Citrix Systems, Inc.
Q1 2014 Earnings Call Transcript

Published: 24 Apr 2014

[Operator:]

Good afternoon. My name is Candace, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems First Quarter 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to introduce Mr. Eduardo Fleites, Vice President of Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Candace. Good afternoon, everyone, and thank you for joining us for today's first quarter 2014 earnings presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer; David Henshall, Chief Operating Officer and Chief Financial Officer; and Sudhakar Ramakrishna, Senior Vice President and General Manager of our Enterprise and Service Provider division. This call is being webcast on Citrix Systems' Investor Relations website. The webcast will be posted immediately following the call. Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the U.S. securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC. Copies are available from the SEC or on the company's Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures as defined by SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website. Now I'd like to turn it over to David Henshall, our Chief Operating Officer and Chief Financial Officer. David?

[David James Henshall:]

Thank you, Eduardo, and welcome to everyone joining us today. Entering 2014, we continued our pivot towards mobile, recognizing that customers are looking for better ways to embrace mobility, the cloud, IT, consumerization and BYOD. We kicked off the year in January hosting our Citrix Summit events in Orlando, Santa Barbara and Singapore, bringing together our worldwide sales teams and a record number of partners for intense product and solutions training, all focused on driving customer success. As a leading provider of infrastructure and cloud services, we helped these customers to deliver a secure, managed mobile workspace by mobilizing apps, data and people. In parallel, we continue to drive innovation in the data center with our unique technologies across physical and virtual networking platforms, powering some of the world's largest clouds and giving enterprises the capabilities to combine best-in-class app networking services on a single consolidated footprint. I'm extremely proud of the Citrix team and our partners, whose hard work has been critical as we continue to drive this transition to mobile and cloud. So let's review the specifics of the quarter. As you can see from the release, total revenue increased 12% year-on-year to $751 million. Product license revenue grew 7% year-on-year. Our total SaaS business was $157 million, up 14%. Adjusted EPS was $0.64, and we generated record cash flow from operations of $288 million. In Q1, we closed 43 transactions greater than $1 million each as compared to 41 a year ago. Importantly, 22 of these transactions came from the Desktop & Mobile business, including 2 that were exclusively for XenMobile solutions. Additionally, the average value of these large orders was up more than 20% year-on-year. Geographically, the EMEA region continues to deliver steady growth, increasing total revenue 15% and driving $12-million plus transactions. In the Americas region, total revenue was up 9%, including 28 large transactions, and the Pacific and Japan region grew 8% year-on-year. So next, let's look at the Q1 results with our 3 primary businesses. First, our Mobile & Desktop business grew 7% from last year to $381 million. We've been driving a broader conversation with customers about transforming their enterprise to enable mobile work-style. The XenMobile products are really proving to be the catalyst to these conversations as we continue to set the bar in enterprise mobility with MDM, mobile apps, virtual apps and desktops and data all in a unified, secure solution. In fact, over 85% of our mobile platforms customers opted for this complete solution, demonstrating the value of the integrated offering versus stand-alone MDM technologies. In the aggregate, we're really pleased with our revenue and pipeline momentum here. And while still a small component of overall revenue, mobile platforms grew well over 100% year-on-year in Q1. We're also rapidly addressing the issues that have impacted overall growth within the desktop and app part of this business. In Q1, we delivered unique innovations, including hybrid cloud provisioning, where customers are now able to provision and deliver desktops and applications from the Citrix CloudPlatform, Amazon Web Services, and soon, Microsoft Azure. This increases data center flexibility, disaster recovery, burst capacity and many other business imperatives. We've also integrated our AppDNA capabilities to reduce the cost and complexity of migrating from physical to virtual. In March, we relaunched XenApp, the market standard for Windows app virtualization. Building on more than 20 years of customer-driven features and requirements, the new 7.5 addition now leverages the FlexCast Management Architecture that dramatically reduces the cost and complexity of virtualizing 5 generations of Windows apps and delivering them to users on any mobile, desktop or Thin Client device. XenApp is also the foundational technology that's been leveraged by Citrix service providers to deliver apps and desktops as a service. This subscription business, now servicing over 360,000 users, is one of our fastest expanding market segments, growing more than 50% year-on-year and now representing nearly 10% of our app and desktop license mix. So we're delivering a complete enterprise mobility solution, allowing customers to bridge the worlds of Windows and mobility. And to do so, all with a people-centric experience that only Citrix can provide. Next, in the Networking & Cloud business, total revenue increased by 13% in the quarter to $167 million. NetScaler products were again the major driver of this business, with balanced growth between both enterprise customers and Internet and cloud providers. For a little bit more context, let me touch on a few metrics from Q1. First, the cross-sell in desktop attach initiatives led to over 500 virtualization and mobile orders that included NetScaler as part of the solution. This is up about 9% from a year ago. We transacted with over 2,100 different customers in the period compared with about 1,900 a year ago, so we continue to expand the base. From a mixed perspective, the NetScaler SDX platform represented 12% of NetScaler sales and increased about 40% year-on-year. And finally, the investments that we've been making in go-to-market coverage in EMEA continue to bear fruit, leading to 25% growth year-on-year in that geo. Finally, within our SaaS businesses, revenue, as I mentioned, was up 14% to $157 million. The communications cloud, which contain services like GoToMeeting, remains the largest part of our SaaS business, contributing over 60% of total SaaS revenue and growing in the mid-teens year-on-year. Our documents cloud, which is based on ShareFile, the data sharing platform that enables IT to deliver robust sharing and sync services that meet the mobility and collaboration needs of its users and the data security requirements demanded by the enterprise, this business is scaling up nicely. It's up about 65% from the last year and now represents more than 8% of our total mix of SaaS. That's compared to between 5% and 6% a year ago. By integrating data into our emerging mobile platforms, we're also expanding the reach of these solutions in the enterprise accounts, giving them the option of leveraging the ShareFile connectors into their own data centers or to cloud storage providers -- platforms like Microsoft Azure. So turning to operations, adjusted op margin was 21% in Q1. Adjusted gross margin in the quarter was 85%. This is down about 128 basis points from a year ago as the mix of revenue reflects the higher growth of both networking and SaaS. We expect this trend to continue through 2014 but level off as we move into 2015. During Q1, we added 95 net new people to Citrix to expand go-to-market reach and customer direct touch, primarily around the networking business. Additionally, we've been investing to expand our documents, cloud and mobile platforms team. And overall, we expect fairly modest growth in headcount throughout the remainder of 2014. As part of rebalancing resources really directly against our strategic imperatives, we incurred a $10 million restructuring charge in the first quarter, and we expect a smaller but related charge to also be included in Q2 GAAP results. Looking at the balance sheet, cash and investments at the end of March were over $1.8 billion, up primarily due to record cash flow from operations, as I mentioned earlier. For the trailing 12 months, cash flow from ops has been approximately $950 million or about $5 per share. With respect to our capital allocation strategy and our continued commitment to generate value for shareholders, we announced today that our Board of Directors has authorized an increase in our share repurchase program of $1.5 billion, and this is in addition to the $429 million still remaining under the prior authorization. We're focused on a sound capital allocation strategy that balances investments in the long-term growth of our business and returning capital to shareholders. We anticipate that our share repurchase for the full year of 2014 will be significantly above 2013 levels, and we plan to purchase shares through both structured programs on the -- as well as on the open market, depending upon market conditions and other relevant factors. We'll discuss this strategy in more detail during our financial analyst event at Citrix Synergy in Anaheim, California on May 6. These presentations will be webcast live and available on the Investors section of the Citrix website. At the main Synergy conference, which runs from May 6 through May 8, we'll be joined by Cisco, Microsoft, IBM, HP, Dell and over 50 other technology partners, showcasing mobile workspace solutions for health care, financial services, education and many other industries. We also have many new and exciting announcements that will continue to further our market and technology leadership. I hope you're planning on joining us and the many thousands of other attendees from around the world. So turning to our current outlook and expectations for 2014, I'd like to first provide some context around our guidance. We expect to see the strongest forward growth coming from our networking, mobile platforms and data sharing businesses. The strength in networking, as we described in Q1, will likely compress gross margins by 1.5 to 2 percentage points from last year, ultimately impacting our overall operating margin. So overall, we're very happy with the solid Q1 results and the good start to 2014. However, given that we're still very early in the year, we're going to maintain our conservative posture towards forward guidance, but feel confident in raising the low end of our current full year estimates for both revenue and EPS. So for our fiscal year '14, our current expectations are now for total revenue growth in the range of 8.5% to 10%, adjusted gross margin in a range of 84% to 85%, adjusted tax rate of 24% and adjusted EPS between $2.90 and $2.95 per share. With respect to Q2, we expect total revenue of $765 million to $775 million, adjusted gross margin in the range of 84% to 85% and adjusted EPS between $0.57 and $0.59 a share. As we open up the call for questions, I want to remind you that I'm joined today by Mark Templeton and Sudhakar Ramakrishna, who are both available to answer your questions. So operator, we'll now take questions.

[Operator:]

[Operator Instructions] And our first question comes from Steve Ashley with Robert W. Baird.

[Chaitanya Yaramada:]

This is Chaitanya Yaramada for Steve Ashley. I just wanted to drill into the second quarter guidance a little bit. You mentioned conservatism. Given we are early in the year, I was just wondering if there was any deal pull forward or anything like that, that you're taking into account when giving the second quarter guidance. Or is it just basically conservatism, as you mentioned?

[David James Henshall:]

Sure. This is David. This is -- as you know, this is the first time we've provided the second quarter guidance. I mean, we -- last quarter, we just talked about the first period and the full year, and that's our normal pattern. So I'd say it's normal conservatism, like we have always at this point in the year. Nothing specific. We did have a very strong quarter in Q1 against networking business. As we've talked about many times, that tends to be a little bit more volatile than the other line items. And while we're likely to have another good quarter in Q2 around networking, it's more challenging to forecast. I'd say that's the only unique thing quarter-to-quarter. The rest is just very straightforward.

[Chaitanya Yaramada:]

Okay, great. And then quickly, I might have missed the desktop license growth that you normally give. If you can provide that, please?

[David James Henshall:]

Now if everyone recalls, like we talked about each quarter last year, starting this year, we are moving up the granularity that we're reporting the business to more align with the way customers are thinking about it. I mean, we're -- as you know, we're selling more and more solution-type sales that are including different line items of the business, more multi-year transactions, more subscription. And so we're only going to be reporting the businesses at a total revenue level and license revenue in the aggregate.

[Operator:]

And your next question comes from Phil Winslow with Credit Suisse.

[Philip Winslow:]

Just wanted to dig into the product license line on the Mobile & Desktop side. It seemed like you had a solid bounce back there in terms of license growth. Wondering if you could provide us with more detail as far as, really, what's driving that? I mean, did you start to see the impact from the release of 7.5 of XenApp? Or was this a kind rebound on the XenDesktop side? Or is sort of XenMobile finally hitting the point of contributing to overall growth?

[David James Henshall:]

Sure, Philip. It's David. Like I said, we're not going to drill into the individual components with granularity, but let me give you some directional indications of what's going on in the business. So of the 3 main sections -- I mean, we have seen very strong growth in XenMobile and mobile platforms overall. I mentioned that in my prepared remarks, up about 100%, more than 100% year-on-year. We continue to see growth in standalone desktop virtualization, and that's offset by a decline in standalone app virtualization. And so that's the way to think about it, and we're addressing each one of those through different parts of the business. The other thing I'd mention that I forgot to on the last question about Q2 is that if you recall last year, we had a very, very strong second quarter. So the comp for Q3 -- or excuse me, for Q2, is very high. I think we were up 21% license growth last year and 20% total revenue growth. So that may be the answer that I forgot for the second question.

[Philip Winslow:]

Right. And then maybe if you guys could just drill down on the XenApp side, I know you mentioned that, that was one of the area's weakness in 2013. Obviously, 7.5 just came out very early in Q1. Have you started to see an impact from that? And if not, when do you think you'll really see sort of channel and customers re-acceptance or better understanding of the forward roadmap there?

[David James Henshall:]

Yes. Phil. As you know, XenApp is one of those products that we deemphasized over the course of last year, and it certainly impacted both our go-to-market and our customers around more tactical project-based applications. That's where XenApp has historically been strong. That's where it's been a market-dominant product for the better part of 20 years. And so reengaging with that, we believe, is an important element for both go-to-market and of course for that segment of customer that has been weaker over the course of the last several quarters. So 7.5 hit the market at the very end of the quarter. We're on a very rapid release cycle right now. And I talked about a couple of those elements again in my prepared remarks, but we're excited about where that's going, and we've got a lot of confidence in that. So probably more to talk about in the quarter than we have right now.

[Operator:]

And your next question comes from Kash Rangan with Merrill Lynch.

[Kash G. Rangan:]

David, I just wanted to drill a little bit on what we discussed on your Q4 call. Any more considerations that the company has given to how you could realign the business model to add more of a subscription wrinkle, given that desktop as a service is now up 50%. And it alone, by my rough calculations, added about 10 points of growth for your Desktop business. How do see the future of the Citrix business model? Do you envision this becoming more of a subscription-type model? And also, secondarily, if you could comment on the expense reductions and how this new restructuring will contribute to your operating margin profile despite the fact that you have adverse mix with more NetScaler?

[David James Henshall:]

Sure, Kash. Let me take the second part of that question first. With respect to costs and margins -- I mean, some of the restructuring that I talked about earlier was really more tactical and aligning, making sure we're aligning resource against the most strategic imperatives of the business. And that is a tough process that we're always going through, and this is really focused on efficiency, delayering and just making sure we're up leveling the team across the board. So that's really the way to think about that. In terms of the broader question around subscription -- I mean, it's a valid question for really any enterprise software provider right now. I mean, customers are more and more looking at consuming things on a utility basis or a service basis, and that's for 2 reasons

[Kash G. Rangan:]

If I could ask a question of Mark, Mark, any update on the CEO search? And also, how do you think about the share dynamics in desktop virtualization? Obviously, VMware has been putting up some good numbers. How do we think about the Citrix growth profile in that market as you look out? Obviously, something is happening. The growth rates are starting to pick up, at least for your major competitor. I just wanted to get your thoughts on it.

[Mark B. Templeton:]

Sure, Kash. There's no data to share on CEO search. As I think everyone knows, these things need to be held closely and managed by the board, and so that process is ongoing. Secondly, I feel really good about our competitive position not only when it comes to VMware, but generally in the marketplace when it comes to serving the mobility needs of individuals and enterprises, especially when you take into consideration the full range of media types that need to be delivered successfully across the range of devices. So we've long stood for device and location independence. We've long stood for the ability to deliver Windows desktops and apps in a general-purpose way, and we've added core capabilities to deliver SaaS and native mobile apps and data as well. And so I think no one is in a better position to bring all these assets together and provide the kind of platform that's needed for the -- what we consider to be sort of the modern workplace, which is a mobile workspace that is device and location independent, as well as application independent, supported by a very strong data platform that's secure, and that can be shared amongst all of these -- all the apps and desktops at the front end. So I feel really good about where we are. We're going to have some exciting things to talk about at Synergy. And a more competitive world is what everyone in the industry is facing. And we have an incredible customer base, an impressible IT portfolio and an incredible application and infrastructure portfolio. And we'll bring a lot more clarity to all that for not only enterprise customers, our service providers, our SMB customers and then a couple of surprises as well. So we're pretty excited about the conference and the outlook going forward.

[Operator:]

Your next question comes from Rob Owens with Pacific Crest Securities.

[Rob D. Owens:]

With Windows XP support ending, are you noticing any behavioral changes in the customer base or the conversations you're currently having with regard to the desktop portfolio?

[David James Henshall:]

Good, Rob. This is David. I'd say nothing specific. It is one of the things that are generating conversations with customers, but probably no more so than the last quarter or 2.

[Rob D. Owens:]

And then, David, sorry if I missed it but on the buyback front, it looked like you were a lot less aggressive here in the first quarter than you were in the fourth quarter. I know the board authorizing a lot more repurchase activity moving forward, but why the change sequentially? It looks like a pretty meaningful change.

[David James Henshall:]

Well, the only thing is we're looking at capital structure and repurchase more holistically. And I can point you to the other releases that we put out today. And I'm not really at liberty to talk about that as an active security offering. However, we will be talking much more granularly about how we're thinking about capital structure, return of capital, et cetera, at our May 6 financial analyst meeting.

[Rob D. Owens:]

And what was the amount of the buyback during Q1?

[David James Henshall:]

De minimis.

[Operator:]

Your next question comes from Keith Weiss with Morgan Stanley.

[Keith Weiss:]

I was wondering if we could get an update on the CEO search, perhaps in terms of sort of how far along you guys feel you are. And maybe some color into kind of what are some of the key attributes you guys are looking at for Mark's successor?

[Mark B. Templeton:]

Yes. I think this is probably a topic that we not -- we prefer not to discuss openly on the call, and it's being managed by the board and the search committee. We have seen candidates, and the search is very active. And I think, obviously, we're looking for things that we value most in people and leaders. And the first is culture, cultural fit. How we do business matters to us as much as how much business we do, and it's been a foundation for the company for a long, long time and one of the long-term strength of the company as you face business cycles over the long time. I think the second area that we are very much looking for is someone who's a strong product leader and product-oriented visionary. I think these -- the landscape, how it's changing, is affecting how we're thinking about candidates and their ability to steer the company and lead the company through any rapidly evolving landscape. And I'd say the third is what I like to refer to as leader of leaders, and that is a great team builder and to really come in and be part of a fantastic team that we have here. And those would be the leading characteristics at a high level. But I think a lot more discussion about the search, we'd rather defer and leave that in the hands of the search committee.

[Keith Weiss:]

Fair enough. If I could squeeze in one more, in terms of the mobile business and the competitive environment there, obviously, a big change in competitive environment with VMware buying AirWatch. I also see Microsoft come out with sort of a refresh of their product portfolio and a suite solution. Can you talk to us a little bit about how that competitive environment is evolving, if you see any change in terms of sort of how customers are thinking about those solutions or who you're going up against in terms of these deals?

[Sudhakar Ramakrishna:]

Sure, this is Sudhakar, I'll take that question. Specific to VMware and the acquisition of AirWatch, at some level, that was really not a surprise to us, as we commented last time as well. As you know, their focus has predominantly been in the mobile device management arena, whereas we have focused on application and content management in addition to device management. I consider ourselves to have best-in-class mobile device management capabilities, and additionally, we are focused on apps and content management. And what we are seeing from customers is an increasing focus on application and content management capabilities and not just device management capabilities. And as you know, competitors such as AirWatch have entered the app management arena only recently. As it relates to Microsoft, a lot of their focus continues to be in the context of their in-tune service, which again is, broadly speaking, a mobile device management solution. Just to give you some perspective to build and deliver secure productivity applications at scale, a company needs a platform for building applications, first and foremost; an ecosystem that can leverage this platform and rapidly create applications, some horizontal applications and some vertical application; a scalable application delivery infrastructure platform that provides things like security, user-level analytics, acceleration and so on and so forth, that our best-in-class NetScaler product line provides; and the assets and the ability to integrate and deliver great experiences across a wide range of applications. Those could be native mobile application, Windows applications and SaaS applications. We are the only company that has all of these assets and the delivery capabilities to integrate and deliver superior experiences to our customers, and this is the reason why I feel extremely confident in our leadership position and our ability to continue to extend that leadership position with our stellar roadmaps.

[Operator:]

Your next question comes from Heather Bellini with Goldman Sachs.

[Heather Bellini:]

I just wanted to ask a little bit about your near term -- or medium-term and long-term operating margin target. I mean, just given the fact that the networking business continues to kind of drive the growth of the company, I'm just wondering if you could kind of give us a refresher on when -- what type of target should we be thinking about? And how do you -- how long do you think it takes you to get there as we look out over the course of the next few years?

[David James Henshall:]

Yes, Heather, it's David. I mean, without giving specific guidance beyond what we've done publicly already, I'd say directionally, we haven't changed our belief that the company should be operating in the mid- to upper-20s in terms of adjusted op margin. We're certainly below that right now for a number of investments, new businesses we're ramping, and obviously this shift in gross margin that's been providing a bunch of headwind. So we're focused on addressing this in a couple of different dimensions. One is obviously growing through the new business dilution as we ramp, in particular, businesses like data sharing, like mobile platforms, et cetera. Second, in terms of overall gross margin, we do -- and I talked about this the last couple of quarters -- we do see that flattening out here in the kind of 2015 time frame. So next year, that'll cease to be a headwind. So efficiencies that we drive both on the top line and internally will accrete to higher leverage. And then, of course, we are very focused on looking at the overall portfolio and efficiencies in the business to see in what areas we can drive higher productivity. So it's a combination of all 3 of those things. But directionally, certainly are still targeting that mid- to upper-20s range, and want to be moving in that direction currently.

[Operator:]

Your next question comes from Kirk Materne with Evercore.

[Stewart Materne:]

I guess, David, could you just -- David, could you talk a little bit about the growth in EMEA? Sorry if someone asked this already. But I guess how much of that is due to the economic environment potentially getting a little bit better? How much of it is sort of your guys' execution and/or I guess just better sales coverage? Because I know you guys have been adding resources over there over the past year or so.

[David James Henshall:]

I think the short answer is all of the above. We've got a strong team that has been led by Carlos Satorios. They're doing a great job driving growth across all the businesses. I called out networking in particular because that is one of those areas that, about a year ago, we said we were going to be investing in aggressively. We had capacity constraints, and so we've been driving across that. We've seen great results there, and it's certainly a model -- we have the capacity to replicate it in other places. At the same time, the markets are, I'd say, maybe modestly improving in some areas and at least stabilizing in others. So we're kind of getting rid of that headwind of economic pressures to the extent that it was last year. I wouldn't call it robust environment. I think people are still very focused on capital allocation, on costs, et cetera, but it's more normalized than it has been for a few quarters. So across the board, yes to all 3 of those points you raised.

[Operator:]

And your next question comes from John DiFucci with JPMorgan.

[John S. DiFucci:]

I guess just sort of a follow-up and not just for Europe, David. Could you talk a little bit about how you're doing with your go-to-market coverage? There was some -- there was an issue the last couple of quarters for weak desktop and mobile sales. It appears things might be getting better there, but can you just update us on that?

[David James Henshall:]

Yes. John, it's kind of a multifaceted question, I'd say. In terms of go-to-market coverage -- I mean, there's certainly some places where we don't have the breadth of coverage we'd like to, to be able to meet customer demand. That's probably a statement both pre and post sales. And a lot of that is also really focused on networking, which tends to be a more specialized discipline than core virtualization would be. So I highlight EMEA because it's one of those areas we made the largest investments and have seen great returns so far. But we are still capacity-constrained in a lot of markets, where we just don't have enough coverage. And one of the investments we've been making, of course, one of the reasons why you've seen such outsized growth in our Networking business over the last couple of years. In terms of the other business -- I mean, we're in early stages of ramping what I'd call more traditional channel partners against mobile platforms. A lot of training and certifications, et cetera, were taking place in the first quarter, but that's going to be an ongoing process for a while. That's still early days, and we need to get that -- get that in the hands of all the partners and get them ramping. In terms of what I think the last question is around more traditional CSA channel partners, the one area that we are focused on right now is reinvigorating XenApp, because that typical project-based sale was often handled very directly by channel partners. With the deemphasis of that product over the past couple of years, it has impacted engagement to some levels. And so as we bring that back out, we help them with the appropriate migrations, assistance, et cetera. That's one of the things that we're doing to reengage that element of the channel. So, John, a pretty long answer, but I think there's a number of different factors that are really underlying the overall go-to-market motion.

[John S. DiFucci:]

And that's actually very helpful, David. But it sounds like a lot of the stuff you have in place, and you've had in place -- and it's starting to work. But it sounds like there are some things you're still going to be doing. Does that conflict at all with what you talked about with your goals for operating margins? Or is that something that's figured into that?

[David James Henshall:]

I think it's all figured into it effectively. I mean, it's not specifically called out. At the end of the day, the more we can work with partners, the higher leverage we're going to have as a company. I mean, we have partnering as part of our DNA. That's how we were founded, and that's really where we see a lot of opportunity in the future. So we're very focused on that.

[Operator:]

Your next question comes from Walter Pritchard with Citigroup.

[Kenneth Wong:]

This is Ken Wong for Walter. Building a bit on Rob's question earlier, you guys used to talk a little bit about how hardware refreshes presented good opportunity to approach customers about XenDesktop. I mean, did you guys see any uplift with the recent -- kind of the recent strength in corporate refresh? And any concern we should have that it might become a headwind in the back half now that the XP end-of-life is kind of over and done with?

[Sudhakar Ramakrishna:]

We don't have any particular concerns. And with regards to additional traction, I'd say, XP end-of-life is still a very recent event. So I wouldn't say we have enough data points to call out a trend at this point in time. We see a variety of customer needs. And as David was mentioning earlier with regards to the larger enterprise customer, DV continues to be strategic for a variety of reasons. And with the migration to 2012, Windows Server 2012 is when we see some additional uptick happening within this business.

[Kenneth Wong:]

Got it. Great. And then you guys saw pretty good strength in technical services this quarter. What was the driver of that?

[David James Henshall:]

I'd say it's largely implementation of large transactions from the end of last year.

[Kenneth Wong:]

Got it. Should we expect that to continue heading into the back half of the year?

[David James Henshall:]

Well, I'd say, as you know, that number does tend to move around just depending upon utilization. I mean, the growth rates last year ranged anywhere from 2%, to -- I think it was 28% or 29%. So it'll bounce around a bit year-on-year, but real high utilization in Q1 and good progress. I mean, we're -- as I mentioned earlier, one of the areas that we continue to do very well in is in large transactions. I said it pretty quickly in my prepared remarks, but an interesting element of the large transactions is that the average size actually is up more than 20% year-on-year, from where we were in Q1. So we're selling larger, more complex, more multi-product elements that are requiring a higher level of architectural assistance, guidance around our consulting organization and really just helping customers scale and be successful.

[Operator:]

Your next question comes from Rick Sherlund with Nomura.

[Richard G. Sherlund:]

So, David, I just wanted to drill down on that last comment a little bit. It seemed that there's a strong need here for tighter integration across all of these products, and the differentiation might very well be the breadth of the offering that you're able to bring to market. I think you've been working on more and more product integration. Can you give us a sense of where you stand in achieving the level of product integration that you'd like to? And you've mentioned there's more big deals. I'd be kind of curious about the pipeline looking forward. Should we continue to expect, as you work more on integrating the product portfolio, that the deals continue to increase in size?

[David James Henshall:]

Yes, Rick. I think in terms of quarter-to-quarter, I think the average size will move around a bit. But directionally, we're moving kind of up and to the right, and I think it's just a representation of being more strategic with customers as you mentioned, as we're integrating more and more components. In terms of where we are on that roadmap of integrations -- I mean, we've got a lot of great proof points of places where we're leveraging products across each other. Simple example is tight integrations with the collaboration and data platforms into more enterprise mobility, creating unique competitive differentiation and really just usefulness for our end customers. In terms of the enterprise products -- I mean, that's a continuum that I don't think we'll ever get off of. And maybe ask Sudhakar to provide a little bit more granularity in terms of kind of where the focal points are and how we're thinking about that over the balance of '14.

[Sudhakar Ramakrishna:]

Absolutely. So this is going to be an ongoing effort on our side to integrate our products more effectively, as well as continue to inter-operate with our ecosystem on a broader basis. So we have developed a series of plans, I would say, across the book. One is to just look at it from the standpoint of automating a lot of our deployments, integrating our product in that sense such that on-boarding a customer becomes incredibly easy. So we -- that's been a lot of focus for our XenApp, XenDesktop product lines, as well as our mobile platforms groups. We are also doing a lot of cross product integration, some of which David alluded to. But increasingly, we see NetScaler being integrated across mobile deployments, as well as across XenApp and XenDesktop on deployments. Our goal is to continue to focus on this to provide better experiences, both from an administrator perspective, as well as from an end-user perspective. So a lot of the comments that I made earlier about integrating Windows apps, SaaS apps and mobile apps and delivering consistent experiences, that is one level of integration that we are undertaking at this point in time. Another level of integration is from an administrator standpoint to provide them better ways of configuring our products, creating visibility into how our products are performing, giving them user-level insights and analytics. So like David mentioned, this is a journey that we embarked on. We have already covered some portion of the journey, and we continue to build on our roadmaps as we move forward.

[Richard G. Sherlund:]

And, David, just one more question for you. On the -- I think you said there was a $10 million restructuring charge in the quarter and you expected there to be more, I think you said in Q2. But I thought you said something about GAAP. G&A was up quite a bit in the quarter. Was that $10 million in the non-GAAP numbers? And should we expect that again this next quarter?

[David James Henshall:]

No. The $10 million is only in the GAAP numbers. And in the Q2 time frame, that should be a similar but smaller charge.

[Richard G. Sherlund:]

What was in the Q1 number? It looked abnormally high.

[David James Henshall:]

Well, a number of things, implementation of capital projects that had been delayed last year, things that start hitting the overall books. I mean, that's the biggest one. We're building out capital and data centers in various places, but nothing extraordinary on that front. The increase in legal fees, things like that, but nothing I would call out as material to the business.

[Operator:]

And your next question comes from Raimo Lenschow with Barclays.

[Raimo Lenschow:]

Quick one. So AWS with their desktop on demand is out now for a bit. Can you talk a little bit of what you see in terms of impact on competition? And I guess, VMware has something out as well. Just kind of how is that shaping up for you?

[Sudhakar Ramakrishna:]

So AWS has launched its desktop as a service. From an impact and a competition standpoint with our existing customers, frankly, we haven't seen a whole lot of it. If I were to segment our customers as enterprise and SMB customers, for instance, many of our enterprise customers are looking at the cloud and DaaS as an extension of their premise-based deployment. They're asking us for capabilities such as how do I burst into the cloud? How do I deliver business continuity while preserving the exact same capabilities and experiences that they get on-premise? This is what we call hybrid cloud provisioning, and this is a capability that was delivered with our XenApp and XenDesktop releases in Q1. And so we are already in engagement with the customers to be able to provide those capabilities. Now as it relates to our small and medium customers, and you heard David talk about how our Citrix service provider channel is gaining -- increasing traction in delivering desktop-as-a-service what, they're looking for is not just plain, vanilla desktops that you get out of a AWS-type service, but taking those desktops as a starting point and adding critical capabilities, both horizontal and vertical, and doing it in a manner that is specific to our end customer, which is what many of our CSP partners are doing. And that's what's driving value into the SMB channel. So we feel we have a very strong play for both segments. The enterprise on one hand is our hybrid cloud provisioning capabilities, as well as the SMB through our CSP channels. And that will continue to be a motion going forward for us.

[Raimo Lenschow:]

Perfect. And one quick question. I know you don't bring out NetScaler now, any more standalone, but if I'll think about the 13% growth in cloud when you obviously had like some massive comp numbers that you had to go against here, how do you feel about competition? I think F5 just came out with like 22% product growth. Is that kind of show I think in the second half and comps are getting easier that we kind of see a clearer number there? Or is there anything that we should kind of be aware of?

[David James Henshall:]

No, Raimo, I'd say nothing specifically. I mean, I haven't seen any detail on their business. But I mean, we've obviously been really focused on the broader, will call the NetScaler business for all the dimensions that I talked about in the last few quarters, that's everything from just expanding our coverage so that we can service more accounts, traditional ADC-type opportunities, selling into some of the largest clouds and Internet service providers, which has always been a strength of ours, as well as just driving deeper integrations. And Sudhakar talked about it a minute ago, where this isn't just an attach or a cross-sale opportunity per se. But really, the accretive value of the system is where a lot of strategic differentiation comes from. And so that's where the 1 plus 1 equals something broader than that. And we can do things by being able to manage both layer 4 7 networking, as well as the higher layers of applications and, in some cases, mobile to really optimize a complete solution. And so that -- it's really all of the above that we're pushing on right now. And then, of course, just continued strong relationship with Cisco, including joint go-to-market opportunities, lots of Cisco-validated designs, I think we have 10 of them now, and some pretty interesting and unique new things we're doing with the RISE infrastructure. So multifaceted.

[Operator:]

Your next question comes from Ed Maguire with CLSA.

[Edward Maguire:]

I have a question for Mark. It's good to hear you on the call. As you look forward to -- toward the role of the new CEO, I was curious as to what your priorities are going to be until your successor is named?

[Mark B. Templeton:]

Thanks, Ed. Good to hear your voice, too, and that really applies to everyone. I've got to say, it's really great to be back. I did in fact start back on February 3 as promised, and the first upside surprise is that my badge still worked when I got to the office. But I've really been inspired by being back. And as I think about my priorities, it'd sort of be just a few things. First, it's staying all in until we do name a successor. And this is my 19th year with Citrix. And I have love and dedication to this company that's beyond a job. And I'm here hands-on, seeing customers, seeing partners, working with the team and propagating our ideas on not only what we do but how we do it. The second big priority that I've been focused on is helping to align our products and go-to-market machinery better so that we get more efficient and more competitive. Obviously, we're taking a number of direct shots from competitors, and part of the reason is we're in hot markets and our vision around mobile and cloud has now become the vision of others. So I'm trying to make sure that we're aligning products and go-to-market where we have a sensible advantage so that we can continue to drive growth and profitability and leverage in the way we have for so many years. And the third big area that's a priority for me, and has been since the day I got back, was to refine our vision. The fact of the matter is, the landscape is moving more rapidly and evolving more quickly than ever. And the trick in having a vision is to articulate how you had increasing relevance in the landscape that you see. So this really gets back to some of the things that -- some of the questions that have come up regarding our portfolio; where we invest more; where we invest less; integrations, both at the tactical and the strategic level; and how to use the whole notion of product design as a differentiator for the company so that -- because that's more and more where the battle line will be drawn, I believe, in the future. So those are a few things that I'm heavily focused on, hands-on, and enjoying working with this great team. And I think you'll see some of this more specifically at Synergy when we roll out some exciting new things.

[Edward Maguire:]

Great. And just a quick follow-up for Sudhakar. Following the ByteMobile acquisition, you've been focused on building out the carrier vertical. And if you could just provide a -- just a pulse check on how those efforts have been proceeding.

[Sudhakar Ramakrishna:]

So we continue to make progress obviously. ByteMobile was used as, call it, entrée into the service provider space. But I want to highlight that our portfolio for a service provider is much broader than just ByteMobile. For instance, we have been increasingly adding capabilities into the NetScaler product line to get into the service provider segment. Our CloudPlatform forms the basis of infrastructure as a service delivery for a large number of service providers and many Tier 1 service providers worldwide. So we've been continuing to build on our capabilities. Our long-term play there is to not only extend these capabilities and gain traction, but also to support the communication service providers as they evolve into delivering more network function virtualization, which is one of the key trends, as you know, in the service provider space. And we believe we have all of the assets, starting from hypervisors all the way up to actual workloads that get delivered from these service providers. So our strategy continues to evolve with a growing set of products and solutions and go-to-market motions for the service providers.

[Operator:]

Your next question comes from Michael Turits with Raymond James.

[Michael Turits:]

I'm sorry if by chance this was asked before, but can you talk a little bit about the channel go-to-market strategy? It seems as if you've been increasing the focus in investment on channel. And how is that balancing with what had been the move towards integrators and larger resellers a few years ago?

[David James Henshall:]

Yes, Michael, it's David. I think we're addressing both. I don't think we've ever backed away from anyone in particular. SIs are an important channel partner because that's really who a lot of our large customers turn to when they're looking at the broader infrastructure. So we've had a big focus on building up that skill set over the last many years. We're doing really well there. I mean, the SI business is up year-on-year. We've got a lot of good traction from the same folks that we have in the past, IBM, HP, Fujitsu and others, to really just driving value and not only against our solutions but against a broader transformation that the customer is trying to engage in. In terms of our traditional go-to-market engine, I mean, we're very focused on that and have been for some time. And the things that I referenced earlier is needing to ramp the capabilities around networking, that's a work in process; ramp the new capabilities around mobile, and that's just simply because it's new; and then of course reengaging partners with app virtualization and continuing to extend desktop virtualization. So multifaceted relationship with those partners, but we are certainly looking to invest in all aspects of it.

[Michael Turits:]

And forgive me again if it was covered, but did you comment on how the go-to-market with Cisco was doing?

[David James Henshall:]

No, we didn't specifically. I mean, it's going well. It has been going well. We're driving lots of joint business, both in terms of desktop virtualization. In total, I think we now have 10, maybe 12, Sudhakar, Cisco-validated designs? So we're working across both go-to-market. Lots of work on the product side to drive deeper integration, and we talked about some of those earlier. From a pipeline standpoint, we continue to manage well north of $100 million in joint pipeline with Cisco, so it's good. It's a very, very good partner and we enjoy working with them.

[Operator:]

Your next question comes from Karl Keirstead with Deutsche Bank.

[Karl Keirstead:]

So at about the same time that you launched the XenApp 7.5, VMware came out with their new product in this space. And while I realize this call is certainly not a forum for a rival product comparison as we all look to evaluate the trajectory of VMware in this XenApp-like space, I'm wondering if you could just leave us with the 2 or 3 things that you would highlight as the key XenApp differentiators from VMware's new product.

[Sudhakar Ramakrishna:]

Sure. Happy to do that. This is Sudhakar, by the way. First of all, I just want to highlight that Horizon 6, which VMware announced, is not yet shipping. So we really don't have the true capabilities, only advertised capabilities at this point in time. That being said, as you know, we've been innovating in and improving the times of application delivery for the better part of 25 years. And there are many aspects to delivering applications securely and scalably, but I'm just going to give you a few quick nuggets on some of the key things that are necessary to deliver broad capabilities. For instance, delivering universal printing capability at the end user level is extremely important to deliver essentially native experiences in a hosted end-market. Likewise, application migration and remediation is an extremely critical capability as well, because part of why customers deploy applications such as XenApp is because of the breadth and the diversity of applications. So capabilities such as the ones that we deliver with what we call the AppDNA product, which is integral to our XenApp product, is extremely important. Another aspect is having deep and broad relationships with ISPs who are focused on key verticals, working alongside them in building applications, optimizing them and so on and so forth. And last but not least is delivering experiences across desktops and mobile, optimizing for voice and video-rich capabilities such us what we bring to HDX. So it's not just about a release with app delivery capabilities but optimizing across all of these dimensions. That is what customers look for, and that's what we have to offer. So that's why I continue to believe we have a significant differentiation and a runway in the XenApp space.

[Operator:]

Your next question comes from Gregg Moskowitz with Cowen and Company.

[Gregg S. Moskowitz:]

David, I know you're fairly excited about XenApp 7.5, and many of your customers were clamoring for a product refresh there. But could 7.5 potentially cause some near-term migration issues along the lines of you saw last year with XenDesktop v7?

[David James Henshall:]

I'm going to let Sudhakar talk about the migration and the roadmap for XenApp.

[Sudhakar Ramakrishna:]

So the first areas that we focused on as it relates to the XenApp release was initiatives providing cloud support through hybrid capabilities, extending our capabilities on delivering better mobile experiences and also video delivery experiences. So there's a class of customers that have been asking for those capabilities that we are able to serve with what we already delivered. But a key area of focus for us going forward into 2014 is to provide migration tools that seamlessly and effortlessly allow our customers to migrate to the new versions of XenApp 7.5, thereby not incurring long upgrade cycles but yet enjoying the benefits of the new features that we've added. Another key highlight that I want to highlight or accentuate there is the architecture for XenApp 7.5 is identical to XenDesktop 7.5. Therefore, it allows our customers to essentially use the same infrastructure or better yet, optimize their deployments much more effectively and do desktop virtualization on one hand or app virtualization on the other hand and have a lot more elasticity, so to speak, in terms of how they leverage their assets.

[Gregg S. Moskowitz:]

Okay. That's very helpful. And then just a follow-up on the share repurchase authorization. And I realize you're restricted from providing specificity, but given what is a fairly depressed stock price, can you say at a high level whether the ASR will be a material component of that plan?

[David James Henshall:]

I can't yet. I can't give a lot of details on that, but we will be talking about that in great detail at the May 6 financial analyst meeting.

[Operator:]

Your next question comes from Mark Moerdler with Sanford Bernstein.

[Mark L. Moerdler:]

Many of them have been answered already, so let me drill on a couple of quick items. Can you give us a sense of the response you're getting to the relaunch of XenApp from both the clients and the partners? Obviously, it wasn't much of an effect this quarter on revenue. But given the initial results, conversations, et cetera, how should we think about the pickup from both sides?

[David James Henshall:]

Yes. This is David. Let me take that. I think it's very early. There was certainly some confusion around XenApp as a product line and the direction of that last year, whether that product was being deemphasized or discontinued, many other rumors about that. Some driven by Citrix, frankly, and some driven by competitors. And so where we are right now is just reasserting our leadership across app virtualization, which is an increasingly important component to delivering mobile work-styles to mobile devices, I'd say. And so we're doing that with the launch of 7.5, as well as a really rapid product development roadmap. And so we'll be talking more about that at Synergy. Keeping expectations very, very light right now until we get a couple of quarters of actuals under our belt. That's probably the way I'd say to think about it in the short term.

[Mark L. Moerdler:]

Okay, that makes sense. And second, on NetScaler, you've given a little color in the past on this. Was this stronger on the enterprise side or the cloud or equal? How is that trade-off that occurs? It shouldn't be a trade-off, but that relationship that occurs?

[David James Henshall:]

Sure, Mark. I mean, it's always stronger on the enterprise side. I mean, that's generally the larger segment. What we call kind of cloud or telco segment is anywhere from 35% down to probably 20% to 25% of the mix. It wasn't closer to the higher end of that, that range this period, but we saw growth across both segments.

[Mark L. Moerdler:]

No huge, large deployments in the cloud side that we should be cognizant of?

[David James Henshall:]

Well, it depends on your definition. I mean, there are always multimillion dollar deals that are going into cloud service providers. In some quarters, there are many of them. Like this quarter, there were several as well. So that is to a handful of names. It's the same dozen or so big, big data center build-outs. And fortunately, we're selling into those in just about every quarter these days.

[Operator:]

Your next question comes from Abhey Lamba with Mizuho Securities.

[Abhey Lamba:]

David, you talked a little bit about the Cisco relationship. Maybe can you give us a little more color on -- should we expect that contribution to accelerate from here as we go into the next few quarters? And what type of ramp up should we see there? And secondly, you call for stabilization of gross margin in 2015. Should we expect the product mix to stabilize and thus, the gross margin to stabilize? Or product mix should continue to kind of favor networking group, but it's the individual business segments' margin improvement should help us see that stabilization?

[David James Henshall:]

Sure. Let me take the second part of that first. In terms of gross margins, really a couple of things. One is the re-acceleration of our software businesses. And as everyone knows, those carry gross margins that are approaching 100%. And on the other side, we are slowly reaching the gross level of our networking business which tends to run in the mid- to high 70s. And obviously, on the virtual component, that has margins that look much more like software. So the -- regardless of the mix, we're kind of coming down towards that level where the decline is slowing pretty materially. Obviously, if we're able to accelerate growth in the traditional software-based businesses, we can impact that much more directly. But as it stands right now, looking at 2015 is a time where it starts to plateau better. In terms of Cisco, we didn't provide a lot of specific commentary around that. Continues to be a very good, positive relationship across both product development and go-to-market. I think we're happy with where we are. We're driving lots of business on the go-to-market side. I think that you're seeing an increasing volume of announcements around product level integrations. Those are important because both companies are focused on customers, and making it really easy for customers to adopt infrastructure in a way that removes as much complexity as possible. So that's where I'd say we're focused, and we'll be talking about it each and every quarter, both in terms of product announcements and go-to-market. But gradually, higher and higher contribution, but I wouldn't expect any material change just on a quarter-to-quarter basis.

[Operator:]

Your next question comes from Ross MacMillan with Jefferies.

[Ross MacMillan:]

Your comments on the CSP or Desktop-as-a-Service business were positive. Are you making -- is that an area of focus? Are you making incremental investments there? And I guess specifically, are there any external factors that you think could change such as Microsoft changing SPLA licensing rules? Or anything else that you anticipate could change the dynamics in that market over the next 12 to 18 months?

[Mark B. Templeton:]

Yes, this is Mark. I think we are making a number of incremental investments to help service providers onboard customers more quickly and build out systems that can handle rich apps and a wider diversity of applications and desktops and to generally grow that business not only in the Tier 2 and Tier 3 service providers but much, much more focus on Tier 1. So that would be the first area of investment and -- from our part. Secondly, Microsoft obviously is hugely behind building their platform around Azure on a global basis. And workloads like data, such as our ShareFile service, as well as desktop and app delivery are huge potentials for consumption of the Azure platform. And I think that as Microsoft sees these kinds of workloads as a great opportunity, I think there's great opportunity for them to optimize their licensing more and more and more to make it easier and easier for customers to leverage the Azure platform. Obviously, as a long, long time Microsoft partner, we're working pretty closely with them on that front so that Azure can be a spectacular platform for desktop-as-a-service and for delivering rich apps as a service as well. So that's how we're thinking about it, and we think that Microsoft will more and more enable this as a way of building the consumption of Azure capacity.

[Ross MacMillan:]

That's really helpful, Mark. And maybe just one quick follow-up, David. Just curious, in Q1, obviously your share buyback was low, although that's going to change here. Was there any specific reason why it was low in Q1? Any technical reasons? Anything to do with the convert? Anything specific?

[David James Henshall:]

Yes. Specifically, we were evaluating overall capital strategy.

[Operator:]

Your next question comes from Daniel Ives with FBR Capital Markets.

[James Moore:]

This is Jim Moore in for Dan Ives. Just on the large deal front, you guys had a pretty good quarter there and had a couple on the mobile side. So just kind of curious as to where you see these large deals going on the mobile side? And you've talked about the sales force and the work you're doing there. I guess how are they going to be able to handle larger deals like these?

[David James Henshall:]

Yes, Jim. March transactions, they came across all product lines. I mean, we had a number from networking, a bunch from app and desktop virtualization, and then I called out a couple that were mobile-only. It's probably worth pointing out that in some of those other transactions, there were components of mobile that were included in that, but I just referenced the greater than $1 million mobile-only one. So -- I mean, these are capabilities that we talked about earlier that we're building out internally to make sure that we've got professional services that can help customers through the most appropriate architecture, building out whatever data center infrastructure they need and then, of course, managing and scaling. Fortunately, most of those technologies or skill sets, let's say, already exist in our traditional channel partner. The most complex part of that, of course, is related to the virtualization, if they're layering that in this part of the solution and in how they're configuring and managing the network infrastructure at the same time. So the overall solution is where we tend to be more hands-on as a company with our own resource, as well as from SI. If it's pure standalone mobile, I think those are capabilities that a lot of our partners are already in a position where they can execute on.

[Operator:]

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

[David James Henshall:]

All right. Thank you. So we're helping customers embrace mobile work-styles. We're mobilizing apps, data and people, all powered by Citrix cloud infrastructure and services. And as I said earlier, we're encouraged by the momentum we're seeing in several parts of the overall business, and we're very confident we have the right strategies, solutions and focus for 2014. So thanks again to everyone for joining the call and look forward to speaking with everyone at our upcoming financial analyst meeting on May 6. Thank you very much.

[Operator:]

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