Citrix Systems, Inc.
Q1 2015 Earnings Call Transcript

Published: 23 Apr 2015

[Operator:]

Good afternoon. My name is Kyle and I'll be your conference operator today. At this time I'd like to welcome everyone to the Citrix Systems First Quarter 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Kyle. Good afternoon, everyone and thank you for joining us for today's first quarter 2015 earnings presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Chief Operating Officer 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 grouping to our Investor Relations website. I would 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 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 Operating Officer and Chief Financial Officer. David?

[David J. Henshall:]

Thank you, Eduardo, and welcome to everyone joining us today. As you can see from the release, total revenue was $761 million, adjusted operating margin was about 19.5% consistent with expectations. Adjusted EPS was $0.65 a share and we generated record cash flow from ops of $292 million. In Q1, we closed 39, $1 million plus transactions. Over half of these deals came from the Workspace Services business with remaining in Delivery Networking. The significant increase in FX volatility this year impacted results as well as customer buyingbehavior. We saw a number of cases where decisions were delayed, where the value of the opportunity had decreased due to pricing or budgets. Despite these issues, total revenue on EMEA still increased 1% including six of the $1 million plus transactions. Within the Americas, revenue was down 1% with the team closing 30 large transactions in the quarter. As we highlighted with our preliminary earnings announcement, we are disappointed with the financial results for the quarter. We experienced a greater than anticipated impact due to our restructuring, org, and leadership evaluation and changes to our field and channel strategies. As a reminder, let me briefly cover the breadth of change that we initiated over the past couple of months as well as the current status in each area. So first, we announced the elimination of roughly 700 full-time positions around the world. This has been completed in the U.S. and will be substantially completed internationally during Q2. Second, we began the consolidation of more than 15% of our leased facilities to improve utilization and density. So far, six offices have been closed and we’ve reduced space in five others. By Q2, we expect to complete projects in six other locations plus a few more complex initiatives in the second half of the year. Third, in the Americas sales geo, we reorganized from a simple regional segmentation to one focused on customer market segments, and in EMEA we consolidated one of the major areas into existing territories while evolving the channel engagement model. These processes are now complete. Next, we continued the rationalization of our product portfolio, a process which we expect to continue through 2015, and finally we have been aggressively evolving a leadership team with new appointments in sales, sales operations, marketing strategy, and product development. These are all important initiatives and well disruptive are necessary to ready the company for the next phase of profitable growth. So next, looking at the Q1 results within our three primary businesses, our Workspace Services business grew 2% year-on-year to $391 million. We are continuing to drive a broader conversation with customers about transforming their delivery of IT services to enable mobile work styles securely and efficiently. Mobility has been the primary catalyst for these conversations. Our solutions in this area continue to grow nicely up nearly 50% year-on-year in Q1. Our strategy in mobility is to expand on simple device management and allow customers to take a holistic approach to solving more important issues like data and applications security. The enterprise edition of XenMobile addresses these needs and includes a range of productivity tools all in a single solution. In fact, about two-thirds of our mobile platform customers opted for the complete EMM edition in Q1, showing the value of our integrated offerings versus standalone MDM technologies. In Windows App delivery, we continue to work on addressing lingering challenges where new license revenue declined year-on-year. Within this market, we are performing well in large strategic projects for our customers with most complex environments. This is evidenced by the number of million dollar plus transactions. However, a larger than normal volume of these opportunities did push out of Q1 due to a range of factors, including the impact on pricing from currency, generally extended approval cycles, as well as our own execution. We’ll be working with customers to try and close this business later in the year. Additional softness in Q1 came primarily from customers seeking project specific solutions, but the average transaction size was down year-on-year, and an increasing number of these licenses are moving to subscription or term based structure. Some of these opportunities though are being served by our CSP business where partners utilized XenApp and XenDesktop subscriptions to deliver as a service offerings to their customers. This program represented more than 10% of Windows App delivery license revenue in Q1, while growing more than 40% year-on-year. So overall we’re innovating rapidly across this business to focus on adding value for both new and existing customers using platform migration, delivery and lifecycle management tools for faster deployments, and introducing new technologies like the WorkspacePod designed to reduce cost and complexity around VDI deployments. Next, in delivery networking, total revenue decreased 3% in the quarter to $161 million. For more context let me touch on a few networking metrics from Q1. First, solution sales led over 530 virtualization orders that included networking as part of the overall transaction. This is roughly an 8% attach rate which is an increase from the contribution a year ago. We sold almost 2200 unique customers in the period compared with 1900 last year as we continue to expand the base. And from a mix perspective, both the NetScaler SDX platform and the VPX family of virtual appliances grew 15% year-on-year, and together these two platforms represent a little over 20% of the NetScaler mix. The decline in total networking revenue came from our telco focused Bytemobile business, and from the cloud service segments or by NetScaler. In Q1 we’ve restructured our telco initiatives centralizing the entire Bytemobile team, realigning the account coverage and strategy. The goal here is to reduce costs and improve focus within this segment. Unfortunately, these changes contributed to a significant year-over-year decline in Q1 bookings as well as performance against targets. Within the cloud services segment, the concentration with a small number of customers creates volatility in the timing of purchase orders quarter to quarter. As you know, we had several very large transactions closed in the first half of last year creating very difficult comps early in 2015. We do expect this segment to be much stronger comparatively in the second half of the year. And finally, revenue from our Mobility Apps business grew 8% to $169 million. The communications cloud remains the largest part of this business contributing over 60% of the mix and growing 8%. Our secure data platform, ShareFile was up more than 35% and now includes 55,000 customers and over 12 million paid users. Majority of the growth here in this business continues to come from document centric verticals, enterprise customers, and from the tight integration with our mobile and Windows App delivery solutions. Turning to operations, as I said earlier, we are working through restructuring and realignment that we announced last quarter, and while disruptive in the short-term, this will ultimately allow the company to operate with more focus and efficiency and deliver against the goals that we laid out last quarter. One of those goals is to drive the expansion of adjusted operating margin including by more than 100 basis points in 2015. In Q1 op margin was 19.5 in line with expectations and forecasted to improve sequentially throughout the year. Adjusted gross margin in the quarter was about 85%, up 40 basis points from Q4. As you know our gross margins have been declining for a few years due to the mix of the revenue coming from our different businesses. But consistent with our prior statements we expect this decline to level off this year in the range of 84% to 85%. Our cash flow from operations was strong at $292 million in the quarter and $850 million for the trailing 12 months which represents about $5.25 a share. And finally, the significant FX volatility in Q1 particularly in the Euro and Swiss Franc, drove $8 million of expense that was included in other income. This is due to the settlements and remeasurement of foreign currency transactions. On the balance sheet, cash and investments was just under $2 billion at the end of the quarter, up primarily due to cash flow from ops. Deferred revenue decreased $42 million sequentially to $1.52 billion, reflecting the overall bookings weakness in the quarter. However in our installed based current period retention rates for maintenance and subscriptions increased slightly on a year-over-year basis. And finally, we repurchased 2.4 million shares of our own stock at an average price of $63. This means approximately 165 million remaining under the current buyback program. So turning to our current outlook and expectations for Q2 in 2015, I would like to first provide some context around our guidance. In the first half, we'll continue to optimize the business model, by taking the actions necessary to drive our targets. Streamlining the organization, initiating a multiyear expansion of margins and simplifying focus across our core growth markets. Our guidance for Q2 is intended to account for continuing impact to executions from the restructuring, a volatile FX environment and a slightly higher than normal deferral rate on customer bookings. From a strategic perspective we'll continue to invest in our emerging high-growth businesses. As well as future initiatives like the workspace cloud which will be an important element in our evolution towards a greater mix of subscription businesses in 2016 and beyond. So for 2015, our full-year expectations are for total revenue in the range of $3.22 billion to $3.25 billion. Adjusted operating margin improvements of more than 100 basis points from last year, tax rate between 23% and 24% and adjusted EPS of between 355 and 360 per share. For Q2 2015, our expectations are for total revenue growth in the range of $785 million to $795 million, tax rate of 23% to 24% and adjusted EPS of between $0.80 and $0.83 per share. So now I would like to turn it over to Mark to give you additional details around the quarter and our ongoing businesses. Mark?

[Mark B. Templeton:]

Thanks, David and welcome everyone. While, I am disappointed in our first quarter results, we are taking on exactly the right decisions to streamline, restructure and reorganize and to deliver on the financial goals we have discussed over the past quarters. Absorbing and adjusting to these very important changes is having greater near-term impact on our execution than anticipated. And as David said, we expect we will continue through Q2 improving in the second half. At the same time we are excited about the pipeline of innovations across our core products to increase customer value, competitiveness and market reach. The message we hear from our customers is clear. Work environments are changing, IT must enable that change and our software defined workplace strategy meets the challenges they face. Workforces, apps and devices are becoming more diverse everyday and the information security mandate reigns supreme. This is the market context we’re built for, so our fundamental goals are not changing. First, to lead in secure workspace delivery across any device, application and cloud. Secondly, to organize around three business units each independently leading in its segment and together delivering greater combined value and third to continue to drive profitable growth with expanded margins. We are helping customers in a world where apps, devices and services don’t conveniently live in one perfect technology framework or another, instead they are unmistakably hybrid, a trend we see accelerating long into the future. Any has been a defining idea for us. In a hybrid hyper-connected IT world any is fundamental. Any app, any device, any cloud, anywhere. 10 years ago, the cover of our annual report carried a simple narrative, it said over the next decade delivering applications to people wherever they work and play will become a defining issue for IT. Why? Because applications of the language of business, winners will be fluent with application delivery, others will lag behind struggling with the pace of change in an increasingly dynamic world. We had it right then and this is even truer today. Our customers have hundreds and in many cases even thousands of the active apps that are the backbone of their business. Those customers represent many of the biggest sectors in the economy, healthcare and pharma, engineering and manufacturing, financial services and banking, government and education. The workspace as they need include Windows, Linux, Web and Mobile Apps. They have series security requirements to protect apps, data and usage. To have the most heterogeneous set of people, devices and locations to serve than ever before and they represent huge market segments were security, experience and flexibility and app delivery are must haves. We are mobilizing a host of new solutions for those major market sectors. Customers with legacy apps and devices, dealing with significant security and compliance requirement, serving large groups of remote workers, contractors and branches and dealing with the profound challenges of consumerization, mobility and cloud. For simpler app delivery solutions, our investments are in the cloud, our work with service providers and our cloud-based offerings in XenApp and XenMobile are however meeting these needs with subscription based service for delivering apps from Windows to Web to the Mobile and soon to Linux. At the same time, we have seen significant unmet needs in the middle market for VDI and we will be much more aggressive in pursuing it. Our new Sanbolic technology gives us the core storage virtualization we need to enable best price performance VDI solutions and to do so with a unique approach to hybrid StorageZones that promote security, easy-of-use and geo-clustering. So this is why we are excited about the future and why we are gearing up to deliver the most impactful set of messaging, solutions and inspiration in Citrix’s history at the upcoming Synergy 2015. This year’s conference will be the biggest Synergy ever. And we’re opening up more live online access to meet increased demand. Personally I am really thrilled about showing customers how to address important near-term challenges while building a lasting vision for the software-defined era. I really hope you’ll be joining us. This is where you’ll see the future of the workplace, secure, delightful, flexible, automated, and available on demand. I am also excited about the Citrix’s ecosystem of partners who will be joining us at Synergy will be featuring new innovation from across this community and showing how partners play a significant role in our next phase of growth. Since our founding 26 years ago Citrix has been a visionary and leader in the software industry. We’ve grown through multiple interest industry cycles, delivered value customer solution and stayed out in front as one of the world’s largest software innovators. So we are working from a strong foundation we are driving multiyear margin expansion through better execution and business simplification. We’re strengthening the leadership team to take on the task of efficiently scaling the business. We are enhancing the programs that serve our community of channel and alliance partners and we are opening new markets and opportunities through innovation. The challenges our customers face are an opportunity for us. Both from the perspective of individual market leading products and for combining them to deliver either more valuable business outcomes. We’ve been reshaping Citrix over the last two quarters to deliver on this opportunity and that will continue. These processes are difficult and as hard as they are to take on, I am extremely proud of how our team is responding. So now I would like to open it up for questions. Thank you.

[Operator:]

[Operator Instructions] Your first question comes from the line of Phil Winslow from Credit Suisse. Your line is open.

[Philip A. Winslow:]

Hi, thanks, guys. Just looking at your performance this quarter versus the guidance and then just your change in full-year, it's sort of implying that some of these issues get rolled forward and some of them get resolved, and it seems like there's sort of distinct ones that are in the U.S. and in Europe. So I guess the question is as you sort of contemplate your forward guidance, whether it be Q2 or the full-year, what are the things that are sort of in your control that are fixable and how do you incorporate those in the ones such as the euro, and sort of the purchasing power in local currency since you guys price in dollars, how do you figure that in and maybe also maybe a little more clarity on how that second part there affected Q1?

[David J. Henshall:]

Sure, Phil it’s David. We think the financial part of that question, in terms of currency overall, a couple of things, we are USD functional in most areas, and we price in USD in the majority of our business. We do have certain elements whether it’s our service providers, our mobility apps, and we give the channel partners the option of selecting local currency in parts of EMEA. So there is a number of moving parts. The net is that impact of revenue was between $5 million and $10 million top line hit, and then on the actual P&L, I called out an $8 million translation and transactional adjustment in other income. I don’t anticipate that to be repeated in the future. There is a few moving parts within that, but you should think about that second piece as a one-time event.

[Mark B. Templeton:]

Yes, Phil in terms of some of the other things, I think the word fix is really not the good operative word from my point of view, it’s really about absorbing the kind of change that we are driving in the company both at the top of the company in terms of stronger, more capable, more experienced, broader leadership that going down a couple of layers, so we are being very proactive about that as well as some of the absorption of de-layering which means certain teams get new sets of priorities, they get new management, and new structure and it takes just some time for people to reorient themselves to these things. Overall, the response internally to the kinds of decisions we’ve made in terms of people, talent, leadership, priorities, and direction have been extremely well received and now we are going about the process of making the appropriate absorption kinds of moves around change management, et cetera. So we are being prudent about guidance and expecting that this takes a little bit longer to absorb than we originally anticipated and that on top of the really exciting announcements we have to make and releases to show at synergy has really got this team very, very energized from within.

[Philip A. Winslow:]

Got it, and then just one quick follow-up to all of that, I mean obviously one of the themes of last year was the product, and sort of getting back to par with XenApp and XenDesktop 7.6 and then also the XenMobile releases. In your conversations with clients, Q4 and Q1, where are we on, just at the very least getting back to par, getting below par so to speak on the product side and that's it for me. Thanks.

[David J. Henshall:]

Okay, what you see on the XenMobile side, you see the uptick there doing well and I think the full impact of the latest release of XenMobile has not been fully contemplated by the market yet, and we'll show some of that the simplicity of standing up a XenMobile solution from device security to App security to App delivery to our application suite at synergy, so we're excited about what we're going to be showing there. Secondly, in XenApp, we have come a long way, and we did make a feature pack release on XenApp 7.6 if you look at the leading indicators around downloads and pilots and intention to migrate, they're all profoundly up from where they were. We have some more to do and once again we aren't going to make any preannouncements here ahead of the conference, but it's a huge area of focus for us

[Mark B. Templeton:]

Operator, next question.

[Operator:]

Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

[Keith Eric Weiss:]

Excellent. Thank you guys and thank you for taking the question. As we're going through this restructuring effort obviously like it's mostly focused on streamlining the organization and cutting out some layers of middle management. Is there any broader sort of strategic review of potential product lines, you called out Bytemobile as a recently acquired asset that might not be working as well as expected or even broader like the rumors that we're hearing in the press potentially looking at whole divisions being spun out of the Company. Are those strategic conversations taking place? Is there something in the per view?

[David J. Henshall:]

Yes, Keith, let me address the last part first. I'd say that consistent with our past practices we're never going to speculate on any rumors that are in the market but I'd say that more importantly when we think about the restructuring and all of the things that I highlighted in my overall prepared remarks is focused on its people, structure, strategy and portfolio and there's initiatives going on across each one of those and then sub initiatives like the way we engage with our channel to make sure that we're driving clarity and value for them, the way we're organized around customer segments et cetera, et cetera. So I mean this is a tremendous amount of change within just a few months but as both Mark and I said really focused on emerging in a much stronger place, much more efficient one, et cetera. We are continuing to work through refining the product portfolio. I mentioned that we've done some things so far this year and we expect that process to continue through the – really through the balance of this year. That's probably what I'd say about that.

[Keith Eric Weiss:]

Got it. And then maybe if I can sneak in one follow-up in terms of the network delivery segment in particular, when you look at the actual decline in NetScaler versus sort of how much the overall businesses pull down by mobile itself?

[Mark B. Templeton:]

Yes, we talk specifically about NetScaler and just frame it out for everyone so you kind of understand the pieces or the market segments. There is only three areas that we have talked about historically the one we call Cloud service providers and that’s a small handful of the largest major cloud delivery providers out there. What we call attach not as a selling a solution that is mobile or virtualization in conjunction with NetScaler. And then the third is just core enterprise ADC and so if I talk about each one of those independently the attach business was flat year-on-year and that is reflection of decline in virtualization but an increasing attach rate and so we are doing much better selling solutions, but its offset by the fact that those new opportunities were down as we talked about earlier. The cloud service provider business is the segment that is most volatile very lumpy intends to move quarter-to-quarter. I called out last year the first half of the year we had tremendous strength in that business drove a lot of growth in overall NetScaler, but those transactions are harder to forecast, that business was down by about 25% year-on-year, that’s a timing statement. And then core enterprise ADC where we’ve really been focused on driving growth through either product strategy, account coverage and other areas just the breadth. That business was actually up about 20% year-on-year. So I mean there is three different pieces there, but I think it gives you a much better overall perspective. And then the standalone by mobile business was down about 50% year-on-year.

[Keith Eric Weiss:]

Got it. That’s very helpful. Thank you.

[Operator:]

Your next question comes from the line of Matt Hedberg from RBC Capital Markets. Your line is open

[Matthew Hedberg:]

Thanks a lot guys, thanks for taking my question. I want to circle back on the currency issue. David, I would imagine there was a higher level of discounting this quarter. Are there any sort of short to medium term changes that you are making for maintenance pricing to kind of help offset what's going on now in the currency markets?

[David J. Henshall:]

No, we are not making any short-term changes there, there is a little bit more discounting from U.S. dollar transaction, that was single-digit percentage, but we did see it. We are getting more push back from customers on pricing because in lot of cases they set their budgets before the end of the year and you saw 20% change in dollar or euro over that period of time. So we will manage that in a real time as needed, prices don’t go up when the currency moves the other direction in general terms and so we are not making any programmatic changes. But we are working with both customers and partners to look at the larger issue make sure that we are addressing that proactively.

[Matthew Hedberg:]

Got it, that's helpful. And maybe one follow-up. One of your mobility peers offered some lower numbers. I'm wondering is there something broader going on in that marketplace right now, if pricing increased competition that you're seeing there?

[David J. Henshall:]

I would say it continues to be a highly competitive area more or so down low at the MDM part of the markets versus the way we describe EMM. EMM is the broader solution what we are bringing together both device management, data and app security, productivity apps et cetera, et cetera and that’s about more than two-thirds of our business mix actually. The ASPs in that area have been reasonably flat actually over the last six quarters, they move up and down just a few dollars per seat per quarter, but overall continues to be a very competitive space.

[Matthew Hedberg:]

Got it. Thanks a lot David.

[Operator:]

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

[Steven M. Ashley:]

Just like to ask about the channel program. I know you guys are in the midst of doing some evolution and change there at Citrix specialization. Can you just give us an update on where we are and kind of transitioning the channel?

[Mark B. Templeton:]

Sure, hi Steve. We at our summit conference in January, we introduced the specialization program, both specialization in terms of markets and products as well as specialization lining all that up with our organization design. So a key piece of what we did is actually take a good part of our field organization in the Americas and aligned them with partner led, partner driven markets and business models, so that they get up everyday and they are not thinking about named accounts. They are thinking only about partner-led business and working collaboratively with partners to a) develop the joint go-to-market plans and b) make sure they have a specialization that cater to the kind of business that they built. Clearly, we have partners that have built their businesses around App delivery at the Windows and kind of high level, we have other partners that have joined in through the networking set of products that we've offered and so that's another specialization and then mobility is yet a third that we're seeing more and more partners step up to both networking partners as well as more of the classic partner and we're a quarter in. The response to the specialization program has been really, really good and it's the kind of thing that takes - probably takes a couple quarters to start to show specific traction but we're basically, the idea is pretty simple and that is helping specialization which is about driving competencies and where partners believe that they have a strong value proposition to offer and we're just making sure our organization is aligned to that from a people, structure and program point of view.

[Steven M. Ashley:]

Great. Thanks so much.

[Operator:]

Your next question comes from the line of Ed Maguire from CLSA. Your line is open.

[Edward E. Maguire:]

Hi, good afternoon. I'd like to ask about the sales reorg. A lot of times when you have a shift in the change of the sales structure, customer touch points get changed and there's always the risk that opportunities that might have been in process don't make it through the hand off. How are you managing the process to ensure that opportunities that were in process or will not be disrupted and does this create new processes from your perspective for sourcing and building out new pipeline.

[Mark B. Templeton:]

Yes, Ed, I mean this is sort of at the core of absorbing these adjustments and the answer to your question will range from the internal systems we use so that the hand off and the knowledge on an account basis is documented and transferred through systems and then at the next level, the leadership of the organization at the Vice President level has really been very stable so it's the same team at that layer. They've just taken on different sectors and segments of the business so they will have different field sales management enterprise relationship management leaders to work with and so when we make the change and design the new model, we try to do everything we could to minimize the hand off issues but invariably these things, that's the challenge of making these changes and there's no great time to do them. There's only whether to do them for the right reasons or not and I think we've done them for the right reasons which will give us greater partner engagement and focus on partner-lead deals and then separate out the small named account types of business that tend to be more high touch and we're taking a much bigger role and working with let's say a partner or a set of partner that the customer wants.

[Edward E. Maguire:]

And just a quick follow up as you are moving toward more of a solutions approach I mean are you - what’s your thought process regarding more vertical specialization I am thinking specifically some of the healthcare work that you guys were doing are you going to bundle more solutions into vertical specific approaches.

[Mark B. Templeton:]

The answer is yes and the starting point is we have huge basis of business and practices in healthcare pharma, government and education, manufacturing and engineering, and financial services and when you look at the reference customers, reference architectures, the hero appsand hero devices that are focused on those segments as well as all the case studies et cetera. We are winding lot of those I think in a really powerful way with then the partners who then choose to specialize in those segments, because in fact many of our partners do specialize in the segments and leverage the knowledge they accumulate let’s say in a healthcare rollout with electronic medical records, clinical systems et cetera and they are able to replicate that competency over and over again. We just have not been organized to really help them amplify that competency and that’s a key part of our go forward including how all that impacts our roadmap in terms of indention and innovation underneath.

[Edward E. Maguire:]

Great. Thank you very much.

[Operator:]

Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open.

[Nicole Hayashi:]

Hi, thanks this is Nicole Hayashi in for Heather. Just first given what’s happened in the quarter and your calendar 2015 guidance, what gives you the confidence that the worst is behind you? And secondly, now that you’ve completed the 700 headcount cuts, how much more is needed like either restructuring or operationally for you to reach those operating margin targets or do we just need to see those costs roll through? Thanks.

[David J. Henshall:]

Nicole, let me take the second part of that question and then Mark will address the first part. So in terms of overall operating margin, we are comfortable with the guidance that we’ve laid out or comfortable with our stated objectives of increasing margin more than a 100 bps on a year-on-year basis and beginning a multi-year, kind of a multi-year expansion margins that over the next two or three gets us back to 25 and eventually towards our longer term goals in the mid to high 20s. And in terms of that where we are in the restructuring I said in my prepared remarks, we are through most of that in the U.S. and will be substantially completed internationally at the end of Q2. There is a number of things going on, on the infrastructure side whether that is just system consolidation, real estate consolidation, de-layering all the things that we have talked about and most of those will be completed throughout the first half of the year. And that’s what represented in our guidance right now and I think the vast majority of the disruption caused by that is already out there and known and we are on the downhill side of working through that. It doesn’t just happen one day and on the next day its perfect, it is a process and I feel good about where we are right now.

[Mark B. Templeton:]

Yes, Nicole, I would just add to that we prospectively we have significant releases of our exciting products as well as this whole move to a cloud-based control plain for workspaces, but I think we will wait for synergy that to show all of that and talk about all of that, but that’s ahead and there will be some market opportunities that open up because of these new releases, Especially when you look at our ability to deliver Linux Desktops and Apps, Windows Desktops and Apps, Web Desktops and Apps, Mobile Apps on a secured data fabric and to do that in a premise-based or a cloud-based model and to do it across the wide universe of partners some of which add value at the higher layers of the stack and don’t want to configure infrastructure. So workspace cloud will definitely help those partners to be more productive and really play to their competencies and as well we will have tools and capabilities for classic partners that like to work from the bare-metal up. So I would say those things that are prospective really are designed to increase our market reach simplified the consume ability of our products for partners in the full range and then obviously we are more and more leaning into the subscription based business model space and which we like a lot and we have well over a million users of XenApp on a monthly basis and growing very nicely that are doing it through service providers. So that evolution is ahead of us as well and I think it all for tends for faster sales cycles, lower selling costs, lower friction routes to market and in the end I think very, very special solutions that we are pretty excited to be rolling out and showing pretty soon.

[Nicole Hayashi:]

Great, thank you.

[Operator:]

Your next question comes from line of Kash Rangan from Merrill Lynch. Your line is open.

[Kash Rangan:]

Hi guys, thanks for taking my question. I think a couple years back or three or four years back at Synergy you talked about rebalancing more on the direct side and now it feels like you're rebalancing more on the channel side. Just wondering why the change and also secondly, any thoughts on the competition especially with AWS getting into the market and also more talking up other market share gains, thank you.

[Mark B. Templeton:]

Well, I think I'm not sure that we are rebalancing on the channel side as much as we're organizing in a way that is more focused around channel lead business and partner-lead business and it's really reflective of the mix that we have had in the marketplace in terms of energy but organized for much more focus so that for example, you don't have someone that's leading geographic area that is responsible for the named accounts and partner lead accounts and Service Provider accounts and Telco accounts, and so through the specialization yes, we're able to get more focus, obviously incentives that align better and products that align better so I think it's much more focus than refocus than rebalance.

[Kash Rangan:]

The market environment regarding AWS gain more…

[Mark B. Templeton:]

Oh I am sorry yes the competitive environment I would say hasn’t materially changed and the way we look at it is when it comes to like a XenApp and XenDesktop’s world is there sort of small and medium and large think of it that way. So in small end of the market it has gotten more competitive with simple types of solutions that are available from competitors like AWS and our answer there obviously is our service provider business which we feel pretty good about how we are competing there because our service providers I think are closer to the customer and able to deliver a more complete solution than a simple kind of remote access solution that you can get from Amazon workspaces. On the large end kind of jumping to the other end, this is where I think we’ve had a dominant share and believe we are maintaining that share and you see that in the number of large fields, the strength of renewals in that area of the business and obviously the major commitment that so many of these sectors that I talked about have to XenApp and XenDesktop due to the security experience and flexibility characteristics. I think the area that is more competitive and where we’ve been investing a lot of energy is in the middle market. That’s typically driven by projects and specifically VDI projects where we haven’t been as aggressive as I think we could be and with our new Sanbolic storage virtualization technology along with announcement we made to our partners earlier this year about around WorkspacePod will be able to be much more aggressive in the middle market with our VDI specific types of solutions as well as the investments we’ve made in the core of XenApp around improving security, improving migration capabilities and improving client list types of access that really bring on new used cases as well as introducing Linux support that expand the primary market there as well. So that’s what to expect and we like competition and we will compete through innovation, invention and we love the opportunity that we are going to be able to show there.

[Mark B. Templeton:]

Operator, next question.

[Operator:]

Your next question comes from the line of Abhey Lamba from Mizuho Securities. Your line is open.

[Abhey Lamba:]

Yes, thanks, thanks for taking my question. Mark, as we take a step back and this desktop slowdown has taken a long time, so as you reflect on what has happened over the last few years, why has it taken so long and what are you doing differently now that gives you confidence that these new measures would work?

[Mark B. Templeton:]

Well, I think Abhey that certainly over the past few years there have been a number of headwind forces some of which go on that really take everyone to understand that sort of that the Windows 32 environment whether that be a Desktop as an App or an App itself is a long tail type of environment that wherein a horizontal basis probably has less opportunity going forward and where the opportunity is in penetration of where the long tail will have its longest run and that is in the sectors that have massive investments in custom Apps and off the shelf Apps that require the kind of security, centralized manage ability, and device flexibility that XenApp can offer. And I think that we've been working our way through that secular evolution both in terms of the product itself as well as the business model in terms of moving to more and more of a service provider model there and those things will continue. At the same time, the same customers want to have a mobility conversation and I think that we introduce some of the most visionary and powerful mobility solutions maybe ahead of market readiness, but its put us in a leading position when it comes to Mobile App security and delivery. We've never been that interested mobile device management and to be honest, we believe mobile device management and device management itself belongs to the device operating system providers. And you see that more and more and more and certainly, everyone that carries a tablet or a Smartphone knows that Google or Apple or Samsung is doing a good job of managing it and I think the same thing is going for the Windows environment more and more and more and why we haven't invested a lot of energy in device management. Our energy has been focused on managing Apps, data, access, and obviously the security of all of that. And doing that as a service and we believe that's our - that's been our Montra and we're working through the market evolution in the mix of types of Apps that customers have to deliver. Windows being, looking back, Windows was the complete center of all Enterprise computing. Looking forward, it's an important piece of Enterprise computing but so are mobile apps, and so are web apps, and we have great products in NetScaler and XenMobile to help customers deliver them high performance, security, access control, encryption and so forth. So yes, it is taking time and I'd say that in my 20 years with the Company, this is the third sort of major evolution of the Company and each one of them has taken several years. There's no doubt about that.

[Abhey Lamba:]

Thanks very helpful.

[Operator:]

Your next question comes from the line of Mark Moerdler, Bernstein. Your line is open.

[Mark L. Moerdler:]

Thanks for taking the question. Two questions. The first one is we saw a year-over-year decrease in professional services. How much of this is driven by the reorg versus Citrix driven versus customer demand driven?

[Mark B. Templeton:]

Mark, short answer is a lot of it was driven by the reorg.

[Mark L. Moerdler:]

Okay that makes that easy. Second follow-up on it. You had in this expenses, you had had the Euro weakness increasing expenses. Can you give us a little more detail on exactly how the weakness in the Euro would drive increase in expenses?

[Mark B. Templeton:]

No. Weakness in Euro for our Euro denominated expenses, I mean just to keep in mind we do business in 39 countries I believe right now so there's a lot of different currencies moving different directions. Two biggest ones being Euro and Swiss Franc in EMEA and those actually moves in opposite directions during the period. And so on core expenses that are just denominated in local currency that actually helps the expense line a little bit, a few million dollars there in a quarter. The below the line items are balance sheet remeasurement largely and then settlements of actual transactions and what not. And so - one-time in there related to year-end entries, volatility in unhedged currencies as well as just the normal noise and cost of a program, so I'd expect other income to go back to that negative one, maybe 2 million in Q2, Q3, Q4.

[Mark L. Moerdler:]

Perfect, thank you I appreciate it.

[Operator:]

Your next question comes from the line of Walter Pritchard from Citi. Your line is open.

[Unidentified Analyst:]

Great, thanks very much. This is actually [indiscernible] in for Walter. If I go back to the Q4 call when you laid out the reorg plan, you guys seem pretty confident that wouldn't really have a huge impact. Can you provide some more specifics on what factors of the restructuring caused weakness and maybe whether it was by a specific product line or specific region?

[David J. Henshall:]

Tyler, I'd say that in Q4 we definitely expected it to have an impact. I mean it's impossible to do a major reorg without that. However, obviously, we underestimated that impact and I think that we probably took on more than we had laid out at that point in time. We've been aggressively tackling all of these things at once. It's much easier to just take the pain, get it over with and then build back over the course of a couple of quarters than to piecemeal these things out over a year or two and so that's the approach we've taken. And with that I'd say you look at the results and we had similar challenges across every Geo when it came to execution related items, when it came to just the impact from the restructuring on reporting structures, on sales process, on a number of these factors, but fortunately I think we're largely through that. I mentioned that the restructuring in EMEA will be substantially completed this quarter and that will be it, and so we'll get the people solidified. Everybody understands their new reporting structures, processes, et cetera and so we will start working through that and expect slight improvement in Q2, we want to be pretty cautious obviously coming off a challenging Q1, but gradual improvement as we go into the back part of the year.

[Unidentified Analyst:]

Great, and then if I think about sales and marketing as a percent of revenue, it declined for the first time in awhile in 2014 and on a year-over-year basis and it kind of looked like it continued that trend here in Q1. If you think about your long-term target of getting to a mid to high 20s operating margin, where do you kind of think that can head over time and maybe if there is more cuts to be done on the OpEx side, kind of what category would you think they mainly come from?

[David J. Henshall:]

Yes, when you say OpEx cuts I just want to be careful that everybody understands what to expect from a restructuring standpoint. As far as the people impacted restructuring on a large scale, that will be substantially completed in Q2 as I said before. However, there is always ongoing optimization we're working on, rebalancing in places, reallocating et cetera, so the idea is to drive more productivity and leverage out of the base that you have, right? And you do that in conjunction with more modest or minor expense rebalancing and then just cost containment across-the-board. And so sales and marketing has been one of those lines where we've been looking to drive greater efficiencies over the last couple of years. It was running North of 40% of revenue for several years, I believe last year was just under that at 39% and this year we haven't given that granular of a guidance but it will be down as a percent of revenue and that's a core focus area. And as Mark mentioned a lot of the restructuring is not pure cost related, but focused on driving greater efficiency and productivity going forward both through our direct team, channel support teems and through our indirect channel partners themselves, and that's where you'll start to see much greater leverage going forward. So net it all out, we still expect to continue to grow expenses slower than we're growing revenue. There are places where expenses of course are coming down on a year-on-year basis and we'll continue to. I hope that answered your question, Tyler.

[Unidentified Analyst:]

Yes, thank you very much.

[Operator:]

Your next question comes from the line of John DiFucci from Jefferies. Your line is open.

[John S. DiFucci:]

Thank you. I've got a question it's coming it from just the opposite angle of a couple of earlier questions. And I guess David or Mark maybe can answer this. Am I looking at and I see what happened this quarter and the deal slippage and the restructuring disruption were the primary issues for the miss this quarter, which is about 25 million on the revenue side. Why doesn't it get a lot better from here? I mean the deal slippage slipped into next quarter and if you sort of figure it out that the restructuring disruption. I guess what I mean is you're lowering annual revenue guidance by $70 million to $80 million after this $25 million miss which doesn't in employ a whole lot of improvement from here relative to what you thought you'd do when you last gave guidance.

[David J. Henshall:]

John, this is David. Let me answer that for you. When transactions push, I mean you always raise the question of why they push and whether that is related to a market issue, an execution issue, product issue, et cetera. And so you took a different lens on your kind of certainty around those and so in this case, I would say the answer is probably all of the above and so we want to take the position at this point in the year that we aren't going to see material improvement in Q2 and planning and guiding around that and until we start seeing that execution improve and some of the new initiatives really taking hold, I'd much rather be in this position. So that's the simple answer of the question, John.

[John S. DiFucci:]

Okay, that's logical. I appreciate it. If I could ask a more dramatic question too of Mark. You guys know, it's always all kinds of speculation out in the market and there recently has been around Citrix stock and around the assets that you hold and how some might make sense if they were just separate entities, but I just think that it's probably good time for Mark to sort of remind us of your vision of how all these assets come together and whether you think at this time that it makes any sense to sort of look at perhaps separating some of them.

[Mark B. Templeton:]

Yes, John obviously, we've seen the rumors and this is a question that by the way has been ongoing question from investors and questions we ask ourselves, because it's just good business to always be asking these fundamental questions. The answer is that we feel better than ever actually about the portfolio and the rationality of how all these pieces fit together and it is sort of rather simple and it's something that we've talked about for quite some time but when you look at the whole notion of delivering a workspace, we used to talk about a desktop but let's face it. Desktops are dead. Workspace is really about the digital world that people live in to collaborate and accomplish tasks. And so we've always stood for the notion of delivering those and in the process of delivering them, you need several pieces. So the first core piece you need is this thing that we put on every end point that's kind of like a browser. It's a universal client that we call receiver. The second piece is you need to control the network connection at the application layers and that's why we compete inlayer 4-7 networking and it's where we're able to actually control and deliver a high quality experience and through acceleration and optimization but also all of the dimensions of encryption, of data in transit as well as access control and so it makes our networking business extremely important. Third is the piece that sort of sits in the middle where it gives you the ability to handle all of the Interactive Media types that we like to call apps and data, so some of them are Windows-based. Some of them are legacy Windows, some of them are the newest Windows. Some of them are apps, some of them are desktops. Same thing goes for web. Same thing goes for mobile and that part of our – that workspace services part of our business is core to being able to handle all of those. And then our mobility apps business which is where we build our secure data fabric, ShareFile, our collaboration tools, our communication tools, et cetera, these are the products that in their own right have markets that we I think have done a great job of attacking and they are the differentiators when it comes to winning deals in medium and large enterprises when those enterprises want the core mobility apps that their people need and they want them in a package that is easy to use, intuitive, consumer-like in its experience, integrated nicely together, and have a security model that meets the kind of regulatory and IP protection requirements that they have, so that's our business. Those are our three business units. That's how it works. And I think actually how they work together is better than ever and I think you'll see the integration of these things to actually improve orders of magnitude as we go forward here because we're reaching that level of maturity in the sense of the platform that's underneath all of them and the ability to consume that platform across our products through APIs and so that's kind of a reminder of the vision and then also a mission that we definitely have done a lot of portfolio rationalization over the last I would say year and we've de-emphasized or eliminated products that where we were over investing, not getting an ROI, and believe that those products are either markets that we don't want to serve or we can better serve them through other channels. An easy example is VDI-in-a-Box, so VDI-in-a-Box has been replaced by things that we've done to XenApp and XenDesktop to make them simpler and all the work we've done with service providers that are spanning out XenApp and XenMobile environments that actually deliver those types of solutions to that type of smaller customer segment. So there is just a constant set of work that we're doing here to optimize and to rationalize across the portfolio.

[John S. DiFucci:]

Mark, I really appreciate that and actually it all makes sense to me anyway, but I'd be remiss not to mention one last thing because otherwise, you're just going to get a lot of speculation. You didn't mention the SaaS business. Is it fair to say that that SaaS business sort of tries to do everything you just mentioned, but do it for a customer that can't implement all that technology to reach down into a smaller customer? And it's a bigger customer at times too or was there some other purpose for the SaaS business?

[Mark B. Templeton:]

John, I should have mentioned, so we are on a course as are many software companies to be entirely a SaaS business, so we in the reorganization we change how we refer to what we used to call our SaaS business to our Mobility Apps business and so GoToMeeting, ShareFile, GoToAssist, these products, write signature, these products are our mobility apps and the way to think about it is we offer them directly to segments, SNB segments and we offer them to enterprise, medium and large enterprise through our Workspace services delivery infrastructure. So our SaaS business figures hugely into this and it's the third major piece. So it's delivery networking as a business unit to handle all of the secure delivery at workspaces over public networks. Secondly, our workspace service business unit that incorporates all of our Windows, Linux, Mobile and Web App delivery and then our Mobility Apps business unit that builds all of our mobility apps in the platforms that they run on in the cloud. So those are the three pieces and around here internally we talk about the business units being independent because they have independent segments like enterprise ADC as a segment, but as well as what I'd like to refer to is WDC, workspace delivery controllers that and David mentioned that this is the attach type business that we get from NetScaler. So really there's independence and interdependence and the interdependence is how we compete in medium and large business and deliver simpler end-to-end solutions.

[John S. DiFucci:]

Thank you very much Mark that’s really helpful. Thank you.

[Mark B. Templeton:]

Thanks, John.

[Operator:]

Your next question comes from the line of Derrick Wood from Susquehanna. Your line is open.

[Derrick Wood:]

Thanks I guess staying on that last topic the SaaS business growth 8% in the quarter its been coming down for a while now can you just talk about the puts and takes in this unit and why its come down so much and what’s a reasonable expectation for growth at this point.

[David J. Henshall:]

Yes, Derrick its David. So high level is there is a little bit of one time in Q1 results and that was impacted about 1% on the growth rate, but if you take a big step back and you think about what we talked about over the last year, there is - 2014 I’d characterize is really an internal focus, we’re focused on rebuilding the underlying platform, which we did focused on lots of new product innovation and areas like that with the overall goal of increasing retention rates on the installed base improving customer MPS et cetera and we are doing really well on those things, in fact retention is up nearly 10% from where we would have been year ago. And the plan for 2015 was about reaccelerating the go-to-market net new spend around new customer generation and what not, and so that’s moving in the right direction as well. Net new customer growth is at its highest pace of where we were probably over the last three or four years I’d have to go way back. So happy with that and I think the expectation should be that growth rate starts to slowly tick up from here on measured on a year-over-year basis. Last point is just to remind everybody that various pieces across the communications cloud which I mentioned earlier represents about 60% of the business and is growing new just under 10% the documents cloud business largely the ShareFile platform continues to grow nicely and I talk about that earlier in my script, up about 40% on a year-on-year basis and now representing a north of 10% of the overall mix. And those are offset a little bit by just a legacy of remote access. Still about 15% but it’s been declining at 5% to 10% per year for a last couple of years. And that trajectory likely will change just a secure sector excuse me a mature market in secular decline. And so lot of puts and takes but I think that’s the way to think about the mobility apps business.

[Derrick Wood:]

Okay thanks for that color and then I guess I was just hoping you could drill a little bit more into the current state of the NetScaler business with cloud providers I mean are you expecting these slip deals to close sometime this year? Have any closed or any lost competitors, maybe just get a little more color as to what your assumptions are in this business for the rest of the year.

[Mark B. Templeton:]

Yes, let me be clear. It wasn’t slipped business in terms of the cloud providers, I mean or competitive losses. I think we still maintain a extremely high market share there, it’s just that the timing of these tend to be very lumpy. It’s a combination of build out and scale up, if you want to put it in those terms. So if you think back the first half of last year where we had tens of millions of dollars coming from this segment because there where major build outs going on across really in that case three large infrastructure players. And then those will come back. I mean we have an annual picture while we are working with these customers in terms of what we expect the demand to look like, it’s just nailing it down to a specific quarter and so that’s the simple way. Nothing changing on the competitive front, really nothing changing overall from what we are delivering, it’s just the timing of that. So there will likely be quarters in the next few quarters where we have large uptick in that business and we will explain that on the upside when that happens as well.

[Derrick Wood:]

Great, okay. Thank you. End of Q&A

[Operator:]

David, at this time we finish the call.

[David J. Henshall:]

Okay, with no more questions let me just thank everyone again for joining the call today. I would like to invite you to join us at Synergy and our Analyst Day in Orlando in May. So please visit our website for more detailed information about the event and we really look forward to seeing everyone there. Thank you and good day.