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Citrix Systems (NASDAQ:CTXS)

Q3 2011 Earnings Call

October 27, 2011 8:00 am ET

Executives

Eduardo Fleites - Director of Investor Relations

Mark B. Templeton - Chief Executive Officer, President and Director

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

Analysts

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Adam H. Holt - Morgan Stanley, Research Division

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Kash G. Rangan - BofA Merrill Lynch, Research Division

Heather Bellini - Goldman Sachs Group Inc., Research Division

John S. DiFucci - JP Morgan Chase & Co, Research Division

Philip Winslow - Crédit Suisse AG, Research Division

Michael Turits - Raymond James & Associates, Inc., Research Division

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

S. Kirk Materne - Evercore Partners Inc., Research Division

Unknown Analyst -

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems Third Quarter 2011 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Eduardo Fleites, Vice President of Investor Relations. Please go ahead, sir.

Eduardo Fleites

Thank you, Christie. Good afternoon, everyone, and thank you for joining us for today's call, where we will be discussing Citrix's third quarter 2011 financial results. Participating on the call will be Mark Templeton, President and Chief Executive Officer; and David Henshall, Executive 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 would like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Securities 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 the 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 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 Executive Vice President and Chief Financial Officer. David?

David James Henshall

Thanks, Eduardo, and welcome to everyone joining us this morning. Today, we're hosting the call from Citrix Synergy in Barcelona. It's our annual customer and partner event in Europe. We're really excited to actually have a record number of attendees this week, up more than 40% from last year. Mark will give an update on the event later in the call.

So turning to Q3, revenue grew 20% to $565 million, adjusted EPS was $0.64, and we generated almost $190 million in cash flow from operations. We're continuing to drive leadership across Desktop Virtualization, delivering significant new technologies in cloud networking, and expanding the capabilities and footprint in our SaaS business. Trends that can be clearly seen in the results.

In the third quarter, revenue from new license sales was $194 million, up 28% from last year; license update revenue increased 7%; tech services increased 37%, led by consulting demand and support agreements; and finally, SaaS revenue was $110 million, up 20%.

From a geographic perspective, the Americas region continues to execute really well, with revenue up 21% from last year including 26 individual deals greater than $1 million each with a metric that has more than doubled from a year ago. In EMEA, revenue was up 12% to $137 million; and Japan and Pacific posted another strong quarter with combined revenue growth of 39%.

So overall, a very good quarter. So now, let's take a look at the Q3 results within our 3 main businesses. First, Desktop Solutions grew 14% in total revenue from last year to $316 million, including product license growth of 24%. Year-to-date, this license revenue in this business is up 18% and is at the top of our 16% to 18% license growth target that we set for the full year.

In Q3, sales of XenDesktop product were up more than 65% year-on-year, with about 20% of revenue coming through the trade-off program and the balance from new licenses. XenApp also increased last -- from last year as more customers are looking to application virtualization as a great way to deliver apps to tablets and other mobile devices.

There's also a few other metrics that I think really demonstrate the breadth of adoption we're seeing, as well as the strategic value the customers are placing on desktop virtualization within their infrastructure. In Q3, there were 22 $1 million-plus deals for XenDesktop, easily a record, and representing customers from healthcare, retail, insurance, government, education and other verticals. In total, over 3,000 different customers purchased XenDesktop, including 174 transactions for more than 1,000 seats each and 24 deals for over 5,000 seats each.

Customers are looking at desktop transformation as a way to accelerate their business imperatives. For example, a large insurance company in Asia with over 20,000 employees buying XenDesktop and XenServer in order to provide flex working for employees, increasing productivity and maximizing real estate savings; or a major U.S. retailer that purchased over 20,000 desktop licenses as part of their critical business infrastructure necessary to deliver on a vision for the store of the future in over 1,800 locations across the country; or a U.S.-based healthcare provider that rolled out more than 5,000 seats of XenDesktop to securely deliver sensitive medical information to affiliate clinics over a wide area network; and using our FlexCast technology allowing them to support the full variety of use cases from doctors and nurses to office workers using PCs, laptops, XenClients and tablets, so increasingly having conversations with customers at this level as the conversation moves from technology to business enablement.

We're providing them the tools to more efficiently transform their desktop infrastructure, including a brand-new solution announced yesterday through the pending acquisition of App-DNA. And this tool allows customers to quickly assess their application portfolio and implement a strategy to deliver desktops and applications as a service to all users in the enterprise.

Next, in our Datacenter and Cloud business. Total revenue was up more than 30% in the quarter with product license revenue increasing 32%. Growth here was again led by NetScaler with license revenue up 48% year-on-year, and the strength really coming from 3 big areas: First, continuing to see really strong traction, driving a cross-sell motion into our traditional enterprise account base with a number of new NetScaler customers up more than 50%. Second, the new NetScaler SDX platform, which started shipping in June is enabling customers to run numerous virtualized NetScaler instances with full multi-tenant support, giving service providers and other large enterprises significant economic benefits to consolidation. And finally, another big quarter from Internet-centric accounts as they're building out the infrastructure to support large retail and other cloud-based service offerings.

In the SaaS business, revenue was up 20% to $110 million. The growth continues to be led by our collaboration products, which were up 30%, and now account for over half of total SaaS revenue.

Geographically, the investments we've been making to expand this business internationally are delivering good results. And in fact, in Q3, revenue from international markets accounted for about 15% of the total, up from just 10% a year ago.

Also in Q4, through the acquisition of ShareFile, we'll begin offering customers a solution for cloud-based data storage, sharing and collaboration, making it easy for businesses of all sizes to securely store, sync and share business documents and files, both inside and outside of the company.

So turning to operations. In Q3, adjusted op margin was 26%, an increase of over 100 basis points from Q2. Our plan all year has been to invest slightly behind demand growth we're seeing in the market, so as bookings, pipeline and POCs have accelerated, we've continued to focus on really 2 main areas: First, which is about expanding our go-to-market reach and customer touch through enterprise account managers, strategic partnerships, consulting and tech support; and second, around product innovation, to bring the market new technologies as well as improving integration across our solutions in order to drive simplicity and a better end-user experience.

So in total, in the third quarter, we had over 400 new people at Citrix, with more than half of those coming into the sales and services organization. In total, headcount now stands at over 6,500 employees, which is an increase of 1,100 people compared to the same time last year.

On the balance sheet, cash and investments is now $1.5 billion, driven by nearly $190 million in cash flow from operations. During Q3, we repurchased just over 2.2 million shares of stock at an average price of $57, and we spent about $200 million on M&A and licensing activities. Deferred revenue at the end of the quarter was $834 million, which is up 23% from last year. And the main drivers here being really 3 things: First is an increasing number of XenDesktop customers that are involved in the Subscription Advantage program; the number of customers that are initiating multi-year agreements; and tech services contracts for consulting maintenance and support.

So we continue to execute really well. We're seeing growth across all of our strategic businesses, and we're making the investments necessary to extend our leadership position in critical markets while at the same time expanding our go-to-market capacity.

So given the strength that we're seeing across several facets of the business and the growth in our opportunity pipeline, we're increasing our revenue outlook for 2011. And just as a reminder, our guidance does include the impact of acquisitions that we've made to date.

So for the full year, our current expectations are now for total revenue to be in the range of $2.2 billion to $2.21 billion, and adjusted EPS in the range of $2.45 to $2.46 a share. And for the fourth quarter of 2011, we currently expect total revenue to be in the range of $610 million to $620 million, adjusted tax rate between 22% and 23%, and adjusted EPS of $0.75 to $0.76.

And with respect to 2012, our planning cycle is still in process, which is normal for early Q4. And at this point, we're comfortable with the current revenue expectations that are in the range of $2.47 billion to $2.48 billion. Our focus next year is going to be on helping customers accelerate desktop transformation, delivering the infrastructure to build both public and private clouds and expanding our customer reach through both direct touch and go-to-market partnerships. We'll update these expectations with more specifics on our fourth quarter earnings call. But ultimately, our confidence in the market position and our ability to drive long-term growth remains unchanged.

So now, I'd like to turn it over to Mark to give you a brief update on Synergy and all of the important announcements coming out this week. Mark?

Mark B. Templeton

Good morning, everyone, and thanks, David. I'm really delighted and proud of our Q3 performance across geographies, business lines and financials. As David mentioned, we're in Barcelona this week with business partners and customers attending our second European version of Synergy. Despite the tough economic state of Europe overall, attendance is up over 40% from last year, and it feels like customer enthusiasm is up over 100%.

Our long health mission and belief in creating a world where people can work and play from anywhere is really resonating. It's clear that in a highly volatile, uncertain, complex and ambiguous world, this is how people and business will live better and work better.

Yesterday, we unveiled enhanced technologies, future innovations and acquisitions that will power mobile workstyles and cloud services. Today, I'd like to focus my comments on a few of the important announcements we've made this week, putting them in context of our markets, strategy and ambitions around growth.

First is empowering end users. Empowering them with increasingly mobile workstyles in their personal cloud. To continue to lead and innovate in this area, we demonstrated how our customers can create seamless access across people, data and apps on any device. Our recent acquisition of ShareFile was the centerpiece. A fast product that enables secure, professional and simple document sharing using any device, Windows and Mac, along with everything mobile from iOS to Android to Windows phone.

Getting to your data from any device is critical to going mobile. Integrating data within collaboration tools is just as critical. So we announced Workspaces, a new feature for GoToMeeting that adds intuitively easy places to create, share and store leading content. With Workspaces, meetings can center around project teams and the content needed for productivity.

Making data available to enterprise and mobile apps is also critical, so we announced the addition of Follow-Me-Data to Citrix Receiver, allowing IT professionals to give employees easy, secure access to business documents from any company-owned or personal device. These data center products and features are all built on the data cloud that's been the underlying infrastructure for ShareFile.

We announced this as our new Follow-Me-Data Fabric, an extensible platform for sharing business data across a wide range of apps, devices and cloud services. We think of it as iCloud for business. Our Follow-Me-Data Fabric powers our own personal cloud services, and we'll make it easy for third-party developers to incorporate data services like search, share, sync, secure and remote wipe through a set of open APIs, resulting in dynamic mesh ups of data sharing in new and existing apps, and making user data securely and easily accessed from millions of business and consumer devices.

The second area of focus yesterday was around transformation. Transformation of traditional data centers into more elastic and economical private clouds. Corralling, controlling and delivering a wide array of services to the personal cloud is creating greater need for a single point of service and control at the front door of the data center. To enable this, we demonstrated Citrix CloudGateway, the industry's first unified service broker that aggregates, controls and delivers Windows, Web, SaaS and mobile apps to any user on any device. CloudGateway empowers any users with self-service access to all their business apps and gives IT unmatched control, providing identity provisioning for authorized users, automatic account provisioning and deprovisioning, and remote wipe for data and apps on lost devices. It also includes a unified dashboard for service-level monitoring and license optimization among other things. CloudGateway is the connection and aggregation point for on-demand IT services, including Windows apps and desktops, where XenDesktop continues as the market leader.

Our focus is to make virtualization at the desktop more powerful and pervasive by expanding our market reach, by lowering acquisition costs and by speeding adoption. A virtualization at the desktop is being deployed by customers of all sizes, with widely recognized ROI for virtual apps and virtual desktops, as David mentioned. We recently shipped new versions of both XenDesktop and XenApp with new features that address performance, management and simplicity, including the biggest set of enhancements to our industry-standard HDX technology in the entire history of Citrix. These releases will help customers drive even greater business agility, tighter security and wider availability across consumer and business end points.

To reach the SMB and departmental customers more rapidly, we announced Citrix VDI-in-a-box, a simple, affordable all-in-one VDI solution. This was especially well received by our European partners who service these smaller customers. Over the past 2 years, we focused on reducing the cost of Desktop Virtualization as an enabler to wider-scale adoptions. This week, we showed how the first year capital cost of a Citrix XenDesktop rollout is now materially below that of physical desktops in many cases.

We're achieving this through our industry-only FlexCast delivery technology, along with the addition of storage, networking and management optimizations, leveraging the innovations of our partner ecosystems and Moore's Law for greater density of virtual apps and virtual desktops.

We also announced XenDesktop's new personal vDisk technology, built on the recent acquisition of RingCube that moves personal apps, preferences and data to a virtual disc. It reduces VDI storage by 65% in most cases, because only 1 image of a Windows VM is now required. Over the next 6 months, I think we'll be able to drive the upfront cost of virtual desktops below a physical desktop across the board, inspiring even broader adoption, which is our third area of focus.

Customers are asking for services and innovations that will speed them to the value of virtual desktops. This week, we announced updates and enhancements to all our desktop transformation model services, with more self-service tools and partner services. We also announced the agreement to acquire App-DNA to simplify the migration of Windows and browser apps to the new world of Win 7, virtual desktops and consumer devices, something that's been a significant obstacle for many customers. This acquisition will give our customers the ability to analyze their application portfolio, to know what their deployment options are, to quantify app remediation where needed and to auto package the apps for use with Microsoft Installer, Microsoft's App-V and Citrix XenApp.

The third area of focus for the conference has been around connecting, connecting to the growing array of public cloud services in the simplest way possible. NetScaler, having a great, great quarter, is becoming the top brand in cloud networking as you can see in our business trajectory; connecting people, devices, apps and data to cloud services. NetScaler VPX, MPX and SDX are the underlying service delivery fabric, leading the industry in the transition from app delivery to service delivery networking.

We also announced enhancements to Cloud Bridge, securely connecting private clouds to the infinite capacity of public clouds at the back door of the data center. The enhancements include the industry's first infrastructure as a service cloud catalog. Leading cloud providers worldwide will be the precertified for supporting Cloud Bridge, giving enterprises a one-sided setup, choosing from a validated list of cloud data centers worldwide. It will be as simple as adding a new email account to your smartphone.

The last area of focus this week has been around building clouds, building new cloud services the way the world's most successful clouds are built. As the industry transitions from the PC era to the cloud era, the cloud services market is projected by IDC to exceed $55 billion by the end of 2014, comprised of thousands of providers of all sizes for business and productivity applications, gaming, collaboration services, managed desktops, data storage, business continuity services and infrastructure as a service. To date, more than 2,500 cloud providers around the world have chosen a combination of Citrix CloudStack, CloudPortal, XenServer and NetScaler products as a key platform for building their cloud businesses, including 4 of the top 5 largest public clouds in production today.

We demonstrated some of them at yesterday's keynote. The Synergy audience really responded to the live demo of CloudStack and CloudPortal, ZenServer and NetScaler customers like GoDaddy, Korea Telecom and IDC Frontier; and super-scale specialty clouds like Zynga's Z Cloud, all built on Citrix Cloud Infrastructure.

Under the covers, they were seeing CloudStack 3, CloudPortal Services Manager, CloudPortal Business Manager, XenServer 6 and NetScaler SDX, powering some amazing clouds from general purpose to special purpose. As more businesses shift to the cloud, our open solutions provide a powerful alternative that will challenge other vendors that are limited to providing proprietary and closed solutions.

So wrapping up. Clearly, we're building strong positions across SaaS, virtualization, networking and cloud markets. And the investments we've made over the past year in people, infrastructure and innovation and go-to-market is powering growth through geographical reach and business model diversity.

And now, I'd like to open it up for questions.

Question-and-Answer Session

Operator

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

Adam H. Holt - Morgan Stanley, Research Division

My first question is about the acceleration in large deals. If you could give us a little bit of color as to why you think you saw such an uptick in the $1 million plus deals. And also, how is that changing distribution? Are you taking more of those deals direct? What kind of shifts are you seeing in the ability to accommodate that kind of deal flow in your model?

David James Henshall

Sure, Adam. This is David. Yes, as you pointed out, we had a terrific quarter for large deals, where it was 40, which is -- frankly, that's about double what we saw in most quarters a year ago. So a lot of movement in that direction, and it's certainly been a trend that we've seen over some period of time. If you recall last quarter, we're up to 26, which was clearly a record for a Q2. We're seeing a good mix across products. We have some of the largest deals coming out of NetScaler as well as XenDesktop and a surprising number of combined transactions. Those customers that are buying both the hardware and the software solution, as well as customers that are looking at both XenDesktop and XenApp stand-alone products as a component. I'd also add that contribution from SIs, as you know, one of our big focus areas over the course of the last couple of years, continues to move up. It's up about 65% year-on-year in Q3. And remember, that's a little bit lumpy because it is related to large deals. But still representing somewhere in the 15% of product bookings neighborhood, big contribution in Q3 from EDS, HP, IBM, Fujitsu and others. And I'd also add, we had a good geographic mix. We had about 10 of the large deals come from EMEA. And even though EMEA is our slowest-growing region, one that is clearly in the middle of working through a number of political and macroeconomic issues, customers are still stepping up for large strategic transactions. And it's just a lot of positive forces moving in that direction.

Adam H. Holt - Morgan Stanley, Research Division

If I could just ask a quick follow-up about the Q4 numbers. There's been a lot of question about the aggregate spending environment. What's your level of visibility on the fourth quarter in terms of pipeline coverage, et cetera? And are you still feeling like the Desktop business can be a 20% grower in Q4?

David James Henshall

Sure, Adam. Yes, I think the environment has proven to be relatively constructive. I think we're seeing good results coming out of all of our regions. And some of it is something the categories we're in, obviously, desktop transformation and networking. And these areas are high priorities for a lot of CIOs and driving high-wallet share and mind share. So that's certainly a positive. We've been executing for the last year under a set of expectations around continued market volatility in some areas, in particular EMEA. And so the -- and I call it the metrics that we apply and the lens that we look at pipeline has adjusted a bit to accommodate that. But frankly, heading into Q4, we've got a record level of pipeline. We've got a record opportunity for large deals, and the challenges always is just getting them closed. But we feel good about our market position right now.

Operator

Our next question comes from the line of Daniel Ives from FBR Capital.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Could you just -- just over to the last question, I mean, what type of budget flush are you sort of factoring into Q4, I mean maybe relative to historical, what you've sort of seen?

David James Henshall

Yes, this is David. I don't really think we factor in the concept of budget flush. We really don't see it the way we would have 4 or 5 years ago. I mean, companies and customers in general just react in much more realtime and adjust their budgets to their spending. It tends to be the large more public sector, government-type entities that operate more on an annual basis. So I wouldn't anticipate any, what you call budget flush. Just normal seasonality that is backed up by our level of activity metrics, pipeline, et cetera.

Daniel H. Ives - FBR Capital Markets & Co., Research Division

Okay. And then just on the NetScaler, I mean, obviously, that continues to be very strong. I mean, anecdotally, what do you think is going on with the business? I mean, is it share gain? Is it sort of cross-sell? Is it customer adoption? I mean, obviously, that continues to be white hot. So what's your thoughts there?

David James Henshall

Yes, the short answer is yes to all of the above. I mentioned a few of the drivers in my comment that we've just been more and more successful driving a cross-sell motion over the last couple of years. It's been a big focus for us. And so as our sales teams and our partners add more capacity, we're able to go out and touch a number more. We've had good success with customers, and they're looking at just expansion of capacity, replacement of legacy gear, a number of those factors, particularly in the Internet vertical. And then, the new products. We've got virtual instances of VPX for all of our major hardware products that are contributing incremental opportunities for us. We are looking at the SDX platform. The new high-end platform really targeted towards some of the largest cloud service providers and large enterprises as a way to drive incredible economics through combining virtual instances of NetScaler technology. And then, as I mentioned earlier, the combination of hardware and software, we're seeing upwards of 500 customers per quarter now that deploying a hardware appliance as part of a broader solutions set for delivering virtual apps and virtual desktops across their entire enterprise.

Operator

Our next question comes from the line of Steve Ashley from Robert W. Baird.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Maybe I can start with a housekeeping question. You talked about XenDesktop being up 65% year-over-year. Was that license up 65%, or was that revenue up 65%?

David James Henshall

That was license revenue, Steve.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

Okay, great. And just kind of following on, as we look forward for the Datacenter business into the December quarter, is that something you would expect to be sequentially up, or can you give us any kind of -- directionally what you're thinking on the business going forward?

David James Henshall

Yes, for the broader Datacenter and Cloud group, the way we report externally, I think modest up sequentially. If you look at the pattern that we've had over a year, Q3 is a big, big quarter because that's when most of the big Internet properties are building up capacity, getting ready for the end of the year and whatnot. So if it's modestly up on a sequential basis, that will still mean that it's up in the mid-30% range on year-over-year. So that's how I would think about it.

Steven M. Ashley - Robert W. Baird & Co. Incorporated, Research Division

And just lastly, another kind of housekeeping question. Other net income was lower than we had expected, it's actually a net expense. Maybe some color, explanation around that and how should we think about that going forward?

David James Henshall

Yes, 3 things going on in that line last quarter. The one is just the interest rate on invested cash is not very high. Second is that's where FX volatility, where we remeasure our balance sheet accounts flows through the income statement. That was a negative $2 million, $2.5 million. And then, we took an impairment for a minority investment for a few million dollars, which is a onetime item. So those are the 3 things that are contributing to other income.

Operator

Our next question comes from the line of Rob Owens from Pacific Crest.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Could you talk a little bit about just the XenApp performance in the quarter and license having steadily improved over the last couple of years, and just what the outlook is there?

David James Henshall

Yes, it's a good question. I mean, remember, when we talk about the Desktop Solutions business, we always talk about XenApp and XenDesktop together, because frankly, that's the way customers look at it. That's the way we sell it on a go-to-market basis. But XenApp is a stand-alone product. It's still a fantastic cost-effective way to deliver apps and desktops, whether that is on a project basis, or remote location or even enterprise-wide. And frankly, it's probably the cheapest way to deliver virtual desktops of all the options that are out there. But I think one of the things that's really driving activity is the broad trends around mobile right now. And so customers are looking at an app-centric world and delivering applications to iPads, tablets, et cetera, and it's a perfect tool to be able to do that. And so we're looking at -- we're seeing customers purchasing what makes sense for their own infrastructure, what makes sense for the projects that they're looking to initiate. So as I mentioned earlier, a pretty good mix of the largest deals for both XenApp and XenDesktop. So I think that's what you should expect going forward. Right now, the mix is somewhere 50-50 in the Desktop Solutions business, and it will move around that over time.

Rob D. Owens - Pacific Crest Securities, Inc., Research Division

Great. And then second, I apologize if you already covered this, but what's the drag from acquisitions in Q4?

David James Henshall

Yes, everything from acquisitions is included in our guidance, so there's nothing incremental. But the overall dilution, really coming from -- predominantly, the Cloud.com acquisition is about between $0.02 and $0.03.

Operator

Our next question comes from the line of Bhavan Suri from William Blair & Company.

Unknown Analyst -

This is actually Patrick, in for Bhavan. And just a couple quick questions for you. We have heard a reduction in partners within the European region. Is that the case? And if so, could you provide a little bit more color on that?

David James Henshall

Well, we're always working through the partner network and making sure that we've got the right partners, the right programs, et cetera, to be most effective. But nothing -- I'd say nothing on a material basis to report.

Mark B. Templeton

Yes, just the thing to point out that's really important is that we do this on a normal basis, and we always look at partners and their performance. So in this particular case, these are partners that have done 0 business with us in the last 12 months. So there's no business impact going forward certainly, and it's because they decided to focus on other priorities. And it's something that we're always doing, adding and pruning to try to up level the overall capabilities of the partner network and, obviously, investing in those that are actually investing in our product lines.

Unknown Analyst -

Great, that's helpful. And then moving towards the Kaviza acquisition, I know it's new. But could you guys provide any color on how that's tracking within the SMB market with new appliance?

David James Henshall

Yes, I'll say we officially launched the products on -- or yesterday. So VDI-in-a-box, that is the Citrix-branded products coming from the Kaviza acquisition. So I'd say stay tuned, we'll have a lot to talk about on the end of the Q4 call.

Operator

Our next question comes from the line of John DiFucci from JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Mark, you said you wanted to expand Desktop Virtualization in a number of different ways, one was by lowering costs, which makes a lot of sense especially given the uncertainty out there. And that actually shows in some of your acquisitions in the desktop area with Kaviza and maybe, I guess, even RingCube. I was just wondering, could you tell us about how much contribution to the top line those acquisitions gave this quarter? And David, maybe -- I know you just gave us what the impact, the dilution impact will be to acquisitions in your guidance for the fourth quarter, but how much is your increasing guidance for the year? How much of that is due to recent acquisitions for the top line?

David James Henshall

Top line, it's minimal. I mean, most of the acquisitions we've done, as you know, are technology focused or very, very early stage nascent markets. So at this point in time, there's no material contribution that's included in our guidance. We'll talk more about that surely on the Q4 call as we enter into 2012 and we start expecting more material contribution. We'd be able to give you a much better feel for how that is incorporated into our numbers. But as far as, like, RingCube that you mentioned, I mean, as Mark pointed out in his comments, that's really about making it easier for customers to deploy, and therefore accelerating deployments of virtual apps and virtual desktops, bringing down the costs so that the cost now is -- the first year cost is below that of a physical PC. And those types of things that we're doing to make the technology more personal, more accessible and certainly, a much higher ROI proposition for customers are all going to be beneficial long term.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay. So that, I assume then that is just sort of embedded in the product? But something like Kaviza, isn't that like -- isn't that resulted in VDI-in-a-box and wouldn't that be something that would be incremental? And again, it doesn't make a lot of sense right now.

David James Henshall

Sure. I mean, of course, it will be incremental. But as of right now, as I said, we just launched the product a day ago. And we'll be able to come back and talk about it in Q4. Like any new product, we don't expect to be a huge ramp right out of the gate. But post Q4, we'd certainly be able to come back and tell you some details and some stories around that.

Operator

Our next question comes from the line of Kirk Materne from Evercore Partners.

S. Kirk Materne - Evercore Partners Inc., Research Division

I guess maybe my first question would be clearly, you guys are seeing broad-based strength across a lot of your regions. I was just, in particular, curious about Asia Pac, if there's anything in terms of the dynamics of buying behavior or sort of technology deployment in that region, why you're seeing really such a strong growth there? And then, I just have a quick follow-up.

David James Henshall

Sure, Kirk. I think specific to Pacific and Japan, first of all, we've just had a great team. We have great team there, and we've been expanding and adding capacity over a period of time. So we just have the ability to touch more customers. And that's all about execution. There's been broadening adoption on some of the newer products. In this case, it would be the NetScalers and others. And even Japan, for example, had a fantastic quarter, recovering from the natural disasters that we've seen in that area. So across the board, I think it's just -- we've been under-penetrated, and this is -- and it's becoming our fastest growing regions as we piggyback on the broad technology buildup that's going on across the region. And a lot of our solution sets are just perfect complements for what those types of businesses are trying to accomplish, dealing with wide geographic regions, et cetera.

S. Kirk Materne - Evercore Partners Inc., Research Division

Great. And then just my follow-up question is license update revenue had solid growth this quarter, but given the strength in new license sales recently, will that become a little bit perhaps more of a tailwind, or will you see some acceleration into next year? And I guess, if not, is -- I assume there's some dynamics around some of the trade-up activity that would keep that from perhaps being a little less, I guess, prolific as you head into calendar '12. I just want to get a sense on how we should think about the license update number.

David James Henshall

Sure, Kirk. It's definitely our slowest-growing line item right now, the Maintenance business. And that's just a function of, as you mentioned, trade-up from a year ago but also, the slowing -- or slow and lower license growth from 1.5, 2 years ago. It's kind of how it manifests itself as that bleeds back in. The underlying dynamics in that business around renewal rates, unchanged. We're still seeing mid- to upper 80s renewal rates. More customers are looking at multi-year subscriptions. It's one of the things that aids in the long-term deferred revenue growth. But I'd expect it to be in about this range percentage-wise into 2012.

Operator

Our next question comes from the line of Heather Bellini from Goldman Sachs.

Heather Bellini - Goldman Sachs Group Inc., Research Division

I was just wondering if you could talk a little bit about next year? I know you gave revenue guidance, which was very good. I'm just wondering if you can give us a sense with some of these acquisitions that you've made, how should we think about your operating margin expansion in next year? And given all the investments that you seem to be making in terms of helping to accelerate XenDesktop or Desktop Virtualization in general, is -- should we keep thinking about the traditional type of margin expansion you've been giving in the past?

David James Henshall

Yes, Heather, I mean, we're working through our plan right now as you'd expect this time of year, and we'll be able to come back and give a lot more specificity after the Q4 call around the other line items of the P&L in much more broad strokes. But just in general, as you mentioned, we are investing in a number of different areas. We're very excited about the market categories and our market position that we're executing in right now. And I think that we've gotten the ability to drive very strong top line growth over a protracted period. And so that's certainly where we're focused. But we'll be able to come back in 3 months and give you more detail there. As far as acquisitions and specific dilution and whatnot, most of the acquisitions we've been doing are not terribly material in size and are focused on accelerating some of these market categories or becoming features -- or infrastructure of existing products. And because of that, the -- it becomes more of a build buy, right? So it's kind of in the number already. And the only area that I'd say had some dilutive drag, if you want to call it that, into next year would be around the cloud platforms group. And that's just because it's very nascent market, and we're investing to capture what we believe is a huge multibillion dollar opportunity in a next few years. So that's kind of a high-level characterization and stay tuned, and after this quarter, we'll be able to give you much more detail.

Operator

Our next question comes from the line of Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Just a mechanical question. You said that XenApp was up, can you quantify that for us and then maybe give us just license, as well as the full XenApp versus XenDesktop percent for Desktop?

David James Henshall

Yes, honestly, I'd rather have you just focus on the combined number of those 2 products around desktop solutions. That's the way we've been reporting it, and that's really the way the customers are buying and we're going to market. I think it's a little -- frankly, it's just not helpful to be digging into the individual products too much.

Michael Turits - Raymond James & Associates, Inc., Research Division

And XenApp sounds like it's still healthy, no reduction in the deployments of that type of technology?

David James Henshall

No, not at all. In fact, it's I think, being looked at in many ways for customers is a great way to embrace new ideas, new technologies around mobility and tablets and others. So it's very strong.

Operator

Our next question comes from the line of Philip Winslow from Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Just a follow-up on the last question on XenApp, if I can go back into it, it looks like XenApp licenses were up sort of 3%, 4% year-over-year. That's a big change, obviously, from what we were doing 9, 12 months ago. David, back in '07, '08, you used to talk about XenApp growing 2% to 4% license. Do you think we're back in that range now sustainably? Or is there a reason with some of your comments earlier that you think we actually could be above or back below that? And then also, just one quick follow-up on technical services. You guys continue to have a fantastic year-over-year growth there, north of 30%. When you kind of think about Q4 and the next year, how should this technical services line keep trending?

David James Henshall

Sure, Bill. On the first question about XenApp and XenDesktop, I really think it's so different from the '07-'08 timeframe you mentioned right now. But honestly, it's just not relevant anymore. I mean, the way to think about it is desktop solutions, and that number that we talked about in a guidance range of 16% to 18% growth for the year, and as I mentioned, we're already at or above the top end of that range. An So that's the way you should be thinking about that business. In terms of tech services, yes, we've seen growth, tremendous growth across all 4 major areas. That includes technical support revenue, consulting, education and maintenance. The big driver, frankly, the largest year-on-year growth rate was around consulting, and this is the demand we're seeing from customers that are either looking at desktop transformation in kind of earlier stages or they're in the process of architecting and deploying XenApp, XenDesktop on a more broad basis. That's a people business, so our ability to grow that revenue is somewhat linked to our ability to hire and bring new people on board. So the way to think about it financially is probably for Q4, I'd expect that business to be up a little sequentially, and in the mid-20s, mid-20% range on a year-over-year basis.

Operator

And our last question comes from the line of Kash Rangan from Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

My question was on the Desktop Solutions business. David or Mark, it looks like this year, we saw a very good benefit from the renewed launch of the desktop solutions from last year and also XenApp started to grow. So I guess this year, we had 2 significant drivers for the business. You're probably headed towards high teens, maybe 20% growth. As we look at next year, how should we think about the growth rate of the Desktop Solutions business given that you probably have a not-so-easy comparison on the XenDesktops and also XenApp, the trends have improved. You started to grow that licenses there. So looking to your overall guidance for revenue, how should we think about the growth rate, given these 2 dynamics that have helped your business this year?

David James Henshall

Sure, Kash. Overall, I wouldn't read too much into the 2012 growth rate. At this point, it's early. This is an early market statement. I'd say as far as the actual growth of Desktop Solutions, it depends on the category growth. We think that it's one of those areas that's going to continue to be, top of mind for CIOs. If you look at many of the surveys that have come out for many of you, Desktop Virtualization and kind of broader virtualization at the desktop, which includes a little bit more of a broad definition, is near the top. It's one of those areas that CIOs are actually looking at increasing spending in. So you look at that, and then you apply our market position, which we feel very good about. And when we look at our competitive win/loss, the breadth of solution we're delivering as well as new things like VDI-in-a-box, targeted towards new markets, smaller customers, more departmental and regional deployments. These types of things make us feel very good about our ability to execute. So we certainly believe that this is a category discussion and one that we're pretty excited about right now. So more specifics on targeted growth rates after Q4, but in a broad strokes, that's how I would think about it.

Mark B. Templeton

Yes, I think strategically, as we look into 2012, there are 2 big things on my mind. First of all, on the drivers' side, whether it's consumerization, security, simplicity, devices and ubiquity around them, that, I think, continues to gain momentum. In fact, stronger in all those areas from a market drivers' perspective next year. And then, on the other side of the formula would be innovations and introductions of improvements, enhancements, new products, et cetera. And we have a great pipeline and line up there as well, including the beginnings of some really great impact from the acquisitions we've made in the second half in this particular space, whether it's the personal vDisk technology or it's the AppTitude technology that we just announced, the acquisition of -- the integration of Follow-Me-Data, which will have a material impact on the value and capabilities of virtual apps and desktops and mobility. So I think, we'll see that start to gain some traction as we push into the first half of the year. So we're optimistic and confident.

David James Henshall

And I'd just like to add as a final comment that to see all this in action, I encourage anyone to go to citrix.com and actually watch the keynote from Synergy Barcelona. That's available there. And you'll see a lot of these products in action and how all the components are leveraging one another.

Operator

Would you like to take further questions?

David James Henshall

No, I think we're just about out of time. I want to thank, everyone, for joining us today here in Barcelona, and we look forward to talking to everybody again in 3 months. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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