Here’s the entire text of the prepared remarks from Citrix’s (ticker: CTXS) Q3 2005 conference call. The Q&A is in a separate article. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
[Jeff Lilly, Senior Manager, Investor Relations]
Thank you, Myles. Good afternoon, everyone, and thank you for joining us. In this call today, we will be discussing Citrix's third quarter 2005 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 slides on the Citrix Investor Relations website, and the slide presentation associated with the webcast will be posted immediately following the call.
[Standard disclaimer omitted]
[David Henshall, Senior Vice President and Chief Financial Officer]
Thank you, Jeff, and good afternoon. Today, I'm pleased to report strong third quarter result of the company, demonstrating solid execution across all four product groups. This was a great quarter for Citrix and really highlight the trends to continue drive our business in additional to provide you some comments in the third quarter results, I'll discuss our current trends in our business, and provide you with an outlook for the fourth quarter and full year 2005. I'll also provide you some early thoughts on the operating model for 2006. Beginning with our financial results, I should note that certain numbers discussed are adjusted figures, please refer to the press release or investor relations website for full reconciliation of adjusted figures, US GAAP figures.
So, let's take a look at our Q3 highlights. Total revenue was $227 million, an increase of 21% over last year. Our GAAP EPS including $7 million write off of in process R&D relating to the acquisition of NetScaler was $0.23, this compares to EPS of $0.22 a year ago. Our adjusted EPS was $0.29 compared to $0.24 last year an increase of 21%, adjusted operating margin was 27% and cash flow from operations was over $76 million. So across the Board really a great quarter. Now I would like to discuss our revenue by product mix and geography as well as our operating performance. Turning to revenue mix, let me first talk about recurring revenue streams. Our online services revenue $26 million in Q3 an increase of 63% over the last year. When normalized for purchase accounting adjustments. The product license update revenue was $85 million, up 20% year-over-year and technical services, which consist of consulting, education and support was $19 million up 30% year-over-year. Finally product license revenue which includes our Access managements, Gateways and Application Networking products was over $97 million in the third quarter. This category grew 10% year-over-year with the major of the growth coming from the Gateways and the application networking groups. Overall we are very happy with the license growth. We are strong despite the fact that a number of anticipated Access re-transactions didn’t close EMEA. A pattern that we have seen all year in this region especially in Germany.
When looking at total revenue by geographic segment EMEA was up 14% over Q3 last year and totaled about 34% of revenue, was $78 million. The America’s regions continue to execute well, growing 18% over the last year and accounting for $103 million or 45% of revenue. The pacific region grew 11% now contributing 9% of total revenue and our online services which are not included in these geo segments has grown into almost 12% of total revenue. When looking at the top deals for this period, we made four transactions greater than a million dollars and our remaining six were all above $500,000. This was led by our North American federal team, which closed five of our top ten deals. In addition our new application networking group generated two of these transactions. By geography six of the top ten are in North America, three are in EMEA and one was in the pacific region. Now we will briefly talk about expenses and operations.
Adjusted operating expenses in the third quarter were $155 million, up approximately 19% year-over-year. This increase was largely driven by the addition of the NetScaler team and other head count investments. During the quarter we added approximately 290 employees to the company. Of this about 230 of the new people joined Citrix through the NetScaler acquisition, 35 came into the online group, and 25 into other areas of the company. In total worldwide head count now stands at 3086. On the balance sheet revenue grew sequentially by about $13 million bringing the total balance to $255 million. This is up about $35 million or 26% from last year. Restricted cash investments totaled $623 million, down $62 million. The sequential decline was related to the cash needed for the acquisition of NetScaler as well as share repurchase activity during the quarter. Also please note that at the end of the quarter we had $75 million outstanding against the term loan in EMEA. As a reminder this debt facility was established in Q3 to maximize repatriation of over $500 million in foreign earnings under the American jobs creation act.
During the third quarter we stepped our stock buyback activity, our repurchasing 3.5 million shares at an average price of $22. This increase in activity was primarily intended to help offset the dilution from the share issued in connection with the NetScaler acquisition as well as our ongoing dilution management initiatives. And finally cash flow from operations in Q3 was very strong coming at over $76 million. This brings trailing 12 months cash flow to a record 295 million. In summary these results demonstrate the continuing progress in executing against the strategy relayed out a few years ago. A strategy to build the complete access platform to solve multiple access problems for our customers. And at the same time diversifying our product revenue streams. We’ve managed this while still maintaining operational discipline and strong profitability.
Now I would like to discuss our outlook and expectations for the fourth quarter and full year ending December 31st, 2005. It should be noted that we are about to make forward looking statements that incorporates certain risks. Please refer to the Safe Harbor Statement noted in our press release and the rest that are stated in our SEC filings. For the fourth quarter we expect total revenue in the range of $243 to $251 million. Within the total revenue number online services are expected to contribute approximately $28 million and we expect the application networking group to contribute $11 to $12 million in total revenue. I would like to point out that this revenue will be approximately 75%, 25% split between license and services. Gross margins are expected to be in the range of 94% to 95%, total adjusted operating expense will increase 7% to 8% sequentially primarily reflecting addition of the NetScaler team and company’s programs to take place in the fourth quarter. For other income we expect approximately $5 million in Q4 rated average shares should be between 180 and 182 million finally we expect earnings of $0.25 to $0.27 per share on a GAAP basis and adjusted EBIDTA of $0.30 to $0.32.
For the full year 2005 we expected the revenue in a range of $883 to $891 million, GAA EPS of $0.85 to $0.87 and adjusted EPS of the $1.10 to $1.12 per share. Looking ahead I wanted to provide some early thoughts on our 2006 operating model. As the application in networking in Gateways groups continue to accelerate, we expect overall gross margin would be in the 93 to 94% range, with more profitability coming from our businesses another US sources, expect the tax rate increase between 2 and 3% then compared to 2005, and overall we will continue to target total adjusted operating margin in the mid of 20% range.
We built a strong foundation this year even alter our scheme from our execution in 2006, we work to continue to deliver top quarterly operating margin performance against our Peer group, while investing and growing our businesses. Now I’ll like to turn over to Mark to give you additional detail on the quarter’s performance and to discuss our ongoing business, as we near the end of 2005, Mark.
[Mark Templeton, President, CEO]
Thanks David, thanks for joining us today. Our third quarter result are excellent, our continued momentum is driving solid growth in revenues, profitability and cash flow. On Q3 with our performance across financial product development and go to market dimensions. We are coming often exciting Q3, we are also coming of a really exciting event just last week, our biggest incest iForum customer events ever, and I would like to start right there. Suppose with incredible of record 3500 customer, partners and employees from nearly 50 counties were there. Attendance of more than a third over last year, and we had more executive level attendees ever. Over 30 customers shall break out sessions, customers like Boeing, Merrill Lynch and Chevron to name just a few. Sharing their successes across all our products and our ECO system partners turned out in record numbers, over 70 of them were iForum sponsors and made it exciting access platform product announcement during the conference. And we made some exciting product announcements too, upgrading and enhancing much of assets platform again, we also feature innovations from our R&D Labs giving attendees the peak into the future.
Regard about our project we coordinate constellation. Constellation is next generation of application, virtualization technologies sales to the Longhorn server platforms. Attendees saw many of these technologies in the on site iForum lab, including Kevlar system health monitoring. IRIS policy based session recording and Constellation extreme graphics acceleration to names just a few. Constellation includes the broader ray of innovations that will be rolled out, out of the next couple of years as new products enhancement, and we will bring him forth Citrix as the industry standard for application and desktop virtualization
We also demonstrated project Tarpon our breakthrough application streaming technologies, Tarpon makes the idea of push based desktop software installation a thing of the past. For the first time it gives desktop PC users one click self service access to desktop apps, it allows IT to deliver desktop application has the software service and delivers the TCO security and performance for desktop apps, that the Citrix brand stands for. Clearly between Constellation and in other areas as well we are innovating at a rapid rate, to extend our lead in the access infrastructure market long into the future. Customers at iForum were very excited to hear how all our products come together as an access platform that delivers a best access experience in every access application scenarios. What we think that we mean best PCO best security, best performance best availability and best business agility. It’s an access platform that’s complete for application delivery by virtualizing client server apps. By optimizing web apps. And by streaming the application to the desktops with our presentation server family, our NetScaler product line, and in the future, project Tarpon. A platform that enables access security and control to the data center, with our access gateway and password manager products, and a platform that enables real time collaboration, built on go-to-meeting, go-to-assist and go-to-mypc products. This is what our platform approach is all about to be the single source provider of access solutions. So now let us look at these solutions in our individual businesses in a little more detail. As David mentioned we had a quite a few large transactions during Q3 in fact 8 of the top ten deals were driven by Presentation Server. It is continuing it’s penetration of enterprise accounts. And maintaining its no.1 position in application virtualization. When it comes to virtualizing client server apps Presentation Server has become IC best practice providing the best cost, security and performance when compared to any other application delivery solution. The Presentation Server isn’t only for the enterprise anymore. In Q3 we released Citrix Access Essentials, our integrated app virtualization solutions for smaller customers; we are really pleased with the first three months of availability. To date more than 850 channel partners have been trained and authorized to sell Access Essentials and in Q3 they’ve already delivered the product to over 200 new customers. Last quarter we released Presentation Server 4 supporting 25% more users per server. 4x faster printing and broader application compatibility than ever. We are really pleased with the early response. PS4 has already generated a lot of excitement with our customers. Last week at iForum we announced the 64 bit version of Presentation Server a release that further increases performance and fundamentally changes the economic of the application virtualization. Performance increases 3X, X64 has all the power of PS4 plus it supports three times the number of users on each server and delivers instant ROI. It’s builds on Microsoft partnership and its garnering go to market support from IBM, HP, DELL and Intel. Moving customers to a more robust industry standards server platform. It’s driving primary demand for application virtualization solutions. Presentation server is already the industry standard for app virtualization the fact is however by our estimates we’ve only captured about 15% of the potential. Leaving a lot of opportunity ahead but for the entire Presentation Server product line. That’s why we are staying aggressive with our long term vision in this market, amplified by our development project code named Constellation that I mentioned a moment ago.
Now I would like turn to our application networking solutions, the Citrix NetScaler product line. Just 60 days ago now the integration of the NetScaler team is off to a great start. We made solid progress in integrating NetScaler into the access platform; we’ve completed the first wave of training for sales, support in education. Launched a new standard edition of NetScaler for small and medium enterprises. And debuted integrated net iForum last week to rave reviews. On top of all that the new Citrix NetScaler team is delivering on its revenue goals and rapidly building a growing pipeline. NetScaler systems are number one in application optimization. Consistently ranked number one in performance and number one in customer satisfaction in the category. We are very confident in our choice of NetScaler and our ability the leverage the superior vision, excellent talent, technical innovation and market leadership this team brings the Citrix. We hit the ground running and are very pleased with the integration so far. Next we look at our gateways business. the gateways group continues to out perform our expectations with another quarter of strong growth, we getting great traction with the next generation SSL BPN our access gateways. As the stable in solution its doing great but it also doing well as the valuable product of the access suite, helping to drive suite sales. Early this year our guidance for the gateways group was 5 to 8 million in revenue, today we are executing ahead of that plan on a faster ramp and we moved into top five of the SSL BPN markets. More than 800 Citrix channel partners are already certified and in Q3 Gateways revenue growth of 50% sequentially. We expect this momentum to continue as we complete the geographic rollout worldwide. And packaged the products for multiple customer segments. Going forward we will bring the performance technologies of NetScaler to our access of Access Gateway. Aggressively driving the most complete and powerful product line for secured access. From the endpoint to the doorway of the data center. Now let us look at our online services business. This business continued its excellent performance and growing our software as a service competency and revenue stream. Citrix Go To MyPC was up 50% over last year. During Q3 we started the data testing of version 5 with much faster performance and support for true color extending our leadership in online desktop virtualization. Citrix Go To Assist the industry leading solution for online technical support grew 41% over last year. And now delivers nearly 8 million remote assistance sessions annually. Thus last week we announced Go To Assist 7.0, which raises the bar with new innovations in management integration and seamless session transfer to name just a few. These improvements will keep Go To Assist number one in its category. Q3 was another great quarter for our fastest growing product Citrix Go to Meeting up 48% sequentially and winning yet another desk collaborations solution award this time from Windows IP Pro. In July we launched version 2 of Go To Meeting with new features like application sharing reading recording and playback, drawing tools, Lotus Notes integration and presentation server optimization. I think its hottest online meeting product available anywhere. Our online services group leveraging our next generation real time collaboration technology bringing on-star like Access to desktop PCs web based meetings online support and stay tuned for even more. So in three years we’ve grown from a single product to nine product lines. I believe we now have the strongest product portfolio in the industry when it comes to access. Every product is the clear leader or the shooting star in its category. So to wrap up great quarter, great execution and momentum across the board and lots of opportunities for continued growth. Now we will open it for questions.