Citrix Systems' CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: Citrix Systems, (CTXS)

Citrix Systems (NASDAQ:CTXS)

Q4 2010 Earnings Call

January 26, 2011 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

Louis Miscioscia - Collins Stewart LLC

Adam Holt - Morgan Stanley

S. Kirk Materne - Evercore Partners Inc.

John DiFucci - JP Morgan Chase & Co

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

Philip Winslow - Crédit Suisse AG

Daniel Ives - FBR Capital Markets & Co.

Steven Ashley - Robert W. Baird & Co. Incorporated

Rob Owens - Pacific Crest Securities, Inc.

Israel Hernandez - Barclays Capital

Michael Turits - Raymond James & Associates

Operator

Good afternoon. My name is Casey, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems 2010 Fourth Quarter and Fiscal Year Financial Results Conference Call. [Operator Instructions] I would now like to introduce Mr. Eduardo Fleites, Senior Director of Investor Relations. Mr. Fleites, you may begin.

Eduardo Fleites

Thank you, Casey. Good afternoon, everyone, and thank you for joining us for today's call, where we will be discussing Citrix's Fourth Quarter and Full-year 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 reclassification and historical revenue trends related to our product grouping to the Investor Relations page of our website. I'd like to remind you that today's conversation will contain 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, acquisitions 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 over 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 finished off the year with great momentum across all of our businesses, delivering $530 million in total revenue, nearly $100 million increase to deferred revenue and $180 million in cash flow from operations.

For the full year 2010, total revenue was up 16% to $1.87 billion, GAAP earnings per share increased 41% to $1.46, while adjusted EPS was $2.08. I'm really pleased with our execution in the field, gains in app, networking and SaaS, and a growing leadership across desktop virtualization, trends that can be clearly seen in our financials.

So looking at the fourth quarter, revenue from new license sales was $196 million, up 17% from last year. License update revenue increased 13% annually driven by demand for Subscription Advantage renewals and the XenDesktop Trade-up program. Tech services increased 40% led by record consulting utilization and support agreements attached to our NetScaler products. And finally, online SaaS revenue was $95 million, up 16%.

From a geographic perspective, the Americas region continues to execute really well, delivering revenue up 27% from last year to $239 million. Included in this number is product license growth of about 36% year-on-year, and 16 transactions greater than $1 million. Internationally, the business environment was mixed in Q4, similar to what we were seeing all year. Japan and Pacific combine for a steady 15% year-on-year revenue growth, while EMEA revenue was up 7% to $153 million as we continue to see uneven demand across Europe. This was despite closing 12 $1 million-plus transactions in the region. We’ll remain a little cautious on these markets going into 2011.

So overall, a very solid quarter to cap off a great year for Citrix. As we enter 2011, customer activity metrics and pipeline continue at record levels. We remain focused on delivering financial results, while investing to expand our capabilities and capacity across our main product categories of Desktop, Data Center and cloud and SaaS.

So let's take a look at the Q4 results within those three areas. First, our Desktop Solutions business grew 14% over last year to over $325 million, including license growth of 16%. The results were led by XenDesktop, where strong demand drove total revenue of $95 million, up 60% sequentially, and up 230% from last year. Of the $62 million in XenDesktop license revenue, approximately 70% came from new licenses and 30% from licenses acquired through the Trade-up program.

So to provide a little more context on the XenDesktop business in Q4, there are a few metrics I think really demonstrate the breath of adoption we're seeing and the strategic value that customers are placing on desktop virtualization within their infrastructure. In fact, more than $30 million of the growth in deferred revenue during Q4 is attributable to XD subscription advantage renewals and trade ups. 15 of the 29 deals over $1 million in the quarter included XenDesktop licenses. There are more than 230 XD transactions greater than 1,000 seats each and over 30 with 5,000 seats each. Download to Vevo licenses increased by more than 100% sequentially. And finally, over 3,000 different customers bought XenDesktop in the period. So throughout 2010, we captured almost 10,000 XD customers, up 3x over 2009, with 5,000 of them taking advantage of the 2010 trade up promotion.

So our installed base of XenApp customers represents over 20 million licenses in total with more than 12 million of those currently active on SA. Last year, we designed a trade-up promotion to migrate the most strategic segment of these customers, ultimately upgrading almost 15% of the active SA base. This month, we announced a new Trade-up program targeting the entire XenApp base, providing an ongoing upgrade and migration path to XenDesktop. This program features a new concurrent licensing option, and three new ways to trade up. Including Trade-up PLUS for easy more project driven upgrades to XenDesktop, with some incentives for purchasing additional licenses; Trade-up Max, which is for enterprise-wide migration to XenDesktop; and Trade-up Restart, offering the benefits of trade up for customers with expired SA. The new Trade-up program really gives our partners and field teams, a more complete set of tools to leverage our large installed base of customers.

So next, looking at our Data Center and Cloud business. Revenue was up 27% in the quarter to $85 million. Growth is led by the NetScaler products, particularly with cloud and Internet-centric and government agencies. We're also still seeing really good traction with enterprise customers, accounting for more than half of the top 20 deals in this business.

Regarding the specific platforms, we saw strong growth in the midrange, NetScaler MPX appliances due to the enterprise uptake. And additionally, the VPX line of virtual appliances continues to do really well, with revenue up more than 50% sequentially, and unit volume up 100% as the cloud of service provider addition is getting broader adoption.

In WAN optimization, Branch Repeater revenue nearly doubled from Q4 of last year, with growth coming across all product divisions. Besides the government, which has always been the largest vertical market here, we're also seeing an increasing attach rate to desktop virtualization deployments as customers are leveraging more of our end-to-end solutions in their infrastructure.

And finally, touching our SaaS business, revenue was up 16% in the fourth quarter to $95 million. For the full year, it was up 17% and now represents almost 20% of total Citrix revenue. Here, the growth here continues to be led by the collaboration of products in the GoToMeeting family, which were up just about 30% in the fourth quarter.

We believe that there's a large SaaS opportunity in international markets, as customers grow more comfortable with this delivery model. We've already seen some early success and market share gains with the GoTo products in Europe, particularly with the recent launch of GoToMeeting in France and Germany. So in an effort to accelerate the expansion in this area, we recently announced our intent to acquire Net Viewer, an online collaboration business based in Germany. Net Viewer currently has over 200 employees and has built an installed base of more than 18,000 customers across enterprise and SMB. This acquisition also brings to Citrix Online a seasoned team to help manage our international growth going forward. So right now, we currently expect the transaction to close in mid-February.

So turning to expenses and operations. In Q4, adjusted op margin was 28%, up 100 basis points sequentially, and in line with a year ago. For the full year, adjusted op margin expanded by 227 basis points to 26%, which is significantly higher than our initial 2010 guidance. This is really a result of the improved revenue performance and our continued focus on execution. Our plan has been to invest slightly behind the demand growth we're seeing in the market so as bookings, pipeline and POCs have all accelerated, we've grown headcount pretty significant with a focus on two areas: First, expanding go-to-market reach and customer touch through enterprise account managers, consulting capacity and tech support; and second, product innovation, to bring to market new technologies, as well as improving integration of the total solution to drive simplicity and better end user experience.

In Q4, we added nearly 250 new people to Citrix, which brings the full-year increase to more than 800. Looking into Q1, the rate of hiring will slow as we work to integrate the new team members and really start ramping productivity. So on the balance sheet, cash and investments increased $1.7 billion, up 39% from 2009, driven by $179 million in cash flow from ops. And for the full year, total cash flow from operations was $616 million, which is up 28% over the prior period.

Also in Q4, we purchased 1.9 million shares at an average price of $66. And year-to-date, we bought back about 8.3 million shares at an average cost of $53 per share.

Deferred revenue at the end of the year was a record $779 million, which is up 26% from 2010. Q4 alone, as I said, we added nearly $100 million to the deferred revenue balance, which is our highest sequential growth ever. Three main drivers for this were the increasing renewal rates for Subscription Advantage, the success of the XenDesktop Trade-up program and tech services contracts for consulting, education and support.

So, overall, really a great Q4. We're executing well, seeing growth in all of our primary businesses and making the investments necessary to extend our leadership position in critical markets, while expanding our go-to-market capacity.

So finally, I'd like to discuss our current outlook and expectations for Q1 and for the full year 2011. Overall, we are raising revenue and EPS guidance for the full year 2011. However, since this is the first time that we provided any quarterly breakdown, I'm aware that the shape of the year is different than many of the published models, particularly with regard to expenses in Q1. So to point out a couple of things here, the most significant items in Q1 include the full impact of Q3, Q4 headcount investments, where productivity will ramp through the year and from the acquisition of Net Viewer, assuming an early February close. And due to the purchase accounting adjustments, and other one-time costs, we're going to realize several pennies of EPS dilution in the first half of the year, which should be offset by the end of the year.

So if you're taking that all into account, for the full-year 2011, our current expectations have increased to total revenue in the range of $2.1 billion to $2.14 billion and adjusted EPS of between $2.29 and $2.33 per share. For the first quarter of 2011, we currently expect total revenue to be in a range of $470 million to $475 million, adjusted tax rate of approximately 23% and adjusted EPS of between $0.40 and $0.41.

So now, I'd like to turn it over to Mark to give you additional details on the quarterly performance and discuss our ongoing businesses. Mark?

Mark Templeton

Thanks a lot, David. Today, we're reporting another record-breaking quarter and year for Citrix in both revenue and EPS. I'm very pleased with our 2010 strategic, operating and financial results, further establishing Citrix's leadership in virtual computing. 2010 was highlighted by three primary things in my mind: Stronger market positions in Desktop Virtualization, Web Collaboration and app networking; secondly, significant strategic visibility in the IT executive suite; and third, solid operating leverage in our financials. Importantly, our go-to-market transformation has elevated our presence as a strategic vendor with significant increases in C-level engagements, step ups in SI pipelines and deal flow, up-selling end-to-end technologies and cross selling our networking products. You can see it in our results, a larger mix of seven-figure deals than ever, greater use of our products as an end-to-end system, record growth of technical services, especially consulting, and strength in SA renewals. I'm extremely proud of the Citrix team and thankful to thousands of Citrix partners and customers, both long-standing and new for their business, their confidence and their enthusiasm for our strategic vision.

Here's how we'll drive the business this year. Five things: First, continued go-to-market evolution with direct customer touch and a larger mix of business from SI and service-provider channels; second, increased depth in select strategic partnerships, that's further develop the virtual computing markets we're in and broaden our reach; third, customer programs and services built around our Desktop transformation model to accelerate the adoption of Desktop Virtualization; fourth, expanded brand awareness in virtualization, networking and cloud computing spaces; and fifth and as always, an amazing innovation agenda for all of our product lines and services. So next, I'd like to give some additional color in several areas of the business starting with web collaboration.

Around the globe, web, audio and video collaboration continue to go mainstream, converging and moving toward mass-market appeal, fueled by solid economic globalization and productivity trends, empowering our Online Services business to 17% growth with over $360 million in 2010 revenue, and increasing our share in web collaboration, now garnering the number two position.

In October, we announced GoToMeeting with HD faces, adding stunning HD videoconferencing to GoToMeeting. We also introduced GoToMeeting for French and German-speaking markets, and achieved some early customer successes in those markets in Q4. As David mentioned, to accelerate our European expansion, we're acquiring Germany-based Net Viewer, adding go-to-market capacity, management depth and a larger customer footprint, and building on our current strength in the U.K. and Nordic regions. In 2011, we'll focus on fully integrating the Net Viewer business, on new go-to-market programs, on higher-impact partnerships, on strengthening of our remote access and support services and on executing in the international marketplace. In addition, our growth plan includes even richer collaboration experiences, partner app integrations and expanded mobile device support including GoToMyPC for the iPad.

Next is our Desktop Virtualization business, where we've now shipped over 6 million licenses since the release of XenDesktop 4 just five quarters ago. 2010 was a milestone year for XenDesktop, growing 400% to about $250 million in revenue and becoming the growth engine of our overall desktop computing business.

In Q4, we shipped more than a million licenses with some great customer wins across geographies, segments and scale. For example, a large U.S.-based healthcare provider, wanted a virtual desktop platform for flexible access to electronic medical records and other apps for 20,000 employees. After selecting Citrix in a head-to-head competitive bake-off, they traded up 4,600 XenApp licenses to XenDesktop Platinum. And then, they added 2,000 new licenses on top of that. An Asia-based customer in financial services with an extensive branch network, abandoned their first-generation virtual infrastructure stack for a full XenDesktop stack, signing a deal for 2,500 seats, and then added Citrix networking products to ensure a secure, available and fast end-to-end user experience.

Another example is the petroleum company, with 2,000 employees throughout Australia needed a virtual Desktop solution to serve a wide variety of end points, over networks and user scenarios. They chose XenDesktop for its FlexCast technology to deliver a mix of hosted shared desktops, VDI desktops, virtual apps and local VM desktops running XenClient technology. This deal was a joint win with Microsoft, where the customer is leveraging our combined Desktop, App and server virtualization stack, all managed by Microsoft system center.

The largest XenDesktop deal in the quarter was with a major European government agency. They purchased Platinum Edition as an end-to-end solution for centralizing apps, desktops and data for 150,000 users to support a vast array of devices, to reach mobile and branch workers and to achieve new levels of security. The deal was closed in collaboration with a global SI partner and Microsoft with Citrix consulting services assisting with architectural design and implementation strategy. So these are a few examples to give you a sense for what's happening with customers in the market.

Looking forward, there are three focal points for our Desktop business: First, drive mass-market demand; second, raise the bar in innovation; and third, expand the desktop to web and SaaS apps. So our biggest XenDesktop growth opportunity lies in developing primary demand for virtualization at the desktop, to drive mass market. We still consider the market to be in earlier stages with the potential to go mainstream as an enterprise-wide solution.

Entering 2011, it's clear that virtual desktops are high-priority for many IT teams, actually becoming a budget line item and being acknowledged as a strategic element of overall IT spend. Our focus is in market segments where security, business flexibility and central management are most critical, in particular, banking, healthcare and government. We already have an impressive set of large-scale successful implementations to reference in these segments.

In 2011, we'll build on our go-to-market partnerships that accelerate core demand in collaboration with Microsoft, with Cisco on the UCS platform, with Wipro's Desktop as a Service offering, with Citrix SIs including CSC, Fujitsu, IBM and Accenture. With Intel and major OEMs including Dell, HP and Lenovo, and with over 400 Citrix-ready business partners. The opportunity is to transform the enterprise desktop to an on-demand service, offering new ways to migrate to Windows 7, to rethink traditional hardware refresh cycles, to embrace amazing new consumer devices and to bring SaaS apps into the enterprise.

From a technology perspective, we're driving the market with Citrix Receiver, our universal client for IT services, allowing IT to say yes to millions of new devices entering the enterprise from personal laptops to tablets to smartphones, making Citrix the one company that can truly deliver IT as a service to any device, anywhere, securely. Over the past few weeks, Receiver has been one of the top two free business apps in the new Mac app store. Receiver was featured prominently in Google's Chrome OS Notebook launch, and Receiver embedded in Motorola’s ATRIX 4G smartphone helped it earn best of show at CES. In 2010, Receiver was downloaded over 1.8 million times across a wide variety of consumer laptop, tablet and smartphone platforms.

Virtual apps continue to be an essential part of the virtual desktop. Last year, XenApp 6 launch set a new standard for user density, overall scalability, integration with Microsoft systems center and app V and support for Windows Server 2008. From here, product advancements will continue at a rapid pace, giving customers lower cost through innovations in management, scalability and storage, making the path to desktop virtualization more clear, more compelling and more economical than ever.

Last year's introduction of XenDesktop 5 in October was a significant step forward, delivering major product simplifications that make simplification, installation and set up faster and easier, a completely new and powerful management operations console. Optimizations for XenServer that significantly reduce storage cost, while raising the level of VDI performance and VM density. Self-service apps including single sign-on for Windows, web and SaaS applications; secure centrally managed virtual desktops to go with our new XenClient feature and lots more.

2011 will mark another year where innovations will further optimize the cost of virtual desktops, while distancing ourselves from competitive solutions through better design, broader device support, better partnerships and greater leverage of our FlexCast technology.

Going forward, SaaS and web apps are rapidly becoming a core part of the Desktop computing experience. That's why we've made the seamless integration of SaaS and web apps into both virtual and physical desktops, a core feature of XenDesktop 5 and a top priority on our innovation agenda. For the user, this takes self-service to an entirely new level, giving them an easy way to access any Windows, SaaS or web app, with a single click and a single log-in. Their apps even automatically synchronize across devices, a Citrix invention we call Follow Me apps.

For the first time, IT gets three core things. First, centrally managed account creation for hundreds of SaaS apps like Salesforce and NetSuite, success factors and Mark Cueto as examples that are fully integrated with active directory. Secondly, IT gets powerful workflows that automatically enable or disable user access. And thirdly, license monitoring and auditing to reduce cost and to enable better compliance management.

Extending the benefits of access control, management and single sign-on to web and SaaS apps is one more way we are helping IT to embrace consumerization, while controlling what matters: the service, delivering a great experience for users on any device and getting robust security and management for IT organizations. So that's how we're thinking about Desktop Virtualization looking forward. As a market, that's multidimensional across virtual desktops, apps and data. That's moving rapidly toward broader adoption, and where Citrix is a clear market leader.

When it comes to the cloud, CIOs love the idea of a more elastic style of computing, one that lets them freely choose from a vast array of IT services, without having to build and support everything themselves. At the same time, they're increasingly concerned about the impending cloud wars they see on the horizon, with every major IT vendor promoting their own proprietary cloud stack. That's why we're taking a fundamentally different approach with our Citrix OpenCloud platform, an approach that makes it easy for customers to connect their existing data centers into any external cloud service, regardless of the hypervisor, network or app platform on either side. This strategy is highly differentiated, and a great example of what makes the end-to-end Citrix virtual computing vision compelling and unique.

In 2010, our Data Center and Cloud products grew nearly 30%, delivering close to $300 million in revenue. Growth was fueled by the NetScaler business growing 35% and XenServer business which saw market share expand to more than 15% of all new servers virtualized in 2010. In 2011, we're focusing on product innovation that will leverage our full range of virtual desktop, app, networking and server technologies.

In addition, we're investing in a dedicated sales team, focused specifically on the cloud-provider market, and game changing new partnerships that will further enhance our position as the most widely deployed networking and virtualization platform in the cloud. I'm very pleased today in fact to announce the first of those partnerships in 2011. An exciting new collaboration with the industry's number one cloud provider and operator of the largest virtualized environment in the world, Amazon Web Services.

As part of this agreement, Citrix and Amazon are working together on the Xen platform in three key areas to make cloud computing more open, more accessible and more secure. More open by enabling seamless interoperability between the Amazon cloud and millions of XenServer workloads running in enterprise data centers and in other clouds. More accessible by ensuring that existing Windows workloads in private data centers run just as well in the Amazon cloud, with the same manageability, reliability and performance. And more secure by bringing XenServer's enterprise-class disaster recovery, compliance and advanced security innovations to Amazon cloud customers.

In a world of many clouds, our strategy of making it easy for customers to connect to any cloud with the best performance, security and ROI, will continue to differentiate Citrix as a leading cloud infrastructure provider.

So in closing, CIOs are telling us three things: First, they want to simplify enterprise computing; secondly, they want ways to embrace IT consumerization; and third, they're ready to adopt a larger mix of cloud services. All of these in the pursuit of transforming IT to an on-demand service.

We think this is the promise and the opportunity of virtual computing infrastructure. This is how we'll continue to deliver a long-term value for shareholders, for employees, for partners and for customers. So I'm really delighted to share these results with you today and now, I'd like to open it up to questions. Casey?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Adam Holt with Morgan Stanley.

Adam Holt - Morgan Stanley

My first question is about bookings in revenue. It looks like you end the year with about 20% bookings growth. Given that your model is evolving, obviously, how should we be thinking about the relationship between the bookings growth this year and the revenue growth forecast of about 13% next year, and how you see those two, bookings versus revenue growth trending into '11?

David Henshall

Adam, this is David. It's one of those areas for our business that as we evolve to sell larger transactions, you see a higher deferral rate as we see more people taking advantage of the Trade-up program. That's going to add to deferreds. And then one other dynamic that is just starting to pop up is renewal rates of subscription advantage. We have subscription advantage that's available on both XenApp and XenDesktop. And now that we've got one-full quarter of last year's XenDesktop sales coming up for renewal, the renewal rates on this are substantially higher than what we've seen historically on XenApp, north of 95%. And while it's certainly one data point, it's in line with the way we've been thinking about this. XenDesktop is a strategic part of customers’ infrastructure, as opposed to XenApp, which in some cases was more project or tactical. And so, I think this is one of those things that will help drive deferred revenue growth as the installed base of XenDesktop, continues to be a larger and larger percent of the mix.

Adam Holt - Morgan Stanley

On the operating margin for the first quarter, how much a dilution, I think you said a few cents in the first half relative to the acquisition, how much should fall in the first quarter and how should we be sort of thinking about layering that in through the year?

David Henshall

Most of it comes in the first quarter. There's a couple of dynamics going on here with M&A, and when you're acquiring a SaaS company, you just have the normal purchase accounting adjustments where we write down most of the deferred revenue, which impacts total revenue. So we'll recognize, call it a couple million of revenue, probably from the acquisition in Q1 and $20 million for the year, ballpark. And that will be substantially lower than the underlying bookings performance that's going on with the international online business. So call it $20 million next year, probably at least double that in 2012 as we get back to a more of a normalized model. So specific to the dilution, a couple of pennies in the first quarter, maybe a penny in the second and then accretive by the back end of the year. So for the full year, I'll expect it to be roughly neutral.

Operator

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

Steven Ashley - Robert W. Baird & Co. Incorporated

David, maybe you could talk to us a little bit about the bookings number that we might think about for XenDesktop in the first quarter. Obviously, a very strong number here in the fourth quarter. And how would you kind of qualitatively guide us to think about bookings for that in the first quarter?

David Henshall

I want to be pretty hesitant to actually guide on bookings. It's really not something that we've ever tried to guide to. We want to provide this information so that everyone has a clean understanding of the dynamics in the Desktop business. But from a guidance standpoint, I'd keep everybody very focused on the reported financials. So the way to think about the broad Desktop Solutions business in Q1 would be product license growth in the -- in the low- to mid-teens, and total revenue growth obviously kind of in that same range, 13% to 15%. I do expect at this point that deferred revenue growth will be a positive in Q1. And I expect deferred revenue balance to go up. It's just forecasting the exact amount, it's got a lot of variables in it. So that's why we shy away from giving bookings guidance. But I would expect bookings to certainly exceed the year-over-year growth rate for recognized revenue.

Steven Ashley - Robert W. Baird & Co. Incorporated

And can you tell us if the stand-alone XenApp business is experiencing license growth year-over-year?

David Henshall

No. The stand-alone XenApp business is declining year-over-year. We don't measure that too much as a stand-alone, but I'll break out the numbers for you so you have it. It's roughly $75 million of license revenue in Q4, which would be down, ballpark, about 20% year-on-year.

Operator

Our next question will come from Daniel Ives from FBR Capital Markets.

Daniel Ives - FBR Capital Markets & Co.

Yes, my question is around Europe. I mean, what do you think is going on there in regards to business conditions? I mean, are you seeing any sort of weakness in the vertical strength in certain countries? Now it's been a few quarters. What's your kind of take? What's going on?

Mark Templeton

Daniel, this is Mark. I think in looking at Q4, not a whole lot changed in Europe overall as we've kind of said in the past that there are obviously countries that are stronger, specifically Germany. And there are regions that are still struggling and spotty, specifically Southern Europe. We've seen good performances from our teams in the northern part of Europe, kind of U.K. and Nordics as well as in Central Europe, which includes Germany, Austria and Switzerland. Good performances from our Eastern Europe teams. And the major weakness that we've seen pretty much all year was Southern Europe, except we did start to see some real positive things happen in Q4 in Southern Europe where several of our seven-figure deals were closed in XenDesktop with some pretty significant banking and telco customers. So that's why David suggested earlier in his comments that we're being still cautious about Europe as we look forward this year until we see a few quarters of a little bit more stability across the region.

David Henshall

Daniel, I'd just add a couple comments on top of that. And one is that I called out in my prepared remarks we did a dozen $1 million-plus transactions, including some of the largest ones in the quarter. So we are seeing the large-scale strategic purchases continue to happen. The EMEA region also had a terrific quarter when it comes to Subscription Advantage renewals. So customers are locking down their infrastructure, they're buying multiyear subscription. There are certainly a lot of the good activity metrics going on. It's just getting the broad-based capital purchasing moving across the broad region.

Daniel Ives - FBR Capital Markets & Co.

And just finally, in regards to the Trade-up, obviously, you have a strong quarter. Was there anything that surprised you this quarter? You look at deals that got done, the size of deals. Just anything anecdotally.

David Henshall

Well, I would say with respect to total license revenue around Desktop and Trade-up in particular, we tracked remarkably close to forecast throughout December. I can't think of any large deal, either Trade-up or new license, that wasn't forecasted to close in Q4. So not a lot of what people look to as the end-of-year flush or upside. Just normal execution of business. No, I think that's pretty much it.

Operator

Our next question will come from Bhavan Suri from William Blair.

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

Just a quick question on the bookings number so I have it clear, David. The comparable number from last quarter, revenue plus change in deferred from Trade-up, was $60 million this quarter. It's $125 million. Is that clear? Am I thinking about that correctly?

David Henshall

Yes, I think that's correct.

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

And then I guess given that Trade-up was only 30% of the mix, the 70% that was non-Trade-up, was there maintenance associated with that, that contributed to deferred? And could you quantify that a little bit?

David Henshall

No, I can't really break out the Subscription Advantage versus the Trade-up piece and deferred. That's getting a little bit too granular. And at this point, I will say that as far as new licenses are concerned, 2/3, about 70% of the mix came from net new customers, and the remaining balance was from customers participating in the Trade-up program.

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

And then turning to the margin line, earlier you've given sort of margin guidance of a 50 bps expansion in operating margin. And if I look at sort of the revenue growth that you projected in the 13% kind of midpoint, it feels like margins aren't expanding sort of the 50 bps. Am I getting that right or am I missing something? Is there something in other income that's coming down or how am I thinking about that?

David Henshall

Our current guidance around op margin is basically unchanged. I mean, our position around wanting to go into this year and show expanding leverage similar to last year's starting position. So the 50 bps is -- our current guidance is probably a little bit below that when you layer in Net Viewer. But the real story is just like 2010. As we continue to outperform on the top line, you should expect op margin to expand at that point. But no change in our position.

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

And then one quick question on competition in the SaaS business. Salesforce acquired a company called Dimdim and is offering sort of the presentation and collaboration piece in the cloud. Have you seen those guys? Do you run into them? Does that worry you at all?

Mark Templeton

This is, Mark, Bhavan. So we have actually worked very closely with Salesforce with our team over there. And basically, the acquisition of Dimdim was to add sort of one-to-one screen sharing as a sort of a small feature of Chatter. And we continue to be a great Salesforce partner with GoToMeeting and working with them in the field, they're a great customer of ours. And so they don't see themselves going into, at this point, the overall web collaboration space as we define it around screen sharing, audio, video, toll-free services, kind of that sort of that marketplace. And we'll continue to work closely with Salesforce as a partner. Competitively, we really don't see Dimdim in the market and haven't competitively ever really competed with them head-to-head in any significant way.

Operator

Our next question will come from Phil Winslow from Credit Suisse.

Philip Winslow - Crédit Suisse AG

I just want to focus in on the NetScaler business. Obviously, you've had fantastic growth this year in the Data Center and Cloud line item. When you start to look forward, Mark, just what do you think is the appropriate sort of just growth rate sort of this business? Are you taking share? And then also, just one quick point of clarification on acquisition. David, I'm wonder if you could give us a sense for just what the expense base was and how we should layer that in as well?

Mark Templeton

Hey, Phil, as we look at the data center and cloud space, especially the NetScaler piece, what we see is great opportunity to continue this kind of growth and continue to take additional share. What we are seeing is that especially to compete in the cloud with service providers, et cetera, you need to actually have both a strong play in the physical appliance of NetScaler MPX. You also need a strong play in the virtual appliance, and VPX has done incredibly well. I'd say this year, in 2011, we'll see VPX unit volumes pass MPX somewhere maybe after the first half. And a lot of that has to do with the uptake in the VSP channel and as well as some of our larger enterprise customers. And then I'd say the third piece that we're looking for is that the fact is that both MPX and VPX interoperate kind of as a service delivery controller fabric so that you can put the physical hardware at the front door, and then you can put the virtual appliances in front of web tier, app tier and data tier services inside the data center and service provider to sort of give an even more powerful solution. So we think that service providers see that as a great differentiator for them to offer their cloud customers. And, obviously, some of our larger enterprise customers are loving it as well. So good opportunity for more growth there.

David Henshall

And specific to the OpEx question, layer in about $20 million of expenses. And that excludes any onetime charges, transaction costs, any of that. That's just the ongoing operating expense.

Philip Winslow - Crédit Suisse AG

Also, what was the acquisition price? We didn't see that in the press release.

Mark Templeton

I don't think we disclosed that in the press release.

Operator

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

Rob Owens - Pacific Crest Securities, Inc.

As we look at your XenApp business and the decay rate that you've seen over the couple of years, I think it did improve a bit in 2010 versus 2009. But how should we think about that going forward? Do you expect it to still somewhat decay at this 20 percent-ish rate or should that begin to improve?

Mark Templeton

Rob, let me sort of take this sort of the bigger-picture question there. What we've said quite consistently is that this is really a Desktop Computing business that has kind of the desktop and apps sort of product then desktop and then the App-only product, XenApp. And over a series of quarters, what we're seeing is customers being able to choose the right solution for what they're trying to do: app-centric solutions, app- delivery kind of solutions, project-based solutions. XenApp continues to be a fantastic product for that. And those that want to move more toward a more robust, full-featured Desktop-as-a-Service kind of a solution, they're naturally picking XenDesktop. Of course, they get XenApp in the process of doing that. So we don't look at this as a decay rate, we look at it as a normalization rate between the products based upon what's happening in the marketplace and what customers are actually demanding. And the key thing that we look at here, obviously, is total growth of the Desktop business, whether we serve a customer more strategically with a full virtual desktop system or we serve a customer more tactically, let's say, with a virtual app solution. We love both customers. So let me -- let David handle more the number -- share part of the question.

David Henshall

Yes, Rob, I'd say specific to the numbers, one thing to think about is that now that Desktop has become such a large component of the whole. And I expect that the XenDesktop or kind of the Desktop Virtualization piece will be greater than 50% of desktop solutions license sometime in the middle of next year.

Rob Owens - Pacific Crest Securities, Inc.

When we get that crossover, we could see an acceleration in the license for desktop solutions overall?

David Henshall

Yes. I think yes. Desktop solutions will certainly continue to outpace the whole for quite some time.

Rob Owens - Pacific Crest Securities, Inc.

And then, if I may, one more on the number of VDI units in the quarter. Mark, I think you said it was over 1 million in your prepared comments. Was there anything more specific than that?

Mark Templeton

Yes, it was over 1 million. About half of them were split between Trade-up and new licenses.

Rob Owens - Pacific Crest Securities, Inc.

I think that puts the year at around 5 million, a little less, and then maybe a little less than you had initially thought. How should we think about '11 in terms of the feed opportunity?

Mark Templeton

Yes, I think that's about right for the year. And I think sort of as we hit the middle part of last year and looking at the impact of the Trade-up promotion, it was hard, I think at the time, Rob, for us to parse out what the promotional sort of momentum was versus the underlying just normal course of doing business, Trade-up part of the business. And we're delighted with the performance of XenDesktop, it's hard to argue with it, for the year. But I'd say you're right, that I was probably a little bit more opportunistic at midyear in terms of unit volumes. Having said that, I think in terms of reorder rates and the size of reorders, as well as the number of customers that we've added on a per-quarter basis, that continues to actually do better than we expected. And so as we look at 2011, I think that we'll start to see some greater penetration, larger deals, et cetera, and we'll see some great growth in the total XenDesktop licenses shipped in 2011.

Operator

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

Israel Hernandez - Barclays Capital

My question is with respect to Cisco. You've have some announcements here over the last few months. Maybe if you can comment on the extent of that relationship. How does being supported by the UCS platform helping you? And are you seeing any traction from Cisco at this point? And also, Mark, maybe if you can just comment on IBM's announcement this week. I think they had some comments around some new product initiatives around virtual desktop and computing?

Mark Templeton

So I'll take the Cisco question first, Israel. So we made the announcement in the fall with Cisco, and there have been several announcements since then. And a lot of traction with customers, pilots and engagement with Cisco in the field. So we're really amazed by what's happened there. They have incredible access at the top end, top levels of IT organizations, and they brought us in, in many, many cases. Secondly, the response that we're seeing from customers on UCS is very positive. The tests that we've run in the lab and customers have run in their pilots with XenDesktop on UCS, it's quite impressive as a platform for XenDesktop. One of the major New York banks has committed with as a platforms for XenDesktop. And in the last five quarters, I think we've done seven figures in licensing for XenDesktop with them, and they'll be putting all that on UCS. And that's again good to see as a validation of the platform and the partnership. There's more to do and more to come this year with our partnership with Cisco, so stay tuned for that. And so just kind of all probably exceeding our expectations right now in terms of how that's going.

The announcement that IBM made I guess a few days ago was really coming out of their software group, a product that's a VDI-only product for the SMB marketplace where I think overall it's pretty much well understood that market adoption for virtual desktops in that marketplace is really unproven and really, really, really early. Our work with IBM, IGS, is all on the enterprise side. And IBM includes XenDesktop in both their Public and their Private Cloud Services business. They have something called Smart Business Desktop Cloud. We're essential to that. They're running that infrastructure for I think now over 100 customers. They've trained hundreds of consultants on XenDesktop in the last year. And our work with IBM Global Services has been amazing. So I identify them as one of the top SIs in terms of momentum. In fact, in Q4, we had three seven-figure deals with them, and it's my understanding that they closed two seven-figure deals since the first of the year that were in the pipeline. So we're highly focused with IBM on where the market is, and that's mid-market to enterprise. And that's what we know about the announcement.

Operator

Our next question will come from Lou Miscioscia from Collins Stewart.

Louis Miscioscia - Collins Stewart LLC

Yes, maybe if you'd go in a little more detail about the Software-as-a-Service growth rate for next year. If you look at it with hopefully Europe eventually bouncing back at least maybe in the second half, and obviously with the new acquisition there, you think you'll maintain or overachieve the growth you saw this year?

Mark Templeton

I think from a guidance standpoint, growth will be about where it is right now, mid-teens on the base business, and then layer on the acquisition on top of that. So that will certainly accelerate the growth rate on a year-over-year basis. And as we go into 2012, the year after that, we've got more of a normalizing, normalization, excuse me, coming from the acquisition where we get full credit for the bookings that are going on. And that'll help keep the growth rate pretty high as well. There's a number of incremental growth drivers that we talked about in our earlier remarks around things we're doing in audio and video and mobility, et cetera. So a lot of growth drivers that we're focused on and looking to keep that growth rate where it is and possibly accelerate from here.

Louis Miscioscia - Collins Stewart LLC

And maybe a quick comment on HD phases?

Mark Templeton

It's fantastic. You got to sort of try it or see it to believe in it. It's a great complement to the kind of performance and simplicity that GoToMeeting has stood for from day one. And so it's as simple as you start a meeting and it's one click to turn on your camera or turn it off. And obviously, we use it extensively here, and you get up to six high-definition video screens coming in adjacent to whatever you're sharing on the screen, PowerPoint or Excel spreadsheet or whatever it happens to be. Performance is incredibly good over both the highly latent connections as well as high-bandwidth. It takes advantage of HD-quality cameras on laptops, et cetera, and it really adds a lot of richness to a meeting, especially meetings that are 30 minutes to an hour, and really makes it more effective and way more engaging. So when it's out for public beta, I hope everyone will jump right on it.

Operator

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

John DiFucci - JP Morgan Chase & Co

There's a lot of questions, a lot of focus on XenDesktop, and for good reason. But I have a question on XenServer. Can you give us a little more granularity in this business? Do you think this is ever going to produce meaningful revenue given your model or has it become more of a strategic business to help gain mindshare and, I guess, market presence in order to help drive your other businesses?

Mark Templeton

John, it's a couple of things. So first of all, it's definitely a strategic component of the business, more so than a revenue driver. And it's strategic for a few reasons. Yes, it's all mindshare and so forth, but that's really not the primary reason. The primary reason is XenServer is at the core of technology that's within XenClient, that's underneath XenDesktop, that is underneath the OpenCloud platform that we'll be enhancing this year. And you'll see parts of other products that we have in the pipeline. So it's an important element across our entire virtual computing platform. And that's how you need to think about it. We do make it available, sort of the basic version of it, free, and there's a viral uptake model there. The monetization is modest, but it's because it's not the focus of the business. The focus of the business is to leverage XenServer technologies. So you see today we made the announcement with Amazon around Amazon Web Services. And so core technologies that were developed in XenServer for optimizing Windows' performance and security of Windows workloads and the manageability of them, et cetera, the ability to tie all of that together with XenCenter to be able to make Amazon Web Services an extension of a private data center, all of that is XenServer technology that's really, really critical for us and as well as in our networking products. And so our VPX products, NetScaler, Branch Repeater and Access Gateway VPX, all really sit on top of XenServer as well.

John DiFucci - JP Morgan Chase & Co

Mark, could you just -- are there any, I guess, quantitative metrics that you can give us for XenServer or that technology? Because, as you point out, we're not really going to see it in the financials. But it could have an impact on your other businesses going forward.

Mark Templeton

Yes. So John, the way to think about it is, so the most straightforward one is we do talk about on an annual basis the number of new servers virtualized in the year and what percentage share that we've gotten. So in 2010, our estimate is 15%. That's up from 11% in 2009 and 3% in 2008. And that's based on viral, and it's based upon relationships we have with certain cloud providers that are building their stack on top of XenServer. Last year, for example, we jointly announced with RackSpace that they would move their entire platform from open-source Xen to XenServer. So making XenServer then an important element there, of course, but counting in the sockets there around new servers virtualized as RackSpace themselves continue to grow. So that's the most direct metric. The other metric is really around the velocity that we get in XenDesktop due to the XenClient technology and due to the optimizations that we make in XenServer so that we can offer a customer a full platform on top of the bare metal and drive optimizations, whether they're storage or density or performance, and while we’d also run on top of other virtual platforms as well. And so XenDesktop is an important piece of the monetization of the XenServer technology. Those are the primary things to look for. And then, as we get further and more deeply into our OpenCloud platform and releasing that, we'll be monetizing it there as well. And that will be another proxy for the value of XenServer in the underlying infrastructure.

Operator

Our next question will come from Michael Turits with Raymond James.

Michael Turits - Raymond James & Associates

First, XenApp license, as you said, is declining. And some of that has got to be the impact from the Trade-up and people buying the XenDesktop SKU instead of XenApp SKU. But how much would you say of the decline in license is a function of people deploying less XenApp as an architecture? Or is it just a SKU shift or would you say that people are really deploying less incrementally of the XenApp architecture?

Mark Templeton

Michael, so first of all, we have no discrete data. And I'd tell you this, that because XenDesktop is a superset includes XenApp, it's impossible for us to know sort of the mix in which customers actually deploy. So I'd say this. If you've been a XenApp customer using XenApp in some significantly strategic way, for the small sort of uptick in cost to get all the other capabilities that XenDesktop brings, my guess is a lot of those customers are going that way with an intention to go further and to do more. So that means more deployments, not fewer, with our strategic customers. I think project-based customers that have bought XenApp in the past will continue and do continue to buy XenApp and deploy it in a similar kind of a pattern and similar kinds of ways. And you see that -- the evidence of that, obviously, is in the SA renewal motion. We continue to see really strong renewal rates. There are no declines in the renewal rates. As a matter of fact, in XenApp and XenDesktop renewal rates are, as David mentioned, remarkably higher. So as I said a little bit earlier in response to Rob's question, the key thing here is to clearly position each product, make sure the sales organization, partners understand those products, and then meet the customer demand where it happens to be and let customers make that decision. That really is our kind of core driving mindset here as we continue to invest in XenApp, of course, and as a component of XenDesktop.

Michael Turits - Raymond James & Associates

Slightly different direction. I think that the relative complexity of VDI/XenDesktop has kept the sales cycle and the initial deployment and trial cycle pretty long. As you’ve gone forward, has there been any measurable reduction in those sales cycles and then say the length of time from proof of concept or trial to full deployment?

Mark Templeton

So we'd agree with you on that, on your assessment. And really, that assessment was the core driving force behind the XenDesktop 5 release. We began shipping in Q4. So it's too early for that release to then now have measurable impact on sales cycles and implementation cycles. But I can tell you the anecdotal evidence that I have from the time I spent with customers and partners since we made the announcement, did the sort of world tour and demonstrations back in October, we expect to see really amazing things. One of the things that we did with XenDesktop 5 is we made sure that if you are going to implement a VDI kind of solution, you can basically install it in 10 minutes. And we call it 10 -- and then spinning up desktops or multiples of desktops is then sort of measured in seconds. And we reduced the complexity overall, a central console for operations and configuration management, et cetera. So we've done a lot of things in XenDesktop 5 to answer these market adoption challenges, and we'll see that play out, I think, in 2011. And that means easier to get up and going and lower cost to own and operate. And that continues to be thematically a key piece of what we're doing with XenDesktop from an innovation agenda perspective.

Operator

Our last question will come from Kirk Materne from Evercore Partners.

S. Kirk Materne - Evercore Partners Inc.

I guess, David, now that you've saw your anniversary of your first big quarter of XenDesktop, I was just kind of curious about some of the buying patterns on sort of the first anniversary from some of those customers. I'm just trying to get a sense, you guys have had a lot of success on sort of reordering after the initial sort of purchase. And does the one-year anniversary of the initial buys sort of spark additional buying from customers or is it really more about sort of the timing of their initial deployment and/or the timing of future deployments? I'm just trying to get a sense on that especially as it relates to some of the seasonality next year given the fact you had a really big Q2 last year.

David Henshall

I'm not sure that the anniversary in of, of itself has any real bearing on customer behaviors, except for what I mentioned earlier in terms of them renewing subscriptions at near 100% level. So that's a great indicator, and it's certainly demonstrating the strategic nature of XD that we've talked about for a while. But when we look in some of the activity metrics around reorders, et cetera, the one that stands out to me is reorder size. And what we're measuring is kind of the subsequent purchase that a customer makes after the first one. And remember, there's not a lot of data points here over the course of a year, but what we're seeing is a reorder size that has gone from about four or 5x earlier in the year, up closer to 10x. And so customers are deploying Desktop Virtualization, they're working through the initial setup and they're on scale. And that's an important driver for us going forward. So great motion, good activity metrics. Stay tuned, we'll keep providing that each quarter. And probably a good leading indicator.

S. Kirk Materne - Evercore Partners Inc.

You all mentioned some opportunities around cross-selling more of the portfolio and sort of strategic accounts. I guess are you guys doing anything from a sales point of view to encourage that type of behavior in terms of spiffs, what have you? I guess how much of a focus is this, I guess, at the strategic level with your sales force this year?

Mark Templeton

Kirk, this is Mark. The 2010 numbers actually, especially on the networking side, are partially a reflection of the successful programs we began last year for cross-selling of networking. And they were so successful that we're doing a couple, three things. Not spiffs, all right, but we're adding more heads to the overlay teams that really help come in and close the networking and cross-selling kinds of products. We are doing a lot more training, and it's been baked into the quotas of every quota-carrying sales rep in the world. So everyone sees not only the strategic sort of benefit of cross-selling because you get the chance to talk about end-to-end virtualization, virtual computing, but also the revenue and the growth kinds of capabilities, opportunities that it brings to the sales rep, and that puts money in their pockets. So I think that last year was a good start. We've put it on the plate as one of the top five priorities for every salesperson in the world. Great success. We're somewhat doubling down this year on two dimensions: upselling, which is really more getting the Branch Repeater, Access Gateway, other kinds of related components and NetScaler components as part of a XenDesktop and a XenApp infrastructure design, as well as cross-selling both our networking products and, in the U.S., beginning to cross-sell our web collaboration products as well. So we think there's a lot of runway there as we scale that up this year and learn a lot more about how to do it and how to scale it effectively.

David Henshall

Well, I think that'll be the last question. We'll close the call. So once again, I think we're in terrific position especially as we see the tectonic plates of the IT industry continue to shift and creating great opportunities for us and the position that we're in. So once again, thanks for the questions. Thanks for listening in today, and thanks for your confidence. We'll see you in three months.

Operator

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

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