Citrix Systems, Inc.
Q4 2014 Earnings Call Transcript

Published: 29 Jan 2015

[Operator:]

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

[Eduardo Fleites:]

Thank you, Heather. Good afternoon, everyone and thank you for joining us for today's fourth quarter and fiscal year 2014 earnings presentation. Participating on the call will be Mark Templeton, President and Chief Executive Officer and David Henshall, Chief Operating Officer and Chief Financial Officer. This call is being webcast on Citrix Systems' Investor Relations website. The webcast will be posted immediately following the call. Before we begin, I want to state that we have posted product specifications and historical revenue trends related to our product grouping to our Investor Relations website. I would like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provisions 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 differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website. Now I would like to turn it over to David Henshall, our Chief Operating Officer and Chief Financial Officer. David?

[David Henshall:]

Thank you, Eduardo and welcome to everyone joining us today. Before I discuss our Q4 and 2014 results, I would like to briefly highlight the restructuring program that we announced today. Over the last few months, we've simplified our software-defined workplace strategy, a unique perspective and approach that's resonating well with customers and partners. Internally this is driving organizational realignment, clarity and focus. In addition, the actions announced today will drive operational efficiency while enabling continued investments in the areas that will power long term growth, like mobility, cloud services and networking. This restructuring will include the elimination of approximately 700 full-time and 200 contractor positions worldwide and the consolidation of certain leased facilities. We anticipate that the company will incur a pretax charge in the range of $50 million to $55 million in connection with this restructuring. And all in, these changes are expected to result in annualized pretax savings of $90 million to $100 million. As I outlined on our prior earnings calls, we're committed to increasing our operational efficiency in 2015 including the continued rationalization of our product portfolio consistent with our stated strategy. So now let's review the specific results from Q4. As you can see from the release, total revenue increased 6% year-on-year to $851 million. We generated cash flow from operations of over $190 million, adjusted EPS increased 6% to $1.10 per share and deferred revenue was up $154 million sequentially or 10% year-on-year. In Q4 we closed a record 90, $1 million plus transactions. About half of these deals came in the workplace services business including 13 that were for the Workspace Suite, our newly launched solution that unites mobility, app virtualization and secure data all in a single package. Geographically the EMEA results were negatively impacted by currency as well as some softness in Eastern Europe, but despite these issues, total revenues still increased 7% including 38, $1 million dollar plus transactions. Within the Americas total revenue was up 4% and the teams closed 48 large transactions and finally in APAC, revenue grew 5% with some uneven demand conditions seen in both China and Japan during the quarter. Next let's briefly look at Q4 results within our three primary businesses. First, Workspace Services grew 2% to $437 million. As discussed last year, we've been driving a broader conversation with customers about transforming the delivery of IT services to enable mobile work styles, securely and efficiently. Mobility has been the primary catalyst, plus the need for customers is to take a holistic approach to solving these problems. This strategy is what drove the creation of the Workspace Suite offering in the middle of last year. In Q4 we saw significant uptake of the Suite from both new and existing customers. And while contributing about 15% of Workspace Services license revenue, it also drove the majority of growth in our long term deferred revenue as many customers chose to enter into multiyear arrangements. We do expect contribution from the Suite to continue to grow into 2015 which will gradually lead to a higher percentage of revenue being deferred. Also in the Workspace Services area is our Service Provider business. This subscription-based program is growing nearly 50% year-over-year, a pace that we expect to continue into 2015. So we're delivering a complete mobility solution allowing customers of all sizes to bridge between the worlds of Windows and mobile, on premise or service based and doing it all with a customer centric experience that only Citrix can provide. Next in the delivery networking business, total revenue increased 11% in the quarter to $195 million. The NetScaler products were again the major driver of this business, showing strong growth within the enterprise customers which now represent about 2/3rds of total sales. For more context, let me touch on a few metrics from Q4. First, product integration initiatives led to over 700 virtualization orders that included networking as part of the overall solution. This is roughly a 10% attach rate which is an increase in contribution over a year ago. We transacted with over 2600 customers in the period compared to about 2300 last year as we continue to expand the base of both new and cross-sell. And from a mix perspective the NetScaler FPS platform has been growing the fastest, up more than 25% year-on-year in Q4 and now representing 19% of the overall NetScaler mix. We continue to drive innovation in the data center with our unique technologies across both physical and software-defined 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. And finally, revenue from our SaaS delivered mobility apps grew 10% to $168 million. Our communications cloud remains the largest part of this business, contributing 60% of the mix and growing 10%. Our secure data platform, ShareFile continues to expand rapidly, up 60% year-on-year and now surpassing 50,000 customers and over 10 million individual users. The majority of this growth is coming across document centric verticals, enterprise customers and the tight integration that we've built with our mobile and virtualization solutions. Turning to operations, adjusted gross margin in the quarter was 85%, down about 0.5% sequentially and while margins will continue to reflect the mix of revenue, we expect this trend to level off into 2015. Adjusted operating margin was 26% in Q4 and cash flow from operations was $190 million for the quarter and $850 million for the trailing 12 months. This is approximately $5 per share. On the balance sheet, cash and investments totaled $1.9 billion at the end of the quarter, up primarily due to cash flow from ops. Deferred revenue increased $154 million sequentially to $1.56 billion including $40 million growth in long term deferred. As I mentioned earlier, this reflects strong renewal rates for our subscription advantage offerings, the continued migration of our install base to more holistic maintenance contracts and the increased volume of multiyear customer arrangements generally associated with the Workspace Suite. And finally, as we discussed earlier last year, we're working to optimize our cap structure and programmatically return capital to shareholders. In Q4 we repurchased $3.3 million of our shares which is the remaining balance from our 2014 ASR program and some additional open-market repurchase. This leaves about $290 million remaining under the current buyback program. Turning to our current outlook and expectations for Q1 and 2015, I would like to first provide some context around our guidance. In the first half, we'll continue to optimize the business model, streamlining the organization, initiating a multiyear expansion of margins and increasing focus on our core growth markets. Our guidance accounts for some potential impacts executions stemming from the restructuring, modest headwinds from foreign currency and a slightly higher deferral rate on new customer bookings. From a strategic perspective we'll be investing in the emerging high-growth businesses as well as future initiatives like the workspace cloud. So for 2015, our expectations are for total revenue in the range of $3.29 billion to $3.33 billion, adjusted operating margin to show improvement of more than 100 basis points, a tax rate of 23% and adjusted EPS of between $3.60 and $3.65 per share. For Q1, 2015 our expectations are for total revenue growth in the range of $780 million to $790 million, tax rate of 23% and adjusted EPS of between $0.70 and $0.72 a share. So now I would like to turn it over to Mark to give you additional details around our reorganization and on the quarter's ongoing businesses. Mark?

[Mark Templeton:]

Thanks, David and good afternoon, everyone. I'm proud of how we addressed market, transitional and competitive challenges in 2014, but I'm not satisfied. From here, we're looking ahead to 2015 with a focus on innovation that delivers a better experience, more flexibility and greater security to our customers, working from a more focused organizational footprint that enables profitable growth. So today I would like to talk about our strategy, structuring for success, expanding our leadership strength and how we're building momentum for 2015. For the past 26 years, Citrix has been a visionary in software defining the workplace, guided by our core belief that work is not a place. A software defined workplace is one where people can securely and effortlessly collaborate across the boundaries of time, place and devices. They create better business outcomes, they're more productive and engaged and their businesses are more agile and responsive to change. We've positioned, scaled and transformed Citrix through significant growth phases from remote access to web app delivery to virtualization to mobile workspaces, and now we're doing it again. We hear every day from customers about the dual pressures they face to deliver business results while creating an engaging work life experience for people. Our focus on enabling a software-defined workplace is putting Citrix in front of this strategic challenge through the unique integration of our delivery networking, Workspace Services and mobility apps. In the design world, form follows function. Similarly, in business, organization follows strategy. So we're restructuring to allow us to better reflect our strategy in our organizational model to refocus our investments on our highest growth opportunities and to streamline decision-making. We'll also improve our overall efficiency, helping us to continue our positive financial growth and expand our operating margin. I think we all know it's extremely difficult to make a restructuring decision like this. Understanding how challenging it will be for those employees whose roles are affected. At the same time, these changes are necessary to deliver on the promise of our software-defined workplace strategy. As you've also seen over the past six weeks, we're strengthening our leadership team with recent appointments of Carlos Sartorius as our Senior Vice President for Worldwide Sales and Services, Robson Grieve as our Senior Vice President for Marketing and Geir Ramleth as our Senior Vice President and Chief Strategy Officer. These seasoned executives bring strong track records, global experience and the additional leadership talent we need to operationalize, execute and drive our business. Carlos has done a remarkable job getting our EMEA business back on track and in his career; he has successfully led teams in every geography in the world. This makes him a great fit for this expanded roll. As the former CIO of Bechtel, Geir led an epic transformation of IT. It's been called actually the Googleization of Bechtel. Geir brings a customer-centric perspective, incredible industry relationships and deep technical knowledge that will help accelerate our software-defined workplace strategy. And most recently, Robson was Executive Vice President of Global Marketing and Customer Experience with Concur, now an SAP company. As an experienced cloud services marketing leader, Robson brings a wealth of experience and talent to Citrix. His background of brand, communications and digital marketing will be instrumental toward communicating our compelling story and significant value proposition to customers. I'm also very excited about our increased pace of innovation, both organic and acquired, especially what we're launching this quarter. For example, we're releasing some amazing features for XenApp that strengthen the value for our customers and expand the market opportunity for our partners and service providers. For example, in customers and engineering, manufacturing and government sectors, we're adding support for Linux-based DDI and remote apps. To add contextual security for banking, government and healthcare apps, we're releasing HDX screen recording. During our recent partner summit, this feature was highly, highly applauded. To simplify anywhere access, we're releasing HTML five-based receivers for no download secure access from any browser and even Chromebooks and for people connecting over high packet loss networks, like WiFi, cellular and satellite, we're releasing a tech preview of HDX with integrated frame hog technology. Everyone that sees it is just amazed. We're also excited to be releasing XenMobile 10 with a completely integrated backend that provides a single console for device security, mobile app security and app delivery operations. We expect the XenMobile 10 to further accelerate pipeline closure rates, increase general engagement and support a greater mix of Workspace Suite deals. We often win XenApp and mobile deals based on the follow-me data capabilities of ShareFile. This quarter we're releasing ShareFile restricted zones. We believe this feature makes ShareFile the most secure cloud-based, document-sharing, syncing and task-flow service in the world and will help us drive even greater share in professional services, healthcare, government, engineering and financial services segments where both security and data sovereignty really matter. Our recent acquisition of Sanbolic adds storage virtualization as a powerful core technology that will add exciting new capabilities across our entire product portfolio. Initially, Sanbolic brings high-performance, nonstop availability, simpler configuration and lower cost to Citrix DDI, Windows App delivery and Workspace Suite solutions. It's also a key enabler to our WorkspacePod solution announced to our partners last week. WorkspacePod is a predefined Citrix software stack on certified hyper-converged infrastructure. It speeds time to value with breakthrough price performance for DDI solutions. Our first WorkspacePod partners include DataON and HP. The powered by HP solution leverages the hyper-converged power of HP Moonshot and provides the most flexible, best price performance platform for hosting simple DDI, all the way to graphics- intensive virtual workstations and apps. So to wrap up, we have a clear strategy. Our vision of a software-defined workplace is resonating with our customers as they turn their attention to driving consumer-like experiences, contextual security and greater device app and location flexibility for work. We're organizing around this strategy with a stronger team, streamlined structure and an exciting pipeline of innovation. Together, this is our framework for delivering sustainable customer value and profitable growth. And now I would like to open it up for questions.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Heather Bellini with Goldman Sachs. Your line is open.

[Heather Bellini:]

I was wondering if you could share with us your goals from the restructuring program in terms of operating margins. I'm bouncing between other calls so I apologize if you mentioned this, but I'm trying to get a sense of should we expect all of this to flow through to the bottom line which by our math, gets to about a 300 basis point improvement in operating margins? And I know, David, last quarter you had chatted a little bit about having a multiyear margin view. I'm just wondering if there is anything you could share with us about how you think about your operating margin goals as we exit this restructuring?

[David Henshall:]

Sure, Heather. Let me talk a little bit more broadly about the restructuring and then touch on longer-term margins. At a high level, the restructuring it's combination of everything from simple delayering across the board, impacting [inaudible] areas in the field organization, development in certain non-core products and others. It will also allow us to continue to drive investment into our mobile apps business, like data sharing, collaboration and works, development areas like mobility, networking and workspace cloud; and go-to-market areas like NetScaler and mobile where we're still capacity constrained in a number of areas. So the simple message around the restructuring is let the strategy drive a simplified organizational structure which in turn allows for more focused and streamlined operations and the outcome as I mentioned, some of these changes allowing us to drive $90 million or $100 million in annualized savings. Our guidance right now is for operating margins to expand more than 100 basis points this year, but begin the process of getting back to north of 25% operating margin over the next couple of years. And so that is the longer-term approach and the way to think about it. We're viewing this as step one in a multiyear expansion of margins.

[Operator:]

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

[John DiFucci:]

My follow-up question, David is on that margin thing, that's something that I think a lot of investors, I'm sure are talking to you about, they're talking to us about and it just seems like the 100 basis points next year, seems like it -- Heather threw out 300 basis points in her question. It seems like you can get a lot more out of that especially in the sales and marketing area. Can you touch on that? Like why you wouldn't especially now that you have the restructuring ready to go forward, why you wouldn't try to get a little more on the margin side there?

[David Henshall:]

Sure, John. Net-net at a high level, the way to think about guidance is a couple of things and it is the 5% or 6% growth in revenue is roughly what we saw in the second half of the year. We feel like it's a right expectation going into the start of this year. It includes some assumption of continued softness around markets like Russia, China and Japan. Some modest FX impact particularly in our SaaS-related businesses where we priced a lot in local currency, and then a slight increase in the aggregate deferral rates due to the strength of Suite focused on software service providers and multiyear arrangements. And so from a margin perspective, the guidance as I mentioned before is greater than 100 basis points and I think that's where we would like to start at the beginning of the year and we certainly have opportunities to continue to optimize the model as well as drive upside from revenue growth. And so again, it's a step one of a multiyear approach to margins. We expect to be able to grow this year and as I said a minute ago, get back to north of 25% in the next couple years.

[John DiFucci:]

And if I could, just one quick follow-up, you mentioned foreign exchange impact to the EMEA business. Could you remind us -- I thought that most of your sales were in U.S. dollars even internationally. Could you remind us how the foreign exchange impact -- how you're having that kind of impact?

[David Henshall:]

Sure, John. It's really twofold. On a direct basis we do sell a number of things in local currency. All of our SaaS business internationally is local and some portion of our other businesses. So the net impact is probably no more than $10 million or so in 2015, but it's material enough that we wanted to point that out. The indirect impact is what we hear from customers and partners that have looked at changes in this [inaudible] strengthening of the dollar as something that has caused an indirect delay or a shrinking of the size of certain transactions. So it's really the indirect one that is harder to quantify. So we're just calling out the direct sales piece.

[Operator:]

Your next question comes from the line of Karl Keirstead with Deutsche Bank. Your line is open.

[Karl Keirstead:]

I wouldn't mind asking a question around the restructuring, the 700 full-time and 200 contractor. Could you add a little bit more specificity around what product area they might be coming out of or functional area? Thank you.

[David Henshall:]

Karl, I would rather actually not go into lot of detail at this point in time. We're still going through notification process around that. I would say that it's consistent with the strategy that we have talked about to focus on core product areas to focus on improving leverage in the field organization and in just general delayering across the organization. So I would rather keep it at that level for right now.

[Karl Keirstead:]

Okay. Maybe I can get a follow-up then if you don't mind, if I could ask about the desktop growth of about 2%? Do you think we're approaching the point where that desktop growth is hitting the bottom and we could begin to have some acceleration in 2015 whether because of XenApp 7.6 or some other catalyst? Maybe a little color on the desktop growth trajectory? Thank you.

[David Henshall:]

Sure, Carl. There is probably two pieces there that we should talk about. First one is that the dynamics we saw in Q4 were actually pointing to a stronger underlying environment than the reported numbers and the big difference there is around deferred revenue. So if you add that back in you'll see a bookings number that is the highest we had all year and really that was coming out of the mobile and desktop, what we call the Workspace Services business. In particular, the growth in the Workspace Suite and just a reminder, that is the combination of mobile virtualization and data in one holistic package. We had great performance there. In fact, up more than 200% sequentially and really driving a lot of strategic conversations. The way that that's showing up in the numbers is just to net it out, an average transaction historically would be about 25% deferred. For the Workspace Suite in Q4, that was more than 50% deferred and it's just a combination of the way they're structured, customers opting for multiyear arrangements, etcetera. So that's kind of the one dynamic that I would point out. I would say overall we're happy with the direction we see things going. Some of the things that Mark mentioned around XenApp, new use cases that we're driving for the broader products, continued expectation around growth of the Suite. Obviously the standalone XenMobile business is continuing to do well and so you put all those things together and do feel like that we're -- not sure if I would call it bottomed out. That sounds too negative, but certainly optimistic about the trajectory of that business going forward.

[Operator:]

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

[James Wesman:]

It's James Wesman sitting in for Michael. Could you just provide some color on your sales strategy going into 2015 since the partner summit earlier this month, maybe some of the changes you guys have made versus 2014?

[David Henshall:]

Sure, James. Let me talk high-level about sales organization. We're in the middle of a sales transformation that began last year and we had a phased rollout across all geographies. The overall goal around the field changes is to increase execution consistency and coverage in areas that will allow us to bring down overall cost of sales and so in the U.S., field restructuring has had really two big objectives. One is a clearer definition and consistency about the way we're aligning resources to maximize performance in each individual market and then to establish focus around really specific segments versus geographical territories. In EMEA, I would say that we start implementing last year around coverage in go-to-market model for each of the top countries that we serve and really the idea was segmenting countries into four distinct archetypes, core, established, growth and emerging and then putting the structure in place within each of these types to provide the right coverage of the market really in the way that we want to address that. So broadly about engaging the channel around commercial, laying Citrix drive directly around enterprise and increasing focus on service providers. That's the three big areas that I would point out.

[Mark Templeton:]

James, the thing that I would add is that we're doing a lot of work to make the product lines much more partner friendly when it comes to partners that are beyond our platinum partners. And when you see things like WorkspacePod, for example when you see us with XenMobile 10, where the backend is much simpler, these become platforms for value-add for partners that I think have been less engaged as the overall complexity of the solutions has grown. And so as introduction of WorkspacePod really makes the time to value much shorter for the customer, it also makes it much easier for partners to implement and much easier for them to then drive services that connect that WorkspacePod and all the services that provides to a customer's specific business. So we're doing quite a few things on that side to revitalize any of the partners that have been so loyal for so long.

[Operator:]

Your next question comes from the line of Rick Sherlund with Nomura. Your line is open.

[Rick Sherlund:]

I missed the very beginning of the call, but it looks to me like the benefit you're going to get from the cost-cutting is, if I'm correct around $0.50 and I'm not sure how much of that flows into the year, but the guidance on earnings I'm kind of puzzled by because it looks like that's about where the Street was, maybe even a little bit lower but with the benefits of the cost savings I would have thought that earnings number would have gone up. What am I missing?

[David Henshall:]

Rick, we talked about the context around guidance and I'm sure you can go back and see that in the transcript. And some of the things that we're doing for revenue guidance and the areas that I think we're being conservative on that approach. We had talked a little bit more about the growth in margins that we're seeing both in this year and our approach to a multiyear to get back north of 25. I would say overall outcomes of the restructuring will allow us to grow expenses significantly slower than revenue growth in 2015 without sacrificing the necessary focus on those parts of the business that are going to provide long term sustainable growth. So broad rebalancing, increase in margins and you'll see EPS growing roughly double the rate of revenue growth next year.

[Rick Sherlund:]

Okay. And should I think about the cost cuts taking place at the beginning of the year or is it over the year? How much of that $90 million to $100 million is actually realized in the year?

[David Henshall:]

Yes, that's an annualized number. I'd say at a high level, impacted employees in the U.S. will be notified shortly. Internationally it will be in accordance with local law and regulations. The facilities changes and closures will come over the next couple of quarters and then other things that we've talked about around the portfolio will be addressed over the next couple of quarters as well.

[Rick Sherlund:]

And there's nothing here that's going to affect the sales force productivity right? No structural changes in the sales organization? I think I heard you something say about not impacting -- it's all non-quota salespeople?

[David Henshall:]

Yes, to a large degree. I think that in our guidance for Q1, we of course do anticipate the potential for some impact of the overall restructuring to the organization. Want to just be thoughtful and conservative around that.

[Operator:]

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

[Steve Ashley:]

I would just like to drill down a little bit on the Workspace Services Suite and how and what impact selling that in terms of you had mentioned it's more of a strategic discussion. How does it impact the go to market of the direct sales force? How does it impact the role of the channel selling that? What do they do differently in terms of selling it and a little color on that would be great.

[Mark Templeton:]

Steve, I would say first of all, Workspace Suite definitely performed extremely well and it performed extremely well in two places. First where we have named accounts and there is very much direct [inaudible] on our part. So it's Citrix lead partners supported, and these are accounts that were down the road, with strategic infrastructure and they are getting to the mobility part of their overall infrastructure decision and that decision is going our way based upon the differentiators we have with ShareFile and our mobility apps on one side and the integration with our delivery networking on the other side. Then the other piece of it is our platinum partners when it comes to middle-market customers, are quite adept at selling multiple products. They are required actually to be a platinum partner to have all these certifications. So we saw a number of them step up to sell the Workspace Suite in Q4, and really an extension of the strategic conversation that they've had with middle-market customers. I don't think we've seen the potential beyond those two sales motions at this point. And I think that what we would expect going forward is that the customers outside the direct touch or the platinum initiated middle-market customer, they will be more likely to engage through the workspace cloud which we'll talk more about at synergy and that should bring some upside to the back end of this year and obviously going into next year where we're providing a full workspace capability from Windows app delivery to mobile apps security and management, to all the data services that are integrated across the board.

[Operator:]

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

[Ed Maguire:]

I wanted to shift things up a little bit and ask about the recent acquisition of Octoblu, blue which is an IoT platform for API's and workflow. I wanted to ask about how you see that fitting into the broader portfolio and whether this is a sign that you're looking to really extend reach beyond machines that users interact with.

[Mark Templeton:]

Okay, so first of all, small acquisition, very small. And secondly, we think the most exciting IoT platform out there. As a matter of fact, there was a recent hackathon sponsored by AT&T and a couple other high-profile sponsors where there were four prizes. Two of them were won by Octoblu team and then one of the other, the third prize was won by someone else that used the Octoblu platform. Now what our goal is, is to use the Octoblu platform as in the form of the IoE integration of everything and to actually allow it to be a platform for our partners to generate additional value add when it comes to creating a smarter workplace. So the demonstrations that we've done, through integration with our mobility apps like GoToMeeting, ShareFile, Podio as well as Citrix Receiver and so forth are pretty impressive, allowing -- [inaudible] to trigger flows that set up meetings, that cause transcriptions to be created and distributed all automatically just based upon proximity in a conference room. That's just one example. There are many, many other examples and possibilities and the Octoblu platform actually normalizes connections not only between apps but between devices, between people, both -- and machine to machine. So you'll see this technology embedded also in some of our products because it has the ability to gather instrumentation information, send that information off to a Big Data analytics and provide real-time predictive capabilities so that we can drive the kind of experience that no one in our space is even thinking about at this point. So it's pretty exciting. It's small. It's early and look for some excitement around it at synergy.

[Ed Maguire:]

And just was interested to get your take at least on the Windows 10 preview so far, the concept of universal apps. How are you guys thinking about evolving your workspaces to address some of the new opportunities around what Windows 10 is bringing to the table?

[Mark Templeton:]

Okay, a few things, first of all we'll be fully Windows 10 prepared on launch. What that means is on the client side, we'll be fully prepared and onto VDI side, we'll be fully prepared for the launch. I've been personally using Windows 10 for some time now and it's a great release of Windows and we expect that it will be important for the business market, the enterprise market. And in terms of universal apps etcetera, certainly it's one of the many solutions to app compatibility across platforms and we'll support all of these. I mean HTML 5 and it's the advancements there where I think working on the cutting edge in that sense in terms of building universal apps. We see a lot of customers going that way, and we'll be fully supporting Microsoft's initiatives as well and prepared with our own products in that context.

[Operator:]

Your next question comes from the line of Philip Winslow with Credit Suisse. Your line is open.

[Philip Winslow:]

Congratulations on having the foresight to undertake this restructuring here but I wanted to focus on the product side, particularly XenMobile and then XenApps and desktop. You talked last quarter about getting back to par so to speak with the XenMobile 9 and then the 7.6 launches in June and September and you just alluded to the XenMobile 10 launch. How do you feel on the product side as you go into 2015, it seemed like the products that came out in the second half would have a hard time affecting the second half business but do these products that came out in the second half kind of reinforce your conviction in that turnaround that you guys talked about or at least touching bottoms bottom on those businesses and then just one quick follow-up to that?

[David Henshall:]

Will, I think the short answer is yes. Each one of these releases has created a tipping point for certain classes of customers and certain aspects of the sales cycle. XenMobile 10 creates another tipping point, 7.6 created a tipping point. We see much more the download counts and the interest in actually migrating to 7.6 is much greater than 7.5. I didn't mention that we also this quarter are releasing additional migration tools. We'll continue on that track and help customers actually automate migration including making sure that older versions of XenApp and XenDesktop run beautifully side-by-side with the newest version, so that's a huge priority for us. You'll see more of that in that synergy but we have released additional capabilities for easy migration and then some of the feature releases that I mentioned in the prepared comments to bring parity, more and more parity to XenApp. And then in some cases, beyond parity which then inspires customers to want to migrate. So this has been a long road. We're intensely focused on it and we're going to drive more tipping points in 2015. Not only for the individual products, around Windows app delivery and mobile apps management, but also tipping points for the Workspace Cloud, Pod and Suites. So expect that and we're hoping to have see some impact there beginning in Q2 and the second half of the year.

[Philip Winslow:]

And then just one follow-up on the NetScaler side, it hasn't really been talked much in Q&A it seemed like the cloud networking line had a good quarter this quarter, good growth. Wonder if you could comment on the trends you saw there and just how you think about this business heading into '15?

[David Henshall:]

NetScaler in particular had a good quarter and it was coming from enterprise customers. We had a more than 2/3rds of the mix coming out of the enterprise as opposed to some of the prior years where you've seen a much higher degree of reliance on the big dot-coms. Overall across the platforms I called out a couple of things in my prepared remarks. I'd say SDX continues to be the standout, that business is growing 25% plus and is now just under 20% of the overall mix and just as a reminder for everyone that is the highly virtualized platform where we can combine several dozen network services onto a single platform driving consolidation, etcetera for customers. So that part is doing really well. Virtual appliances continue to do well. I would say in the traditional ADC market, the more generic ADC, that's a price sensitive area and units are growing faster than bookings. You've seen some price compression as we try to keep up with some of the competitors they are, but overall we're really happy with what's going on in the overall NetScaler area. We've got some good things coming in the 2015 timeframe and as well as some opportunities for potential upsides in areas like WAN virtualization which is new and more of a second half play for Citrix.

[Mark Templeton:]

Yes, Bill, additionally and as a reminder, to everyone is that we still don't have the kind of worldwide coverage to successfully market NetScaler in areas of the world where there is great opportunity. So part of the restructuring actually shifts resources toward greater networking coverage and we'll actually see some benefit from that, we think later in the year and especially focus on the parts of the product line that provide premium value as David mentioned, SDX providing consolidation value and then there will be another major release in the year that will drive try scale in a way that will get advantage from the largest scale types of customers around the world as well and continue to work with Cisco, that partnership is very healthy and robust. I think NetScaler has the best integration with Cisco's software defined networking infrastructure and is the later 4 through 7, SDN component of choice in terms of partnering. Still early market but we're bullish around what we're doing with the Cisco team.

[Operator:]

Your next question comes from the line of Gregg Moskowitz with Cowan. Your line is open.

[Gregg Moskowitz:]

Earlier you mentioned briefly the rationalization of your product portfolio. I'm wondering if you could help us understand at a high level what criteria you're using to help you make those decisions? And then I just had a quick follow-up.

[Mark Templeton:]

Greg, at a high level we're looking at things that are pretty logical. First of all, profitability and strategic context and necessity, some of the products that have small amounts of revenue that are not necessary to the strategic goals of the company, what we're doing there, we're either end-of-sailing them or they're moving from being products to being features. So one example would be our fantastic technology known as AppDNA, that is technology that allows for rapid P to V or physical to virtual conversion of Windows apps. That went from being a product to being core technology that's a feature of XenApp Platinum and XenDesktop Platinum. So there is an example there. Another example would be VDI in a box. We're going to end-of-sale that product and it will be replaced by a simpler and more price competitive version for DDI that we have coming and so there are a number of different cases, so that would be the high-level view of how we're looking at the portfolio. And as we said, I think for the last couple calls, we're looking to actually have fewer brands where we get more wood behind fewer arrows and that means turning some products into features and the elimination of some, especially the smaller-volume products.

[Gregg Moskowitz:]

For David, if you could tell us if XenMobile revenues ended up growing 100% or more in 2014? I think that's what you had originally anticipated at the beginning of the year. Thanks.

[David Henshall:]

Sure, Greg. On a bookings basis, yes, the overall mobility business gets a little bit munched when you start looking at it from an external point of view and that's because we don't provide allocations externally or really talk about bookings. So if I was to maybe add up all the pieces, some of the standalones in mobile opportunities are certainly being closed as Workspace Suite now which as I've talked about a couple of times had a really big pop in Q4. The XenMobile standalone products in Q4 growing north of 40% just on a point-product basis and then other areas like the ShareFile Data platform that's embedded in there, also growing north of 60%. So I would say all in, mobility is somewhere in the $150 million-plus area for us and growing nicely.

[Operator:]

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

[Keith Weiss:]

It's Keith Weiss from Morgan Stanley. For fear of beating a dead horse, I'm still getting a lot of investor questions on the nature of the restructuring, because basically in our models when you guys were talking about 100 basis points of expansion FY ‘15, we were looking for basically mid-single digit revenue growth in FY ‘15 with slightly slower, almost mid-single-digit total expense growth. From your guidance it looks like we're looking for basically the same thing, a mid-single digit revenue growth with slightly lower mid-single digit expense growth, but now we have a restructuring put in place at the beginning of the year. So should we be thinking about the nature of this restructuring as more of reallocating resources or freeing up dollars to put into more productive areas or is this a restructuring to really, truly drive down total expenses?

[David Henshall:]

Keith, at a high level it's to grow expenses significantly slower than revenue growth. So if you look at our current guidance that's out there right now, it would be 5% to 6% roughly on the topline, expense growth of roughly 4% to get to the bottom-line numbers. We did take up tax rate from most people's expectation that probably impacted by $0.10 on most models. Again that's just being conservative and that could come back down if things like the R&D tax credit get extended if normal tax audits close, but that's where the forecast is at this point in time. We also brought revenue growth a little bit down in some of the areas we talked about, whether that is elimination of some of the standalone products that Mark called out the general motion towards more deferred and then the other areas of caution that I mentioned when I was providing context for guidance. And so you put all that together and it would show profitability going up from where most people are forecasting it right now and as I've said a couple times, we maintained the goal of more than 100 bps in op margin this year and plan to get back to 25% in a couple years.

[Keith Weiss:]

But the bottom line is that this isn't a restructuring to lower your absolute level of expenses? This is more of targeting slower expense growth into more productive areas?

[David Henshall:]

It's both. It's certainly about driving a reallocation of expenses towards the things that are going to drive acceleration of growth in the future and then of course, bringing absolute expenses down in some areas but in the aggregate just growing expenses much slower than revenues going forward.

[Mark Templeton:]

If I could help a little bit just from a granularity perspective, delayering is an ongoing cost reduction. You do it one time, you get fewer layers. We get faster decision-making, but it's a cost reduction. Product eliminations or if a product moves to a feature, that gives you cost reductions because the cost of maintaining a product that's not taken to market as a product but is integrated as a feature is radically different. So that's the cost reduction. Cost reductions that will go along with some of the facilities consolidations that David mentioned as well. So there are quite a number of these things that are institutional cost reduction and then I would say less of it is around reallocation, but where we are doing reallocation, we're reallocating where we see the opportunity and where we see the strategic aspects of the business. So for example, greater spending on networking and field coverage and networking, greater spending on service providers and moving our service providers from a single product like XenApp or CloudPlatform to becoming workspace service providers where they're providing a full complement of products that are of higher value and create higher profit for them. It's a mix, but I would say there is a fair amount of institutional cost reduction here and then moving resources on to higher growth producing products and segments that we've had proven performance.

[Keith Weiss:]

One follow-up, any change in how you guys are going to be approaching acquisitions? You guys have definitely looked to acquire products in the past and in the near past. Any change in that strategy on a going forward basis?

[David Henshall:]

No change at all. I think we continue to look at technology tuck-ins that are core. So for example, Sanbolic, smaller acquisition still substantive, but it's a core technology that we monetize across product lines where we are already in the market with routes to market established, etcetera and as I mentioned, the initial approach is to use the Sanbolic technology to be much more aggressive and direct in VDI where I think we have not been very competitive, but there are lots of opportunities with Sanbolic in the core platform in the foundation for monetization in other products. Much like XenServer, there's a new release of XenServer. It's a foundational technology and it's going to make a huge impact in XenApps and XenDesktop in terms of density which in fact, reduces costs as well as performance and especially in virtual GPU support. And obviously a better XenServer means a better NetScaler SDX with some new capabilities for SDX that will be coming as a result of that related to performance and the ability to consolidate layer four through seven delivery services even better. So that's how to think about acquisitions in the core in the foundation and then the other way to think about them is that we look for acquisitions that have great attach rates and adjacency, especially in our mobility apps space. So for example, last quarter we acquired RightSignature. The conversions on RightSignature continue to be upwards of 35% when we do the co-marketing with ShareFile. We think there are other opportunities like that where we get synergy, but even better we get stickiness with the customer so the renewal rates are higher because we are more embedded into the customer's workflow. And obviously because we're taking very much a vertical market approach to a number of our SMB products. We think that there is great opportunity there and obviously those same products differentiate XenMobile in terms of our Worx Apps Suite, so we get synergies both ways with acquisitions like that.

[Operator:]

Your next question comes from the line of Daniel Ives with FBR Capital Markets. Your line is open.

[Unidentified Analyst:]

This is actually Jim [inaudible] for Dan Ives. Just wondering if you could talk a little about the competitive landscape and in particular just on the mobility on the NetScaler side? Thanks.

[David Henshall:]

Sure, Jim. I would say, similar to my prior comments around networking continues to be a very competitive market as it's always been. The core ADC, simple ADC use case is price competitive and we saw ASP's come down a bit in that area. In mobile, mobile has always been a very competitive space in particular on standalone mobile opportunities. Of course we compete a lot with folks like Mobileiron and AirWatch, but overall when we look at ASPs they were roughly flat on a year-over-year and sequential basis. So highly competitive, but we're winning based on differentiation and the approach that we've taken to reframe the conversation from a simple MDM to a much broader more strategic conversation around enterprise mobility and we can do that just because of the nature of the solution bringing together all the various components that Citrix has. In terms of the core desktop and app virtualization area, again the consistent ASPs, not a lower change on that front. We have a fair bit of business that I've talked about multiple times here that's been moving to the higher value Workspace Suite so that's a motion that's going to continue both in terms of new customers as well as the trade-up opportunities as we target back into the installed base and that allows us to bring together again multiple technology areas and get out of the price competition and really focus on feature and breadth of differentiation that way. Obviously growth in deferred would point to a bit better demand environment than the actual reported license numbers but overall no material changes, I would say in any markets, but of course they're all still competitive.

[Operator:]

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

[Walter Pritchard:]

Two questions, David, a question on the headcount. Is the 700, is that a gross number or is that a net number? Do you expect to add that back during the year and above the down 700 for the end of the year?

[David Henshall:]

It's a gross number at this point in time. As I said, there are some areas that are absorbing investment right now and will continue to and that's everything from our various SaaS properties where we're seeing strong growth in areas like data, places around networking and mobile where we're just capacity constrained. And then in some cases where you're going through things like off-shoring and just driving more long term efficiencies. So overall headcount will be down, but some of that will be reinvested.

[Walter Pritchard:]

And then, Mark, you've talked a bit about product focus and you mentioned XenServer and some new things coming there and sounds like maybe Sanbolic was partially related to that. Just wondering as you think about product focus, it feels like XenServer is the third or fourth product in its market and objectively hasn't had a ton of traction outside of some of the open-source deployments that some of the cloud providers use and maybe under your own product. What is the value proposition around continuing to invest in that product as a standalone?

[Mark Templeton:]

Walter, so first the way we rationalize the portfolio is you're either a product, a feature or you're a foundational technology. In the case of XenServer, you're foundational technology. The monetization of that technology is indirect through XenApp, XenDesktop and NetScaler SDX. If you look at the contribution of those three products relative to the investment we make in XenServer and our distribution of the open-source XenServer because as a reminder to everyone, last year we moved XenServer into the Linux foundation as a full-fledged open-source project. So there is open-source XenServer and then there is our distribution of XenServer. So when we moved into the Linux foundation, it was a huge surge of in the community and so our investment in XenServer is -- we're still a great contributor but is a foundational technology. So by itself, the NetScaler SDX product line that really is powered by XenServer and differentiated by XenServer was a $100 million product all by itself. You're right, we do not have an entry in server virtualization and it's not a market that we compete in directly. And to the degree that customers want to use XenServer as their server virtualization platform either under CloudPlatform or in the raw, they're welcome to do that. But there is not a go-to-market motion in investment related to that.

[Operator:]

Your next question comes from the line of Matt Williams with Evercore. Your line is open.

[Kirk Materne:]

It's actually Kirk. Mark, could you talk a little bit about what you're doing to simplify the messaging around mobility in the channel? Are conversation with partners continue to indicate there is just some confusion as to the strategy about how each of the product lines come together. And I'm sure you guys have been working on this, but how long does it take to get this fixed in some respects? Is this a multi-quarter challenge for you guys? Or is this something you feel like you've been working on and you can start to see the fruits of those labors by the back half of this year? Any color on that would be helpful. Thanks.

[Mark Templeton:]

Sure. So first we just are coming off of our Partner Summit and we went through the strategy, the message around software-defined workplace and how it relates to mobility. In fact, its core value proposition is to allow customers to mobility transform their business and people. And I think the introduction of the Workspace Suite made it much easier for partners to see how to message and sell our Windows app delivery and mobile app delivery products together in a full solution, especially as we are now coming off of summit. We made it very clear to them that the way to think about this is the desktop is to the PC era is the paradigm for the PC era, but the Workspace is the paradigm for the cloud era. And so this kind of simplified set of ideas that will be followed through with packaging and pricing and cloudification, etcetera I think begins to really address the partner issues and then I think the other piece of it is that XenMobile 10, when you look at the data on installing the backend, configuring it, etcetera, how much time it takes, the simplicity in learning impact in terms of how to operate it, it's radically better. And I think that by itself is making partners much more interested in learning the message because it's really not that hard and making it part of their go-to-market motion. So as I mentioned in my prepared comments, what we saw at Partner Summit was huge intent and feedback from partners that they are ready now to integrate it into their portfolio and sales motion now that they feel they can handle the backend parts. So I do think it's multi-quarter, as we drive the message and have tipping points, more tipping point. Some of them are marketing related, demand gen-related. Some of them are product related and innovation related. And so I believe that's what we heard during the Partner Summit in Las Vegas.

[Operator:]

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

[Abhey Lamba:]

Mark, how should we think about the impact of Windows Server 2003 expiry? Have you started seeing any conversations around that and what are you accounting for this year from that?

[Mark Templeton:]

I think the primary message there is that it creates the back pressure for customers to actually look at migrating and so the confluence of all the work that we've done and are still doing around making migration simple lines up with the 2008 end expiration if you will. And clearly Windows Server 12R2 is a great platform. It's the best Windows Server ever. And we have taken advantage of so much of what's there in XenApp and XenDesktop. Obviously a key part of our partnership with Microsoft. So I would just say it is some tailwind for migration and obviously the more migration tools we provide and training to our partners and the more compelling tipping points we have for value around security, experience and flexibility, all of those actually should bode well for having that as a catalyst and a lever for driving XenApp, XenDesktop migrations.

[Operator:]

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

[Mark Moerdler:]

I want to drill in a little bit. Workspace is growing, it's 50% deferred. I'm trying to think, how should we think about how that converts to revenue? Is this more maintenance, more license with longer rollouts, longer contracts? How should we think about that? And then I've got a follow-up.

[David Henshall:]

Yes, Mark, that's the right way to think about it and it would lead to, next year, a higher growth in deferred revenue than we saw in 2014.

[Mark Moerdler:]

So it will be higher growth in deferred, but rolling over -- what the horizon should we think it converts?

[David Henshall:]

The average transaction in Q4 was about three years.

[Mark Moerdler:]

Okay. And the second, just to confirm, make sure we're all it, the $90 million to $100 million, that's after any reinvestment?

[David Henshall:]

No. That's the gross number related specifically to the restructuring items that we called out today.

[Operator:]

Your next question comes from the line of Pat Walravens with JMP Securities. Your line is open.

[Unidentified Analyst:]

It's actually Matt in for Pat. Had a question about ShareFile and how you guys compete against Box there. Wonder if you could share some of your win rates and perhaps when you lose and when you win against them. Thanks.

[Mark Templeton:]

ShareFile, we're just really delighted with the results that we've got with ShareFile. So first of all, we actually have surpassed the 60,000 customer mark actually very recently. So the growth rate we're seeing there in terms of customer acquisition we think is actually the greater pace than what they are seeing over at Box. Secondly, we had focused really, really intensively on two spaces. One is enterprise and the other is in premium SMB verticals and so the reason you see us spending so much time on security is that the verticals that we serve in the SMB side, in the areas of professional services, engineering and construction, brokerage and financial services and healthcare, these customers require support for HIPPA, ERISA, etcetera and we've been very aggressive in supporting those kinds of data security privacy standards. And when we're in those markets, we win. Our win rate is awesome. On the enterprise side, our win rates are fantastic where we have a customer making more of an enterprise kind of decision and that ranges from big professional services organizations to healthcare and to financial services. And where those decisions are departmental and people are making unilateral decisions outside of IT, that's where we'll see Box probably be a little bit more successful because many times there are deal that we don't tackle ourselves. I think there is opportunity for us there and especially as we've added this restricted zones which is one of a kind in the market and basically what it means is amongst all the document cloud providers, we're the only one that has technology that allows for data sovereignty and complete anonymity. So we hold no keys, we have no information about your data. Not even the names of files or even owners or publishers of them. And this is the kind of stuff that when you look at governments, when you look at healthcare, when you look at banks, when you look at other segments where customers are just not comfortable with storage of their documents in the cloud, that this is the kind of thing where we hands-down win. So we'll continue to do more of that and so stay tuned. We are real excited about what we're doing with ShareFile.

[Operator:]

Your next question comes from the line of Rakesh Kumar with Susquehanna. Your line is open.

[Rakesh Kumar:]

I was hoping if you could elaborate on some of the changes in the Partner Program as it relates to the new CSA initiative and some of the adjustments to partner profit margins that you announced at the Partner Summit?

[Mark Templeton:]

I'll take that. High level, what we're encouraging partners to do is specialize and through specialization that they can generate we believe higher margins, higher profitability. So our incentives for training and certifications are encouraging them to specialize in areas that they have competency or where they see opportunity in their market. This is a change from where we've been, where we've really required broad certification from partners and this new program is very positively received by the partners that were in attendance at our Partner Summit in Las Vegas and then a smaller event in Singapore last week. So this year between the partner programs that we're initiating as well as partner readiness in terms of products, we're looking forward to really a re-engagement of partners that have been more around the edge and not the broadly certified partner that's like a platinum that's certified on everything that we do.

[David Henshall:]

Rakesh, I would just add that part of moving away from geographic leadership focus in some areas towards organizing around segments will help drive a lot more clarity in terms of what types of accounts are Citrix-led versus what our channel-led and just allow for much broader consistency about the way we engage and that will be helpful for sure.

[Operator:]

Ladies and gentlemen, we've 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 Henshall:]

Thanks again, everyone for joining the call today. We are clearly helping customers embrace mobile work styles, mobilizing apps, data and people and all powered by Citrix cloud infrastructure and services. I think we're confident we have the right strategy, solution and operational focus as we enter 2015. We look forward to speaking again with everyone in three months. Thank you.

[Operator:]

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