Citrix Systems CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Citrix Systems, (CTXS)

Citrix Systems (NASDAQ:CTXS)

Q3 2010 Earnings Call

October 21, 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 - Senior Director of Investor Relations

Analysts

Bhavan Suri - William Blair & Company.

Sarah Friar - Goldman Sachs Group Inc.

Israel Hernandez - Barclays Capital

Philip Winslow - Crédit Suisse AG

Steve Ashley - Robert W. Baird

Giuseppe Incitti - J.P. Morgan

Kash Rangan - Banc of America, Merrill Lynch

Heather Bellini - ISI Group

Rob Owens - Pacific Crest

Todd Raker - Deutsche Bank AG

Walter Pritchard - Citi

Robert Breza - RBC Capital Market

Adam Holt - Morgan Stanley

Brent Thill - UBS

Tim Klasell - Stifel Nicolaus

Edward Maguire - CLSA

Bradley Whitt - Gleacher & Company, Inc.

Curtis Shauger- Caris & Company

Operator

At this time, I would like to welcome everyone to the Citrix Systems Third Quarter Earnings Call. (Operator Instructions) I would now like to introduce Mr. Eduardo Fleites, Senior Director of Investor Relations. Mr. Fleites, you may begin the conference.

Eduardo Fleites

Good afternoon everyone, and thank you for joining us for today's call where we will be discussing Citrix's third 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 US 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. Today we announced our results for the third quarter 2010 delivering total revenue of 18% to $472 million, adjusted operating margin of over 27% and a record cash flow from operations.

I am very pleased with our execution in the field, gains in networking, SaaS and growing leadership position across the emerging desktop virtualization opportunity. So looking at the third quarter revenue from new license sales was $152 million up 18% from last year. License update revenue increased 15% annually driven by strong year to date demand in XenDesktop Trade-up program.

Capital services increased 30% led by record consulting utilization and maintenance agreements that are attached to our NetScaler products. Online SaaS revenues is $92 million with growth of 16% over last year and once again led by the strengthening of over the collaboration products.

From a geographic perspective the Americas region continues to execute extremely well, delivering total revenue up 22% from last year for a total of $217 million and included in this number is product license growth of about 28%.

Internationally business environment was mixed in Q3. Japan and Pacific combined for a healthy 27% year-on-year growth, while EMEA was up 9% to $123 million as we saw some customer caution in Q3 delaying decisions on new capital purchases. We will talk more about this later in the call.

So overall a very solid quarter within a mixed economic environment. As we exit Q3 customer interest in pipeline build were record levels and we remain focused on delivering financial results, while building momentum across our main product categories of Desktop, Data centre and Cloud and SaaS.

So now I would like to discuss the Q3 results within these three areas. Our Desktop business increased to 11% from last year to $277 million, including license revenue growth of 5% in the period. Within these numbers there were some particular dynamics I would like to highlight.

First, while license revenue was up from last year it was down 6% sequentially due to the timing of XenDesktop Trade-up orders. As you recall early this year we were running a Trade-up promotion that ended in Q2, which was extremely successful in generating interest for Desktop virtualization on install base, reengaging customers and increasing channel vibrancy.

Financially the net result was that the promotion pulled in more business expect in the third quarter, but despite this specific timing issues from Q2 and Q3, remain very bullish on the program and expect that many existing customers who continue to take advantage of these easy upgrade path leading to much stronger Q4 trade up revenue.

The next item I’d like to point is the non trade-up business essentially new customer licenses and desktop and this is an area that was very strong posting revenue growth of 17% sequentially and well over 200% from last year.

Additionally there is few Q3 metrics within the total desktop business that really demonstrate the breadth of adoption we are seeing and the strategic value the customers are placing on desktop virtualization within their infrastructure.

In fact $10 million of the $19 million plus transactions included XenDesktop licenses. Approximately 2000 different customers XenDesktop in Q3, many of these net to Citrix. There were 85 XenDesktop transactions from more than 1000 seat each, while 13 customers purchased over 5000 XD seats. More than two thirds of the total XenDesktop revenue came from the higher ASP platinum edition where customers can leverage the greatest flexibility and delivery models for both its virtual labs and virtual desktops.

So looking ahead into Q4, we are confident about the overall desktop business. We expect to see the year-over-year license growth rate increase from Q3 about levels and for deferred revenue to be up sequentially.

So next let’s review the data center and cloud business, which consists primarily of our app net working and server virtualization solutions. In total revenue was up 47% from last year to $84 million led by the NetScaler products where we saw significantly demand from Cloud service providers and internet centric businesses.

We are also continuing to gain traction with enterprise accounts accounting for more than half of the top 20 deals. This is the result of the programs we had in place this year to cross-sell networking insulations in to our traditional base.

So regarding these specific platforms we continue to see the transition to the higher end MPX appliances that were introduced in Q1 while two new products the 21000 series our most scalable product ever and a fifth edition targeted the government verticals both generated solid business as well. Additionally the VPX line of virtual appliances posted strong momentum growing 40% sequentially.

Finally, touching on our software as a service business Citrix online revenue was up16% in Q3, this is led by the collaboration products in the GoToMeeting family were up about 30% from last year.

Customers are very focused on improving productivity while cutting costs, and by leveraging our GoTo services they can immediately reduce travel budgets while expanding customer reach.

As we look forward we a pursuing a number of different initiatives to accelerate the long-term growth rate of this business including international expansion, video, IT management and mobile solutions. So we will be investing accordingly to maintain our market leading position, as well as grow share in some of these new areas.

So turning to expenses on operations; Q3 adjusted operating margin was up over two points from last year to 27%. This is due to revenue acceleration and our continued focus operating leverage. As the demand and the opportunity pipeline have been improving this year, we have been investing in number of areas, designed to drive future growth opportunities and to expand our competitive advantage.

The primarily investments have come in the form of headcount growth with a focus on two areas. First expanding go-to-market reach and customer touch through enterprise account managers, consulting capacity and text support.

Secondly, product innovation to bring to market new technologies as well as improving integration of the total solution to drive simplicity and greater end user experience.

So in total we added nearly 300 people in the third quarter and would expect similar growth in the fourth quarter.

Looking down the rest of the P&L, other income was up mostly due to foreign exchange remeasurement items, and higher cash balances, while the tax rate for the quarter was effectively zero on a GAAP basis and about 12% on a non-GAAP basis.

Now the tax rate was impacted by 18 million of credits largely from a R&D tax credit study that’s been in process for little over year.

Net impact of these tax items was a $0.10 cent increase in adjusted EPS and this was not anticipated in our original Q3 guidance.

So turning to the balance sheet, cash and investments increased to $1.6 billion driven by a record $190 million cash flow from operations and DSOs that were in the lower 50’s.

Year-to-date our cash flow from Ops as well as free cash flow are both up about 50% from the same period last year. The primary use of cash in Q3 was once again for share repurchase where we bought back 1.9 million shares at an average price of $59 per share. Year-to-date we repurchased about 6.5 million shares. In Q4 you should expect to continue our buyback of at least at a similar pace to Q3.

Differed revenue ended Q3 at $680 million. While this is up 23% from last year, down about 1% sequentially, the result is both a decline at the trade-up orders that I talked about earlier and in a fewer number of large term based licenses like those seen in Q2. We do expect to see sequential growth in deferred revenue in the fourth quarter.

So finally I would like to discuss our current expectations for Q4, as well as provide a preliminary outlook on the full year 2011.

We are going into Q4 with solid momentum in most areas of the business. We do remain a little cautious on EMEA market given the customer behavior from last quarter but in general we are really encouraged by our leadership position across Desktop virtualization, the continued gains in networking and SaaS and in a record opportunity pipeline.

So for the fourth quarter 2010 we currently expect the revenue to be in the range of $500 million to $510 million, adjusted tax rate of 23% to 24% and adjusted EPS of $0.59 to $0.60 per share.

So when you include the out performance in Q3 and increase in our Q4 outlook, the full year 2010 now has total revenue in a range of $1.845 billion to $1.855 billion and adjusted EPS of $2.02 to $2.03 per share.

With respect to 2011 planning cycle still in process, which is normal for this time of the year, however our initial guidance at this point is for total revenue to be in a range of $2.04 billion to $2.07 billion and a continued commitment to operating leverage that will drive a 50 basis expansion and adjusted.

We will update these expectations in our fourth quarter earnings call as we have more visibility into next year and customer 2011 budgets.

Ultimately our confidences are in market position and our ability to drive along term growth while improving margins remain unchanged.

So now I’d like to turn it over to Mark to give you more details on the quarter’s performance and discus our ongoing businesses.

Mark Templeton

Thanks David. I am really pleased with our Q3 performance and proud of the strategic and financial result we delivered this year. We have great confidence in our execution and growth in three focal markets for virtual meetings, virtual desktops and virtual data centers.

In Q3 we’ve continued the process of strengthening our go-to market muscle, elevating our brand visibility, expanding our global SaaS footprint, driving more penetration in cloud infrastructure and delivering fabulous product innovation.

As we enter Q4 we are ramping up a record in Citrix history. I love our trajectory investing in core innovation, market demand and customer touch, while driving profitable growth.

I also like our timing. Broad market forces are reshaping the face of computing. The definitions of work and computing are being reinvented. Work is going virtual, computing is going virtual and Citrix is perfectly positioned to capitalize on these historic transformations in both business and computing, by delivering better ways for people and IT to work. All this was crystal clear at Synergy Berlin our first EMEA wide customer and partner conference.

Synergy sold out weeks ahead of time with more than 60% attending their very first Citrix event. Customer enthusiasm was effusive with lots of “aha” moments as I saw for the first time what it really means to go virtual, the Citrix way, from virtual meetings to desktops and into external clouds.

I am convinced many came to simply attend the technology conference, but they left inspired to go back and transform the way they do business, EMEA customers and partners got really energized. Synergy was also a strategic where we unveiled important new products and partnerships across our virtual computing platforms.

Let’s talk with virtual meetings. Virtual work styles begin with web collaborations making it easy for people to connect and work together from anywhere. It makes people more productive and far more cost effective to support. We have one of the world most scalable platforms for doing this, hosting more that 100million online support and collaboration sessions on our GoTo platform last year alone.

At Synergy we raised the bar on virtual meetings once again with a breakthrough new technology called HDFaces, GoToMeeting with HDFaces available next quarter will make web conferencing richer and finally allow video to be an integral part of real time web collaboration. When users fire up an online meeting they will instantly see their colleagues in full HD quality. There is nothing to setup, no extra modules to purchase or configure. Its all software and it just works. We are using it internally at Citrix, the experience is stunning and completely immersive.

We also announced significant expansion of our online business in Europe. Watching GoToMeeting , and GoToAssist in Germany, France, Austria and Switzerland. We are thrilled to be offering one-click meetings, the easiest way to start online meeting in the industry. Total audio with seamless integration of PSTN and voice conferencing and integrated toll-free enabling convenient toll-free access numbers from over 35 countries in these new markets.

These announcements expand our addressable market geographically and to a wider range of customers. They continue to push the envelope in innovation, while keeping the use of experience simple, fast and secure.

We also made several exciting new announcements at Synergy in our data center and cloud business. When it comes to the cloud, customers are excited about the concept. They loved the idea of more elastic computing, giving them choice from a vast array of external services rather than having to build and run everything themselves. At the same time they are nervous about the cloud wars they see, with every major vendor in the industry promoting their own proprietary cloud stack.

That’s why we are taking a very different approach. The Citrix open cloud platform makes it easy for customers to connect there existing data centers to any external cloud service, regardless of a hypervisor, regardless of the network, regardless of the App platform on either side.

To make that vision a reality we announced two new products at Synergy, Citrix OpenCloud Bridge, which seems seamlessly connects existing data centers to any external cloud with full security, performance and network transparency and Citrix OpenCloud Access, which connects employees to any external web or SaaS application with enterprise single sign-on security and full provisioning capabilities.

Both of these new products are software add-on modules to NetScaler making it easy for customers to buy and simple to implement. They also further accelerate our growing NetScaler momentum in the enterprise and with cloud service providers.

We also announced the acquisition of the VMLogix to further extend our OpenCloud platform at the VM level, making a possible to move workloads across different cloud environments for the first time ever, regardless of the underlying hypervisor or cloud platform.

We believe this any-to-any approach is a real differentiator and it’s a winner and its all about Citrix. It means customers can leverage a promise of cloud computing without been having to bet on which providers, stacks and standards will win in the long run. In other words they get choice and control.

Finally I would like to discuss our desktop virtualization business. We are coming off an extraordinary first half XenDesktop, with solid license growth from new customers and amazing results from existing customers who are trading up. This promotional phase of trade-up which ended in Q2 created a strong uptick in channel vibrancy. Same-partners sales metrics have increase steadily driving for more strategic customer engagements.

The second phase of trade-up expires at year end when its most valuable for two type of suppliers, strategic XenApp customers and a large pool of FA renewal customers.

This year we are on track to trade up nearly 15% of our install base. I think we can take that even further in 2011 by making trade-up part of the normal XenApp upgrade process.

I am also pleased with new customer acquisition in Q3 which continued to ramp nicely driven by good fundamentals and customer demand generation, reorders, overall channel activity and technical services growth. As David mentioned we closed an impressive number of 1000 and 5000 seat deals during the quarter and the leading indicators here continue to be a very solid with record increases and pipeline information.

We saw a strong customer traction in Q3 across a wide variety of customer scenarios, like the Fortune 500 food and beverage manufacturer who traded up 2000 XenApp licenses to reduce cost, simplify management, enable iPads and make it easier to open branch offices. Than they turned around and purchased an additional 6500 new desk XenApp licenses to extend desktop virtualization to 100% of their user community.

With a large federal agency we trade up 1000 XenApp licenses for 2000 seated XenDesktop two enhance security and simplify management bringing their total XenDesktop licensed purchases since the beginning of this year to 13000. Over the next few months they plan to nearly double this total again extending XenDesktop to more than 70% of their users

Then there is a leading Korean services company who deployed their first XenDesktop pilot of 500 seats last year to improve data security and mobile user access. Then in the first half they added another 2000 seats and in Q3 5000 more. These customers and many more like them are experiencing the benefits of desktop virtualization first hand and expanding their usage enterprise wise.

We also saw tremendous momentum with our industry partners in the quarter , further accelerating our XenDesktop business on all fronts.

Our partnership with Microsoft from desktop to data center set new records in Q3 for joint pilots, for wins on deals and pipeline creation. Wipro announced the desktop as a service offer built on the joint Citrix Microsoft stack. We announced exciting new partnership with Cisco to deliver a comprehensive joint solution combining XenDesktop with a Cisco UCS platform and giving customers a single support number to call.

Both Dell and HP are ramping up to ship XenDesktop clients as a factory installed options on their enterprise laptops. Lenovo announced their plan to offers XenClient on ThinkPad, laptops and think centered Laptops.

McAfee announces their groundbreaking new reboot solution for XenDesktop making it easy for customer to scale virtual desktops security to tens of thousands of user enterprise wide.

Then we announced an incredible 15000 products that are now verified to work with XenDesktop through our Citrix ready program.

So we have momentum and a solid foundation for Q4 business and into the first half of 2011. Just one year ago we launched the XenDesktop4 as the first compressive Desktop Virtualization solution, delivering unparallel value the customers in putting us into market leader ship position then Desktop is allowing us to drive top downs procedure engagements with enterprise desktop customers, and up sell our higher end of customer base . Since then we shipped well over four million licenses working with customers of all shapes and sizes, banking, education, government and healthcare are the fastest moving segments

Two weeks ago in Berlin we raised the bar again with the launch of XenDesktop5 an amazing new release that’s getting rave reviews already from customers and partners. They are loving new XenDesktop features like 10 to Xen making it easy to install than XenDesktop in just 10 minutes and rollout new Desktops in seconds. Support for our full range of existing new consumer devices covering PC’s Mac’s, zero clients, tables and smartphones, a beautiful and stunning new user experience that’s also a lot easier to use.

XenDesktop5 also takes self service to an entire new level giving users a single place, with a single click and a single login to access any enterprise SaaS or cloud app, including apps that automatically synchronizes users to move between virtual an physical desktops. Its a first we call FollowMe apps and finally the new Zen client feature giving mobile employees secure virtual desktops to go even they are not connected.

In short we entered Q4 with great momentum, market leading partnerships and a new release that completely changes the game again, but we were not slowing down. Our goal is to drive the primary market for desktop virtualizations and to maximize our share.

Heading in to 2011 I am more convinced than ever that the desktop virtualization market at first is multi dimensional across virtual clients, desktops and apps. Secondly that is moving rapidly towards broad adoption and third that Citrix is the clear market leader and growing.

From here our focus is to drive the market by allowing customers to optimize the desktop around security or mobility or agility or cost or any mix of these. As David mentioned earlier we have continued to invest in CIO engagements, all the data sys were moving up the stack to more strategic IT conversations, about faster migration to Window 7, lower desktop refresh cost, broader adoption of collaboration, better data center flexibility and cloud enabling data centers and what’s even more impactful is how these CIO conversation act directly to their critical business issues, like greater mobility for their workforce getting to tighter security controls, making regulatory compliance easier, faster merger integrations, increased employee productivity and creating a greener enterprise footprint and how all of these lets us just say yes. Yes, the virtual working yes, to DYOC, yes to SaaS apps, yes to cloud infrastructure and yes to iPads and tablets from everywhere.

Our virtual computing platform delivers a wider, simpler more flexible IT where people not data centers are at the centre of computing, business is done by people and the best business happens when people are free to do whatever, whenever, wherever, with full access IT services at any time from any device in collaboration with anyone.

We are at the intersection of some very powerful market forces, the transformation of IT to an on demand service, the computerization of the enterprise and the promise of cloud services. This means Citrix gets more relevant every day more capable and more strategic in the market place. Its exiting.

Now, I’d like to open it up for questions.

Question-and-Answer Session

(Operator Instructions) Our first question will come from Bhavan Suri from William Blair & Company.

Bhavan Suri - William Blair & Company.

Good afternoon guys. Just some questions on the obviously XenDesktop, from your comments marketed about four million licenses. That sort of implies over about 500000 licenses sold this quarter which and again you haven’t split out that business but if you can apply some color on ASPs were like in the quarter if those numbers are correct?

David Henshall

Bhavan, this is David, why don’t I take that question. We shipped between five and 600,000 licenses last quarter, definitely a different mix of the type of licenses than we saw last quarter, In this case fully two thirds of them were what we be call new licenses kind of that non trade-up business and because of that it carries a much higher ASP. So for the first time over all ASP’s in the desktop business, business was up we know was well over a $100.

Bhavan Suri - William Blair & Company.

Great and then you provided some color on some of the SI’s but sort of what are you seeing as the drivers for some of desktop as the service offerings and how do you see that playing out sort of longer term?

Mark Templeton

Now there is a tremendous amount of interest in building these DAZ kinds of clouds and SIs were not only, some of them are actually building themselves like the partnership we announced with Wipro but others were actually helping our enterprise customers build at their own DAZ clouds.

I think the drivers they are first within the enterprise no different from what we have been seeing security control, speed, flexibility. When it comes to the sort more than the external cloud I think the journey still out there, I mean these were being built and many of the parts that we’re working where they are saying see demand from medium sized business and they want to build out an infrastructure to service them.

I think one of the issues is right now for a VDI type of solutions out of a DAZ cloud and the customer actually have to bring their own licenses because Microsoft doesn’t yet have a slaw license for the Windows7 desktop. So obviously they can still use the other type of virtual desktop models that XenDesktop offers whether it’s the server hosted desktop or stream VHD or even a local VM desktop based on XenClient. So its sort of a broad spectrum that they are working on but its still pretty early on that remark.

Bhavan Suri - William Blair & Company.

Then David just one more quick one if I can squeeze in what was the differed impact from XenDesktop?

David Henshall

Now differed as I mentioned was down on a kind of gross there?

Bhavan Suri - William Blair & Company.

That’s right.

David Henshall

We certainly deferred a fair chunk of XenDesktop as well and what drove the decline I commented on that in my script just on some of the timing things are on the trade-up and also if you look at from our recognized standpoint a little bit bump in text services and so there was number of things that were hung up on the balance sheet on that line item waiting for completion of project etcetera which have brought their way through.

So I haven’t broken out how much of the deferred revenue balance is related to XenDesktop but bookings were higher, like customer booking were higher than recognized, its just the defined version of bookings as recognized plus change in deferred.

Operator

Our next question will come from Sarah Friar from Goldman Sachs Group Inc.

Sarah Friar - Goldman Sachs Group Inc.

Great and thanks very much. I am going to continue this XenDesktop questioning. David you were teasing us a little giving a lot of stats around XenDesktop but last quarter you gave us the expressively 60 million in XenDesktop revenue 90 million in bookings. Can you just clarify for us what those two numbers are for the third quarter?

David Henshall

Let me answer the last question first and that is the definition of bookings and its Reg G issue for us. We have to define it as recognized revenue plus the change in deferred so we want to be consistent about that, and that is how we defined it last quarter.

So I have to assume that the change in deferred for XenDesktop was zero in the third quarter, so on recognized basis revenue was $60 million in Q3, that’s how much we recognized from our XenDesktop business and I mentioned earlier that new license revenue kind of the non trade-up business was up 17% sequentially.

So that one has continued to do really well but then trade up component was down, it was down two-thirds sequentially which is a timing item that I talked about and then the SAP’s which is really just the recognition of prior trade ups that was also up about 50% sequentially. So net-net, modest growth on a sequential basis and obviously very strong growth year-over-year.

Sarah Friar - Goldman Sachs Group Inc.

Got it. Okay, that make sense. Then on the $4 million licenses shift, do you have any sense how many have actually gone live and what can you guys continue to do to speed up the deployment because I’m sure that also is gaining factor to keep this really fast growth momentum going?

Mark Templeton

Yes Sarah. We don’t have precise count on what’s gone live, but there are proxies for all this and the two proxies that we like to use are the text services, specially in our consulting services because a lot of those services go toward XenDesktop deployment.

So if you look at the metrics there, the consulting hours are up 50% sequentially at sort of all time levels and that after adding a growth in a headcount in a professional services organization about 12% sequentially in the quarter.

The other proxy for it is a partner activity. We’re seeing our partners are busier than ever with implementations and they love it and this way, they make their money. Then the third piece is reorders, and the reorder rates have continued to be in the three to five months range and I gave a couple of examples customer example where we are talking about trade up, plus and order from new plus of reorder and another reorder and that momentum continues to roll. So we are very happy with the deployments that we’re seeing. There is a great flow.

Operator

Our next question will come from Israel Hernandez from Barclays Capital.

Israel Hernandez - Barclays Capital

Can you guys comment on the pipeline for a large deal obviously the trade up accelerated some purchases in Q2. If you look at to the balance of the year to 2011, do you think that you trade up essentially accelerated those large purchases in that ranges in a process of having to rebuild that large deal pipeline. Can you just make some comments around on that please?

David Henshall

Sure, Israel this is David. We closed the 19 deals over $1million in the third quarter which is basically what we’ve did in the second quarter and excluding Q4 of last year is the highest we’ve ever had as a company. I will say looking at the pipeline going into Q4, we have by far and away, a record number of $1 million dollar plus opportunities out there and lot of this is just to build up of what Mark mentioned in his comments with the window sharp growth in pipeline opportunity on a sequential bases and we’ve really seen that across all products and across all regions.

Israel Hernandez - Barclays Capital

Then maybe just a one follow up. Your comments around EMEA still being rather saw some purchases. Can you just comment on what you are seeing for Q4, some of those deals returning and I just kind of just sit down there and either like what do you think at the end of this quarter?

Mark Templeton

Yeah. Israel, after having to spend a couple of weeks in EMEA in and around synergy talking to a lot of EMEA customers. I think the net, net is for Q3 with the overall sort of economic environment is never a fabulous quarter in EMEA to begin with. I think that a little lots of business confidence and a little bit of a pull back. So at the conference, we had number of meetings with customers, obviously while we’re there. A customer council which is about 30 customers, about third are from EMEA and they all indicating not only good Q4 business, but great business into 2011 and in forecast and looking at the pipeline, the things that did not close in EMEA in the third quarter are the top respect for Q4.

So, we’re still a little cautious as David mentioned, because just there a little behind, US overall and continue to be lagging and they probably just want to be a little cautious that’s all.

Operator

Our next question will comes Philip Winslow from Crédit Suisse.

Philip Winslow - Crédit Suisse AG

Just two quick questions. First just a point to clarification, David. Was XenDesktop $60 million in total revenues, so the same as last quarter’s 60?

David Henshall

No. the mix is a little bit different. From a license standpoint, it was north of 32 million with the balance been Fx.

Philip Winslow - Crédit Suisse AG

Okay. So total revenue quarter to quarter, they are above 60.

David Henshall

Yeah. I mean it was 58 last quarter, and 60 in Q3.

Philip Winslow - Crédit Suisse AG

Got it. Okay. Then Mark, when you just look at going forward here, when you talk to your customers about 2011, obviously you saw a very strong first half of 2010 what are they talking about as far as just deployments going and through the relative to the seats they’ve bought so far? Thanks.

Mark Templeton

Yeah, Bill the truth is that I don’t think that granular in the conversations, I think the intent to buy and deploy continues to grow year-over-year. When you look at the metrics and in the conversation in terms of the intensity and enthusiasm around this full range of virtualization asset desktop whether that’s about ZEN clients and sort of in the client virtualization area or about the various modes that’s for virtualizing the desktop OS or the modes we have for delivering virtual acts, so I just think we are going to see continued momentum there.

We are planning on by the way continuing to drive our services capacity and do a lot of work with our partners to drive there services capacity because that can be a bottleneck. So we are growing and talk a little bit about the headcount growth there.

We also announced the program we call it [why to how] and basically it’s a pretty sophisticated program for really moving customers in to the how do I do this step by step by step kind of process and we’re bringing all that partners and training all of them from local type VAR all way through the largest SIs that we work with. They were all at the conference in Berlin and pretty enthusiastic about that, so we just going to keep investing in that deployment and in terms of services, know-how, methodologies and at the same time make it simpler and simpler over time, which XenDesktop5 really is a big leap in that directions to make it simpler to implement.

Philip Winslow - Crédit Suisse AG

Then one just last quick fallow up for David. So it’s 500,000 seats this quarter and the correct number on it was it 2 or 2.5 last quarter?

David Henshall

It was little under 2 last quarter.

Operator

Our next question will come from Steve Ashley from Robert W. Baird.

Steve Ashley - Robert W. Baird

I am going to continue to take down in the our XenDesktop business, could you tell us what trade-up revenue, and trade-up bookings were in the quarter?

David Henshall

Steve some of the answer I gave to bookings I mean we don’t report billings which I think is what you are looking for but based on our Reg G limitation we’ve always defined bookings a certain way and so I am just going to point you back to the recognized revenue and because deferred were flat and assume there was no change there.

On a revenue basis the recognized licensed revenue attached with trade-up was little over $6 millions dollars in Q3.

Steve Ashley - Robert W. Baird

What gives you confidences, you talked about that rebounding in the forth quarter what gives you confidences if you could see a rebound in that activity?

David Henshall

Steve its really a function of two things one of them is opportunity pipeline and the huge rate of growth that we saw during Q3, going into Q4 pipeline and also 2011 pipeline. What we saw similar going into the second quarter and we certainly saw the results of that.

The other was once we had a chance to really go through and look at all the dynamics that occurred in throughout Q3 and how much business was really a function of color trade in pull in to Q2 based on the success trader program. We think it normalized itself.

So year-to-date we’ve traded up about 14%, 15% of what we consider to be the eligible base and Q4 is largest opportunity pool of the year when it comes to subscription advantage. Marry that with the pipeline and all the dynamics that are in place and we certainly expect to see a rebound in Q4.

Operator

Our next question will come from John DiFucci from J.P. Morgan

Giuseppe Incitti - J.P. Morgan

This is Giuseppe on for John just a quick question on sales and marketing expense in the quarter, it seems to be down sequentially and also down a bit as percentage of revenue just curious if there was any reason and how we think about that going forward thanks.

David Henshall

Yes, Giuseppe we had no reason other than it was up big in Q2 based on the success of the trade-up which had a really high level of bookings entertainment in Q2 lower in Q3 and as far as going into Q4 that’s a time where you usually see a pretty good pop in sales and marketing expenses on a dollar basis and that’s just simply function of people being ahead of plan and lot’s of variable call. So that’s we should expect this quarter.

Operator

Our next question will come from Kash Rangan from Banc of America, Merrill Lynch

Kash Rangan - Banc of America, Merrill Lynch

Hi. Thank you very much. Just looking at the trade up metrics, arguably there was some pulling into Q2. I’m just wondering what gives you the confidence looking to next year is prizing really an important level for this market. How sensitive our customers to pricing and how we got on over as an industry the hurdle of the high CapEx that comes in storage and networking costs that go with Desktop authorization if you want to get that more confidence in this.

There are question and secondly, just curious, how should we look at licensed revenue when I go back and compare to the prior peak in license revenues, if we look at 2008 levels. We still are not back on those 2008 levels. Lot of the software companies coming out to depression of come back and license revenue that are at or above their peak prior peak. I’m just curious how we should think about license revenues in this environment. Thanks.

Mark Templeton

Hi, Kash. I’ll take the first couple of questions. So first on price, I think we don’t misses that pricing is not the magic in the trade of program at all. I know that the metrics that we have shows over Q2 to Q3 might not suggest that. So I’m talking about in market, in conversation with customers looking at individual transactions and also gives us confidence that this will rebound in Q4. So not a pricing issue, its really a value issue and we think that the value in the trade of program in terms of the cost of the trade up as well as the ongoing subscription actually delivers great value when you look at the full stack of capabilities that is XenDesktop.

Specially, the platinum edition which is, as David mentioned about two-thirds of the business is delivering everything from the high performance delivery networking components access control etcetera. All the way back to the core infrastructure for provisioning and delivering a virtual desktop or virtual apps.

Secondly, in terms of your question around the cost of storage and network and I think you are really referring to the VDI model, that’s where the cost of storage and networking actually come seriously into play in cost of stack. There is lot of innovation going on to bring those cost down.

I don’t think that there were at any inflection point yet in terms of driving those costs down but we are still seeing customers go forward with the VDI model and the customers that are going forward with it, sort of in spite to those costs because they are going forward where security, agility and speed actually trump the cost. So when you think about that, they are getting the all alike on security and agility and speed, not on just sort of head-to-head comparison between like a physical PC and the VDI style virtual desktop.

We’ll keep innovating and keep driving that down. We’ll make some announcements in Berlin and the server area which is a component all about every XenDesktop sale even though it does get implemented in every case and we are introducing Intel cash, technology that seriously reduces the amount I’ve spend, needed and reduces the amount if needed and so that impacts obviously both storage and networking in the datacenter in a huge way. Stay tune for that, that’s sort of a more than 2011 story when it comes to impacting the product and the momentum in the market place. David, do you want to take the license?

David Henshall

Yeah. The case for me I mean, let me think to solved out the last question you had. You mentioned that some vendors that were back up to the 08’peaks in terms of license revenue. I can’t speak much to their business. I’m going off a memory here. I think we posted at above to 620 in license. 620 million license revenue in 2008, which is certainly a peak for the business. Then if you look at our performance in 2010, we’re just taking the money year-over-year growth rates. We posted 10% Q1, 15% Q2, 18% Q3 and guidance pointing you to again into the low double digits for Q4.

So, on a full year basis, just running the guidance and we’ll take you to between about 610 and 620. So I think we’re back. We’re certainly back to those peaks. I mean work through the unique dynamics around the last 24 months from economic standpoint. I very good about our position as we look into the next couple of years.

Operator

Our next question will come from a Heather Bellini from the ISI Group.

Heather Bellini - ISI Group

Hi, thank you very much, guys. I had two questions. One, just because I’m sure as many people on the call have their inboxes what it would questions. I’m just wondering you define XenDesktop bookings on last quarters call using the same active rules. I guess I’m just wondering if you define at the same way this quarter. What is the number and because even if they changed in deferred to negative meaning, you recognized more than what you brought in. There should be some sense to compare it to last quarter. So that would be the first question. Then the second question, given I think we all understand that the promotion is going on until the end of Q4 and that was a big driver in 2Q meaning if there is a lot of pent-up demand in Q4 I guess, I am wondering if you could give us an idea of whether or not its faired to think we can see the same type of Q4 sequential growth in bookings. The same way you defined them in the second quarter that you saw from the March to the June quarter so sorry for the mouthful but those were the two questions? Thank you.

David Henshall

Okay Heather. On the first part of your question when we talked about the business last quarter we said that our recognized revenue was deferred plus about $30 million in the growth of deferred revenue was related to data programs.

Heather Bellini - ISI Group

Right.

David Henshall

That’s consistent when we talk about recognize plus in deferred that’s the way we’ve always defined bookings and because there was no change in deferred there is not much I can say about that. So I got to say is if you want to use that type of map it would have been 90 million last quarter 60 million in Q3.

Heather Bellini - ISI Group

Okay. What’s the change in deferred negative this quarter?

David Henshall

Yes, but not it was down a little bit but not related within desktop.

Heather Bellini - ISI Group

Okay. Okay and then on the second part if you don’t mind.

David Henshall

Yes.

Heather Bellini - ISI Group

Just about the growth expectations in Q4.

David Henshall

I mean if you look at our guidance we talk about totaled desktop product license and that’s Zen apps in desktop, etcetera and I think the expectation for Q4 out of the range that get you in below double-digit year-after-year tougher and that would require the 35% to 40% sequential growth of Q3 as far as deferred revenue growth to top line to forecast just given the …

Heather Bellini - ISI Group

Yeah.

David Henshall

So certainly we expect it to be up pretty significantly from Q3 with the vast majority of the deriver being data program around end desktop as well as the potential for some of the very large multi year deals that I seen the pipeline.

Heather Bellini - ISI Group

Okay so does that mean its possible you could see the same type of growth from Q1 to Q2 differed I mean in that ballpark it was a big number?

David Henshall

Yeah I think its possible, I think that its certainly possible that Q4 is larger than Q2 even including the dynamic that we saw around the time.

Operator

Our next question will come from Rob Owens from Pacific Crest.

Rob Owens - Pacific Crest

Thank you very much. Could you guys tell us what the reclassification of revenue was this quarter and what you moved down in to other.

David Henshall

Rob with that there is a small line item of other, there was about 2.4 million in Q3 and that’s just the miscellaneous little products they don’t fit anywhere else, that was actually down from 3.2 million and within in Q2.

Rob Owens - Pacific Crest

Second if you look at Citrix online I think it accelerated a little bit can you tell us what’s going on there?

David Henshall

Yeah, they grew 16% accelerate a little bit, I’d say there is probably two things. One of them is we’re look in to behind were we’d like to be in building out international foot print we’ve been focused on number of newer initiatives this year around video, training, management, audio etc. So it just have been put as much a investments towards that, not mentioned we just launched a product for France, product in Germany, turning to Scalars investments right now and you know that’s what we think it really helps problem marks opportunity and keeps our business growing.

Rob Owens - Pacific Crest

David do you anticipate that we accelerate them in Q4 for 2011.

David Henshall

Yes, I’d say steady right now in the Q4 and then the opportunity for us to accelerate 2011 a radical nature of Sis makes to be immediate investments payback over a period of time so it’s a timing difference.

Rob Owens - Pacific Crest

Okay and then lastly, I think we have self improved quarter-over-quarter back to historical levels do you see that stainable here, I trying on that 15 the range other than Q4 where it takes up?

David Henshall

Yeah I think there are more 15 where it’s been there most of the time and the only swing factor is generally just changing deferred’s right so when we talked about this in Q2 we had the huge pop in differed of DSO’s went up. I’d expected SaaS to go up again in Q4 again just a function of accounts receivable and then comeback down in Q1 as no impact on the underlying quality if receivables those of have always been terrific.

Rob Owens - Pacific Crest

Okay and you might want to check this spread sheet we posted to the website I am not getting email that other people are seeing bit of a re-class as well. So.

David Henshall

I will check that and make sure that we will got externally is clear and something not been material it’s being moved between categories

Operator

Our next question will come from Todd Raker from Deutsche Bank AG

Todd Raker - Deutsche Bank AG

Hey, guys how are you, two questions for you Mark you guys highlighted a bunch of deals as 1000 seats and few 5000 seats plus can you give us the sense where how many those are new customers verses trader and then you don’t trying to size this market where do you think penetration can go within the enterprise verses what was your traditional kind of ZenApp penetration.

Mark Templeton

So, let me start with the second one first. Rob, so I’d say that we traditionally looked at 15% when you look at XenApp virtual apps, concurrency and the kinds of project that customers classically did with XenApp and still are doing by the way with XenApp. So sort of an average on typical customer we have 15% I mean you’re going to have some outliners, if you know that are 75, 80%. You’re going to have some at a very-very small percentage but above 15%.

If you look at the pattern of that, now that we have pretty much four quarters of data, we see that creeping up and ranging out with XenDesktop to being much more in the 35 to 50% ranged. Again we had still some outlines. I mentioned a few on the prepared comments where they are close to or at 100%. So I don’t think that the opportunity is there broadly anytime soon to get to a 100% penetration across the broad range of customers.

So, to think sort of moving from 15% to 35% to 50% is kind of what’s on our mind right now and some of that will really get down to how we have other technology and how the market continues to involve and mature and sort of the early adopter community really drives out that sort of the early majority community if you subscribe to the Jeffery More’s crossing the crest and model. When it comes, let David handle the second question.

David Henshall

Yes. Total forces to breakdown of the 85 customers, 1000 seats or more, don’t have that in terms of what was trade up and non trade up handy. So what I will says is we talked about the top, the top million dollar plus deals or 19 if I’m on the quarter. 10 of those were XenDesktop including XenDesktop, so you can drop pretty good correlation here and non of those were trade up exclusive deals. So I would call there was new license transactions.

Mark Templeton

I think that is actually the trend. I think two out of the three examples I gave really have a mix and its what we are looking for. I mean the whole idea, the trade on program was active, get the fly will spinning with partners but also with customers so that they would also add new XenDesktop licenses to their deal. So it’s hard and harder to pass that a part in a pure and with pure metrics.

Todd Raker - Deutsche Bank AG

As you guys look out to 12 to 18 months, would you expect the ASP to hold over a $100?

David Henshall

It’s going to be a function of trade up. So I mean the trade up piece in Q4 as we’ve talked about this afternoon, I think this is going to be strong and that component of the business will be less than a 100 and then a new licenses components will be more than a 100. So overtime, I think the general trend is up into the right and that simply because the new license components will gradually become a greater and greater percent of the total.

Operator

Our next question will come from Walter Pritchard from Citi

Walter Pritchard - Citi

Just two questions. One on the revenue that was and surprisingly stronger in the quarter. I was wondering if you could just kind a helps that’s in application as we’re looking that in the Q4 into next year. Shall we expect that business to continue to grow well ahead of the overall company’s growth rate?

Mark Templeton

Yes, especially NetScaler, just had a great quarter in Q3. We talked a little bit about it in some of the prepared remarks about the segments that were driving growth right now. The one thing that tends to be a little bit unique to Q3 is generally in to the Citrix customers. I was on a big web property that was building our capacity and anticipation of holiday shopping seasons etcetera. While those have been a little bit absent in the last couple of years, and we’ve really seen them come back and buying a lot of the newer high end NetScaler appliances, to help build out their datacenters. So that was good. We had about 390 new customers in the third quarters as well. One of those has early design wins across cloud service providers and then across sale activity that I talked about in the enterprise.

So as far as a go forward, we had good Q4 last year, if you remember I think we did just over $46 million in recognized license revenue. So, I think this quarter will be expectations for Q4, ought to be up about 20% half of a big Q4 last year. Certainly not to 50% we saw in Q3.

So, still growing faster than the company as a whole. So, we will happy with what we’ve seen in our business right now.

Walter Pritchard - Citi

Got it. Then just I guess we all hear your excitement around the virtualization. So if I look at license revenue in that business so the first nine months year and it runs about 9% year-over-year half of something to first nine months of last year that was down about 23%. I’m just wondering those numbers don’t speak to a businesses accelerating and I’m wondering as we get into Q4 and then the next year is trained up starts to see may be a bit. Should we expect that license growth rate actually accelerates or to some reason why we’ll continue to see elsewhere but not in license revenue and desktop solutions.

Mark Templeton

The desktop solutions as you know as made up of two big pieces the historical XenApp revenue as well as the new kind of broader Xen desktop revenue and the phenomena that’s been going for couple of years now is the decline in XenApp with the rapid growth in Xen desktop.

Some of that as intentional upgrade activity that we’re trying to drive within our customer base and really the reason why we look at as one combined business, so you’re right. Year-to-date we’ve had a 9% license revenue growth over a comparable period and the outlook for Q4 is higher number than that so we are to be in the lower double digits in the Q4 and that as we move further in to the year. Actually be on a next quarter we will give you more granular expectation for 2011.

Operator

Our next question will come from Robert Breza from RBC Capital Market.

Robert Breza - RBC Capital Market

Thanks for taking my question. May be as a follow up question to David is there way that you could talk to may be around the overall expectation for bookings as we think about the XenDesktop numbers going in to next year, I know you said you will give more granularity later? Thanks.

David Henshall

No, not now for 2011 at this point our general patterns like we done the last few years is to give high live directional guidance, the way we’re thinking about the plan the way we’re shaping our business plan and so right now it’s the 204 to 207 billion in totaled revenue and then the commentary around our adjusted operating margins really just the directional indicator to demonstrated we take the growth in leverage seriously and we plan to deliver that again next year. So very similar profile to what we had going into this year.

Robert Breza - RBC Capital Market

Thanks

David Henshall

More commentary on desktop in the forth quarter.

Operator

Our next question will come from Adam Holt from Morgan Stanley

Adam Holt - Morgan Stanley

Hi guys thanks for sneaking me in hear , I had two quick questions, the first is hundred percent of the business that you do in XenDesktop showing up in billing or is there any kind of balance sheet components that many not be captured in billings.

David Henshall

Yeah, we never talked about off balance sheet and backlog to say this is on thigh that does occur is for example one might win a very large contract from government agency or what not we had that in the past were they may be awarded something for make up the number 50000 seats and then we will recognize that as they place orders against the appointments schedule, so we might get 5 or 10 thousands of those in a quarter period and then the rest over a multi year time frame so that’s the only way, that we’ve really talk about what I would consider off balance sheet backlog but nothing that we run intentionally in a business.

Adam Holt - Morgan Stanley

Perfect, and then my next question’s on cash wealth looks like this year operating cash flow will bill to the materially our base earnings. Should we expect to see the same kind of relationship between cash flow and earnings and operating income into next year.

David Henshall

We are not going to give next year guidance yet but you are right I mean operating cash flow has been a free cash flow is being great this year we run a very efficient financial model as know we are driving cash flow, free cash flow between 45 and 57% growth year-to-date matrix and substantially faster than growth of any of the inline items so it’s really pretty simple. Net income and change in differed plus the working capital item and we tried manage those officially as possible so we don’t want to give guidance around 2011 yet but rest assured we are certainly focused on driving that kind of performance.

Operator

Our next question will come from [Kurt from Evermore Partners]

Unidentified Analyst

Thanks very much I guess David and Mark can you talk a little about I guess just the expectations you have for the trader program is this going to be the final end of it I guess in December. I guess you don’t want to answer that I guess can you just talk around I guess the strategy of if you are going to keep it in place is it just how may if you are existing customers get on board on to ZenApp or zenta sub at the end of this calendar year. I guess just talk around I guess the thought process around either ending it or maybe keep it going with a lower discount rate somewhere what you did this, this last six months.

Mark Templeton

Hey Kurt, so the way to think about this is in 3 pieces sort of a phase one, phase two, phase three Phase I was introduction of trade up for motion which had some incentives and encouragement and was all about getting the channel partner and customer fly we will spinning that was the focused of Q4 last year through the first half of this year. Then it expired and phase II is really about the trade-up program, which the terms and condition changed. Yes, the pricings are little bit different and the sales promotions are little bit different. As we’ve talked about really tying it more to the SA renewal. So the conversation that we’re having with customers as well as continuing to address the strategic XenApp customer base.

So, the phase 3 will begin on January 1st and would not so that the current program will expire at the end of this year and we have not made any final decisions regarding what that looks like for 2011, but, as I mentioned in my prepared comments, stage 3 is the way to think about it is a trade up like skew that is simply that doesn’t have a time out, that doesn’t have an expiration date and really is that sort of a normal in the flow XenApp upgrades skew for customers that love virtual apps and get the vision and get it around virtual desktops and want to step into that in a much more natural basis, may be more tight to their normal SA renewal cycle. So that’s what you expect, but the current program will expire at the end of the year.

Unidentified Analyst

All right. Then David, just may be a follow up to that, I know you’re doing again the 2011 very much but as we are thinking about sequentially from 4Q to 1Q, should we think about that? I guess giving the trade of dynamics similar from 2Q to 3Q this year or just in terms of how we build that sort of bookings our revenues with XenDesktop.

David Henshall

Yeah. I’d looked at it as a Q4 to Q1, a normal year and a seasonal decline than we see, that’s probably the best starting point.

Operator

Our next question will come from Brent Thill from UBS.

Brent Thill - UBS

How would you characterize the tailwind you’re seeing from the Window7 corporate upgrade. If any and for David, if you could just talk about the composition of deferred. What percent maintenance versus licenses and, if you could also just speak quickly to that recent 25% prize rise, how the channel taking that prize hike?

David Henshall

Brent. I’ll take the first. The tailwind from the Window7 continues to build mostly because enterprises or as every quarter goes by you get closer to their planed migration process. That allow us to be in the conversation and even if they are not doing any virtual desktops and they want to do physical desktops and devises but with virtual apps.

We are on the conversation that helps. Also obviously in that discussion, we like to talk to about how to optimize different type of user communities with in the organization to where they can actually do a more efficient. Window7 migration and lower their cost of desktop refresh by reusing some of the hardware that they have and moving at the desktop and moving more pieces to the data centers. So, I just think that, with every quarter that goes by, the win XP platform ages further, the hardware ages and that creates just more urgency with enterprise customers and helps the conversation we’re having with them.

Brent Thill - UBS

Can you just clarify, do you think we’ve seen we haven’t even had to switch spot yet for the Win7 corporate upgrade?

Mark Templeton

No. I think it's nicely in play. I think when you look at, when I look at conversations we have with the customers, it's in play. I think it will – its going to roll for the next couple of years have been. Also I think you see that and some of the OEM numbers that have been pretty strong on their enterprise business.’]

Certainly as we have conversations with HP, Dell, Lenovo, Toshiba etcetera, their interest in the client as part of the future of desktop and managing desktop that’s another leading indicative of where things are going. David, you want to take the other question?

David Henshall

Sure. Brian, I think the question was about the composition of the total deferred revenue balanced. Right now, I would say renewals subscription advantage is about let’s say its about 40% of the base. Maintenance and support making up about another 20, 25% and then the balance is been online.

We really don’t have a lot of product licensed. Essentially they get hung up in deferred. Whenever we got really large contracts, multi year contracts, the way the wrap wreck works is usually it comes back through the P&L in the form of the license update and so, we put that up as a renewal. So there is some license revenue there. It’s just not a very large piece.

Then also, I would like to come back to I guess it was nor I think this opportunity to answer Rob's question about the, the franchise [ph] was on the website, because I didn’t get a like a since I made the comments and there is an ad in the title on the spreadsheet. We’ll get that corrected so there was a reclassification but it was just the education and consulting pieces that were put in to category called other enterprise services, it shouldn’t say to other enterprise products. So there was no product that was been re-class there was just some of the tax services pieces. So I think my statement is still correct as just we’ll get that spreadsheet corrected. Operator next question.

Operator

Our next question will come from Tim Klasell from Stifel Nicolaus.

Tim Klasell - Stifel Nicolaus

Yeah, good afternoon everybody. Just a one question here, you mentioned that the new customer book in to up 17% sequentially, I wanted to get sort of a feel for was there any may be changing focus by your channel or either focused on the trader program in Q2 and then in Q3 was that to focused on may be some of the new opportunities that have been may be -- so this we can get what we should be expecting going forward just moved out.

Mark Templeton

Yeah it’s a good question. I think that its fair probably to assume that some of the channel capacity got consumed by trade up in Q2 and taken away from new license but if not a metric that we major or even have await a measure in the way that majors capacity and so for, so I think for the most part we will see this normalizing and everybody have the look at the dynamics here across the entire year taking Q4 in to consideration around our guidance and then as I mentioned earlier, the trade ups will become much more of a standard kind of skew in 2011 and then real normal live partners will spend the time with customers they kind of got they can spend the time with customers that really can benefit from a full desktop virtualization stack. In a triad up is the right thing to take them to do that , that skew or if there are new customers I’ll just take new desktop license to them or there are other customers they will be taking them next [demand]] to them . That’s the way to think about in 2011 after it normalizes hear out for the year 2010.

Operator

Our next question will come from Edward Maguire, CLSA.

Edward Maguire - CLSA

Yes, Good afternoon everyone I was just looking past the initial phase of focus on PDI , I just want to ask about your strategy of times and client very closely to the Wipro Chip , how much of a limitation is there, is there a broader perception that this is purely going to Wipro related solution for type one hypervisor and how does this figure into your broader growth plans looking into 2011.Thanks.

Mark Templeton

The way to think about this is that Wipro is where we are starting , because the focus of our client is around secure mobility and that means having CPU platform that has all the characteristics that allow us to deliver a highly secure and highly mobile kind of environment so that we can address all those use cases that we’re hearing form government, that we’re hearing form healthcare, that we’re hearing from banking customers and they required a horse power and capabilities R&D pro end by the way these solutions that they are planning and they are building. They are buying new hardware for those things.

So that the beginning that’s where we are starting and we got a pretty good hardware comparability lift’s up going now with HP, DELL and LINOVO will be more coming and as that feels in and as we rolled solid in these platforms become more common in the enterprise on the price list of the OEMs that becomes less and less of an issue. In terms of volumes I might add the volumes of these laptop, we’re talking about here these major OEM’s are somewhere between 40 and 50% of all the enterprise laptops that they shift so there is the volumes they are actually huge so Wipro is not limiting factor for the Xen client solutions what’s so ever. and as we go forward, we don’t have to be limited to that but certainly we won’t get all of the security and mobility capabilities that Wipro can deliver if we move in to some of the other CPU platforms.

Operator

Our next question will comes from Bradley Whitt from Gleacher & Company, Inc.

Bradley Whitt - Gleacher & Company, Inc.

It looks like that kind of going forward that subscription advantage were knows is kind of going to be a driver of the Trade-up, so I am just curious as you have, do you have any idea what percentage of your XenApp install base would be up for renewal in the fourth quarter.

David Henshall

Yes, you are right I mean the customers are on subscriptions advantage right now for XenApp as that is the population that is else (inaudible) right now. Q4 is our a largest opportunity pool of any quarter of the year and that’s simply distracts to the fact the that’s when historically most of the product license deals were going down so we have one of the thing that’s making us feel good about the Q4 trade-up number that we expect right now. As far as what we have seen year-to-date, I mentioned earlier that we’re got about roughly 15% of the installed base that’s been up for call its asset renewal to the first nine months has upgraded to use and desktop and you know its probably a good number to use for Q4 at this point time and obviously think that we can drive that dipper into the population in 2011.

Operator

Our last question will come from Curtis Shauger from Caris & Company.

Curtis Shauger- Caris & Company

Thanks Mark first for you do you have a view on what fully burden virtual desktop is roughly today and a perspective on what it might be 2,3 years from now.

Mark Templeton

Okay, so that’s a very tricky question because of fully burden virtual desktop for us and Xen desktop environment is got what do you asking is that sort of a VDI or server hosted a screened VHD or local VM desktop does it half virtual apps or not or used more traditional ESP kinds of technology to put the apps in it. Mean, there a lot of variables there, so I think the way the think about it is more and those slices and then we can, I don’t have the fully burden cost models and at but I said here what I’d said that first of all when customers are looking for a lower cost windows desktop to put in fund of a user.

Hence, down a lowest cost is to the go with a server hosted desktop that’s built on XEN desktop with the thermal services under any thing, I mean its for the lowest and yeah there probably they are between 10 or 20 million of those by the way in service every day when so that’s where you gets sort of the cost optimization, where you want to get a security optimization that’s when your turn to the hosted DM sort of VDI type model or the streamed VHD model that‘s because in both cases if the entire desktop is centralized its stored and its provisioned and its (inaudible) and its only on demand but end runs either on the data centre or FDN point but if full total control on backup inscription etcetera that will higher cost but also would have they can have better security up primers and than last model is really optimize around security and that’s the local VM running on like the XenClient, Hypervisor on the end point. That’s where you’re optimizing around mobility without training of any security issues. So, the cost there are probably a little higher on average than sort of a traditional physical laptop that you might buy. In terms of the up front cost but the ongoing savings around support around upgrades patching around security issues that invariably come along back up etcetera, that’s where all the costs savings come in that kind of model.

I know it’s a long answer and it's not specific to what you want, what you asked, but we continue to see customers that come back and they say when I take all with in, I’m trying to hit. I think I can hit about 50% lower cost of ownership across the wide range of desktop and act delivery scenarios within my enterprise. Okay. That’s the TCO statement not an apex exclusively statement or CapEx statement exclusively. I hope that answer is correct.

Curtis Shauger- Caris & Company

It is helpful. I guess may be a more simplistic way of looking at it is there, anything. The suggestion is we get into a higher volumes that the cost structure across the board for a role model. Could you talk about might be improving to the next two three years?

Mark Templeton

Yes. It’s a core goal of hours to drive the marginal costs of a virtual desktop or virtual act down.

That will come in some of the places that we’ve talked about a little earlier around storage, the consumption of storage, the consumption of bios in the datacenter in terms of what kinds of end point platforms we can operate on when it comes to client virtualization. It will come in the form of higher densities when it comes to server as well as higher densities in terms of transmission over the network to make sure that we can efficiently use network, so it will coming all of those places and it’s a key elements and continuing to drive primary demand here. So again a little comeback to always circle back to sort of a fundamental thing I would like to think as there sort of two by two metrics, there cost that are OpEx cost that are CapEx and then there are tangible sort of benefits and the intangibles.

What I observe in customers, the more the customers use this technology more they value the intangibles and more they see the OpEx savings and therefore they are willing to make the kind of CapEx investments. So, that’s the way I think about the dynamics and what I see every single date. The most enlighten customers are the one is that start outstanding I got to save some money, I have this project, I implement in desktop, I get a still port and then they have a fire or a flood or emergency at a branch operation for a factory or a warehouse where there actually delivering the applications to the desktop and they figured out and they figured out quickly. Well, I got a TR solution force free that wasn’t in the original tangible cost model and model on which they brought the product and that happens when someone shows up within iPads someone, shows up with a Max someone shows up with other some of kind of consumer or personal device, it shows up when all of a sudden says you know I have to move this work from my own facility to the facility’s somewhere right that I don’t own the network I don’t own the devices. See those are the all the intangible that are learnt with time and business change and that’s why we have this very deep belief and very intense focus on driving the primary market place and knowing that as customers see these things and learn these things it comes back in the form of reorders, it comes back in the form of license renewal, it comes back in the form of customers learning to trade up from a virtual App only type solutions to much bigger strategic solutions. So that’s how to think about the dynamics there.

Curtis Shauger- Caris & Company

Excellent and if I could one question for Dave the tax benefit that you saw in Q3 is that your irrespective of the federal R&D tax credit with that stopping, was hoping you might clear?

David Henshall

Yes, it is. It’s specifically related to a long term R&D tax credit study that we have been doing for year, year and a half in order to make sure we have effectively utilized what we are eligible for. Our guidance that we put up out right now 23% to 24% on an adjusted tax rate for Q4 is what everybody should use for modeling purposes.

Mark Templeton

Well I will just wrap up the call here and adjourn the meeting and just by saying thank you again for your confidence, your support, great questions and discussions this afternoon and as you can tell we are feeling bullish about virtual computing and how we defined it from end to end from virtual meetings and virtual support through what happens of the desktop around client hardware and desktop a lesson apps all the way into the cloud and the data centre and external cloud providers.

So where in great spot were executing well, we are keeping eye on the ball and trying to deliver the kind of profitable growth that you’ve seen us deliver over three quarters of this year or guidance of Q4 and how we are looking at 2011.

So once again thank you and we will see in three months.

Operator

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

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