Citrix Systems, Inc.
Q3 2013 Earnings Call Transcript

Published: 24 Oct 2013

[Operator:]

Good afternoon. My name is Doris, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Third Quarter 2013 Fiscal Results Conference Call. [Operator Instructions] I would like to introduce Mr. Edward [ph] Fleites, Vice President, Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Doris. Good afternoon, everyone, and thank you for joining us for today's third quarter 2013 earnings presentation. Participating on the call will be David Henshall, Acting CEO and Chief Financial Officer. This call is being webcast on Citrix Systems' Investor Relations website. The webcast will be posted immediately following the call. Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the U.S. securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. 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. Copies are 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'd like to turn it over to David Henshall, our Acting CEO and Chief Financial Officer. David?

[David James Henshall:]

Thank you, Eduardo, and welcome to everyone joining us here today. As you can see from the release, overall results in Q3 were $713 million in total revenue, up 11% year-on-year; product license revenue, up 3%; cash flow from operations, up 23% year-on-year; and adjusted EPS of $0.70 a share. In addition, we closed 38 transactions greater than $1 million each, with relative strength coming from customers in the healthcare, retail and technology sectors. Geographically, we saw uneven conditions across our markets in Q3 as customers continue to be cautious with capital spending. From a license revenue perspective, business was flat in the Americas region, slightly negative in the Pacific, while EMEA grew in the low-double digits. Clearly, we're disappointed with the financial results for Q3, coming up short of our guidance range for the first time in more than a decade. However, we remain as confident as ever in our long-term strategy and opportunity. In my comments, I'll discuss the results in the context of our 3 primary markets, highlight the items that were below expectation in Q3 and how we're thinking about it going forward. So let's look at the results within our 3 primary businesses. First, our Mobile and Desktop business grew 8% from last year to $381 million. This area continues to be in transition, as we've been driving the strategic conversation with customers about transforming their businesses to enable mobile work styles. The introduction of XenMobile Enterprise Edition is a catalyst for these conversations, raising the bar in enterprise mobility market with MDM, secure mobile apps, virtual apps and desktops, secure docs and mobile support as the standard. We've been leading with this solution, which began shipping about 3 months ago. In Q3, over 2/3 of our mobile platform customers opted for this edition, while the majority of those customers were also net new to Citrix. We're seeing the XenMobile opportunity pipeline developing at an aggressive pace, and we're very comfortable with our full year goals for this solution and strong growth into 2014. We're also accelerating the pace of product innovation. We have an important new release of XenMobile shipping this quarter, further simplifying and enhancing the user experience, integrating productivity apps and extending our competitive differentiation in the market. However, while the total business in mobile and desktop was up 8% in Q3, we also saw a 3% year-on-year decline in license revenue. And this was driven by 2 primary factors

[Operator:]

[Operator Instructions] Our first question is from the line of Philip Winslow with Credit Suisse.

[Philip Winslow:]

Just 2 quick questions. First, in terms of NetScaler, can you provide some more detail on some of the -- what caused the deceleration in growth this quarter? And then, as you think about your guidance for Q4, what are you sort of implying in there for NetScaler and that cloud division? And then also back towards XenMobile, you talked about a big release coming. I think you're calling it Artemis [ph] and we've heard that it's focusing on a single-server infrastructure, MDM and mobile application management, some authentication changes too. Can you provide some more detail on that release and then how you think that's going to impact the business, especially in 2014?

[David James Henshall:]

Thanks, Phil. Let me talk first about Networking and then ask Rama to speak specifically to the XenMobile releases that are coming up. First off, as I said in my prepared remarks, our business is really shaped into 2 primary areas

[Sudhakar Ramakrishna:]

Yes. Thanks, David. On the XenMobile release, it is really an extension of what we delivered last quarter as it relates to XenMobile enterprise. Our focus on the upcoming release is three-fold. One is to continue to work on simplifying end-user experiences, as it relates to setting up of mobile applications and leveraging mobile applications and mobile data. Specifically focused on mobile applications is how we integrate secure mail as an example. We've made significant strides in that application to significantly improve the performance of it, FIFO capabilities, as well as set up and performance. We also focus on integrating secured data applications for online and mobile editing of documentation and integrating productivity and collaboration capabilities, for instance, with one click using join the GoToMeeting application from our calendar application. So our continued focus is in addition to MDM -- traditional MDM, focusing on application management and information management through focus on big targeted applications like secure mail on one hand and also to expand our ecosystem by providing them the APIs required to continually add to our mobile ecosystem.

[Operator:]

Our next question is from the line of Walter Pritchard with Citigroup.

[Kenneth Wong:]

This is Ken Wong for Walter. On the NetScaler business, again, I mean, you guys had -- I mean, it's -- typically, Q4 is a pretty robust quarter for that -- for the Internet group. I mean, should we be expecting that you'll see that same kind of trend this coming Q4? Or are you guys dialing down expectations there?

[David James Henshall:]

Yes. Ken, we're not breaking out expectations in our guidance by product for Q4. We just haven't done that in the last few quarters. But one thing to keep in mind, when you look at individual pieces of the business, for example, the networking products were up just under 60% growth in product license a year ago and nearly 30% sequential growth. So we had a really big Q4. As I mentioned earlier, that was the first of kind of 3 quarters that we received a large volume of orders for major cloud services build-out. So they're there in the pipeline. I think we're very optimistic about our ability to continue to take share over the long term. But the timing of specifically when those close is harder to forecast, and that's one of the reasons why we don't want to be breaking out at a product-by-product level.

[Kenneth Wong:]

Got you. And I guess, in the quarter, did you guys see any weakness come from federal?

[David James Henshall:]

Yes. I think as everyone would expect, the fed was a little choppy. We had kept our expectations pretty much in check in that area. I'd say there's more -- probably more activity on the civilian side. Well, DOD and places like that were more focused on infrastructure and security and those types of initiatives.

[Operator:]

Our next question is from the line of Raimo Lenschow with Barclays.

[Raimo Lenschow:]

I had a question on mobile. If I look to this, to me, it seems there's 2 areas, sort of your product and then there's the market. Because if I look out there, there's some of your competitors who seem to have been slowing down again. Can you talk a little bit about customer behavior in terms of making tactical decisions on mobile versus strategic? And what do you think it's needed to kind of turn that towards more a strategic decision-making process, i.e. from your product as well, but also from the market -- setup in the market understanding.

[David James Henshall:]

Yes. Raimo, this is David. At a high level, the conversation really has changed. We're driving a lot of that. I think, longer term, all CIOs recognize that it's going to be critically important to bring Windows, mobile and SaaS apps together, alongside how they think about data, data security, profile management and then doing that in a unified way so that it's a seamless experience both for IT and, of course, for the end user. And so strategically, that direction absolutely resonates. I think that where we are from a market is working our way there. Like a lot of trend transformations, they happen fairly slowly. But customers are purchasing the longer-term vision right now. There's still a lot of people buying MDM, and the #1 app out there is really around secure mail. And so when you look at the focus areas that Rama talked about the things that were driving with releases this month and into next year, it's really about making that the best experience available. And that's our focus. And at the same time, we're integrating with some of the other tools that we have, our broader solutions and then the ability over time to really bring those things together, as I mentioned before. So that's probably the way I think about the market. From an opportunity point of view, we're -- our pipeline is now measured in the few hundreds of millions of dollars, so there's a tremendous amount of interest out there. And as we bring new solutions to market, we're very focused on closing that out. So I think it will be a good year in 2014 from both the market point of view and, of course, for -- from a XenMobile point of view.

[Operator:]

Our next question is from the line of Michael Curtis (sic) [Turits] with Raymond James.

[James Wesman:]

It's James Wesman, sitting in for Michael. We've been hopping on calls, so I apologize if you guys covered this already. Can you just tell us what bite in Xen Enterprise inorganic contribution was in the quarter?

[David James Henshall:]

Yes. James, we actually didn't break that out. But as you know, it's pretty modest. These are both slow businesses that are ramping at this point in time.

[James Wesman:]

Okay. And then second, can you just talk about a little bit of color with the integrated sales around the XenDesktop and Mobile? Again, I apologize if you covered this earlier, but just some color would be helpful.

[David James Henshall:]

Yes. James, I think that we did cover that in the remarks but I'm sure you'll see that in the transcript. But at a high level, the message around Mobile and the strategic conversation is resonating quite well. I think that the pivot in this environment, it's had a bit of an impact in our ability to drive more short-term, project-based desktop virtualization. It's one of the reasons why we are shifting a little bit of focus, demand gen and sales effort towards those things that resonate with the customer budgets that exist today, opportunities that we can close in Q4 and into next year, things like data security, secure remote access, et cetera.

[Operator:]

Your next question is from the line of Steve Ashley with Robert W. Baird.

[Steven M. Ashley:]

I'm going to circle back to the NetScaler business and just ask, was the overall performance of that business consistent with your plan in the quarter?

[David James Henshall:]

Yes. Steve, I'd say it's roughly in line. It's a -- I think, from a year-to-date point of view, that business is up north of 30%. We are ahead of plan year-to-date. The timing of the large, cloud-based orders, I'd say, are the ones that are harder to forecast and that's why there's a little bit of variability quarter-to-quarter. That's why we've talked about that over the past couple of quarters that, that's going to be a little bit lumpy because that's the shape of those transactions.

[Steven M. Ashley:]

But if we look out longer term, what would you suggest we think about the growth rate of this business, maybe on a license basis? And again, longer-term kind of smoothing out some of those larger deals, the timing on those deals?

[David James Henshall:]

Yes. Steve, I want to be careful not to give 2014 guidance at this point because we're specifically not doing that right now. But when we look at what we've done from a market -- in a market share point of view over the last few years, we think all those trends continue to be in place

[Steven M. Ashley:]

And would you say that the performance this quarter is not representative of what you would hope to see the business grow longer term?

[David James Henshall:]

Yes, I'd say that -- the only thing I'd say about that is this quarter was one that we had some weakness, as I pointed out earlier, in the Internet-centric and cloud service provider sector. The big part of that business is harder to forecast. We feel very comfortable about the directional trend of that. And so this quarter, we may have wanted that to be stronger. But overall, as I said, we're tracking extremely well year-to-date and we're optimistic looking forward.

[Operator:]

Our next question is from the line of Kash Rangan with Merrill Lynch.

[Kash G. Rangan:]

First off, best wishes to Mark, if he's reading the transcript at some point in the future. And with respect to the business, we hear that VDI -- cost of VDI technology is starting to come down pretty significantly. It's starting to make sense even to mainstream organizations and plus, you got VMware that acquired the Desktone and you guys signed a large deal with a service provider the previous quarter. So all indications are that the market maybe is becoming more mainstream but much later than anybody thought. So wondering how you guys are positioned. Do you first want to agree with my assertion? Maybe I'm completely off base. And secondly, how would you go to market next year in light of the mobile product acquisition? Do you foresee having 2 separate sales force just in order to get the best out of these 2 opportunities?

[Sudhakar Ramakrishna:]

Kash, this is Sudhakar. Let me comment on that and David can add on top it. So first, well, I agree with the comments that you made in terms of the economics of VDI or desktop virtualization in general, working in the industry's favor, whether it be storage cost or computing, power and cost. As you heard from David, customers are evaluating XenDesktop 7 and in some cases, that has protracted adoption. Plus, the story has become larger as it relates to enterprise mobility and bringing together of mobile applications, native mobile apps, as well Windows apps that are getting mobilized. Our focus is to continue to help customers accelerate their evaluations, continue the adoption and a great focus of XenDesktop 7 was simplicity, manageability, while continuing to deliver the security that we have come to be known for. So in regards to market expansion, we're looking at -- is you mentioned Desktone, frankly, that -- we believe that is a validation of what we have seen in the market for the last 3 years. As you know, we have over 2,600 Citrix service provider partners serving up desktops and applications using cloud technology. And we continue to accelerate and build momentum using the same base technology but cloud-enabling it. In addition to that, we are expanding the market opportunity in terms of addressable desktops that we can capture through innovations within XenDesktop 7, as it relates to specific verticals and engineering community or computer-aided design and others, which have a rich need or an expansive need for graphic acceleration and graphics performance and interactivity. So I agree with you, and these are our focus areas as we go forward. As it relates to XenMobile, we have a specialist sales team already in place. However, increasingly, our customers who are our traditional XenDesktop and app customers also tend to be our XenMobile customers. So our focus there is not only penetrating our install base, but also expanding into new customers with mobility as the front end, with expansion into the entire portfolio as we move forward.

[David James Henshall:]

And Kash, I'd just add, the -- I mean, the strategy, of course, is striking the right balance between the long-term strategic vision for the most advanced mature customers and, of course, addressing and servicing more project-based opportunities that exist out there right now.

[Kash G. Rangan:]

Great. And then just finally, if I could. On The Networking business, it's rare that you have missed numbers in the Internet vertical. Is there any pause going on there, competitive share or execution, a combination of those?

[David James Henshall:]

Yes. Kash, I wouldn't say we missed numbers because we haven't guided to that specifically. But I would say that, if you remember, we've had really large quarters over the past 9 months. Q2 is particularly strong in that area. We talked about that last quarter being up 54%, being driven a lot by some of these large transactions coming out of the cloud area and that the timing of those was inherently difficult to forecast. So we feel good about it long term, and this is just the way everybody should think about it is that segment of the business has historically been and will continue to be a little bit lumpy from a timing standpoint.

[Operator:]

Our next question is from the line of Kirk Materne with Evercore.

[Stewart Materne:]

David, sort of understanding that the sales process might have gone a little bit delayed through more customers evaluating Desktop 7 and sort of the shifting around the mobile narrative, I guess where do you think you are in terms of that process, meaning how far along are we in terms of the evaluations versus them getting back on schedule, where the pipeline was originally set? And I guess, as it relates to your fourth quarter guidance, I guess, what's in -- I guess, what have you done differently, given that it has been more choppy in terms of the conversion rates on pipeline? Because it sounds like you guys are still very positive on your overall pipeline. I guess, what are you doing in terms of the conversion rate assumptions to try to, I guess, de-risk some of that lumpiness for investors?

[David James Henshall:]

Sure, Kirk. Yes, you're absolutely right on the desktop piece, the total piece. We feel that this is a really powerful platform that came out with XenDesktop 7, and we're bringing together for the first time a new architecture around app and desktops, the ability to deliver those seamlessly from one console, more on a -- kind of a cloud-focused architecture, if you will. But it's a challenging upgrade for customers. And existing customers that have large farms rights now are going to through a thoughtful process on how to do that. And for a typical customer, there's very few that are wall-to-wall desktop virtualization. Most of them are in some phase of projects that expand on a ordinary course of business, and that's been a land-and-expand strategy for 20 years now. And when they go through the evaluation of a new platform, that expansion business is the part that's probably most impacted. At the same time, we have released 7.1 coming out this quarter, which actually supports R2 of Windows Server 2012. That's important because it historically is a point where a lot of customers upgrade their underlying server OS. And so that's how we're thinking about it on that front. As far as the other part about the message and whatnot, the message remains the same. However, it's -- as I said earlier, it's not an either/or when it comes to dealing with the more specific requirements like data security or BYO or secure remote access. It's both and so that's why we're transferring a little bit of focus back in Q4 and into next year on those areas, so we don't lose sight of that. As far as the guidance and what's in there, we haven't given specific numbers out around how we think about overall pipeline and pipeline coverage and closed ratios. But I will say we are, in general, consistent with my comments, being more conservative on those assumptions based on the choppiness we've seen over the last couple of quarters. And that is most specifically around the Desktop business.

[Operator:]

Our next question is from the line of John DiFucci with JPMorgan.

[Darren R. Jue:]

It's Darren Jue on for John. David, in the Desktop segment, you referred to the pivot to mobile and the XenDesktop 7 transition as impacting growth in that business. But I just wanted to ask if there was anything your competitors did in the quarter that may have also impacted that business at all?

[David James Henshall:]

No, there are nothing I can think of. I mean, this is a market that's always been competitive. No change on that front.

[Darren R. Jue:]

Okay. And then just a question about cash flow. It looked like collections drove a lot of the growth in the quarter. Was there anything unusual going on there? And I suppose, should we assume that there's going to be a headwind created by that next quarter?

[David James Henshall:]

I don't really look for headwinds as much as --- cash flow was strong. Where it's up -- I mentioned earlier, it was up 23% year-on-year. Last quarter, I believe, it was up 25% year-on-year. So trailing 12 months is probably about 20%. It has been a focus, as I mentioned, several quarters ago to keep cash flow growing faster than revenue and net income. It is one of our focused areas. And so we're very fortunate to have a business with a high degree of recurring revenue, good visibility into cash flow and a very solid and clean balance sheet.

[Operator:]

Our next question is from the line of Abhey Lamba with Mizuho Securities.

[Abhey Lamba:]

David, just following up on your recent comments. You mentioned that XenDesktop 7 is a challenging upgrade for customers. What are the chance for competition to try and displace you? And in other words, is it challenging enough for customers to look at other alternatives as they go through the upgrade process?

[Sudhakar Ramakrishna:]

Yes. This is Sudhakar. I'll address that. XenDesktop 7 is actually one of the, I would say, a groundbreaking release in terms of simplicity and manageability, while maintaining all of the benefits. And in fact, we have simplified the architecture greatly by combining it up for desktop and apps. So in that sense, it's actually a highly competitive and very easy installation process. In fact, we can get customer serving up desktops within a matter of minutes. The point that David was highlighting was about these large customers that have actually multiple releases of XenDesktop and then app in the same network across various server farms. Graduating them to XenDesktop 7 is actually a slow process because they have to, not only qualify XenDesktop 7, but actually go through the migration of several discrete farms. And that's what actually results in some protraction for existing customers.

[Abhey Lamba:]

And Sudhakar, just a quick follow-up, can you talk about what's causing the slower uptake of mobility solutions? If you can talk about the customer decision process. Do you normally have to replace somebody there? How long do you think some of these proof of concepts around evaluations are going to go on before we start seeing meaningful uptake of those solutions? That's it for me.

[Sudhakar Ramakrishna:]

So in terms of displacing others, we take a lot of pride in actually working with the installed base of a customer to the degree that they have CD [ph] units [indiscernible] in. Many of the prior customers have small number of MDM seats and so on and so forth. We're not really expecting them to change out or drop out as we coexist with them and we help expand that. The message that is really resonating with our customers as it relates to mobility is not just about MDM as much as mobile application management and information management, coresident with mobilizing Windows applications themselves. So when they look at an enterprise-wide strategy, they're not looking at it from XenDesktop and apps or VDI perspective alone, but broadly speaking, enterprise mobility management in total. And so that's really what's getting customers excited about our strategy, and that's also what's contributing, let's say, to some of these evaluation cycles that David mentioned.

[David James Henshall:]

And Abhey, I'll just mention on top of that, that this business is ramping ahead of the expectations that we laid out originally. So we're comfortable with where we are. We always like to go faster. And I think that, because we're on such a rapid pace of innovation there in bringing new releases to market every few months, this helps to address whatever customer issues there are out there, that are slowing things down. And so we feel good about where we are and certainly going into 2014.

[Operator:]

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

[Rob D. Owens:]

On the telco side of the business and if you specifically look at ByteMobile, are you seeing much pull-through there, relative to NetScaler? And just, how is ByteMobile transitioning overall? How should we think about that in what historically, I think, is a strong fourth quarter for that business unit?

[David James Henshall:]

Yes. Let me start out, and then I'll ask Sudhakar to follow on here. So I'll tell you, just in general, the ByteMobile business is maybe on track to what we have thought in terms of dollar contribution. We're probably a little bit behind in building out the go-to-market motion from where we'd like to be. As you know, selling into a carrier is a different beast. It's a longer sales cycle. The deals are large and the deals are infrequent, and they tend to be multiyear in nature. But we've got a good pipeline opportunity of what we call new logos. The timing, of course, is very hard to predict, but they're out there and we're ramping well. As far as ByteMobile as a product, we have a new release called 7, which -- ByteMobile 7, which is shipping this quarter, enables mobile operators to really differentiate service by managing things like Internet radio traffic and User Experience Indexing and some pretty cool features there that will add value to their networks. So it's early for us. It's an early segment and one that, I think, we'll keep focusing on into next year.

[Sudhakar Ramakrishna:]

Rob, I had a couple of comments to that. Release 7 actually has a lot of features that continue to expand what's called the wireless spectrum efficiency and optimization that we've been delivering in the ByteMobile context to our customers. We've also added capabilities to help them meet and rate their users more effectively, thereby enabling them to deliver differentiated business models. So that's on the ByteMobile stuff. There is a level of NetScaler attach related to ByteMobile deployments. However, the main focus on NetScaler is, call it, supporting telco data centers, which typically tends to be different buyers within the same telco. But we're using our ByteMobile presence, ByteMobile sales teams and the broader proposition that they're delivering to gain additional traction on the broader NetScaler portfolio gives us. So there's some limited attach as it relates to ByteMobile directly. And then there is also a focus on expanding into their data centers.

[Rob D. Owens:]

And then, Sudhakar, on the Mobile and Desktop side, and Citrix has relatively broad portfolio, which -- you're newer to the company. Is there the natural synergies there that we think? And are there further steps that you really need to take to do more integration to make it more consumable and improve velocity? Or are they playing out to be more discrete categories that end customers are looking at?

[Sudhakar Ramakrishna:]

So Rob, that's actually an excellent question and this is a focus area for us. As we bring to bear, not only Windows apps and mobile apps, but also Saas applications in the future. So while we've made our mark with serving up desktops and applications in a Windows environment, we're quickly integrating and expanding to mobile applications, as well as SaaS through common and unified architectures and experiences.

[Operator:]

Our next question is from the line of Heather Bellini with Goldman Sachs.

[Heather Bellini:]

I had 2 questions. The first one was, how do you guys see the R2 release of Windows Server impacting your sales cycle, if at all, if it had an impact this past quarter? And there's a lot of concern in the market that this is also going to impact your growth going forward as well. So I'm just wondering if you guys could share your thoughts there. And I guess, David, for you, the guide -- I think I'm getting as to what -- the guide's a little bit higher than what we normally see in terms of the sequential growth for Q4. So can you talk about your confidence level and how your conversations with customers might be changing versus a 4 to weeks -- 4 weeks to 6 weeks ago when they were more cautious.

[David James Henshall:]

Sure. Let me take the second part of that first. In terms of sequential model and whatnot, we are, as we always have, we focus on more of a bottoms-up approach to guidance and then pipelines and forecast and whatnot. And that's just because the nature of the businesses is changing. I think the last year on sequential total revenue, we were up 15%, I believe, maybe 16%. Our current guidance would be more like 12% to 14%. So well, probably relative...

[Heather Bellini:]

Yes. You really peaked last year, right, in Q4? I think that's the question I'm getting as you guys ended up crushing your guidance. So usually, you guys guide a little bit more conservatively.

[David James Henshall:]

Well, we felt like this is a conservative guide, Heather. And that's based on where we are.

[Heather Bellini:]

Okay, that's perfect. And then the third question...

[David James Henshall:]

In terms -- sure. In terms of R2, I mean, the important thing to remember is that Microsoft has been a terrific partner for 20 years and a lot of what we do on the app and desktop side is embrace and extend the platform. And Server 2012, being a powerful platform, a lot of companies are in their eval or starting to adopt. And it's usually -- now we're looking back historically, choosing the R2 release of the server OS that has accelerated adoption for over many generations. And so there's no reason for us to expect that it's any different now. And that's also based on customer conversations.

[Operator:]

Our next question is from the line of Brent Thill with UBS.

[Brent Thill:]

David, I just wanted to go back and not to dwell in Q3. But from the pipeline, did you see those deals that's -- those were late-stage deals. Are you anticipating those to come back into Q4? And was there -- I know you mentioned the kind of the desktop and mobile, but any color as it relates to the geography? Where you saw those deals slipped, is it across the board or centered in one region?

[David James Henshall:]

Sure, Brent. It's -- a deal slippage is one of those things that we always want to be a little hesitant with when we talk about it because opportunities do move in and out of every quarter. I'd say from a market standpoint, it was a fairly challenging environment in many markets. I think customers who have been more focused on tactical projects, fairly similar to last quarter, but very similar to a year ago in Q3. If I start breaking it down by regions, EMEA was mixed by some region, relatively weaker in western and northern areas. However, NetScaler, as I mentioned before, doing really well, up more than 30% year-on-year as we've just been increasing the investments there. It's like a proof point that we got a lot of runway. APAC, more emerging markets. They were, I'd say, most challenging and that was across the board. And in the U.S., fed, as we've talked about briefly, Latin America and so in the broader Americas region and then the western area. That was probably the most impacted. I'd say, if I had to characterize Q3, it was one where the -- there's was a -- probably a falloff in expectation very late in the quarter. And it was just focused on a lack of urgency for customers to initiate capital spending. That's the cleanest definition. And as far as opportunities coming back in, yes, sure. There are at least a handful of million-dollar opportunities that had slipped and have closed already. But that isn't too dissimilar to a normal quarter. So I'd be careful just reading too much into that.

[Brent Thill:]

Okay. And just one clarification on Mobile. I believe you gave some high-level expectations you thought for the year. Can you just update us on your financial expectation for the Mobile business for the -- this fiscal year?

[David James Henshall:]

We do. We said the contribution from the mobile platforms would be at least $30 million of total revenue, and we feel very comfortable with that number at this point.

[Operator:]

Our next question is from the line of Keith Weiss with Morgan Stanley.

[Keith Weiss:]

Yes. Back on the Networking side of the business, I'm sort of curious. I don't think you guys talked much about the virtual appliance in your prepared remarks, and I was just wondering if you could update us on the type of traction you're seeing with that. I know that a lot of the partners that we speak to are excited about. But I know it's also something that some of your traditional competitors are also beginning to invest a lot more. And so if you could maybe give us a little bit of an update on what you're seeing in that part of the business, that'd be great.

[David James Henshall:]

Yes. I think the virtual appliances are doing extremely well. I mean, we didn't -- I didn't break it out in the prepared remarks. But in terms of bookings dollars, it's still smallest of the 3 major areas, but it was up north of 40% year-on-year. The great thing about the virtual appliances, they just provide so much more flexibility for customers to utilize those types of capabilities at different parts of the apps stack. Think about it as almost creating more of an app fabric to be able to integrate with our more hardware-based appliances. The other thing that we haven't talked about is the release of Citrix NetScaler 1000V by Cisco, which is a virtual appliance, and that's only an OEM arrangement and that just went live in the last couple of weeks, so just getting more and broader market coverage and more opportunity to get that technology into more customers. Sudhakar, anything you'd add to that?

[Sudhakar Ramakrishna:]

No, I think you've covered it all. The -- we are quite excited about Cisco's release of Cisco NetScaler 1000V as well. And it's a continuation of our focus on virtualization and providing customers options, be it 100% software-only, as well as, in some cases, hardware-based solutions or appliance-based solutions, I should say.

[Keith Weiss:]

Great. And then maybe just talking to some of those larger Internet and cloud deals that you talked about maybe being pushed out a little bit. Were there any of that were lost to competitors? Or are they all still in the pipeline and just a matter of timing when some of those might come back in?

[David James Henshall:]

No, there was nothing from a competitive standpoint that's changed. It's just timing. It's simply focused on when a lot of these big companies need incremental capacity. And remember, we have really strong growth coming out the last 3 quarters in a row from this vertical. So for it to come back a little bit just on timing is not a big deal in our minds.

[Operator:]

And our next question is from the line of Gregg Moskowitz with Cowen.

[Gregg S. Moskowitz:]

A little bit of a follow-up to Kash's question on the refocusing of demand gen. How quickly, David, do you think you can pivot and start seeing some positive results from this? And also, do you view it as more of a temporary or permanent shift in go to market?

[David James Henshall:]

Well, 2 things

[Gregg S. Moskowitz:]

Okay. And then you also talked about the 1000V. I wanted to ask about that because I also saw the SKU, it did live for a couple of weeks now. Can you talk about your expectations, particularly for 2014, just given the recent enhancements on the technical integration side, as well as go to market as well?

[David James Henshall:]

No. Actually, we really can't talk about expectations for next year. We haven't given anything for next year right now. But as Sudhakar mentioned, there's a lot of great things going on with partners like Cisco, not just on 1000V, but with the tight integrations that we have with Nexus 7000. We've -- we haven't talked about but continue to do a great joint business with desktop virtualization on UCS. Now that we're part of -- a component of Cisco-validated designs, that helps a lot with customers when we're talking about ADC migration opportunities. So it's multifaceted and a lot of good things going on.

[Operator:]

Our next question is from the line of Daniel Ives with FBR Capital Markets.

[Daniel H. Ives:]

With Mobile and Desktop, could you just talk about what the sales force is in terms of capacity? I mean, it seems that you have the right guys in the right places, just talk about where they are in the ramping process, given the product transition.

[David James Henshall:]

Yes, I think we're relatively early on. I mean, for our internal teams, as Sudhakar mentioned, we do have specialists that are very focused on Mobile. But it's also highly related sales to our generalist teams. And so I think we've got good leverage there and that will keep getting better all the time. And from a partnership or a partner contribution, traditional resellers, yes, it's ramping. I don't have the numbers in front of me, specifically how many partners are certified. But it is a nice related sale to those that have the skills to sell virtualization already. So I'd say it's a work in process, like every new product and market launch for us, but it's getting progressively stronger each and every quarter.

[Sudhakar Ramakrishna:]

And just to add to that, not only in terms of pure heads, but we are also focused intensely on readiness and training both of our internal sales team as well as our partners, just to help us scale better and more effectively going forward.

[Operator:]

Our next question is from the line of Mark Moerdler with Sanford Bernstein.

[Mark L. Moerdler:]

Two questions. So the first one is, given your tight relationship with Microsoft, how do see clients moving to Azure having effect -- I mean, historically, they are -- like the new version of server has helped you, do you think moving to Azure has a similar type of lift effect to you?

[Sudhakar Ramakrishna:]

So we -- as you mentioned, we are close partners with Microsoft and we've been working on delivery of desktops and applications from -- in the Azure architecture with Microsoft. I'd say it's fairly early days in terms of actually defining the architecture, much less actually talking about the rollout plan and such. But my belief is that our continued partnership will help us leverage the cloud as another delivery vehicle to expand overall addressable market for us.

[Mark L. Moerdler:]

Excellent. And then the Mobile side, relating to partners, et cetera, do you see that you have the right fit? Do you feel you're going to need to significantly change or expand the partners that are going to drive the newer mobile Offerings?

[Sudhakar Ramakrishna:]

No, we feel good about the level of partnerships that we have and the partners that we have. As we mentioned, it's a fairly new product to the company and to the market. And the proposition that we have is truly unique and differentiated. So there's a lot of focus on readiness and training, as I mentioned, and helping our sales team, as well as our partners scale more effectively.

[Mark L. Moerdler:]

So you say, there's going to be a lot more ramping that you're still going to have to do, but the clients are the right guys.

[Sudhakar Ramakrishna:]

I mean, this is going to be an ongoing process because we continue to expand our ecosystem as well. But we feel good about where we are. As David highlighted, we feel good about the results in 2013, as well as our continued prospects into 2014. So it's not so much a ground-up effort as much as an expansion and an extension effort.

[Operator:]

Our next question is from the line of Scott Zeller with Needham & Company.

[Robert Scott Zeller:]

I wanted to go back to NetScaler and just ask housekeeping. I know we were told that license for the networking [indiscernible] up 10% year-on-year. Should we assume the NetScaler license was roughly the same performance? I don't believe it's called out.

[David James Henshall:]

Yes, I said license was up 10% year-on-year.

[Robert Scott Zeller:]

For NetScaler as well, typically?

[David James Henshall:]

Yes.

[Robert Scott Zeller:]

And then I'll try again on calendar '14. I know you're not offering official guidance. But how should we think about the investments and the change in sales strategy for Mobile versus margins for next year?

[David James Henshall:]

Yes, I'll tell you what. I mean, like I said earlier, I mean, we are in the middle of our planning cycle right now. We've got new leadership across the product businesses. We're very confident that we'll have a really complete plan going into next year. And one that strikes the right balance between both long- and shorter-term strategic initiatives, like in -- really like our markets, our competitive position and our focus. But it's just not appropriate to provide specific guidance until we get further along in the process. So as we exit next quarter, we'll be able to able lay that out with a lot of specificity.

[Operator:]

Our next question is from the line of Rick Sherlund with Nomura.

[Richard G. Sherlund:]

If you can just comment on the size of the deals you're experiencing on the Mobile side, are they tending to be smaller in size, suggesting perhaps you may be seeding the market now and maybe you got an opportunity for more follow-on larger deals next year? And also, F5 has just commented that they say a win rate of about 90% and no pricing pressure. I'm just curious whether you saw anything -- I think I heard you gave earlier, you say no change in competitive [indiscernible]. But specifically on the NetScaler side, is there any change in the dynamics you're seeing in the market there?

[David James Henshall:]

Yes. Rick, let me start with the latter part. I can't really speak to the win-loss rate. I mean, I'd say that from a numbers point of view, our business and what would be traditional ADC/load balance is doing extremely well. That's the enterprise side. That's the part that was up 30% year-on-year last quarter. So I think we were positioned really well competitively. And as we have more and more coverage, we have the ability to engage in that many more conversations with customers. And then, of course, partnerships and others help to aid that at the same time. I will say that it's been a highly price-competitive market over the last several quarters from a number of vendors and that -- we should expect that to continue into the future. We differentiate based on our architecture, our approach to Pay-Grow and other more, call it, enterprise-friendly features; and then, of course, with platforms as being able to bring forth both the core MDX, virtual MPX and SDX, which is the big consolidation opportunity. So that's how I think about the NetScaler component of the business. In terms of Mobile, one thing for everybody to keep in mind is that we've been in the market now for only 3 months with a enterprise edition of XenMobile, really changing the whole story, and in the MDM -- kind of the MDM space. It is very early days at this point. I think most of the opportunities we're seeing and we're closing tend to be smaller in nature. These are customers that are rolling out 100, 500, maybe 1,000 seats at the high end. And so we're just getting started there. From an ASP standpoint, as you'd imagine, this is a smaller sale than a broad desktop virtualization sale. But the strategy longer term, of course, is how we bring these things together, how important it is to support Windows, Mobile, SaaS and other apps together in one unified solution that has the context around data, data security profile management, et cetera. And so longer term, that's exactly the direction we're going.

[Operator:]

. Our next question is from the line of Ed Maguire from CLSA.

[Edward Maguire:]

I was wondering if you could just discuss the long-tail aspect to the desktop business? It's been now well over like 3.5 years since we've seen this broad Windows 7 upgrade and that's starting to tail off. Windows 8 has not lived up to a lot of expectations. And I was wondering if you could comment on what impact you've seen that -- sort of that broad shift having on your business and whether some of the broader confusion, I think, that's been in the market around the enterprise adoption of Windows 8 is also having impact on your desktop business.

[Sudhakar Ramakrishna:]

And so I wouldn't characterize it necessarily as a long tail as much as our ability to support heterogeneity, even from a Windows release standpoint. As you know, there's been a huge install base of XP out there in the marketplace. And we make our mark by supporting and providing support for multiple releases of Windows, multiple versions of Windows and applications. However, the conversations are shifting more towards mobilizing Windows apps, regardless of the release, as well as enterprise mobility at large, including our XenMobile application management and information management. And so that's really where we see the opportunity, in addition to expanding the footprint by providing different delivery mechanisms, such as the cloud and also different application possibilities, which expand our addressable market, going back to the reference I made about engineering and CAD-related applications. So that's how we are seeing the market evolution from an overall opportunity size standpoint.

[Operator:]

Our next question is from the line of Ross Macmillan with Jefferies.

[Ross MacMillan:]

David, I actually had a couple of financial questions. The first is, when you think about Q3 and the shortfall relative to your plan, would you describe it all as a product shortfall? And the reason I ask is that we've seen some deceleration in license updates and maintenance, which have been growing sequentially very rapidly, and I was just curious as to whether something has changed there, apart from this sort of no cone [ph] effect from lower products and license growth?

[David James Henshall:]

Yes. Ross, your last comment is exactly right. It's simply just a relationship of lower product sales in that area over a period of time. So as that catches up, we've seen the deceleration in license updates and maintenance and that should be expected. I will say that underneath that, we're doing some things that continue to increase the value we're providing the customers and hence, say, the ASP of those, trying to move them to more of a integrated solution for maintenance and staying closer to customers. We have a much more direct touch. The other area that gets impacted when new license sales are a bit muted is professional services. So PS was only up about 9% year-on-year in Q3. That's a direct reflection of 2 things

[Ross MacMillan:]

And then just one follow-up. On the OpEx, it was down 5% sequentially. Were there some adjustments, some accrual reversals for the reduction in the top line guidance? Or any other items in there that would have driven that larger-than-seasonal decline?

[David James Henshall:]

Yes. Ross, no accrual adjustments per se. I mean, what you see going into Q3 is usually a lack of period costs. Q2 tends to be highlighted by some of our major events like Synergy and Summit, so those are not necessarily there. And then, of course, the related travel and entertainment goes along with that. Q3 tends to be a vacation quarter, so maybe the vacation accrual comes down a little bit. And also, just variable selling costs and those types of things that are variable with revenue and bookings do come down. But in the aggregate, we've been very focused on cost managements, on profitability. And we want to keep an eye on margins, of course, going forward as we transition through a number of these businesses.

[Ross MacMillan:]

And maybe if I could squeeze one last in, just on desktop-as-a-service. What do you think are the barriers to broader adoption of desktop-as-a-service? Because it strikes me that the service provider market has the opportunity to really drive down cost per unit or cost per desktop because they have to scale economies across multiple customers. What are the hurdles to desktop-as-a-service being more broadly adopted?

[Sudhakar Ramakrishna:]

First of all, that's exactly our perspective, that is service providers, both Citrix service providers and larger telco, for instance, can be excellent vehicles to deliver desktop-as-a-service. And our estimation is that it will be at least $600 million market by itself in the next few years. As it relates to barriers to entry, we believe we have overcome or circumvented a lot of the traditional barriers to entry for this. For instance, we have cloud-enabled our platforms. We have created multi-tenancy capabilities, simplified installation and experiences and provided our customers the business tools necessary to both deploy, as well as monitor, manage and charge their customers. The industry at large is in fairly early stages as it relates to delivering these capabilities as a service, and we were one of the first ones to start it. We did it around 2009, and we have a significant traction in that space, as well as continue to extend our lead of its capabilities, like the ones that we added to XenDesktop 7 and on a go-forward basis. And as you noticed, our competition is coming into this space as well, further validating the market potential. But it's not so much a barrier to entry as much as the technology has been addressed, and it's now a matter of scaling the market and maturing the market to realize its full potential.

[Operator:]

And our next question is from the line of Richard Williams with Cross Research.

[Richard T. Williams:]

I wonder if you could just talk about the differences between the SaaS business in Europe and Asia compared to the U.S. markets?

[David James Henshall:]

The SaaS business is largely U.S.-based at this point in time. And I -- and that's just a historical basis and so 80-plus-percent is being driven out of North America. That's fairly consistent. We have had a focus to drive more of an international expansion over the past couple of years, but it's really a U.S.-based business. No discernible trends across the markets than I can really point out. For us, SaaS is about 2 primary markets. It's about collaboration, where we're doing really well. We're driving north of 20% growth in that recurring item and in data sharing, both in terms of a product and as a platform. I've mentioned earlier that ShareFile is growing north of 70% year-on-year. We're expanding opportunities, and we're doing some really cool things with integrations across the rest of our products and frankly, other solutions to allow customers to think about data in a secure but cloud-based way. And so, excited about what we have going on there. So I think that's all the time we have for questions today. As I said earlier, we're really excited about the future. We think we've got a tremendous set of product solutions as we enter 2014. I want to use this opportunity to really thank the Citrix teams around the world, our partners and our customers. And thanks, again, for everyone joining the call today. Goodbye.

[Operator:]

And ladies and gentlemen, this does conclude today's conference call. You may now disconnect.