Citrix Systems, Inc.
Q3 2015 Earnings Call Transcript

Published: 22 Oct 2015

[Operator:]

Good afternoon. My name is Kyle and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the Citrix Systems Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Thank you. I'd now like to introduce Mr. Eduardo Fleites, Vice President-Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Kyle. Good afternoon, everyone and thank you for joining us for today's third quarter 2015 earnings presentation. Participating on the call will be Mark Templeton, Former President and Chief Executive Officer; David Henshall, Chief Operating Officer and Chief Financial Officer; and Bob Calderoni, Interim President and Chief Executive 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 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 Mark Templeton, our Former President and Chief Executive Officer. Mark?

[Mark B. Templeton:]

Thank you, Eduardo, and greetings everyone. I am really pleased with the strong results we're reporting today on my 70th and final Citrix earnings call. Over the past year, we've made many difficult, yet important decisions. I can only say how extremely proud I am of this dedicated Citrix team and the results they've produced. As you've seen in the press release, we're announcing the appointment of Bob Calderoni as Interim CEO. Bob is Executive Chairman of the Board and has been driving the operational review process we announced in July. These outcomes will be instrumental in shaping our 2016 plan and ongoing strategy. And the execution of that plan is our top priority. As a result, the Board and I believe this to be the right time for a transition, one that will ensure the continuity we need across the business in 2016 from financial, operational, and succession perspectives. Since joining Citrix Board, Bob has helped us ask many insightful questions with the goal of unlocking margin expansion and efficiency. Both are critically important toward executing our ongoing business strategy. He's an accomplished and great executive to whom I'm happy to be passing the baton, while also providing assistance during the transition. As I reflect, Steve Jobs had it right. The journey is the reward. No one has had a more interesting and blessed journey than me. When I came to Citrix in June 1995, I saw amazing potential in the company's vision, its culture and its opportunity to change the world. Today, the world's most important apps and data are protected, delivered, and managed with Citrix technology for millions of people, businesses, and governments around the world. The number of hands and hearts in all of this, of employees, partners and customers, is practically infinite. What they all have in common is the belief in good. Good intentions, good service, good relationships, good outcomes, goods business, and nothing but authentic. For me, it's been a true privilege to be a set of those hands and one of those hearts, seeking to help people work better and live better. I would never have predicted we would grow to be one of the world's most important software companies. As I look to the future for Citrix, I'm filled with optimism around the beliefs, principles, and vision that's defined us during my time, all from the little multi-user OS/2 remote access company born in South Florida with vision, integrity, respect, humility and conviction. Before I turn it over to David and Bob, I'd like to say a sincere thank you from the depths of my heart for believing in Citrix, for the privilege of leading, and for your confidence in me over so very many years. I'd like to add a very special thanks to our channel partners. It will always be lovely to see you again, my friends. And finally, my Citrix team, I wish you all God's blessings, good health and a fond farewell. Oh, and one more thing. Citrix has been an experience beyond my wild dreams. As I reflect on the past 20 years, it reminds me of a lyric from the Moody Blues, my favorite band. I'm just a singer in a rock and roll band, the best band in all of software and that's Citrix. So now let's hear David discuss the excellent business results we're reporting today. David?

[David James Henshall:]

Thank you, Mark. And before I begin, I'd just like to say it's been a real honor and privilege to work alongside of you for the last 51 quarters, and I know I certainly speak for everyone at Citrix when I simply say thank you. So let me turn to the quarter. First, I'm really pleased with our Q3 results and how they positively reflect the benefits of the actions we've taken since the start of the year to improve our operating margin, increase sales through our channel, leverage the integrations between NetScaler, XenApp and ShareFile and continue to grow our as-a-service offerings. Our results for Q3 reflect the progress the team has made in absorbing and adjusting to these initiatives, org and leadership evolution, and changes to our field and channel strategies. We're directing more of our energy towards our core strategy, the secure delivery of apps and data, setting the company up for even better execution, greater efficiency and profitable growth. As you can see from the release, revenue is $813 million, adjusted operating margin was over 26%, adjusted EPS was $1.04 per share, up 38%, and we generated cash flow from operations of $260 million. In total, we closed 58, $1 million-plus transactions compared to 40 in the same quarter a year ago. The primary differences from last year were large orders for our Workspace Suite, which increased from three to 18, and from NetScaler which added five more than it did in Q3 a year ago. From a geo perspective, when you exclude SaaS, total revenue in the Americas was up 9%, EMEA increased 2% in the quarter, but results in APAC declined 3% year-on-year. We do continue to see foreign exchange rate impact both demand and discounting internationally, but I'd say it was generally in line with our expectations in the quarter. Looking at Q3 results within our three primary groups, our Workspace Services business grew slightly year-on-year to $396 million. We continue to drive the holistic conversation with customers about simplifying the delivery of their IT services, securely and efficiently, across all types of applications and data. While overall net new license revenue in this business declined modestly, this is the fifth quarter in a row that we saw improving year-on-year performance. As we've reviewed previously, there's a number of initiatives that we're driving to improve results of this business through simplification, innovation and aggregation of our unique assets. As I said earlier, in Q3 we saw strong uptake for our Workspace Suite, our comprehensive solution for secure app and data delivery, contributing 15% of license revenue for this group. It also drove the majority of the growth in long-term deferred revenue as a number of customers chose to enter into multi-year contracts. Additionally, we continue to grow our CSP business, where partners primarily utilize XenApp to deliver subscription based offerings to their customers. This quarter, the Windows app delivery CSP represented 10% of license revenue for this business, growing over 25% year-on-year. So we're delivering a complete mobility solution, allowing customers of all sizes to bridge between the worlds of Windows and mobility, on premises or service space, and do it all with a customer centric experience that only Citrix can provide. Next, in delivery networking, total revenue increased 21% in the quarter to $187 million. The strength in this business was driven by NetScaler, primarily in the segment of the business that's supporting cloud service providers. As you know, this segment is somewhat volatile over the first half of this year, rebounding nicely in Q3, and representing over 35% of the product mix in the quarter. For more context on the overall business, let me touch on a few metrics. First, solution sales led to more than 650 virtualization orders that included networking as part of the overall solution. This is roughly a 10% attach rate as compared to just 8% a year ago. We sold over 2,200 unique customers in the period with 38% being net new customers. From a mix perspective, our SDX platform bookings increased 6%, MPX by 40%, and the VPX family of virtual appliances was up 20% in the quarter. So overall, a really strong period for networking. And finally, our SaaS-based solutions delivered revenue of $191 million, up 15%. The communications cloud remains the largest part of this business, contributing nearly two-thirds of the mix and growing at 17%. In the workflow area, our secure data platform, ShareFile, was up almost 40% in subscription-based revenue, with the majority of this growth coming across document-centric verticals and our enterprise customers. Helping revenue growth has been the continuing focus on improving retention rates of the active customer base. This has been driven through extensive changes in product innovation, packaging, and customer care, all helping the net new business metrics increase significantly over a year ago. So turning to operations. As I said, we're seeing results from the initiatives that we've been discussing with you over the past few quarters. In Q3, adjusted operating margin was up over 26%. That's 147 basis points sequentially, and up over 530 basis points from last year. In total, our operating expenses declined both sequentially and year-on-year, despite continued investments in our higher growth products. We're happy with the current progress on cost structure, and we see further opportunities to drive efficiencies and more focused growth throughout the company. On the balance sheet, cash and investments totaled $1.9 billion at the end of the quarter. The increase was due to strong cash flow from operations of $260 million that I mentioned earlier. Over a trailing 12-month period, cash flow from ops was $944 million representing approximately $5.80 a share. Similar to Q3 of the year ago, deferred revenue declined sequentially by about $30 million, although long-term deferred was up modestly due to multi-year customer engagements compared to last year. Deferred revenue is in total at $1.51 billion, up 8%. And finally, while working concurrently on operations in our long-term business model, we've been very active with our capital return program. In mid-September, the Board authorized an increase of $500 million to our ongoing program. In Q3 alone, we returned about $280 million, repurchasing nearly 4 million shares. And since the beginning of Q4, we've continued this pace, repurchasing an additional 3 million shares to fully utilize this increased authorization in over just the past six weeks. So turning to our current outlook and expectations for fiscal year 2015, I'd like to first provide some context around our guidance. As you know, the management team has been working with the Operations Committee of the Board on a comprehensive review of our portfolio, our cost structure, and our capital structure, and this includes the previously announced evaluations of strategic alternatives for ByteMobile and GoTo businesses. We expect to be completed with this work over the next few weeks, and plan to schedule an update for investors in mid-November to discuss the results of the review, as well as provide our financial outlook for 2016. So therefore, today, we'll only be providing an update to 2015 guidance. We continue to optimize the business model by taking actions necessary to drive margin targets, streamline the organization, and simplify product focus on just our core growth markets. I think we've made a lot of progress as you can see, and we're confident that these actions can lead to even better execution, greater efficiency, and profitable growth. However, given the broad level of change occurring in our business, and the strong resulted delivered in Q3, we're going to remain mindful of the potential for short-term disruption in the balance of the year. So our expectations for the full year 2015 now include total revenue in the range of $3.24 billion to $3.25 billion, while increasing the adjusted EPS range to $3.85 to $3.90 per share. So now, I'd like to turn it over to Bob. Bob?

[Robert M. Calderoni:]

Thank you, David. Before we turn to the Q&A portion of the call, I'd like to take a few minutes to talk today about the announcements regarding our leadership succession, and also our operating and strategic reviews. But first on behalf of the Board, I'd like to thank you Mark for your vision, your talent, and your leadership over the past two decades. Your contributions to our company, to our customers, and to the industry has been impressive, to say the least. The entire Citrix team wishes you the very best and thanks you for all of your dedicated leadership. This afternoon we announced that the Board has appointed me as Interim President and CEO, and as many of you know, I've been a member of the Citrix Board since last year, and I'm currently serving as Executive Chairman. And I will maintain that role on the Board going forward. I've worked with many of you in the past, yet for some, I may be a new name. So by way of introduction, let me just say a few things. I have more than 25 years' experience in the software and tech industry. I most recently was CEO of Ariba from 2001 until we sold the company to SAP in 2013. And at Ariba, we led a successful transition from a low-growth, low-margin software business to a high-growth, high-margin cloud business through a combination of innovation and operational excellence. Today, along with Godfrey Sullivan and Jesse Cohn, I'm also part of the Board's Search Committee. And as a reminder, we continue to work with Heidrick & Struggles to find a permanent CEO, and I see this as one of my primary responsibilities as Interim CEO. Pleased to say we're making good progress on this front. We're vetting several very capable candidates and we're prioritizing individuals who have a combination of proven operational expertise, along with a strong technology background to continue to build upon Citrix's technology and product leadership. Another priority for me is to continue the momentum we have in our operational and strategic review of the business. As we announced in July, we formed an operating committee of the Board to identify opportunities to build upon our current trend of margin improvement as well as driving operational and capital efficiency in the business, as well as focus. It is this focus which I believe will eventually translate into even higher growth. I'm pleased here also to say that we're making good progress in these efforts, and as David mentioned earlier, we're close to completing our reviews, and we will be ready to report on our actions and plans in just a few weeks on analyst call. My appointment to this interim role is intended to provide continuity while we move forward with the search process and the other strategic and operational initiatives that are focused on driving shareholder value. I can assure you that throughout the search process, Citrix remains committed to delivering for our customers and partners, in addition to executing on the transformative initiatives we announced in July. While the committee conducts its search, we're pleased to have a very strong and talented leadership team in place, and we're committed to successfully executing on the strategy, and I'm honored to be part of that team. So with that, let's open the call for questions.

[Operator:]

Your first question comes from the line of Mark Moerdler from Bernstein Research. Your line is open.

[Mark L. Moerdler:]

Thank you, and congratulations to both, the Interim CEO and to Mark Templeton on all that you've done so far. And I wish you the best going forward. Two questions from a operational point of view. Given the accelerated return of cash we've seen both in Q3 and the beginning of Q4, how should we think about return of cash for the remainder of this year and into next year? And then I have a quick follow-up question.

[David James Henshall:]

Yeah, Mark. It's David. Let me take that. I mean, as you know we've been spending a lot of time talking about capital structure on a long-term basis. We've taken some actions last year where we returned over $1.5 billion. Year-to-date, I think including this quarter, we're at about $700 million. It's obviously been far and away our largest use of free cash flow and expect that one to continue. Thinking about capital structure longer-term, it's something that's on the top of our minds. There are some dependencies on a lot of the other activities that we're driving right now, and I think you should expect for us to come back to you beginning in November to talk about our longer-term position, but in the short-term expect free cash flow to be primarily used for share repurchase.

[Mark L. Moerdler:]

Okay. And then on the cost cutting that's already been implemented, how much of that is left, how much is in the numbers we've seen so far in terms of the margin improvement and how much is still left?

[David James Henshall:]

I think that we've identified a lot of areas in the near-term and over the course of the last three quarters. We've talked about fairly extensively whether that is simplifying our product portfolio against the key solutions that really create growth and differentiation long-term, organizational optimization and issues like that. And so it's an ongoing effort. I think the team has identified a lot of different areas that we're looking at and we'll be talking about more in the future.

[Mark L. Moerdler:]

Okay. I guess we'll be looking forward to more information shortly. Thanks on the great quarter.

[David James Henshall:]

Thank you, Mark.

[Operator:]

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

[Steven M. Ashley:]

Thank you very much. First of all, Mark, congrats on a great run and Godspeed. I'd like to ask about the SaaS business. Nice acceleration in growth. What drove the acceleration of growth and how should we think about that growth rate going forward?

[David James Henshall:]

Yeah, Steve. I mean you've seen the growth rate move up over the last couple of quarters, right? And that started at the back half of last year where our leadership team in the SaaS organization has been driving a real focus on, what we call, net new business. And that's just simply looking at the retention of the current install base as well as the efficiency of new sales going forward. And those things over time help drive recognized revenue, of course. So that's kind of point number one. Point number two is the faster growing solutions like ShareFile, which I mentioned in my prepared remarks, continue to become a larger and larger part of the overall business. And third, we continue to be active around new solutions and audio services, whether those are organic or acquired. And so I think, the balance of the year we should expect growth rates in this ballpark.

[Steven M. Ashley:]

Great. And then I was wondering if you could offer any comment on – we looked at the core workspace services. You called out a strong Workspace Suite quarter. Are you seeing traction in the channel as well as direct sales with Workspace Suite?

[David James Henshall:]

Yeah. I think Workspace Suite, as everyone knows, is a solution that really brings together a lot of our capabilities across apps of any type, virtualization and data. It is the comprehensive solution and we're going to market with a lot of our enterprise transactions. And we've talked a lot about the channel in the first couple of quarters, and even have recruited and on-boarded channel executives to lead these efforts. So from a metrics point of view, the contribution from our CSA partners in Q3 was actually up double digits. We've seen positive growth in product sales in most geographies. We're seeing a growth in transacting partners. All these are very early activities, but I think we're focused on the right areas, and over the next several quarters, we'll be able to drive that. The other area of partners that is important around the workspace services business is those that we call CSP's or Solution Providers. Those are the ones that I talk about that utilize primarily XenApp as infrastructure to deliver SaaS-based offerings to their end customers. And that's been a really important part of the story, and those folks have been driving revenue up more than 25% to 40% throughout this year. That is certainly impacted, to some degree, by currency as more than 50% of this revenue is outside the U.S. So the kind of organic growth in users is actually quite faster than recognized revenue.

[Steven M. Ashley:]

Great. Thanks so much.

[Operator:]

Your next question comes from the line of Philip Winslow from Credit Suisse. Your line is open. Philip A. Winslow - Credit Suisse Securities (USA) LLC (Broker) Yeah. Thanks guys and congrats on a great quarter, and Mark, just all the best to you. Wanted to focus in on the networking side of the business, because if you look at sort of at least where our estimates were, that was sort of the most tough side (24

[David James Henshall:]

Yeah. Thanks, Phil. You are right and I agree. NetScaler had a great quarter. Overall networking was certainly the strongest part of the business. We've talked a lot about the concentration in the cloud service providers with a handful of the largest technology companies in the world, and their purchasing patterns tend to be somewhat volatile. And so historically what we've seen is their contribution to the mix be anywhere from 25% to 40% approximately in any given quarter. This quarter it was closer to 40%. It was actually just between 35% and 40% and that compares with the low end of the range a year ago. As everyone knows, it's a very, very important segment of the business, but it does mask a little bit all of the things that we've been doing to enhance the non-CSP – excuse me, the non-Service Provider or enterprise part of ADC. So when we take a step back and we look at the non-Service Provider business, that was still up in the high single digits year-on-year. The reason that that's been growing is really a couple of things. One is the broader attach motion that I mentioned earlier. Customers are recognizing a lot of value by combining the virtualization and networking products together. We can create differentiated advantage there and it also gives us a platform to be able to continue expansion inside those accounts. The second is the unique approach we've taken from a technology point of view. Being a software company, it gives us a lot of flexibility to allow customers to grow with us as their needs grow without having to do forklift upgrades and other things. And then lastly, is just as we've been able to expand coverage and participate in more transactions, it's allowed us to grow that business. So it's really a combination of those two. Philip A. Winslow - Credit Suisse Securities (USA) LLC (Broker) Great. Thanks, guys.

[Operator:]

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

[Tyler Maverick Radke:]

Thank you very much. This is Tyler Radke on for Walter. Just wanted to ask you guys about the guidance that you updated for the full year. Looks like you're maintaining the high end of the range at $3.25 billion. Just curious as we head into the fourth quarter, is there anything about seasonality we should be thinking of? I would just think, given the strong results here, maybe you would raise the top end of the guidance, but just any color there would be helpful. Thank you.

[David James Henshall:]

Yeah. Tyler, Q4 is always the largest quarter of the year, and it has some unique attributes to it. We certainly don't try to forecast those unknowns to happen in a period. And I think the way to interpret guidance is just like I said in my prepared remarks. We're really happy with the performance. We had a great Q3. The teams are working through a lot of the change that we initiated earlier this year. You see that especially in North America and the Americas in general where Q1 was absorption of a lot of volatility, and they've had good performance over the last couple of quarters. And we're working through that in international markets as well. So given the change, I think it's appropriate to be prudent right now with our outlook and shift a lot of our focus towards the cost structure initiatives, efficiency and those things that we've been talking about. So while we're maintaining the top end of the range on revenue, we're obviously bringing up profitability and EPS pretty significantly throughout the entire year.

[Tyler Maverick Radke:]

Got you. And then a follow-up question on the workspace side of the business. You mentioned strong deals in the Workspace Suite, but can you talk about the rest of the business? Your competition made some comments yesterday that they believe they're gaining share. Just anything you're seeing in that business.

[David James Henshall:]

Let me talk about it at a high level first. From a competitive standpoint, it's a little challenging for us to get the exact data. As you know, most of those transactions are part of a much larger bundled deal. And so what we don't have is specific data in terms of deployments, or actual usage versus allocation. So that's the caveat. When we look at our business, it's really a tail of three segments, and this is oversimplification but bear with me. The CSP which I talked about, really servicing the SMB, mid-market customer, doing extremely well, cloud-based, it's all subscription and it's been growing north of 25%. At the high end, that is where Workspace Suite, XenDesktop Platinum et cetera, really provide customers that set of capabilities to transform their business. And those are the types of transactions that we track very closely in our sales management system, and our win-loss has not changed on that. We still really dominate that space. I think it's the mid-market project-based activity, or the ones that we've been talking about through this year that we need to continue to put more of a focus on. And we're doing that through innovation. You're seeing a lot of new capabilities come out around XenApp and XenDesktop. The things that we're going to be doing with Workspace Cloud and really more of a late 2016 and 2017 part of the story, but focused on abstracting away that complexity for customers that comes with enterprise infrastructure to allow them to absorb and go faster. Those are the types of activities that I think you should keep an eye on over the next several quarters about growing that business.

[Tyler Maverick Radke:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Raimo Lenschow from Barclays. Your line is open.

[Raimo Lenschow:]

Thank you. First of all quick question for Bob. Bob, at Ariba you went through that transition towards more of a subscription-based business. What were the key things that you kind of took away at Ariba that you think we need to be aware of, if you think about Citrix and the changes there? And then I have one for David afterwards.

[Robert M. Calderoni:]

Yeah. I think what I learned at Ariba was success comes through a combination of both operational excellence and innovation. After all, it's a technology business that we're in and you can't discount innovation. This company here at Citrix has plenty of innovation. The strategy has been narrowed and focused recently around secure delivery of apps and data. And I think the next turn of the crank here now is just to get the organization focused around that very focused strategy of delivering of apps and data. And that's where the operational excellence will come from. You put together excellent innovation and excellent operations and I think you can create tremendous shareholder value, and I think the makings for that are here, right here at Citrix.

[Raimo Lenschow:]

Perfect. Thank you. And one quick question for David. Like, if I look at the performance on the networking side of the business, I seem to remember from the Analyst Day a couple of months ago, one of the big focuses was that the sales force set up we wanted to change a little bit to make sure that we have more dedicated people in there. Can you talk about the progress there, please?

[David James Henshall:]

Yeah. Sure, Raimo. We're evolving. It's fairly early days. We've got certainly more consistent focus across North America in particular. That team is executing well. Obviously North America is what drove a lot of the upside, just based on the total numbers that you saw me talk about earlier. I'd say we're going to continue a lot of work across this in the next several quarters, looking at areas where we've got opportunities to add more capacity, more go-to-market distribution, more differentiation, et cetera. So happy with the progress for sure, still see opportunities in the future.

[Raimo Lenschow:]

Lovely. Thank you, and Mark, thanks for all your great work at Citrix. Thank you.

[Mark B. Templeton:]

Thank you very much.

[Operator:]

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

[Heather Anne Bellini:]

Great, thank you. And I'll echo everyone's best wishes, Mark. I just wanted to focus, David, on what you think – I know you're going to announce the review of kind of the operational procedures that you've been going through, but at least going back to Mark Moerdler's original question. When you think about the operational efficiencies and kind of how far you are through what you've been able to achieve, can you give us a sense of ex-those, kind of how much more there is left in what you originally laid out in – I think it was in January? And then I had a follow-up just on the MDM market following up a little bit on some of the comments that were made last night. Growth rates for those businesses seem to have slowed for kind of everyone in the market. Just trying to get a sense of what you're seeing from a pricing and bundling perspective. Thank you.

[David James Henshall:]

Sure, Heather. I think that similar to Mark's question, it's not as simple as saying that there's a short list of things and we're 75% of the way through. I just don't think that it's fair. I think that you've got to take a little step back and think about cost structure, focus of the strategy, and really put it all together. So what we've been doing and what we will be talking about in November is much broader than that around the product portfolio, the strategy and the focal areas and then how we're thinking about cost structure over the next couple of years. I think that the team has identified lots of near-term opportunities that you've seen. And when we entered this year, we talked about the beginning of a multi-year expansion of operating margins. That's probably the easiest way for everyone to keep track of our progress. That's the focus that we've been on. We said that we would expand by hundred basis points at a minimum in 2015. We're clearly two and a half times that right now and we see further opportunity. And so that's really the way to think about it but I would put off any specific comments until we get completed with our work, and we can talk about it much more holistically and give you a longer-term outlook at that point.

[Heather Anne Bellini:]

Okay. Great and then the MDM market?

[David James Henshall:]

Yeah. MDM market, I'd say that our focus really hasn't been on MDM, as everyone knows. I mean, our focus has really gone from the other end of the wire and then, talking to customers about a solution for optimizing applications of all type and driving enterprise mobility. And so, from that respect, that's been our approach. And a lot of our mobility sales right now are actually coming through Workspace Suite and other large solutions like that. And so we don't have to be stuck down in the pure-MDM where it's highly commoditized, et cetera. I'd say that there's a lot going on, certainly with Microsoft, everyone knows. I've seen those comments just recently. I'd say that their continued success with Intern (35

[Heather Anne Bellini:]

Thanks.

[Operator:]

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

[Edward Everett Maguire:]

And Mark, I just want to say that it's been a pleasure dealing with your vision and heart over the years. And I am confident that you'll be very much missed. I wanted to focus on Windows 10. There's some debate about how much lift it may actually have impact on the workspace business and the desktop, in particular. But as you look at the business over the last few years, it's become less closely coupled to PC cycles. And I'd like to get your view on the impact of the Windows 10 adoption cycle on your business as you're approaching it now.

[David James Henshall:]

Sure, Ed. It's David. I'd say that as everyone saw the Window 10 launch and Citrix positioned as a migration partner and that's just a proof-point example of our great long-standing relationship with Microsoft. And similar to my comments that I made around MDM that Heather asked, I mean we've always had that approach of embrace and extend the platform. I think everyone recognizes that Windows 10's a great platform. And we expect to see a lot of uptake over the next many quarters. I think that the broader conversation of course is a little bit less about the desktop OS as a standalone than it was five years ago, and much more about the broader delivery of apps than data, in a bit more of a generic context. And that's where we're really focused. And the things that we can do to make that any message, any app, any device, any network, any hypervisor, et cetera is very important. So that's what we'll take, and it'll be a part of the sales tools, and a kit that we work in conjunction with Microsoft. But give us a couple of quarters and we give you more specific data.

[Edward Everett Maguire:]

Great. And just a quick follow up on Asia. You're seeing weakness there. And I think there's been some concern that the weakness in that region may spread further. What's – tone of business in the channel and as far as you can see it, how do you look at the disruption that we're seeing in the Asian market? And do you see it really being contained regionally?

[David James Henshall:]

Well, I think there's been a lot of discussion obviously about China and the impact there. And we've certainly seen that be a challenging market over the last few quarters and it continues to be so. In addition to that, we are also going through a consolidation right now of our APAC and Japan region kind of into a single larger structure. And that's causing a little bit more just on a disruption point of view. And so we need to work through that, but I'd say the way I'd frame it up economically is volatile and maybe trending slightly down, but within expectations.

[Edward Everett Maguire:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Gregg Moskowitz from Cowen & Company. Your line is open.

[Gregg S. Moskowitz:]

Okay. Thanks very much and Mark, best wishes and congratulations on just everything that you've accomplished over the years. So David, I wanted to just ask you about average transaction size for larger deals which I think last quarter increased by 5% to 10% year-over-year. And I'm wondering if you would share with us what you saw with respect to the Q3?

[David James Henshall:]

Yeah, there was no real anomalies in terms of extremely large deals. We talked about the actual number of large transactions bumped up pretty significantly; the average transaction size was actually just about flat.

[Gregg S. Moskowitz:]

Okay. Got it. And then just secondly, gross margins have kind of reached that long talked about 84% to 85% range. Are you still expecting gross margins to plateau from here?

[David James Henshall:]

Yep. I think definitely. It'll move around based on just the mix of revenue like you saw in Q3, but I think this should be the plateau point that we've talked about.

[Gregg S. Moskowitz:]

Terrific. Thanks very much.

[Operator:]

Your next question comes from the line of Patrick Falzon from Evercore ISI. Your line is open.

[Kirk Materne:]

Thanks. Hi, it's Kirk. Mark, best of luck going forward; it's been a pleasure working with you. I guess my question for you guys going forward's going to be, David, when you think about the – or actually I guess my question was more around the SaaS business, a little bit in front of what we're expecting. Can you just talk a little bit about that? Are we getting to the point now where some of the lagging products are getting smaller as a percentage of the mix, and you're starting to see more of the growth from solutions like ShareFile come through? Sorry if this was asked earlier, but I just jumped on. Thanks.

[David James Henshall:]

Sure, Kirk. I think your question was just a little bit more granularity into that business. And like we've talked about for quite some time, we've seen just the faster-growing components be a larger, larger part of the overall mix. And that's certainly influencing the broad business. As you'd imagine, there is one mature business in there around GoToMyPC. We've talked very openly about that. But I think more importantly than just the secular pressures going on in some of the individual markets, it's really focus on the work that the team has been doing over the last year. I talked about it on one of the earlier questions where the real focus has shifted from just driving gross sales to one that's focused much more on retention of the base, product innovation, differentiation, et cetera, and that's really helped. And that's driving not only a more cohesive product portfolio and set of solutions for customers, but really driving better execution. And so that's going to be a continued focus as well.

[Operator:]

Your next question comes from the line of Michael Turits from Raymond James. Your line is open.

[James Wesman:]

Hey guys, good afternoon. It's James Wesman filling in for Michael. Dave, can you give us a little bit more color on the enterprise side of the NetScaler business and how it did relative to the cloud service providers? And also, for delivery networking as a whole, what's your outlook on the business for the remainder of the year? Thanks.

[David James Henshall:]

Sure. I think that delivery networking as a whole, it's a good market. Our performance in the cloud service providers will allow for more volatility; it's just a fact. It's a very important part of the business. We have extremely high share, and so the purchasing patterns of those customers impact our results. Doesn't change the strategic positioning, of course, and so when I talk about everything but that, I think it gives a better picture of the enterprise market. And that business was up about high single digits in the quarter and demonstrating some of the traction points that I referenced in an earlier call.

[James Wesman:]

Great. Thank you.

[Operator:]

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

[Howard Ma:]

Hi. This is Howard Ma in for John. Thanks for taking the question. A big part of your strength in billings appears to have come from a nice bump in long-term deferred revenue, which, in your prepared remarks, you said came from workspace customers choosing to enter into longer year deals. David, could you just comment on how sustainable this change is as well as any other notable changes in billings duration?

[David James Henshall:]

Yeah, that's really been the change that we've talked about over the last several quarters. I mean, we've never made it an intention to push multi-year transactions very aggressively. It just seems to be that, customers, when they're looking to buy a piece of enterprise technology, want to lock in a little bit longer. So that's something the customers have been driving. We had actually one of the larger transactions in the Workspace Suite area. Windows app delivery was a term-based license in the period with a large government entity. And so those do come up. And when you have a multi-million dollar term-based deal, we'll recognize it ratably over the next several years. But I'd say that's a transition that will continue at probably the same pace that you've seen up to this point. Like I said, we're not trying to drive it that aggressively, but we'll follow what customers are looking for. I hope that answers your question, Howard.

[Howard Ma:]

Yeah, thanks. It does, David. Thank you.

[Operator:]

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

[Unknown Speaker:]

Hi. This is Stan (45

[David James Henshall:]

Sure. Fed was as expected. Fed always has a good Q3. In terms of overall enterprise business, like you've seen in North America, it was particularly strong. That team had a great quarter and so that was really the standout in the period.

[Unknown Speaker:]

And to sort of follow-up, as we look to the big enterprise quarter in Q4, how do you feel about the pipeline coming into Q4 this year versus last year?

[David James Henshall:]

We don't break out the exact numbers, but in terms of opportunity pipe there's certainly a huge focus internally, as you'd imagine.

[Unknown Speaker:]

Yeah.

[David James Henshall:]

There's plenty of opportunity there. It's always an execution story.

[Unknown Speaker:]

Appreciate it. Thank you very much.

[Operator:]

Your next question comes from the line of Bhavan Suri from William Blair. Your line is open.

[Alper Tuken:]

Hey, guys this is Alper Tuken in for Bhavan. Just had a quick question on the product and license revenue growth, kind of, from a higher level. I know you guys saw almost about 7% growth in the quarter after kind of seeing decreases in the previous four quarters, and I was just more so wondering how you guys see license growth moving forward, if you think that you'll kind of see up into the right trend to end 2015 and kind of into fiscal 2016.

[David James Henshall:]

Yeah. I mean it's like we've talked about for the last couple of quarters. We're focused on those solutions that are going to grow and drive the business into the future. So obviously our growth rates are impacted a little bit by things that we've been deemphasizing or discontinuing, et cetera. That puts a little bit of a headwind out there. Clearly we had a strong NetScaler quarter which we talked about. And as those come in, those will disproportionately impact the reported results. We obviously believe that the markets that we're in will support a business growing significantly faster than Citrix is right now. That's a large focus of why we're going through operational reviews, simplifying the strategy and really focusing our efforts on the things that are going to drive long-term profitable growth. And that's the way we're thinking about it. And certainly based on Bob's remarks, we'll be talking about that more in November.

[Alper Tuken:]

Thanks, guys.

[Operator:]

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

[Unknown Speaker:]

Hi, guys. Thanks very much. This is Parthiv (48

[David James Henshall:]

You know, I think that it's interesting because our position in desktop and application virtualization is largely one that goes back to inventing the market. We've got the kind of capabilities for doing this over the last 20 years that will give us tremendous breadth and depth. I think that we've always been able to differentiate across the ideas of security, experience, and flexibility. The idea of any app, any network, any device, any hypervisor, et cetera is just a core part of what we do. We partner with the best – important companies out there to deliver these capabilities whether it's Microsoft, IBM or others, and we're continuing to innovate very aggressively. You've seen innovations hit the market fairly recently around protocol capabilities. And really what that means is just performance. We've got by far and away the best performing endpoints that are out there. That's what customers care about and that's the kind of thing that we're going to continue to deliver. I'd say that our innovation rate across app and desktop virtualization is on an uptake right now. We're focusing a lot more effort in that area. And you're seeing that come out with our new products. The other thing which is still bit of a future, but the Citrix Workspace Cloud where the idea is to be able to give customers a simplified infrastructure where they can adopt these technologies, realize value in a more rapid fashion, and be able to scale without the effective overhead of a lot of enterprise on-prem technologies. And so that's a focus area as well. And so you put all these things together, it's a very strategic market for us. We've built a well over $1 billion business here, and we believe we can continue to grow that into the future.

[Unknown Speaker:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of Scott Zeller from Needham. Your line is open.

[Scott Zeller:]

Hi. Thank you. I may have missed it earlier, but wanted to ask about the license performance within the networking group. And also, could you please tell us the remaining capacity in the share buyback program?

[David James Henshall:]

Sure. We don't really break out the individual product license numbers, but based on my comments, you can infer that the license revenue in the networking obviously contributed all of the upside, if the other part of the business was down a little bit. And so that's probably the way to think about it there. In terms of the buyback, we have roughly $100 million left in the current authorization, but that is simply a conversation that we have in the broader context of capital return. So we'll continue to have that with the Board as part of this operations review, and we'll talk more about that in November.

[Scott Zeller:]

Thank you.

[Operator:]

There are no further questions at this time. I'll now turn the call back over to management for closing comments.

[David James Henshall:]

Great. I just want to say thanks again for everyone for joining the call today. We really look forward to speaking with everybody in mid-November. Thank you.

[Operator:]

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