Citrix Systems (CTXS) Kirill Tatarinov on Q2 2016 Results - Earnings Call Transcript

| About: Citrix Systems, (CTXS)

Citrix Systems, Inc. (NASDAQ:CTXS)

Q2 2016 Earnings Call

July 26, 2016 5:15 pm ET

Executives

Eduardo Fleites - Vice President-Investor Relations

David James Henshall - Chief Operating Officer and Chief Financial Officer

Kirill Tatarinov - President, Chief Executive Officer & Director

Analysts

Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)

Nikolay Beliov - Bank of America Merrill Lynch

Raimo Lenschow - Barclays Capital, Inc.

Nicole Hayashi - Goldman Sachs & Co.

Kirk Materne - Evercore Group LLC

Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker)

Karl E. Keirstead - Deutsche Bank Securities, Inc.

Michael Turits - Raymond James & Associates, Inc.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Rob Owens - Pacific Crest Securities.

Brent Thill - UBS Securities LLC

John DiFucci - Jefferies LLC

Ed Maguire - CLSA Americas LLC

Scott Zeller - Needham & Co. LLC

Jason N. Ader - William Blair & Co. LLC

Zach Smith - RBC Capital Markets

Operator

Good afternoon. My name is Doris and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Second Quarter 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session period. [Operation Instructions]

I would now like to introduce Mr. Eduardo Fleites, Vice President, Investor Relations. Please go ahead, sir.

Eduardo Fleites - Vice President-Investor Relations

Thank you, Doris, and good afternoon, everyone, and thank you for joining us for today's second quarter 2016 earnings presentation. Participating on the call will be Kirill Tatarinov, President and CEO; and David Henshall, Chief Operating Officer and CFO. This call is being webcast on Citrix Systems investor relations website. The webcast will be posted immediately following the call.

Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the US securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. 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. Copies are 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'd like to turn it over to David Henshall, our COO and CFO. David?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Thanks, Eduardo, and welcome to everyone joining us today. We continue to show great results from the operational initiatives we introduced last year. We are focusing all of our energy on our core strategy of securely delivering apps and data, allowing for this consistent execution and really setting the company up for profitable growth as we look forward.

As you can see from the release, total revenue was up 6% year-on-year in Q2, with product license up 7%, and SaaS up 14%. Adjusted operating margin was 28%, adjusted EPS was $1.20 per share, up 20% from Q2 a year ago, and we also generated $228 million in cash flow from operations. In total, we closed 61 $1 million plus transactions across product and service, an increase of 33% year-on-year, with particular strength coming from financial services, healthcare and cloud verticals.

There was also good balance across the portfolio, more than half of these transactions coming from Workspace Services solutions, an increasing number from Delivery Networking and even our largest ever single contract around enterprise file sync and share.

From a geo, perspective, excluding the GoTo business, revenue from the Americas was up 11% while EMEA and APJ both declined modestly. The Americas geo has continued to really be the growth engine for a number of quarters now. This region is where our restructuring activities began early last year and therefore has had the benefit of stability and continuity, a key contributor to this performance and a model for changes we're making elsewhere in the world.

So, next let's look at our Q2 results within our primary groups. Our Workspace Services business, including app virtualization and mobility grew about 2% to $412 million, including a 1% year-on-year increase in license revenue. The results show that this business is benefiting from the strategy and increased focus applied last year. And as we've discussed before, there's a number of specific initiatives that we're driving to accelerate growth in this area through faster innovation, more verticalized solutions and aggregation of our unique assets.

Within this area, there's a few dynamics that are worth noting. First, total revenue from the Workspace Suite, which is our comprehensive solution for secure app and data delivery, was up more than 70%, contributed about 12% of license revenue. Second, we continue to grow our CSP subscriptions where partners primarily utilize XenApp to deliver cloud-based offerings to their customers. Overall, CSP revenue grew 37% to an ARR of about $75 million. And finally, we saw great results coming out of the Americas geo for overall Workspace Services where license revenue grew 23% in the quarter and 16% for the first half, really led by demand from the suite.

Next, looking at our Delivery Networking, total revenue increased 11% in the quarter to $195 million, with license growth of 16%. When you focus just on NetScaler, I'll remind everybody that the business is essentially made up of three segments, cloud infrastructure and service providers, Citrix solution sales and enterprise ADC. Demand from the cloud customers continues to be really strong, consistent with what we've seen over the past year. This segment contributed about half of NetScaler product bookings.

Solution attach sales represented 15% of the mix in Q2 with the number of app and mobile opportunities that included Networking as part of an overall Citrix solution, consistent with what we saw a year ago.

Enterprise ADC was about a third of the mix in the Q2, and we're seeing increased traction from the new NetScaler SD WAN products, which is addressing a nascent market, but one that's expected to grow really significantly over the next few years. All in, we sold over 1,900 Networking customers in the period, with over a third of them being net new.

And finally, our SaaS delivered revenue was up 14%, contributing over $200 million in the quarter. The contribution from the GoTo Solutions was $169 million, growing 10.5% from a year ago. As we announced earlier today, we're merging this business with LogMeIn over the next few quarters, but until that transaction is completed, we'll continue to operate as a consolidated entity for reporting and guidance purposes. More detail on the performance of the GoTo businesses, individual segments will be included in the LogMeIn S-4 filing which is expected later this quarter.

Looking back on the other core Citrix cloud-based services, they contributed $33 million in total revenue, growing at 30%. The bulk of this is coming from ShareFile, our secure data platform, and other new services addressing mobile, networking and desktop needs for our customers.

So clearly, we're beginning to see a shift in the way that products are being consumed by our customers, evolving slowly towards a more consumption-based model. When we include revenue coming from the CSP program, our cloud-based services, excluding GoTo, and any term licenses, the aggregate ARR was over $200 million in Q2, growing at more than 30%. We'll begin to break this out each quarter to provide more visibility into this dynamic.

Shifting gears and turning to operations, we've shown a rapid increase in margin over the last few quarters despite funding incremental investments in our growth businesses and certain go-to-market areas. Our restructuring plans across the company are intended to generate permanent expense reductions, allowing the company to execute more efficiently while also driving scalability into the future.

In Q2, we posted 28% adjusted op margin which was up 370 basis points from a year ago. We're clearly operating well ahead of our stated goal of reaching 30% in fiscal year 2017.

The focus on leverage has also really helped increase cash flow from operations, which was up 13% in the quarter to $228 million and up 31% on a trailing 12-month basis. This translates into approximately $1.46 per share in the quarter and over $7 a share over the last four quarters.

Before I wrap up, let me talk about our current outlook and expectations for the remainder of the year. Our operational programs and strategy is clearly working. We're happy with the results and confident in our plans for the balance of the year. At the same time, we're going to remain conservative given the restructuring, the GoTo merger and the significant revenue upside that we delivered in the first half of this year.

That said, we're going to increase our assumptions for Q3 and for the full year. For Q3 2016, we now expect revenue in the range of $820 million to $830 million and adjusted EPS of between $1.18 and $1.20 per share. For the full year 2016, we're increasing our expectations to include revenue between $3.37 billion and $3.39 billion and adjusted EPS of $5 to $5.10 per share. This range represents 3% to 4% growth on the top line and more than 15% growth in adjusted EPS. I'll remind you that this guidance represents all businesses, including those that are part of the planned GoTo merger.

So now I'd like to turn it over to Kirill to give you further color on the quarter and to focus on the areas looking forward. Kirill?

Kirill Tatarinov - President, Chief Executive Officer & Director

Thank you, David. I am very encouraged by our performance this quarter. It's a clear signal that our focused execution on the strategy to deliver the world's best integrated technology services for secure delivery of apps and data is resonating well with our customers, partners and the market. Our product teams have delivered on all commitments, enabling us to make a number of powerful announcements at the Synergy event in late May.

Specifically, we announced and delivered XenApp and Desktop 7.9, new NetScaler with an option to deliver it in a docket container and also brand new management and analytic system in NetScaler and also ShareFile's new information rights management, amongst many other advanced capabilities.

We've also announced our renewed and stronger-than-ever partnership with Microsoft, and most importantly, we shared our strategy to become the leader in Workspace-as-a-Service and accelerate our move to the cloud. All these announcements and product delivery received resoundingly positive feedback from all constituencies. Our innovation and partnerships are clearly fueling the continued strength in our execution and position us as number one or two in all market segments where we play.

Adding some comments to the Q2 results that David just shared, I'm very pleased to see that our Workspace Services business or Xen family is delivering growth, reversing past trends and clearly regaining market share. This quarter, our rate of growth in net new customers for XenApp/XenDesktop reached strong double-digit growth year-over-year. XenMobile contributed strongly to the overall suite. Last month, Citrix was yet again positioned as a leader in Gartner's Magic Quadrant for Enterprise Mobility Management Suites.

On our transformation to the cloud, the growth in ShareFile reached 30% year-over-year in new sales, and our Citrix service provider business continues to grow at a rapid pace, 37 percentage points year-over-year, primarily delivering XenApp and XenDesktop as a Cloud service, but also now adding XenMobile and NetScaler as Cloud service as well. We clearly see the Cloud as a strong growth catalyst for Citrix, really positive sign as we continue to focus on the evolving Citrix Cloud strategy.

Overall, this was a terrific quarter for our worldwide sales team. Particularly our Americas team executed extremely well in the quarter.

We just completed a comprehensive review of our operations in EMEA, and we see strong opportunities in the region, of course balancing it with all the geopolitical headwinds. We're seeing some strong wins in Asia Pacific and Japan and we have high growth aspirations for that region also.

This was an incredible quarter adding new customers to the Citrix family, but also solidifying our existing customer relationships. We also saw significant growth in large deals, as David mentioned, and we saw strength in our targeted industry verticals, particularly financial services and healthcare, with nearly a third of our largest wins represented by healthcare organizations.

A significant number of customers are moving from other virtualization and networking vendors to Citrix. In fact, we have nearly 800 combined competitive wins or replacements against our top competitors in Q2. Amongst more noticeable competitive wins in Q2, Kettering Health Network, a long time competitor's customer with more than 12,000 employees and 2,100 physicians, chose XenDesktop for VDI deployment. In another win, a major short-term housing provider in the United States selected Citrix cloud delivered XenApp and XenDesktop to support business critical applications in more than 180 locations. These wins serve as a nice example of XenApp and XenDesktop returning to growth and regaining market share.

Our renewed and strengthened Microsoft partnership started to bear fruit already in this past quarter. We worked with Microsoft in an engagement with a cellular carrier owned by LG Corporation. It was the largest ever deal closed in Korea for Citrix, with 29,000 licenses being deployed to help enhance security and productivity.

On strengthening our existing customer relationships, one of the world's largest investment banks, a long-standing XenApp and XenDesktop customer, moved to allow (14:23) Citrix to its worldwide operations, encompassing more than 200,000 employees. The bank's decision to choose Citrix was heavily influenced by our unique ability to execute virtualized Skype for Business and this was only one of many such examples. Microsoft recently issued a technical guidance, making an unambiguous statement that Citrix is the clear choice for deploying Skype for Business in virtualized environments. We anticipate that our partnership and alignment with Microsoft will provide us continued additional lift in end user computing.

On the network delivery side, CNA Insurance, one of the largest commercial insurance companies in the United States, replaced an established competitive networking vendor with Citrix NetScaler, making it the cornerstone for their networking infrastructure. CNA chose NetScaler to provide good quality end user experience to their employees and the mission critical applications. Essentially it is an ADC scenario in the enterprise.

And finally, ShareFile continues to provide itself as an industry leader, quickly gaining share in the market. We're seeing our efforts to extend ShareFile to the enterprise segment pay big dividends, with the highest number of large deals ever.

Among those large scale wins with ShareFile, we saw one of the largest accounting firms standardize on ShareFile to enable secure collaboration and work flows between their consultants and clients. With accounting being a target vertical for ShareFile, this win now gives ShareFile two of the top four accounting firms as customers.

Our unique differentiators clearly help ShareFile to continue to stand out against generic cloud storage providers. In fact, last week, Citrix was positioned as a leader in Gartner's Magic Quarter for Enterprise File Sync and Share for the third consecutive year. Needless to say, we see a very bright future for ShareFile.

This week marks my sixth month as Citrix's CEO, and I'm more enthusiastic than ever. Our results demonstrate that we're on the right path, building new Citrix. I feel highly confident that we have the right strategy and the plan to execute upon it. I'm incredibly excited about the future of Citrix. Today's announcement with LogMeIn will allow us to continue to focus our resources and investments and accelerate our execution and results.

Thank you, and we look forward to your questions.

Question-and-Answer Session

Operator

[Operation Instructions] Our first question is from the line of Walter Pritchard with Citi.

Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)

Hi. Thanks. Two questions. One, just a quick one for David on – maintenance revenue was down sequentially. We haven't seen that before. What was the driver there?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Sure, Walt. Two things. One is the decrease is a direct result of just declining Workspace Services' license you've seen a couple of years back. Fortunately, the pressure there is abating as the performance has really come back on that front.

I'd say that, as we've talked about a couple of times, we're uplifting the ARR by delivering new offerings and really migrating customers towards higher-value subscriptions, and so as of last quarter, we had about 25% of the installed base migrated. We're going to be making a larger portion the second half of the year, really accelerating that, so I think that's one of the things that's going to continue to drive license update and maintenance going forward.

I'd say the second thing is a little bit of a timing issue with our largest installed base customer for an order that came in right after the close of the quarter, which influenced that to kind of a mid-single digit millions range. Overall, when I look at license update and maintenance, I'm comfortable with about 3% growth for the year and expect that to grow sequentially into Q3.

Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)

And then, Kirill, on the GetGo transaction, you're contributing about two-thirds of the revenue to that business, and you're taking about half the economic value there in terms of the shares after the deal. And I'm wondering just sort of how you thought about that? It seems like a bit favored in your direction on the revenue contribution but more of an even split on the economics?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, if you think about this deal, first and foremost, this transaction is about synergies than it is about scale. Essentially we're creating a new company which is at scale, at much larger scale compared to both LogMeIn and GetGo if we were to spin it off into the independent company, and most importantly it is the speed of our execution and certainty for Citrix.

I think those three things combined, in particular the Synergy side which realizes tremendous value for the both LogMeIn and Citrix, is a tremendous asset here. We have larger revenue. LogMeIn is a faster-growing company. In balance, we feel good about the distribution of value in this transaction.

Walter H. Pritchard - Citigroup Global Markets, Inc. (Broker)

Okay. Thank you.

Operator

Our next question is from the line of Kash Rangan with Bank of America.

Nikolay Beliov - Bank of America Merrill Lynch

This is Nikolay Beliov sitting in for Kash. Thanks for taking my question. Can you give us a little bit more detail around the Microsoft relationship, especially the go-to-market component of it?

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, obviously, as you all know, we've announced this much stronger relationship at the end of May, along with our Synergy conference. We're now putting it to work. There's a tremendous collaboration that we're starting to see in the field worldwide. I just returned from touring EMEA, and every stop of the way there is a lot of energy and a lot of discussion between Microsoft and Citrix field organizations. We've seen some real examples where collaboration is already occurring.

LG Uplus in Korea was one such example and there are many more, and I will expect to see a lot more. This is clearly the case where this is win-win for both companies. Citrix is truly helping Microsoft deploy Skype for Business in virtualized setting in the largest enterprises, and that's how they want to deploy Skype for Business. This is also the case where Citrix has a ready-to-go technology to help deploy Windows 10 in the enterprise, and obviously Microsoft is very focused on that deployment.

And all of that is even before we realize some additional product integrations that are coming later in the next 12 months and enterprise mobility suite and NetScaler with Azure and more on Azure integration. So all in all, this is really what we're seeing as the beginning of this partnership becoming to work for both companies.

Nikolay Beliov - Bank of America Merrill Lynch

And can you please provide us an update with how the channel performed in the quarter?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, Nikolay, it's David. I'd say channel continues to perform well. We have been working on that over the course of the last few quarters. You're seeing a higher contribution, kind of the way we measure internally around net new source versus performance and so it's trending in the right direction.

Operator

Our next question is from the line of Raimo Lenschow with Barclays.

Raimo Lenschow - Barclays Capital, Inc.

...my questions, and congratulations on that deal. It seems exciting. Two questions, if I look at your growth in Workspace, it's good, it's getting better but it's still a very measured growth rate, and I look at the friends from the ember (22:31) and there you'll see numbers don't look overly pretty at the moment, and let's not talk about mobile and (22:36) for the time being. Is there a change in how the value gets distributed in the industry at the moment or is Microsoft taking a bigger share? Or like something, any – all of the old big guys seem to be suffering at the moment and it seems something bigger is going on? Maybe I'm missing something here but maybe, Kirill, maybe give me your view of how you think about this?

Kirill Tatarinov - President, Chief Executive Officer & Director

I think in the – when you take the geography where our execution is really going incredibly well, which is Americas we clearly see winning, we clearly see Citrix taking share and we clearly see Citrix regaining strength. And I think our execution in North America and our growth in virtual computing and end user computing as a whole in North America is just an example of what's possible when the execution gets nailed across the world, which, of course, is something that we're focused on, on working on, and that we'll see in the coming quarters. But certainly the tides have shifted in the last quarter. That's how we want to see it.

I think our teams worldwide are getting very focused on regaining market share and getting to winning spirit. That's been pretty significant shift that we saw, as it is evidenced by just sheer volume of wins that we've seen around the world, but most importantly in North America. And, of course, as I mentioned earlier, our partnership with Microsoft is starting to provide significant uplift, and we believe that it will continue to provide that uplift going forward.

David James Henshall - Chief Operating Officer and Chief Financial Officer

Raimo, it's David. Let me put a few numbers around that as well, just to reinforce a couple of these points. First off, as Kirill mentioned, Americas did extremely well. In fact, for Workspace Services new licenses they posted over 20% growth year-on-year. When I look at our subscription delivered CSB business, that's growing north of 35% year-on-year. Our other SaaS delivered options while small, things like XenMobile cloud and others, are growing over 25% a year. So we're certainly seeing user growth faster than actual reported revenue growth, but that's okay. And you know, because those will catch up over a lifetime value. So we feel like the work that we've done over the course of the last year, the innovation, the integration and simplification is really working in our favor, and we'll just keep executing.

Raimo Lenschow - Barclays Capital, Inc.

Perfect. Very clear. Thank you.

Operator

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

Nicole Hayashi - Goldman Sachs & Co.

Thanks. This is Nicole in for Heather. I might have missed this but could you talk about the percent of delivery network revenue that came from public cloud vendors? And since this business is typically lumpy quarter-to-quarter, how do you expect this business to play out in the second half, especially given difficult comps starting next quarter?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, Nicole, this is David. I did say that about 50% of the contribution in the quarter from NetScaler is coming from cloud infrastructure and cloud service providers. I mean, it continues to be obviously a meta-trend across the industry and so, not only are we contributing to the build out of public cloud infrastructure which has been a tremendous strength over the last four quarters, but we're seeing a growing number of customers that are actually delivering their own cloud services, and so that's part of expanding the base at the same time.

It has been a little bit more of a lumpy segment historically. However, we're now on the fourth quarter of strength in this business, so we've had great continuity over the course of the last year. It's one of the things that always allows us to be conservative when we look forward, because it is such a large concentration, but we love our position there and even when I look at the other parts of NetScaler like the enterprise ADC market, et cetera, we've talked about being capacity constrained in the past. One of the investments we're making right now is to expand our go-to-market capacity across, really across all geos, and that's one of the things that will allow us to even accelerate that business going forward.

Nicole Hayashi - Goldman Sachs & Co.

Great. Thank you.

Operator

Our next question is from the line of Kirk Materne with Evercore ISI.

Kirk Materne - Evercore Group LLC

Hi. Thanks very much and congrats on the transaction and the good quarter. Hey, David, I was wondering if you could talk a little bit about just margin expansion from here in the core business. It's obviously been an unbelievable move over the last year, but I imagine some of the low-hanging fruit has been sort of pruned at this point in time, and what drives margin expansion from here.

And then just secondly and somewhat related, when are we going to get a bit of a clearer view of the core business, margins and earnings contribution, say ex the go-to business? Is that something that's just going to have to wait until after the transaction is completed, or I guess how are you thinking about that? Thanks.

David James Henshall - Chief Operating Officer and Chief Financial Officer

Sure, Kirk. Let me start at the top actually and just talk about op margins. So in – six months ago when we laid out targets for the combined company, we were talking about 30% op margin by the end of 2017. I mean, we're clearly operating well ahead of that, probably a – nearly a full year in front of that when you look at our guidance, so we're really happy with the execution across the board. When you kind of step back a little bit and think about the core Citrix, excluding the part that is merging with LogMeIn, that part of the business is operating between 1.5% and 2% higher on an adjusted op margin than the consolidated whole. So we're clearly well above the 30% range already from a core Citrix point of view.

As it comes to providing more granularity into the individual pieces, the S-4 will be filed by LogMeIn later this quarter, and so at that point in time you'll have a better position to look at the individual performance of the go-to business standalone, the forecast moving forward, et cetera, and I'd say after Q3 we'll be talking about guidance going forward for 2017 as a standalone entity. So I'd say that – that's a better way to think about it.

Kirk Materne - Evercore Group LLC

Thanks a lot.

Operator

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

Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker)

I'd actually just like to talk about the international business, maybe specifically EMEA. Kirill, you mentioned you were just over there. You mentioned that you've kind of just begun following the roadmap that the U.S. has provided. But I wondered if we could just drill down and get a little bit more color on what kind of changes we might see in EMEA, what kind of timing we're talking about. Could you give us a little bit more color around that? Thanks.

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, I think we've certainly seen tremendous progress in the Americas since we started the restructuring and implemented some very important changes in this region, earlier than we did it in EMEA and in Asia Pacific and Japan. Essentially we're following the same blueprint that is working so successfully for us in the Americas and in EMEA right now, this was the sort of main purpose of deep dive with the team in EMEA, we had the entire leadership put two days and we went through strategy across different countries, across different regions, and we really see some positive momentum and we see great opportunities.

In fact, we've spotted some strong opportunities in the U.K. and we're working to realize them, and we expect to see those materialize, I would say, within the next 12 months. Similarly, in France, and we have strong leadership and strong execution in Germany and Central and Eastern Europe in place already. So we look forward to seeing greater results in that region.

Overall, as I mentioned in my remarks, we see great opportunities there, obviously balancing it with the obvious geopolitical headwinds, but we think that in the next 12 months we'll see strong results in EMEA following what we're seeing here in Americas already.

Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker)

Perfect. And just a quick follow-up on the NetScaler business. I was going to ask about service provider. I think, one of the things you were trying to do is reduce the reliance on large transactions with maybe some of the customer concentration you have, trying to build out more of a run rate business. Have you been able to do that? Is some of the strength we've seen here coming on base hits in doing some of that smaller business? Thanks.

David James Henshall - Chief Operating Officer and Chief Financial Officer

Sure. I'd say, overall, when looking at NetScaler, we sold to 1,900 unique customers in the period, about a third of those being net new to Citrix. So a big push for us going forward is, of course, continuing to expand the base.

Steve M. Ashley - Robert W. Baird & Co., Inc. (Broker)

Thanks.

Operator

Our next question is from the line of Karl Keirstead with Deutsche Bank.

Karl E. Keirstead - Deutsche Bank Securities, Inc.

Thank you. I just wanted to drill down on one of the positive metrics here, that 23% license growth in the Americas for the Workspace business. You broadly said it was due to good execution, but could you offer a little bit more clarity on how you're driving that growth? And whether pricing is a lever that you're using any more aggressively? Thank you.

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, this is David. I'd say pricing is not a lever we're using aggressively. In fact, pricing is one of those things that you're competing against. In many cases, we are not the low-cost provider. In fact, we are – you're often competing against a bundled solution, and so price is not a lever that generates growth generally.

We compete on breadth of functionality. We compete on integration and unique assets. And so, that's really been the big driver. When you look across the Americas business, they had great performance from everything from fin services to healthcare to technology companies and others, and it's just a testament to the execution of that team and a lot of the work that they've done. So I'd say our win rates and everything in the US are extremely high, and we're just going to continue driving forward as quickly as we can.

Karl E. Keirstead - Deutsche Bank Securities, Inc.

Got it. Thank you, David.

Operator

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

Michael Turits - Raymond James & Associates, Inc.

Turits. Raimo asked about the Desktop business, but how about on the XenMobile side? Both what do you see as the general market dynamics there, do you still see this as a growth business with opportunity for penetration and pricing? And what are you seeing competitively against AirWatch, MobileIron and Microsoft?

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, we actually see XenMobile continue to perform well as part of the overall Workspace suite and end user computing push from Citrix. As I mentioned, we've received another strong accolade from Gartner, being named as a leader in their Magic Quadrant, and the product has done very well. We have some unique differentiators that continue to play out for us, in particular, we differentiate by delivering a unique set of capabilities in mobile application management as opposed to just generic low-cost mobile device management, and these are the capabilities that are being valued in bring-your-own-device scenarios. These are capabilities that are actually being valued by Microsoft. They were core to our alignment with Microsoft, between XenMobile and Enterprise Mobility suite, and we see continued strength and growth in that market. Yet again, we differentiate by focusing on mobile application management, by delivering unique capabilities like Micro VPN, and really focusing on a suite with XenMobile, with ShareFile, and with NetScaler playing a significant role in that particular rollout.

And we also continue to strengthen our portfolio and our solution with some additional capabilities like the new forms application that was introduced as part of XenMobile in June. It's being very well received by our customers, yet again focusing on applications versus device itself.

So we're quite excited about what we have with XenMobile. We predominantly see it as a part of the overall suite, of the overall offering. We see more and more customers choosing XenMobile to be delivered as a Cloud service, and we expect to see more of that. And we're quite excited and bullish about that particular product.

Michael Turits - Raymond James & Associates, Inc.

It sounds really strong in terms of capabilities. You did mention on EUC that – or Desktop that it felt like you were regaining share there. Does it feel the same way on XenMobile, or is it hard to tell because it's part of the bundle?

Kirill Tatarinov - President, Chief Executive Officer & Director

We really view it as a part of the overall solution, and as David mentioned, we see significant growth, continuous growth in customers wanting to buy the overall suite and kind of the overall Citrix value as opposed to point products. And I think, even if you look at some of our competitors, we're ahead of many in sort of being able to provide this complete value, raising our standing in the enterprise IT to the level of sort of enterprise decision-maker versus a point product implementer, and we actually view it as a very positive sign.

We first sort of saw it at Synergy, when, for the first time ever, we had this good contingent of IT decision-makers, really senior CIO level people coming to join us to talk about Citrix, and that raised profile and raised visibility certainly enable to us deliver more of that complete value. And that's certainly how we'll look at the future. It's not a point product, it's a overall end-to-end solution to help people securely deliver their apps and data.

Michael Turits - Raymond James & Associates, Inc.

Okay. Thanks, Kirill.

Operator

Our next question is from the line of Abhey Lamba with Mizuho Securities.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Thank you. Kirill, thanks for that additional color. That was very helpful. Now how should we think about the potential for Workspace's business in light of your partnership with Microsoft? What type of revenue growth can the segment deliver on a sustainable basis, and how far are we from getting there?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, I think our partnership with Microsoft is starting to produce real results, and in this past quarter already, even though we announced this partnership with Microsoft actually midway in the quarter, even in that quarter, we saw some very exciting wins as a result of better alignment.

We see more of that alignment coming in the future. I would say right now, we're at the beginning of working out the mechanics and specifics of how this partnership is going to play out in the field. The signs, the early signs are incredibly positive, and we're certainly looking forward to increased velocity and better execution, and frankly, better momentum as we work close together.

There's some specific product initiatives and specific joint workings in the field that will certainly be producing more results. We're ready to go with Skype for Business virtualized, and that's how many a large enterprises want to deploy Skype for Business on Citrix. Microsoft just issued technical guidance on essentially stating that Citrix is clear choice to deploy Skype for Business this way. We have solution to deploy Windows 10 in the enterprise and virtualized and VDI fashion, and that is incredibly well received, and that is a huge priority for Microsoft.

And we certainly expect both of those existing initiatives to start bearing more fruit. Of course, it depends on overall Skype for Business adoption in the enterprise. It all depends on Windows 10 adoption in the enterprise, and we continue to work with Microsoft to advance it.

And of course, later in this year, we're really looking forward to introducing additional capabilities into this partnership and into this channel, especially with XenMobile and overall XenMobile suite now playing a role into the Enterprise Mobility suite and also NetScaler being aligned with Azure.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Got it. Thanks. And, David, looks like OpEx was a little bit more than initially expected, resulting in lesser EPS beat was with the revenue performance. Can you talk about the OpEx during the quarter, what drove it higher and how should it trend over the next few quarters? That's it for me.

David James Henshall - Chief Operating Officer and Chief Financial Officer

Sure, Abhey. I'd say that a few one-time costs and in Q2, especially in the G&A line, you saw that jump pretty heavily on a sequential basis. That will come back down in Q3. I would expect, actually, overall OpEx to decline from Q2 to Q3 at this point in time. There's also, you know, a fair bit of variable comp in there as we've outperformed in the first half of the year. Really nothing besides that.

Abhey R. Lamba - Mizuho Securities USA, Inc.

Thank you.

Operator

Our next question is from the line of Keith Weiss with Morgan Stanley.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Thank you guys for taking the question. Perhaps a little bit of a – sort of a longer-term question. It seemed like coming out the Analyst Day, the focus was definitely on rolling out further cloud services with the expectation that maybe we'll see some of those on additional products in the back half of this year. So I guess the question is, are we on track for the cloud service roll outs? Is there anything kind of in the guide for those? And how should we think about that impacting results in 2017? Maybe even just from a kind of a mix shift and how revenue is recognized perspective?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, Keith. This is David. Let me take the guidance part of that question. Overall, I wouldn't say there's anything explicit in our guidance. However, implicitly, we are certainly talking about a model shift that we've seen gradually. For us, we're in a fortunate position where a lot of it is incremental to what we've already done. The CSP, for example, which is ratable coming out of the Workspace Services business is addressing SMBs and other areas that our core products wouldn't have.

That business is running about a $75 million ARR right now. When I look back at core Citrix cloud delivered services, ShareFile is clearly the biggest. But we've also rolled out new services around XenMobile. We delivered networking, actually, as a service. We have desktop and VDI and some of these other things that are rolling out as new services. When you aggregate those together, that business is running at about a 30% clip, and it's generating an ARR of roughly $130 million per year.

So I mean you put those two together, and we are sitting on over $200 million of annualized recurring revenue growing north of 30% right now. That's probably the best way to really frame out the shift that we've seen over the past couple of years, versus a type of revenue model that you would have had historically. It will be a shift that continues. You know, we're going to talk about this metric each and every quarter to give people more visibility into how that is moving. And when the time comes, not in fiscal year 2016, but when the time comes then we're going to be more aggressive in our shift of installed base, or something that could have a material impact, we'll make sure we talk about that well in advance and communicate that explicitly as a part of guidance.

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, and I would just add that Citrix cloud is, overall, obviously, very significant transformative momentum that is building inside Citrix. We signaled the fact that we are all in, in the cloud at the Synergy event in May. We are working hard to solidify our road maps, and continue to deliver new services. We have some additional milestones later in this year and most importantly, in January of 2017 at our kick off with our partner community where we're going to be articulating more detailed strategy, and more detailed deliverables. But before this calendar year ends, we will have some very significant things to articulate to the channel, and to the market in terms of our wins, in terms of the referenced customers that are going onto Citrix cloud end-to-end and continuous alignment with Microsoft on the overall cloud delivery.

So it's, I would say, from where we were early in the year, we've made huge progress. From what we announced at Synergy, we feel good at where we are on the delivery, and I would say overall we're on track with this Cloud transformation. And, of course, as David mentioned, once we have specifics and details on the pace and updated guidance, we will certainly bring it up to you.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Excellent. And then maybe just one more very tactical question. You talked about some uneven macro out there. Any explicit impacts you saw either on Q2 results? Or sort of how you're thinking about close rates in the pipeline coming specifically from Brexit?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, obviously there's some uncertainty that comes from any event like that, and just like anyone else in business and anyone else in our industry, would see some modest impact of Brexit, but I wouldn't characterize it as material. And for us, most importantly is to bring our execution in EMEA to the level of Americas, and I think that is the most important priority of ours, and that's what we're focused on in EMEA right now.

Keith Eric Weiss - Morgan Stanley & Co. LLC

Excellent. Thank you.

Operator

Our next question is the from the line of Rob Owens with Pacific Crest Securities.

Rob Owens - Pacific Crest Securities.

Thank you for taking my question. David, back to I think where we started with Walter a little bit on the license updates and maintenance. Help us with some of the puts and takes here. You mentioned that you didn't get a renewal in the quarter which would have made things look better. But what do renewal rates look like overall? And then with regard to moving into CSP Workspace Services in the cloud. Help us with some of the puts and takes there, because you didn't really show a big improvement in sequential deferred revenue despite the fact that your license revenue was up even for workspace?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, let me take the license update piece first. Yes. On a year-on-year basis, it was up about 3%. There was our single largest customer renewal that happens on an annual basis. It just slipped a little bit and because of that some chunk of revenue got deferred out of the quarter. That will come back in Q3. I'd say that's the only one real anomaly that's out there. The other two dynamics that I talked about earlier are important to understand in terms of net new licenses and Workspace Services and then the underlying ARR of each individual customer contract below that and that's the work we're doing that to capture that multi-hundred-million-dollar opportunity by migrating everyone to maintenance offerings. So I think that's kind of the dynamic in there. I think for the full year, I would expect that license update and maintenance line to be growing roughly 3% all in. The...

Rob Owens - Pacific Crest Securities.

Okay. And then – go ahead.

David James Henshall - Chief Operating Officer and Chief Financial Officer

No. Go ahead. Ask your question.

Rob Owens - Pacific Crest Securities.

I was going to say then secondarily with regard to Europe shifting gears, you mentioned that you laid the groundwork there. What evidence do you have in terms of improvement? Is there improved bookings rates? When would you expect this to turn a corner? Because it was down obviously year-over-year but also down sequentially. And then APAC has been down for quite a while so when can we expect some improvement on that front?

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, I would say Europe is obviously an aggregation, in a number of unique markets. I mean obviously our largest being the UK and that's been the most challenged from an execution point of view. If we step back and we exclude UK, it's masking real solid growth across a number of other regions in EMEA. So that's clearly our focus in terms of making that better. Same thing holds true for our Japan business. It's one of those areas that's been somewhat challenged and we're in the process of working on execution there. And what we've seen in the US, I mean, the pattern works. We're having really good results there. We're just – we need to drive it around the rest of the world.

Rob Owens - Pacific Crest Securities.

So how soon should that pattern work? What's expected timing for return?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, we're working it right now. And hopefully you see results and let's think EMEA in the second half of the year and that will be focused on the UK. We'll probably talk a little bit more about it just because it is such a big market and it's been one that's has been underperforming for us over the course of the first half of the year.

Rob Owens - Pacific Crest Securities.

Thanks.

Operator

Our next question is from the line of Brent Thill with UBS.

Brent Thill - UBS Securities LLC

Thanks. On Workspaces, can you just talk a little bit about the low single digit organic growth, what you think you need to change to get that high single digit organic growth?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, we just have to keep executing. I mean, it's been a trend that's been up and to the right for a number of quarters now. We are seeing more growth in users than we are in actual revenue. Some of that is just a shift in the overall model towards term license, towards CSP, towards other things. Users have been growing in the mid-single digits for a couple of quarters now. I think that's a reflection of the work that we've done and we're going to keep at that. A number of things that Kirill talked about that we're doing from new cloud services, work with Microsoft, et cetera, you know, more to come on that front. I think at this point it's really just execution and we're going to continue the pattern that we've been on.

Brent Thill - UBS Securities LLC

And, David, just with the mid-single digit user growth, what's the discrepancy? Is it just you're just giving lower prices per user? What's happening there and how does that – does that wear off over time?

David James Henshall - Chief Operating Officer and Chief Financial Officer

It's a different type of user. CSP, for example, it's one that we've talked about now for a couple of times. Those are monthly subscriptions where our CSP partners are leveraging XenApp to deliver a cloud service. We build those on a monthly arrears basis. That business is growing at about 35%, generates a much higher user count. If you think about that in ARR terms which is again, it's an important metric that we're going to have to be talking more about, that business runs with an ARR of about $75 million a year right now which is a material part of overall Workspace Service license. If I look at just other SaaS inside of that, the smaller services, those are obviously growing faster than the whole. So that's the primary disconnect you see between users and recognized revenue.

Brent Thill - UBS Securities LLC

Thanks.

Operator

Our next question is from the line of John DiFucci with Jefferies.

John DiFucci - Jefferies LLC

Thank you. David, just a clarification on something you just said. I guess, well first of all, how long did it take for that 25% of Workspace installed base to transition to ARR? And when you say product license revenue grew 1% year-over-year for this business, does that include the subscription transition to ARR? Because subscription, as I think you just said, is in the product license line, isn't it?

David James Henshall - Chief Operating Officer and Chief Financial Officer

In the case of CSPs, yes, it's in the product license line.

John DiFucci - Jefferies LLC

Okay.

David James Henshall - Chief Operating Officer and Chief Financial Officer

In the case of any cloud-delivered service, that shows up on the SaaS line.

John DiFucci - Jefferies LLC

Okay. Okay.

David James Henshall - Chief Operating Officer and Chief Financial Officer

In terms of the installed base, we've got about 25% migrated. We have new products being delivered with, I guess you could think of it as a holistic maintenance offering instead of a standalone subscription advantage contract. The difference from a customer point of view, just so you can model this out is, think roughly 5 percentage points of revenue is the difference in pricing between one contract and the other.

We're doing some things right now that will accelerate the installed base migration over the latter part of this year and into next year. At our analyst day we identified a couple hundred million dollar plus opportunity just within this installed base and that's one of the areas that we'll be driving over the next few quarters, and you'll start to see that in results early next year.

John DiFucci - Jefferies LLC

Okay. Great. And if I could ask a follow up. NetScaler business for the fourth quarter in a row has shown real strong growth. I know you've been hesitant to call it this, but it's starting to really look like a secular trend, I mean, like a more consistent secular trend. It's always been a driver, but it's always been really lumpy. But it seems like, I mean, should we – could we anticipate this being just a pretty consistent driver going forward, because it has been for now several quarters?

David James Henshall - Chief Operating Officer and Chief Financial Officer

John, I think that overall we have continued to outgrow the market for a number of years now. The part of the business that is associated with build out of public cloud and cloud services is the part that has been really outperforming over the last four quarters, and it's the area that we want to continue to be cautious about because it does have a higher concentration than the other many thousands of customers. And so we'll continue to be conservative on our outlook. But as you would imagine, we're doing everything we can to make sure that it is a repeating item. We just want to be very clear with everyone that it is more volatile and it does go up and down, we've just been really fortunate to see four quarters in a row of great performance.

Kirill Tatarinov - President, Chief Executive Officer & Director

And I think it is certainly worth noting that secular trends are playing to NetScaler's continuous growth. Obviously cloud build-out only continues. It is hard to predict, but it's certainly been continuing for the last four quarters. Whether it's going to continue at the same pace, I tend to believe that it will but it's impossible to pin it down, and therefore we're being conservative on that part of the business. But then there are additional parts of NetScaler that we're really excited about. The fact that NetScaler is essentially the only pure software-defined ADC enables us to do truly unique things in that market, as evidenced by some wins last quarter, and of course emerging SD-WAN, part of NetScaler, we believe in very strongly, and we expect that to start providing some real material growth in 2017 as that market evolves and matures, and we certainly plan on talking about it when we provide overall guidance for 2017 in late October.

John DiFucci - Jefferies LLC

And, Kirill, what areas or what use cases does the advantage of having pure software solutions sort of rise to the top?

Kirill Tatarinov - President, Chief Executive Officer & Director

Well, it's just flexibility in how you deploy it. It's ability to deploy NetScaler as a Docker container, essentially enabling sort of more on a kind of left-to-right load balancing in the DevOps scenario, its ability to deploy this technology in a traditional appliance, its ability to did deploy this technology as a virtual machine or in the cloud, and its ability to move from one to another, and its ability to scale up or scale down depending on the need.

It's also the ability to innovate at a rapid pace where essentially you don't need to replace your hardware in order to move up to new capabilities or increase your capacity, you just sort of enable new software features to deliver it and to unlock it. Those are sort of top obvious benefits, and of course it's not to mention the pace of execution being more agile and really embracing new requirements much faster by delivering it in a software fashion.

Kirill Tatarinov - President, Chief Executive Officer & Director

Great. Thank you, guys.

Operator

Our next question is from the line of Ed Maguire with CLSA.

Ed Maguire - CLSA Americas LLC

Yeah, I was wondering if you could just discuss what you see as really core business use case drivers for the – really for the year-over-year rebound in the US, particularly around Workspaces and XenApp? Is there some pent up demand in the market? Or more specifically, when you look at the CSP model, are you having customers making a transition of their existing licenses into an expansion through CSPs?

Kirill Tatarinov - President, Chief Executive Officer & Director

I think – let's just start with Citrix's strategy. We're all about secure delivery of apps and data, and this is the top-of-mind of every organization large and small, security and cyber-security playing such a strong – it's such a strong priority for everybody. And I would say that is the number one most significant secular trend that drives the need for Citrix solutions. And of course, Windows 10, Skype for Business that we've already discussed, are additional very important capabilities that people need to embrace. And people need to deploy Skype for Business at scale. With Citrix you can do it securely, and you can do it reducing your overall support costs.

And sort of the other thing that I would mention is, with the engineering work that Citrix has been doing over the last few years, we're now uniquely positioned to deliver XenApp and XenDesktop, essentially application virtualization and desktop virtualization on the same platform.

And we're seen quite a strong number of customers really wanting to do both of the same platform, and some of those who were using XenApp in the past now want to deploy VDI. And having the same platform and the same infrastructure really enables them to do it with ease, using the same tools, using the same life cycle manager, management. That's the trend.

And perhaps the final thing that I would mention that sort of sets the Americas apart from the rest of the geos, here in Americas, the team embraced vertical focus ahead of anyone else. And if you think about healthcare wins, lots of them happened here in Americas, and if you think about financial sector and focus there, lots of those – most of those wins, actually – happens in Americas as well. And yet again, we expect the play book to now be replicated across the world, and that gives us confidence in the future.

Ed Maguire - CLSA Americas LLC

Great. And just a follow-up for Dave. Given that the expected separation of the GetGo business is going to be a quarter later, has there been any change to your thinking about uses of cash and how you look at the balance sheet?

David James Henshall - Chief Operating Officer and Chief Financial Officer

No, there really hasn't, Ed. At this point, it's something that we've pushed out just with this transaction ongoing. Later in this year, we'll come back, we'll talk more about capital strategy and whatnot, but I think the anticipation is we've been very aggressive with share repurchase over the last several years. It's been our primary use of cash flow and will likely continue to be going forward.

Ed Maguire - CLSA Americas LLC

Great. Thanks a lot.

David James Henshall - Chief Operating Officer and Chief Financial Officer

You bet.

Operator

Our next question is from the line of Scott Zeller with Needham & Company.

Scott Zeller - Needham & Co. LLC

Yes. Thank you. I'm not sure if it was mentioned earlier, but what was the performance of XenApp year-over-year? And what was the license performance year-over-year? Total rents and license?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yes, Scott. We talked about Workplace Services, that business was up about 1% in net new licenses and 2% overall, including maintenance and subscription.

Scott Zeller - Needham & Co. LLC

Okay. So no break out of XenApp specifically?

David James Henshall - Chief Operating Officer and Chief Financial Officer

No. We didn't break out the individual components.

Scott Zeller - Needham & Co. LLC

Okay. Thank you.

Operator

Our next question is from the line of Jason Ader with Blair.

Jason N. Ader - William Blair & Co. LLC

Yeah, thanks. I just wanted to understand the license guidance, or the second half guidance, the implied product and license. Looks like it's going to be down year-over-year at a reasonable clip. Is that just a function of tough comps with last year?

David James Henshall - Chief Operating Officer and Chief Financial Officer

Yeah, Jason. The – yes, the guidance is reflective of really good second half last year. But I wouldn't read into it at this point in time. The way to think about it is we're not guiding onto any individual line items. We're just guiding to total revenue and EPS, and in that respect, we uplifted expectations for both Q2 and for the full year well in excess of the Q2 beat. So we feel good about the business overall. We obviously just want to maintain a conservatism that we've had for a number of quarters now, and we'll do that for the balance of the year.

Jason N. Ader - William Blair & Co. LLC

Okay. Thank you.

David James Henshall - Chief Operating Officer and Chief Financial Officer

You bet.

Operator

And our next question is from the line of Zach Smith [RBC Capital Markets].

Zach Smith - RBC Capital Markets

Thanks for taking my question. Are you currently exploring the app refactoring space? I know that hopTo – was that Synergy, was working on a XenApp integration. Is that still in process? It seems like their capabilities could be pretty beneficial for – well, especially legacy apps accessing those on mobile. All right. Thank you.

Kirill Tatarinov - President, Chief Executive Officer & Director

Yeah, within XenMobile, we have broad-range capabilities that enable customers to essentially take their legacy apps and deliver them through newer technologies. There are also some very interesting things that are sort of, being currently in the pilot mode, coming out of our labs that would take legacy Microsoft Access applications and put them out on HTML 5-enabled devices which essentially, if you think about it, tens of millions of those Microsoft Access applications that are out there hidden in the coffers of large enterprises being essentially locked from being able to access from those modern devices. Now, that value that's quite important for those customers is being unlocked through that technology.

So there's a number of initiatives at play here, and I would say, sort of our overall approach of helping customers breach their past into the future, but most importantly being focused on the future and focused on the cloud is what we're going to continue to execute, and there's a broad range of things sort of coming from both angles here.

Operator

And we have no further questions in queue.

Kirill Tatarinov - President, Chief Executive Officer & Director

All right. Well, thank you, everybody, for joining us today and thank you for following Citrix as we continue on our journey, making Citrix better than ever. I truly believe that we're on the right path, with an exciting product roadmap and a strategy that is being validated every day by our results. Thanks, everybody. Have a great afternoon.

Operator

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect. Presenters please hold a moment.

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