driving the cross-sell motion into our traditional enterprise account base. In fact, more than half of NetScaler customers in Q2 were first-time NetScaler buyers. Second, contribution from the VPX line of virtual appliances nearly tripled from a year ago as customers are recognizing the value of deploying the virtual and physical appliances together as a complete solution. Third, the new NetScaler SDX platform, which enables customers to run numerous virtualized NetScaler instances with full multitenant support began shipping in late June, and has already generated 10 new customers. And finally, we just had a record quarter from Internet-centric businesses and customers building out the infrastructure to support large cloud-based services. And offsetting the very strong growth in NetScaler, licenses for our WAN op solution, Branch Repeater, declined by about 2/3 from Q2 a year ago. And as you know, historically, comparisons in our WAN op business are occasionally skewed by large individual orders as was the case in Q2 and Q3 of 2010. So finally, turning to the SaaS business, revenue was up 19% in the second quarter to $106 million. The growth continues to be led by our collaboration products, which were up 31% and now account for over half of our total SaaS revenue. SaaS will further value through collaborations. This quarter, we're releasing in HDFaces, the videoconferencing capabilities is fully integrated into GoToMeeting. Geographically, the investments we've been making to expand this business internationally have been delivering results. In Q2, revenue from our international markets accounted for about 15% of the total, which is up from less than 10% a year ago. So looking at expenses and operations now. In Q2, adjusted op margin was 25%, an increase of about 1.5 points over Q1 and a result of our revenue performance. Our plan has been to invest slightly behind demand growth that we're seeing in the market. So as bookings, pipeline and POCs have accelerated, we continue to focus on 2 main areas. The first is expanding go-to-market reach and customer touch through enterprise account managers, strategic partnerships, consulting and tech support. The second area is product innovation to bring to market new technologies, as well as improving integration across the solutions to drive simplicity and better end-user experience. In Q2, we added 130 new people to Citrix, primarily in the sales and the services in the SaaS business. Headcount now stands at over 6,100 employees, which is an increase of about 1,000 people as compared to the same period of last year. And also of note, cost of goods sold as a percentage of revenue increased both sequentially and year-on-year. And the primary driver here is product license mix due to the very strong NetScaler results, as well as the record demand for consulting services. Turning to the balance sheet. Cash and investments totaled $1.7 billion, driven by $162 million in cash flow from operations. On a trailing 12-month basis, cash flow from ops is over $690 million, an increase of 24% year-on-year over the comparable period. During the quarter, we repurchased nearly 1.2 million shares of stock. And we also spent about $30 million on M&A and licensing activity. Deferred revenue at the end of the quarter was a record $830 million, up $41 million sequentially, and up 21% from a year ago. The main drivers around deferred revenue have been the increasing number of customers, XenDesktop customers in the subscription advantage program, the number of customers that have been initiating multiyear agreements and tech services contracts for consulting, maintenance and support. So really in summary, we continue to execute well. We're seeing growth in all of our strategic businesses. And we're making investments necessary to extend our leadership position in critical markets while expanding go-to-market capacity. So before I get to guidance, I'd like to briefly discuss the financial impact of our recent acquisitions, Kaviza and Cloud.com. Both of these companies bring great technology and future opportunity to Citrix but are in their early stages of ramping their revenue base. Our plan is to initially focus on development and integration with the majority of go-to-market activities happening later in the year. Therefore, these acquisitions will result in aggregate EPS dilution of about $0.03 in Q3 and an additional $0.02 in Q4. This dilution is included in our forward-looking guidance. So given the strength that we're seeing across several facets of the business and the growth in our opportunity pipeline, we're increasing our revenue outlook for 2011. For the full year, our current expectations are now for total revenue to be in the range of $2.16 billion to $2.19 billion, and adjusted EPS to be in the range of $2.38 to $2.41 per share. And for the third quarter of 2011, we currently expect total revenue to be in the range of $540 million to $547 million; adjusted tax rate, between 22% and 23%; and adjusted EPS between $0.56 and $0.58. 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:]

Thanks much, David. I'm really pleased with our Q2 performance and proud of the strategic and financial results we've delivered this year. We have great confidence in our execution and growth in all 3 of our focal markets. Customer enthusiasm for going virtual, across meetings, desktops and clouds is simply amazing. We saw this firsthand in our Synergy San Francisco conference, which was completely sold out again. Since the conference, I spent significant time with enterprise customers, with SI partners and service providers in the U.S., Europe and Asia. These conversations have consistently focused on 3 key themes

[Operator:]

[Operator Instructions] Our first question comes from Adam Holt with Morgan Stanley.

[Adam Holt:]

I guess I had a two-part question about the commentary around the Desktop license accelerating in the back half. First, would you expect XenApp to remain roughly flat on a year-on-year basis? And secondly, if so, that would imply, it looks like, quick calculations, better than 30% growth in XenDesktop license in the back half. Can you maybe walk through what gives you comfort in that acceleration off of, albeit a tough comp in Q2, but acceleration nonetheless?

[David Henshall:]

Sure, Adam. This is David. Yes, I think you hit it right about down the middle in terms of XenApp as a stand-alone product. And remember, it is fairly hard to forecast exactly the mix that's going to come out because we're selling to customers in what makes most sense for the projects that they're looking to deploy. But in order of magnitude, I do think that XenApp, roughly flat year-on-year, is the way to think about it. And then the majority of the growth continuing to come from new licenses of XenDesktop. So we've made Trade-up a part of the ongoing motion, just giving customers a path to migrate from XenApp to XenDesktop, as they look to a kind of a much more broad, holistic solution around desktops and apps. And then, new licenses is we're either selling into new parts of existing customers or more likely just brand-new customers. So that business is where I think the majority of the growth is going to come from. And what gives us confidence in the growth rates that I talked about here is it's really a function of just the overall opportunity pipeline we're seeing. We're exiting Q2 with record levels across aggregate pipeline and in large deals that I mentioned earlier. We're seeing very high pipeline coverage ratios. We're seeing increasing activity metrics from our SIs and other partners. And in some of the other metrics that we occasionally quote around that business, be it reorder rates or time to reorder, they're all very positive. And the last comment I'd make is really around the utilization we're seeing for consulting. It's been several quarters in a row now that we've talked about record consulting utilization, and that continues to be the case. It outstrips our capacity by far. And that's really just customers working through everything from proof of concepts up through scaling large deployments. And how successful we are making them successful drives long-term business. So these are all generally moving in the right direction. We feel good that our standing guidance of 16% to 18% growth for this total desktop and app business is the right place right now. We feel very good about that.

[Operator:]

Our next question comes from the line of Rob Owens with Pacific Crest Securities.

[Rob Owens:]

Following on Adam's question, so if you look at 30% kind of Desktop license growth in the back half, you saw 20% here against a really tough compare, 30% actually seems a little conservative I guess if we were to normalize Q2 of the year ago, maybe you can elaborate on that a little bit.

[David Henshall:]

Well, we always hope guidance proves to be conservative in hindsight. And we do look at this in the context of an emerging business, all the great metrics that I just talked about, and also, an environment that is still a bit uneven. I mentioned EMEA growing 9% versus the other geos that are growing between 2x and 3x that fast. And so there's a little bit of that factored in, just continued expectations around the environment. But overall, I do think that the XenDesktop business accelerates in the back half of the year. We did talk about some of the kind of macro-dynamics that are affecting this, in terms of the investments that we've made to make the products easier to acquire, POC scale and manage to improve the ROI profile, those types of things, as well as just the breadth of adoption we're seeing across verticals. Three or 4 quarters ago, we'd be talking about financial services exclusively. Now we're talking about government, education, retail, and others that are really adopting on large scale.

[Rob Owens:]

Great. And then in data center and cloud solutions, did I hear you correctly that license growth is roughly 26% year-over-year?

[David Henshall:]

That's correct.

[Rob Owens:]

So that's the second time. A year ago in June and then this year you saw massive sequential increase. Is there something seasonal in that business? Or is that just share gains that you're seeing right now?

[David Henshall:]

Well it's a number of things. I called out the moving parts that are going on inside the Data Center and Cloud division, which really -- NetScaler being the standout. NetScaler had a fantastic quarter. And that was a couple of things. One of them is just the continued success we're having on the cross-sell motion. This has been a major focus for several quarters. We've talked about this. We've made it the priority for our sales and services teams. And so, we've got some geos, for example, that are seeing more than 50% of their NetScaler revenue coming from sales in conjunction with XenApp and XenDesktop, and that's great. In other cases, we're just having more access to opportunities inside those accounts, and that allows us to just ramp the base. From a competitive standpoint, we continue to do very well competitively. You should assume that most of the large deals are competitive bake-offs with one or another. We've got a great set of core features, price performance, metrics. And then some of the others that Mark mentioned that really differentiate NetScaler as a product around like AppFlow, which gives application and transaction level visibility. DataStream, which is about sequel load-balancing and many other things that just make a very compelling solution. So all that together post a great quarter. And the number of customers that are building out large scale call it, cloud services -- infrastructure to deliver cloud services. We've been fortunate to participate alongside of those as well.

[Operator:]

Our next question comes from Lou Miscioscia with Collins Stewart.

[Louis Miscioscia:]

Do you assume that you're going to see over the next couple of quarters -- I haven't been able to run all the numbers through my model, but I guess maybe I was just expecting a little bit more on the bottom line into third quarter.

[David Henshall:]

I missed the beginning of that question, but I think the question was you expected to see a little bit more on the bottom line in the third quarter? Is that correct?

[Louis Miscioscia:]

Yes.

[David Henshall:]

Okay. This is the first time we've provided third quarter guidance, specifically. So as we think about the shape of the business, the only thing that's really unique in the third quarter is around M&A, and those activities that I talked about. So we've got a couple of pennies per quarter of dilution coming from the acquisitions. The early focus is around integration, development, et cetera, with the real go-to-market push coming late in the year. And so, that's basically it. We also have some one-time transaction costs in Q3 related to those. And that adds another $0.01 to $0.02 pennies. So that's the primary delta.

[Louis Miscioscia:]

Okay. And do you think it will hold -- obviously that would have been in a nice upside for the full year. Do you think that, that now hold it back? Or do you think that there's still a little bit of possible margin benefit in the fourth quarter?

[David Henshall:]

Well, I think that the margin benefits would be from upside to revenue at this point in time. So right now, our guidance was flat, our full-year guidance from where we were last quarter. So essentially, we're absorbing all of the dilution that we've incurred. But I wanted to break it out to give people a much clearer picture on the dynamics of the components of the business. As far as upside to that, yes. Some upside in revenue will surely flow through the P&L and provide higher up margin and EPS.

[Operator:]

Our next question comes from Israel Hernandez with Barclays Capital.

[Israel Hernandez:]

We've heard a lot this quarter about the weakness in Europe's financials, the government vertical. Could you maybe talk about what you saw from a linearity perspective, were the deals at the end of the quarter coming in where you thought they would? And do you see some push out that's from larger transactions, especially given some of your exposures in financials and in the government vertical?

[David Henshall:]

Sure, Israel. This is David again. Yes, I think that uneven is the best characterization of the EMEA business. Both Mark and I spent some time in EMEA over the quarter -- over the course of the customers and partners and others. And it's like you expect, there's a number of pressures, whether they're public sector or just confidence pressures that are impacting our ability to close deals. And so, I'd say that the timing of specific transactions is a little bit more challenging in EMEA than it is anyplace else. But that's unchanged for the last couple of quarters. So really nothing new there. Definitely, some business that slid from Q2 to Q3, some large portion of that, which has already been closed actually. So we're not losing opportunity pipe but actually getting customers to sign off a new capital projects. There's a little hesitancy out there. But again, nothing wildly different than what we've seen over the last couple of quarters.

[Operator:]

Our next question comes from Philip Winslow of Crédit Suisse.

[Philip Winslow:]

Just kind of a question back on the Desktop solutions business. Obviously, we've seen a lot of improvement in the trend in XenApp over the past couple of quarters here, going from double-digit declines down 7% to down 5% in terms of license growth. And David or Mark, if you could just want to comment on, and what sort changed there? Why are we going back to a more, I guess, stabilization in that business? And if you can maybe also rationalize that vis-a-vis what we're seeing in XenDesktop?

[David Henshall:]

Sure, Phil. I think there's -- I'm not sure that there's a natural equilibrium point that I would talk to. I don't believe that exist. I think it's really more a function of we're selling the right solution for what the customers' projects are and what they're trying to drive. And there are certain dynamics that are going on that I think have pretty raised the visibility and interest around our virtualization. One of those has been the tablet phenomenon. A lot of people are using XenApp as a way to deliver applications to iPads, et cetera. Others are just expanding the delivery of applications in a different context. So a lot of uses for the product. It's a great product. It has huge customer base. So I do think that about this level is stable at this point in time, from a year-over-year growth rate perspective. In terms of the dynamics with XenDesktop, I mean in many cases, they are largely a different sale. Customers are looking at desktop transformation, a way to transform, I'd say, the whole IT delivery into more of a service. And that's where XenDesktop plays much more directly. The larger deals will tend to be XenDesktop, it is a more strategic product. It's more infrastructure focused. And I think that, that's going to become even more pronounced as we move to the next several quarters.

[Operator:]

And our next question comes from Kirk Materne with Evercore Partners.

[S. Kirk Materne:]

I guess, Mark or David, as you all continue to add to your product roster, I was just curious how to think about sort of the go-to-market perhaps shifting more to a direct model as you're adding things like Cloud.com, and how that sort of impacts your spending outlook or your hiring outlook for the back half of the year.

[Mark Templeton:]

This is Mark, Kirk. We're definitely spending and investing a lot more in direct cuts kinds of people and processes, including our ability to touch, train, educate, et cetera, SI partners. That gives us more reach and more scale. All of that sort of looks the same when it comes to the kind of skills, and kind of how it works from a cost model perspective. And we'll continue to see that play out as we look for new partners to power our cloud platform business, as well as inspire some of these SIs to continue along the trajectory, which has been quite good, by the way, in terms of their level of engagement. And obviously, in our more of a CSA-type partner universe, we're doing sort of 2 things. First, we're focusing on managed partners that actually have a business plan, have a focus on Citrix platform, they're doing quite well. And the second area, we're trying to deliver more consumable types of solutions for those that are focused more on SMB-type customers. So we're looking forward to getting the Citrix brand on the Kaviza SKU and launching that later this year, and start that trajectory.

[Operator:]

Our next question comes from Steve Ashley with Robert W. Baird.

[Steven Ashley:]

I was just going to ask about the SaaS business, saw a nice acceleration there, 19% growth. You talked about continuing to see collaboration traction. I wonder if you could just give us a little bit more color on the improvement you're seeing there.

[David Henshall:]

Sure, Steve. It's really coming from a number of different areas. I mean probably the single biggest one is from an international standpoint, we've made a lot of investments there. We've talked about them a lot over the last year to really broaden up the footprint. And the result is the international component of the mix is now north of 15% where it was south of 10% a year ago. So that's really been the big push geographically. On a product-by-product basis, the collaboration products, which is kind of a general bucket that we put, the GoToMeeting family and webinar, et cetera, those have been, and continue to be the growth engine moving north of 30%. A couple of standouts that -- while small numbers are providing the nice incremental growth has been around GoToTraining, which is a product that we initiated last year, and has been growing nicely, as well as our audio services, which have been a nice incremental growth engine as well. So one of the things that both Mark and I talked about in our prepared comments around HDFaces going live here in the short-term is just continuing to add value and differentiate the products in the marketplace. And one of those things that we believe will allow us to not only attract and retain new customers but also maintain the price points at the right level. And so, all of these things coming together have allowed that business to accelerate over the last couple of quarters. Looking into the back half of the year, I think it's at these levels, maybe even slightly faster is the right way to think about the SaaS business.

[Mark Templeton:]

Steve, the other thing that I'd add is we've had quite a focus on getting the mobile platforms out there with the right kinds of capabilities, not just sort of crippled mobile apps, and that's on GoToMyPC, GoToMeeting, it's now available on iPhone as well. GoToManage, which we announced at Synergy, is going to be a big driver on the mobile side of the formula, which is important to the overall business.

[Operator:]

Our next question comes from Brent Thill with UBS.

[Brent Thill:]

David, just on the deferred revenue, I think we were all looking for a little bit stronger improvement in deferred. And can you just talk through the shape of deferred for the second half of the year? Do you expect a bounce back relative to what you saw this quarter?

[David Henshall:]

Yes, actually I thought this quarter was a pretty strong deferred revenue quarter. It's up north of $40 million, about 3/4 of that coming from the Desktop business, the rest split between online and tech services contracts. The second half of the year, it generally moves up even further. So with deferred revenue being up about, let's say, about 21% year-on-year, I'd expect at least that rate as we move into the back half of the year. And just going back to, maybe the one thing I'd add to that, is that if you look in the components of deferred revenue, you are seeing the long term grow faster than the short term. And I think long-term deferred was up, just about 30% on a year-over-year basis. And what's going on there is really a reflection of customers looking at multiyear commitments. And so, we've got more and more customers coming for a, call it a term-based or a site license type of an engagement with Citrix. And so, that revenue gets deferred and recognized over a period of time instead of upfront like a traditional license sale. So we're seeing more and more of that as customers are looking at long-term deployments.

[Brent Thill:]

Okay. Just a quick clarification on your pipeline. You mentioned record pipeline, and it seemed like there's maybe just some timing differences but in some of those deals from your perspective just slipped into Q3 and you expect those deals to have closed, those are later stage contracts and you feel comfortable with.

[David Henshall:]

Yes, I think there's certainly a little bit of that in Q2 and predominantly in Europe, and that's just a reflection of the comments we made earlier.

[Operator:]

Our next question comes from Heather Bellini with Goldman Sachs.

[Heather Bellini:]

My question -- actually I had 2 quick questions. One, based on your comments that you just made to Brent about deferred and your commentary about the strength of the long-term deferred line. If that's a trend that we should continue to see, should we start to see an acceleration in bookings growth then in the back half of the year? That would be one question. And the second question would be with Microsoft's proposed acquisition of Skype, I guess I'm just wondering how do you see the dynamics, the competitive dynamics changing, if at all, for the GoToMeeting segment.

[David Henshall:]

Sure, Heather. I'll take the first part of that question and ask Mark to answer about Skype. In terms of defining bookings targets, I mean we've never really given guidance on our bookings growth rate. I mean, certainly, bookings are growing faster than revenue. And I think it will continue to, especially on the license line. But giving actual guidance around that is just something we haven't done in the past. But I will do is to continue to provide commentary around the shape of deferred and the components of deferred just so everyone understands the dynamics that are actually going on in the business. Because while not a -- I wouldn't call it a material trend at this point, it's just becoming more and more interesting to watch customers looking for longer term engagements, more strategic in nature as they think about deployment over a multiyear period. So we'll just provide more commentary on that so everybody understands.

[Mark Templeton:]

Heather, regarding your question about Skype, a couple things. Well first, the shape of Skype's business is primarily consumer focused. And they've had actually a very small SMB and business revenue focus. This is where we had great discussions and an agreement to partner with them to help power the Skype for business platform with GoToMeeting. We don't have insight, until Microsoft actually closes the acquisition, we don't have insight on to Microsoft's product and strategy plans with Skype. But we're assuming that they're going to seek to actually integrate their technology assets with Skype. And that will create a dynamic, and at least in the enterprise and of the marketplace that will be -- a place where we haven't played big with the GoToMeeting at this point. And at the consumer end, we don't really play there either. So we'll stay focused on SMB, focused on ease-of-use, focused on the value proposition that has gotten us here, and do more integration across our own platform and with third parties as we go into the future. And hopefully, Skype will be one of those platforms that we can integrate with, as a potential partnership as opposed to head-to-head competition. But we really won't know until Microsoft closes the deal and talks with us more directly about their strategy.

[Operator:]

Our next question comes from Walter Prichard with Citigroup.

[Walter Pritchard:]

Just on the license update side, I know one thing that we expected might sort to happen here is you might see license update growth accelerate given XenDesktop, I think, there's a higher maintenance rate than XenApp. I'm just wondering where are we in seeing that, and will that happen this year or beyond?

[David Henshall:]

Yes. Well I think that the license update line is going to be relatively stable on a year-over-year growth rate basis. And part of what's going on is just the type of deal that I mentioned earlier, as we see more customers looking towards longer-term deals, those have a different lead back profile on them. So this kind of high single-digit, maybe low double-digit year-over-year growth rate is the right way to be thinking about license updates going forward.

[Walter Pritchard:]

Okay. And then, just on the sort of classic desktop business, I'm wondering what you're seeing in the SI indirect business versus sort of your classic VAR sales business, and if there's any sort of disparity in growth rate between the 2 channels?

[David Henshall:]

Well, in terms of the actual growth trend, I mean the SI has been a big push for us. And so, the SI contribution has been moving up sharply and SI pipelines moved up very, very sharply. But those really tend to be concentrated on large deals. I mean there may be large deals in our, what you'd call our more traditional channel, but every deal for an SI tends to be high 5 or high 6 figures, 7 figures, et cetera. And so, the actual closing of those tends to be -- it will bounce around a little bit, a little bit less consistent. But overall that business, at least from a pipeline standpoint, I think it was up 25% sequentially or so. So it's a lot of opportunity out there. The specific timing of close, that's gets a little harder to nail down.

[Mark Templeton:]

Yes. The only thing I would add, Walter, is that a number of our SI partners have really created practices and specific skewed offerings around XenDesktop like CSC with Dynamic Desktop, and Wipro with their DaaS service. And so, as they do that, they get a lot more urgency, and it becomes much more of a rhythm in terms of driving the market as opposed to following the market. And obviously, this is what we've been working on for now, a couple years to help them design, architect and skew these kinds of offerings up, which accounts for the increase in the pipeline and the growth rate we're seeing with SI. So it's all good. We wanted to move faster at this point.

[Operator:]

Our next question comes from Brad Whitt with Gleacher.

[Bradley Whitt:]

I was curious if you've seen, notice any reaction from your customers and prospects to the VMware pricing changes on VSphere? And curious whether you're seeing more Xen downloads, that type of thing?

[David Henshall:]

We have. We've seen an uptick in downloads as well as direct inquiries coming in based upon what they did with their licensing. And we're not headlong into the server virtualization space. And obviously, we're doing well with that platform across desktop and networking and now in the cloud platform. But it's not a focused go-to-market for us. So I'd say probably Microsoft with Hyper-V and System Center has probably seen a much bigger uptick as a result. But we have seen greater interest in XenServer.

[Operator:]

Our next question comes from Tim Klassell with Stifel, Nicholas.

[Abhishek Ghuwalewala:]

This is Abhishek Ghuwalewala subbing in for Tim. I just wanted to find out if you've seen any improvement in sales cycles with SMBs now that you have Kaviza under your belt. I think it was in the last earnings call, you talked about SMB kind of being the focus and sales cycles kind of being there sort of uneven. Can we expect Kaviza to kind of shorten that sales cycle going forward as well?

[Mark Templeton:]

Well we barely have a quarter under our belt with the Kaviza product. And without a Citrix brand on it, I'd say that in terms of SMB and the sales cycle there, just the announcement of our acquisition, gave great credibility and comfort to customers and partners that were looking at the Kaviza solution already. And so, nice little uptick in revenue there but again, not overall material yet. And we'd expect sales cycles on this kind of product through the kind of partners that we have around the world that focus on SMBs to be pretty short actually. And but we're yet to get to that part of the process so you have to stay tuned for that. Overall, on the enterprise side, sales cycles really haven't changed materially from -- well, over the last couple of quarters. Obviously, we're seeing a full range of those cycles based upon whether a deal with XenApp is sort of incremental at the project level and transaction level, which tend to be very short and/or XenDesktop at the strategic level, which can take 90 to 270 days, just depending upon how big and how strategic a transaction like that is with a big gating factor along the way, being the design architecture of the system itself, migrating applications and that process. So we see a full range of cycles but no material change from last quarter.

[Abhishek Ghuwalewala:]

I have a quick follow. Did you -- in terms of housekeeping, did you talk about the number of XenDesktop licenses sold and the mix between XenDesktop and XenApp?

[David Henshall:]

No, we didn't. I mean we actually stopped talking about licenses a couple of quarters ago because it just became less and less indicative of the business performance because of the Trade-up and the named user versus CCU licenses, et cetera. So we haven't been giving that one out for a while. I will say, the only thing that's probably you in terms of units and impact on units has been the CCU addition. We launched that last quarter. And it's actually been a pretty big uptick. And in terms of revenue, not units, but in terms of revenue, it accounted for nearly 25% of the XenDesktop revenue in the second quarter.

[Operator:]

Our next question comes from Kash Rangan with Merrill Lynch.

[Kash Rangan:]

I was just wondering, just if you could give us a little bit more analysis on the quarter. At the margin, it looks like the XenApp business is doing a little better than what most people expected. The XenDesktop business grew a little bit slower than what most people expected. And I look at that trend in the quarter against your reiteration of the growth rate for the combined desktop solutions, but the margin in second half although you'll see an acceleration relative to Q2 levels, it seems to be a little bit slower growth rate than what most of us might have anticipated. Maybe you could just give us some insight as to what might be causing that mixed shift? And also, David, last, I don't know if I missed it, but the reorder rates, if you could give us a little bit color on that, and also if you have any data on seats and production for XenDesktop, that will be great.

[David Henshall:]

Sure, Kash. In terms of overall dynamics, the split between the products, I mean we're running just about half and half right now between XenApp and XenDesktop. And the reason why we haven't guided to the individual component is like we've said, every single quarter is that we're really focused on selling the customer what makes most sense for what they're trying to do, what they're trying to accomplish and the type of deployment. So that said, we certainly have put more focus in the last year or so, selling the broader desktop solution, which includes desktops and apps. And hence, the growth rate of that being significantly larger. But in terms of the way we want to forecast the business going forward, it really does need to be combined with the desktop solutions. And so, there will be quarters, I think, where one grows a little faster than the other but the way to really think about it is on a combined basis. And reiterating our 16% to 18% full year is right in line with what we're seeing. Hopefully, that proves to be conservative at the end of the day. But right now, that's our guidance. That's really the way we're thinking about it. In terms of the individual, some of the activity metrics and just remind everybody that these are interactivity metrics, and shouldn't -- don't take them with a high level of precision. But from a reorder rate, it's been -- a reorder timeline, it's been pretty consistent. Last quarter was 8 months. So about 8 months after the initial order, customers are coming back for a follow-on. The actual size of the reorder moved up a little bit from last quarter. It's more than 9x. So that's a positive indicator. But again, these are more directional than specific. And in terms of actual seats and production, I'm not sure we have any way to measure that with a high level of specificity. I will say that the renewal rates for XenDesktop continue to be extremely high. And that's one of our best indicators that we have in terms of what is actually being deployed and used. Did I answer your question, Kash?

[Kash Rangan:]

Yes, it does.

[Operator:]

Our next question comes from Tom Ernst of Deutsche Bank.

[Unknown Analyst -:]

It's Tyler [ph] for Tom. I have a question about the renewal rates from maintenance. I mean you guys sold about $2 million licenses in Q2 '10. Can you answer that, how many of those licenses were renewed for maintenance this quarter?

[Mark Templeton:]

Yes. I mean the maintenance rates have been pretty stable, I'd say, over the last couple of years in terms of XenApp running around the 80s and the XenDesktop running around the 90% range. So no major shift there.

[Unknown Analyst -:]

Is that on the licenses sold or is that the licenses deployed?

[Mark Templeton:]

No, that's of the licenses. Well, it's licenses sold. I mean there really is no difference between sold and deployed from our perspective. But it's from the licenses sold that are eligible for renewal in that period.

[Operator:]

Our next question comes from Michael Turits with Raymond James.

[Michael Turits:]

Another strong NetScaler quarter. Can you talk a little bit more about the drivers there considering the weakness in some other networking type of companies like Redpoint, Riverbed and Five, even Juniper. And how we should think as the growth rate for NetScaler for the year and whether the current trends are sustainable?

[David Henshall:]

Yes. Michael, this is David again. It's really growth across the business. I mentioned that a bit earlier in terms of the individual drivers. But from the -- on the enterprise side, it's breadth of accounts, we're just being successful in terms of our cross-sell motion. It's been a priority for the business over the course of the year. And so, we're getting more and more customers that are buying NetScaler either in conjunction with a virtual app, virtual desktop deployment or in just raised visibility that we have into other opportunities for more traditional load-balancing, for example, or app security. So that's kind of one motion that's working well. The other is around our virtual appliances. We've made a big push in the last year around VPX and created virtual instances of many of our technologies, and they've been very successful. I mentioned in my comments that they're up about 3x from a year ago, which granted small numbers still but now contributing more and more material component all the time. And the benefit there is that customers are not only deploying the physical hardware, but they're deploying the virtual appliances now in more of a, we call the service delivery fabric. But if you think about it in conjunction with a physical appliance and then you can take a virtual appliance and deployed it like an application to your web tier, it just gives you a tremendous flexibility from an overall solution architecture. And so, that's been a driver. And then the third is around just the broader capacity in technology that we've delivered to one of our higher end appliances that are doing extremely well in the traditional Internet-centric cloud service provider or maybe you could call it enterprise accounts that are building out data centers to deliver cloud services. So all of those things are very -- we're just very, very strong in Q2. As we look into the second half of the year, we do guide at a total division level. So there's a few moving parts that I talked about earlier. We continue to think that the NetScaler as a standalone will be the majority component of that division. On a year-on-year basis, probably in Q3, it will be down year-on-year from a division because we had that huge Q3 a year ago. So in the mid to high teens from a division. And then in Q4, it will be back north of 20% year-on-year growth again. So that's the long answer but the way -- kind of a little more context on the NetScaler side.

[Michael Turits:]

But down for the third quarter, you mean a lower growth rate, to the mid, high teens, right?

[David Henshall:]

Yes, a lower growth rate. On a sequential basis, I'd expect it to be up more than 10%.

[Michael Turits:]

And then north in the 20s in the last quarter?

[David Henshall:]

That's correct.

[Operator:]

Our next question comes from Scott Zeller with Needham & Company.

[Scott Zeller:]

Two questions about the Data Center business, again another NetScaler question. Could you give us a little more color around your comments earlier around the cross-selling effort, maybe just an example of a deal or 2 where something changed in the cross-selling efforts? And then, the second part of the question on Data Center is on the WAN acceleration piece, could you tell us why that slowed down given that your services business with deployments is quite busy and clearly, you've got some nice growth in license. It seems to be a core component of a rollout. Why would that slow down?

[David Henshall:]

Okay. I'll take the second part of the question. I mean, our WAN op business is largely related to solutions sale, as customers are rolling out and optimizing the other related technologies, virtual apps, virtual desktops, et cetera. However, we also have large deals that occasionally come in from the government, for example, as was the case in Q2 and Q3 last year. We had very big pop around Department of Defense that was doing a specific project. And so those things are in the pipeline. They come from time to time. They're very difficult to forecast exactly when they hit. Don't anticipate any -- and didn't anticipate any in Q2 and don't anticipate any in Q3. So that's the context around my commentary on the Branch Repeater business. In terms of the cross-sell motion, it was one of the 5 key focuses for our field organization this year, and it was -- it includes everything from just awareness, making sure customers are aware of the capabilities we can deliver in the networking area. It's about demonstrating the benefits that are derived by some of our technology integrations to be able to optimize traffic around the virtual app or virtual desktop deployment. And then, putting in place programs to really package these in a way that customers can acquire them easily. And so, that's been a key play, as we call it, in the sales and services organization. And so, I mentioned just anecdotally that in some geos, there's even a couple of countries in EMEA that I had visited that get more than half of their NetScaler business through cross-sell activities versus trying to sell into Internet accounts, et cetera. So that's what's going on there. And I think it will continue. And one of the gating factors in our networking business is capacity, we spend a lot of time and effort looking for the right people, both internally and our capacity to train channel partners and make sure that they're proficient and capable to sell our networking products. So a lot of work to do still on that front, but we're pretty excited with the results that we've seen throughout this year.

[Operator:]

Our next question comes from Ed Maguire with Credit Agricole. Edward Maguire - Credit Agricole Securities (USA) Inc. I was wondering if you could comment on your expectations for technical services, which were kind of higher than I had modeled. And also, comment on the contribution of NetViewer to the business, particularly in Europe.

[David Henshall:]

Sure. On tech services, yes, we had a great quarter in tech services, up north of 30%, driven by record utilization of consulting, big support contracts, et cetera. So just strength across all those line items. I do think that for Q3, it will be flat sequentially, in terms of actual dollars, which will yield a slightly lower year-over-year growth rate. That's just based on our capacity, what we're seeing right now. As we add more people and more capacity, we'll be able to ramp that further. But that's the way to think about it right now. From a full year standpoint, I would expect a growth rate in the high 20% range, maybe 30% for the tech services business. Edward Maguire - Credit Agricole Securities (USA) Inc. And on NetViewer, what have you seen since you completed the acquisition?

[David Henshall:]

I actually don't have the numbers in front of me, because we've integrated that business right out of the gate. But it's certainly one of the driving factors behind the growth in our international business. The strategy of the acquisition was to bring in more capacity, and that's certainly been successful. So we're working through that right now. And I'd equate that to a large part of the growth internationally.

[Mark Templeton:]

And we're real happy with how that team is doing both at leadership level, at the go-to-market level and technology level because we did acquire a number of really sharp developers there. And if you remember, late last year, we started delivering the French and German localized versions of GoToMeeting, and GoToAssist, et cetera. And then the NetViewer team came in on the back of that giving us a sales team. And we're just barely 2 quarters into it, and really pleased with how they've come up to speed, learning how to sell GoToMeeting, which was a new sales process for them because they have been focused on selling remote support solutions and how they transitioned over to the GoToAssist platform. So it's a great story of great innovation, a lot of great results coming from it end to end.

[Operator:]

Our next question comes from Curtis Shauger with Caris & Company.

[Curtis Shauger:]

If I could, there's been a lot of questions I get around what percentage of your business comes from direct versus indirect channels. And from what I understand, you've been investing a lot in direct, but those folks still consummate a lot through the channel. Is there an appropriate way of looking at that, just to clarify with inventors for you, Dave?

[David Henshall:]

I don't think there's a specific percentage, and part of the reason for that is that even business -- if you assume that every large transaction, and you can measure that, let's say $100,000 and up, has direct touch to it in some way, and so, it may be built through a partner, a partner maybe participating alongside of us, but we're engaged at some level. And that's changed over, let's say, 5 years. I mean, so more and more business is going through partners like SIs and others that are driving a large part of the actual demand generation, the implementation, et cetera. But we probably have direct touch in more than 2/3 of our business.

[Curtis Shauger:]

And any idea what that might have been a couple years ago?

[David Henshall:]

It definitely would be less. I don't have a specific number. But the concentration of direct touch is certainly moving up into the right. And that's just right in line with the strategic nature of what we're selling now. And as we sell more infrastructure-like products, those require the vendor to be closer to the customer. They tend to be much larger deals, more strategic in nature, a less of a project-based sale, which is how I would generalize XenApp 5 years ago. So this has been a continuum. It's been shifting over this period of time, and it will probably continue in this direction.

[Mark Templeton:]

Curtis, I'd say it probably started to tick up maybe 6 or 7 years ago when XenApp started to become more of a strategic kind of product for certain customer segments. And then after we did the NetScaler acquisition, that really required a specialty that our channel organization did not have at the time. And then, probably another inflection point, a couple years ago now when XenDesktop went strategic and where we really understood the need to talk to customers, larger ones on the direct touch bases when we started to bring SIs in, and when we went to a more of a managed partner program with our platinum partners and some of our top-tier gold partners. So I'd say it has been gradual probably took a little bit of an inflection point a couple years ago when XenDesktop began to hit the marketplace and continues to go that same direction. The acquisition of Cloud.com will continue that trajectory because the kind of sales process and direct engagement even after the sale, whether it's on architecture or implementation support, is much more profound than, let's say, than even XenDesktop at this stage of the customer and market maturity. So we're investing a lot in professional services, ERMs, technical relationship managers and the people that really build our SI partnerships, including those that train them. We have a huge uptick in trainings and so forth. So a lot of energy going to that.

[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 comments.

[David Henshall:]

Well, once again, thank you for dialing into the call today. And we appreciate your ongoing support, confidence in Citrix, our team, our strategy. And we look forward to seeing you on the call in 3 months from now. Have a great summer.

[Operator:]

Ladies and gentlemen, thank you for participating in today's Citrix conference call. You may now disconnect.