Citrix Systems (CTXS)

Q2 2010 Earnings Call

July 28, 2010 4:45 pm ET

Executives

Mark Templeton - Chief Executive Officer, President and Director

David Henshall - Chief Financial Officer, Principal Accounting Officer and Senior Vice President of Finance

Eduardo Fleites - Director of Investor Relations

Analysts

Adam Holt - Morgan Stanley

Heather Bellini - ISI Group Inc.

Brent Thill - UBS Investment Bank

Bhavan Suri - William Blair & Company L.L.C.

Curtis Shauger - Caris & Company

Philip Winslow - Crédit Suisse AG

Edward Maguire - Credit Agricole Securities (USA) Inc.

Brent Williams - The Benchmark Company, LLC

Steven Ashley - Robert W. Baird & Co. Incorporated

Sarah Friar - Goldman Sachs Group Inc.

Bradley Whitt - Gleacher & Company, Inc.

Todd Raker - Deutsche Bank AG

Israel Hernandez - Barclays Capital

Presentation

Operator

Good afternoon. My name is Sirona [ph] (8:40), and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Second Quarter Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Eduardo Fleites. Mr. Fleites, you may begin your conference.

Eduardo Fleites

Thank you, Sirona [ph] (9:10). Good afternoon, everyone, and thank you for joining us for today's call where we will be discussing Citrix's second quarter 2010 financial results. Participating in the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Senior Vice President and Chief Financial Officer.

This call is being webcast with a slide presentation on the Citrix Systems Investor Relations website, and the slide presentation associated with the webcast will be posted immediately following the call.

Before we begin the review of our financial results, I want to state that we have posted product classification and historical revenue trends related to our product groupings to the Investor Relations page of our website. I'd like to remind you that today's conversation will include forward-looking statements made under the Safe Harbor provisions of the U.S. Securities laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, such as the impact of the global economic climate, uncertainty in the IT spending environment, risks associated with our products and competition. 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, including the risk factor disclosure contained in our most recent annual report on Form 10-K, which is available from the SEC or on the company's Investor Relations website.

Furthermore, we will discuss various non-GAAP financial measures as defined by the 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 would like to turn it to David Henshall, our Chief Financial Officer. David?

David Henshall

Thanks, Eduardo, and welcome to everyone joining us this afternoon. As you can see from the release, we had strong business momentum in Q2, delivering $458 million in total revenue, an increase of 370 basis points and adjusted op [operating] margin, more than $100 million in cash flow from operations and deferred revenue up $50 million sequentially. These results drove adjusted EPS of $0.41, which includes the one-time tax charge of approximately $0.07 that we announced last month.

We saw record results from many of our products, led by XenDesktop, NetScaler and Online Collaboration. We closed 18 transactions over $1 million each, including several deals over $5 million, as customers are looking to Citrix as a strategic vendor to help re-architect their IT infrastructure.

I'm very pleased with the execution of field, operationally and within our products’ organizations. So drilling down into the different revenue lines for Q2. New license sales were $149 million, up 15% from last year, driven by growth in both the Desktop and Data Center businesses.

License updates increased 13% due to strong customer interest in the XenDesktop Trade-up program. Tech Services grew 35% from record consulting utilization and have networking maintenance. And our Online SaaS revenue was $89 million, up 18% year-on-year with Web Collaboration leading the way, up over 35%.

From a geographic perspective, the Americas region continues to perform well, growing 17% from last year. Internationally, though, despite an uneven economic climate, EMEA posted stable growth , up 11% year-on-year, and revenue in Japan and Pacific grew 31% driven by increasing demands for our Data Center solutions. So overall, really a solid quarter.

Customer interest, pipeline build continue to be at record levels, and we remain focused on delivering results while building growth across our main product categories of Desktop, Data Center and Cloud and Online Collaboration. So now I'd like to discuss the Q3 results within these three areas.

First, our Desktop business, which grew 15% over last year to $290 million, including product license growth of 16%. Results were highlighted by the accelerating demand we saw in XenDesktop and for the XenDesktop Trade-up program, which gives existing XenApp customers the opportunity to upgrade to the complete solution for delivering both apps and desktops on-demand. In total, we recognize more than $60 million of XenDesktop revenue with XenDesktop Trade-up products adding another $30-plus million to deferred revenue.

So within this business, there's actually a few metrics I'd like to highlight to demonstrate the breadth of adoption we're seeing and the strategic value that customers are placing on desktop virtualization within their infrastructure. So first, 13 of the $18 million-plus transactions in the quarter included XenDesktop, five of which were existing XenApp customers, upgrading to XenDesktop through the Trade-up program. Second, more than 3,500 customers bought XenDesktop in Q2, including more than 1,000 net new. Third, the average deal size from desktop orders was more than 3x what we've seen from XenApp. And finally, more than 20% of the XenApp licenses that were eligible for subscription renewal in Q2 instead were traded up to XenDesktop, and this compares to about 10% of the mix that we saw in Q1.

So regarding the Trade-up program, we previously said that promotional pricing would end on June 30. So in early June, we announced to our channel partners that for the second half of the year, we'd be increasing prices by approximately 25%. And we'll take another look at pricing again near the end of the year.

So overall, the Trade-up program has been extremely successful so far. Not only does it give our existing customers an easy upgrade path, but it also gives our field organization and partners an opportunity to engage in a strategic conversation with customers about their entire desktop infrastructure. And both of these items are critical to create a base for driving greater account penetration in the future while blocking out competitive solutions.

So next, let's review the Data Center and Cloud business, which consists primarily of our app networking and server virtualization solutions. Here, led by NetScaler, revenue in the business was up 20% year-on-year to $74 million. The NetScaler products continue to do well in the enterprise market with 2/3 of bookings coming from this segment and the number of unique customers growing more than 50% from Q2 of last year.

We're seeing a platform transition to the highest end MPX appliances that were introduced in Q1, and we're also driving new revenue streams with the VPX virtual appliances, which continue to gain good traction across several different verticals and geography, in fact, growing over 75% sequentially for the third straight period.

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