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CTXS > SEC Filings for CTXS > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for CITRIX SYSTEMS INC


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees contain "forward-looking" information that involves risks and uncertainties. In particular, statements contained in this Quarterly Report on Form 10-Q, and in the documents incorporated by reference into this Quarterly Report on Form 10-Q, that are not historical facts, including, but not limited to, statements concerning new products, research and development, offerings of products and services, market positioning and opportunities, headcount, customer demand, distribution and sales channels, financial information and results of operations for future periods, other (expense) income, net, product and price competition, strategy and growth initiatives, seasonal factors, international operations and expansion, investment transactions and valuations of investments and derivative instruments, reinvestment or repatriation of foreign earnings, fluctuations in foreign exchange rates, tax matters, tax rates, the expected benefits of acquisitions, changes in domestic and foreign economic conditions and credit markets, liquidity, litigation and intellectual property matters, constitute forward-looking statements and are made under the safe harbor provisions of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary materially from those stated in any forward-looking statements. The factors described in Part I, Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year ended December 31, 2012, as may be updated in Part II, Item 1A in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report on Form 10-Q, in the documents incorporated by reference into this Quarterly Report on Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition. We caution readers not to place undue reliance on any forward-looking statements, which only speak as of the date made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made.
Overview
Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand our financial condition and results of operations. This section is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for the three months ended March 31, 2013. The results of operations for the periods presented in this report are not necessarily indicative of the results expected for the full year or for any future period, due in part to the seasonality of our business. Historically, our revenue for the fourth quarter of any year is typically higher than our revenue for the first quarter of the subsequent year.
Citrix is a cloud computing company that enables mobile workstyles- empowering people to work and collaborate from anywhere, accessing apps and data on any of the latest devices, as easily as they would in their own office- simply and securely. Citrix cloud computing solutions help IT and service providers build both private and public clouds, leveraging virtualization and networking technologies to deliver high-performance, elastic and cost-effective services for mobile workstyles.
We market and license our products directly to enterprise customers, over the Web, and through systems integrators, or SIs, in addition to indirectly through value-added resellers, or VARs, value-added distributors, or VADs, and original equipment manufacturers, or OEMs.
Executive Summary
We believe our approach is unique in the market because we have combined innovative technologies to enable and power mobile workstyles. Our technologies mobilize desktops, apps, workloads and people to help our customers drive business value. Our Mobile and Desktop products are leaders in the area of desktop management, including Desktop Virtualization, marketed as XenDesktop and XenApp. In addition, in January 2013, we acquired Zenprise, Inc., or Zenprise, and its mobile device management, or XenMobile MDM products, which was integrated with our Citrix CloudGateway product offering to provide customers a comprehensive solution for enterprise mobility management, marketed as our Mobile Solutions Bundle. Our Networking and Cloud products also offer customers a value-added approach to building and delivering IT to end-users through our Cloud Networking products, which allow our customers to deliver services to mobile users with high performance, security and reliability and through our Cloud Platform products, which allow our customers to build scalable and reliable private and public cloud computing environments. We believe this combination of products allows us to deliver a comprehensive end-to-end mobile lifestyles solution; and one that we believe, when considered as a whole, is competitively differentiated by its feature set and interoperability.


In today's business environment there is a sharp focus on IT products and services that can reduce cost and deliver a quick, tangible return on investment, or ROI. We are focused on helping our customers, as they invest in IT products and services, to reduce IT costs, increase business flexibility and deliver ROI by offering a simpler more flexible approach to computing. In 2012, we generally saw uncertainties surrounding IT spending. In the fourth quarter of 2012, however, we saw some improvement in demand across all geographies. In the first quarter of 2013, we again encountered uncertainty in the IT spending environment and hesitancy on the part of customers in initiating large capital projects causing an unusually large number of opportunities to be pushed into the future. For example, this dynamic was most pronounced in Europe and Asia-Pacific and contributed to the Product and licenses revenue results in our Desktop products when comparing the first quarter of 2013 to the first quarter of 2012. See our Summary of Results section below.
We believe that continued economic uncertainty may adversely affect sales of our products and services and may result in longer sales cycles, slower adoption of technologies and increased price competition.
In 2013, we continue to focus on helping our customers embrace and power mobile workstyles and build cloud infrastructure so cloud services can be delivered virtually anywhere with a high quality user experience. We plan to sustain the long-term growth of our businesses around the world by expanding our go-to-market reach and direct customer touch through hiring additional enterprise account managers and expanding consulting and technical support capacity; investing in product innovation, bringing new technologies to market and improving integration across our product portfolio to drive simplicity and better end-user experience; and making selective and strategic acquisitions of technology, talent and/or businesses.
Infrastructure
Our Desktop Virtualization products are built to transform and reduce the cost of traditional desktop management by virtualizing the desktop, with our XenDesktop product, and virtualizing applications, with our XenApp product, in a customer's datacenter. We are moving the delivery of desktops and related applications to an on-demand service rather than the delivery of a device. We continue to see growing customer interest in XenDesktop and we are maximizing our XenApp install base and driving continued XenDesktop adoption. In January 2013, we completed our acquisition of Zenprise, a privately held leading innovator in mobile device management, or MDM. We have integrated the Zenprise products for MDM, marketed as XenMobile MDM, with our Citrix CloudGateway product. Now sold as our Mobile Solutions Bundle, this new offering manages mobile apps and data to offer our enterprise IT customers comprehensive products that make it easier to manage and secure devices, apps and data, while allowing users to embrace mobile workstyles and access enterprise apps from virtually any device. We believe our Mobility products offer a comprehensive approach that can transform organizations into mobile enterprises with the security and control IT requires, the ease of use and flexibility users desire, and the productivity business demands.
Our Cloud Networking products power mobile workstyles while altering the traditional economics of the datacenter by providing greater levels of flexibility of computing resources, especially with respect to servers, improving application performance and thereby reducing the amount of processing power involved, and allowing easy reconfiguration of servers by permitting storage and network infrastructure to be added-in virtually rather than physically. Our Cloud Networking products are also enhancing our differentiation and driving customer interest around desktop virtualization as enterprises are finding good leverage in deploying these technologies together. In July 2012, we acquired Bytemobile, Inc., or Bytemobile, a privately held leading provider of data and video optimization solutions for mobile network operators. The Bytemobile acquisition has given us a strategic foothold in the core infrastructure of certain mobile operators which are experiencing rapid growth in network traffic, driven by the combination of new consumer devices, rich multimedia content, and high speed 3G, 4G and LTE networks. Our Bytemobile Smart Capacity products combined with our Citrix NetScaler line of Cloud Networking products enhance our broader strategy of powering mobile workstyles and cloud services and allow us to offer mobile operators combined solutions that deliver a high quality user experience to mobile subscribers. Our Cloud Platform products allow our customers to build scalable and reliable private and public cloud computing environments where customers can quickly and easily build cloud services within their existing infrastructure and provision hosted applications, desktops, services and infrastructure as a service, or IaaS, from the cloud.
SaaS
Our SaaS segment is focused on developing and marketing Collaboration and Data products. These products are primarily marketed via the web to large enterprises, medium and small businesses, prosumers and individuals. Our SaaS segment's Collaboration products offer secure and cost-effective solutions that allow users to host and actively participate in


online meetings, webinars and training sessions remotely and reduce costs associated with business travel. Our Data Sharing product, ShareFile, makes it easy for businesses of all sizes to securely store, sync and share business documents and files, both inside and outside the company. ShareFile's centralized cloud storage capability also allows users to share files across multiple devices and access them from any location. In addition, through our Remote Access and IT Support solutions, we offer products that provide users a secure, simple and cost efficient way to access their desktops remotely and provide support over the Internet on-demand. Summary of Results
For the three months ended March 31, 2013 compared to the three months ended March 31, 2012, a summary of our results included:
• Product and licenses revenue increased 8.3% to $193.1 million;

• Software as a service revenue increased 13.9% to $137.6 million;

• License updates and maintenance revenue increased 19.4% to $315.7 million;

• Professional services revenue increased 2.5% to $26.5 million;

• Operating income decreased 29.9% to $56.6 million; and

• Diluted net income per share decreased 12.6% to $0.32.

The increase in our Product and licenses revenue was primarily driven by sales of our Networking and Cloud products, led by NetScaler, partially offset by decreases in our Mobile and Desktop products, primarily related to our Desktop products. We currently target our Product and licenses revenue to increase when comparing the second quarter of 2013 to the first quarter of 2013. Our Software as a service revenue increased due to increased sales of our Collaboration products, led by GoToMeeting. The increase in License updates and maintenance revenue was primarily due to increased renewals and sales of our Subscription Advantage product and an increase in maintenance revenues, primarily driven by increased sales of maintenance and support across all of our infrastructure products. The increase in Professional services revenue was not significant primarily due to the decrease in revenue in our Mobile and Desktop products, which led to lower implementation sales in the Desktop business. We currently target total revenue to increase when comparing the second quarter of 2013 to the second quarter of 2012 and when comparing the second quarter of 2013 to the first quarter of 2013. In addition, when comparing the 2013 fiscal year to the 2012 fiscal year, we target total revenue to increase. The decrease in Operating income and diluted net income per share when comparing the first quarter of 2013 to the first quarter of 2012 was primarily due to an increase in operating expenses related to our acquisitions, an increase in stock-based compensation costs primarily related to our annual stock grant and our recent acquisitions and an increase in amortization of intangible assets primarily related to our recent acquisitions. Partially offsetting the decrease in diluted net income per share was the research and development tax credit extended for the 2012 tax year in the first quarter of 2013.
2013 Acquisition
Zenprise
In January 2013, we acquired all of the issued and outstanding securities of Zenprise, Inc., or Zenprise, a
privately-held leader in mobile device management. Zenprise became part of our Infrastructure segment, in which we have integrated the Zenprise offering for mobile device management with Citrix CloudGateway™ for managing mobile apps and data. The total consideration for this transaction was approximately $324.0 million, net of $2.9 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.6 million, of which we expensed approximately $0.1 million during the three months ended March 31, 2013 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, we assumed certain stock options which are exercisable for 285,817 shares of our common stock, for which the vesting period reset fully upon the closing of the transaction.
We have included the effects of the Zenprise acquisition in our results of operations prospectively from the date of the acquisition. 2012 Acquisitions
Bytemobile
In July 2012, we acquired all of the issued and outstanding securities of Bytemobile, a privately-held provider of data and video optimization solutions for mobile network operators. Bytemobile became part of our Infrastructure segment and extends our industry reach into the mobile and cloud markets. The total consideration for this transaction was approximately $399.5 million, net of $5.6 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $2.1 million. No transactions costs were recorded during the three months ended March 31, 2012.


Podio
In April 2012, we acquired all of the issued and outstanding securities of Podio ApS, or Podio, a privately-held provider of a cloud-based collaborative work platform. Podio became part of our SaaS segment and expands our offerings of integrated cloud-based support for team-based collaboration. The total consideration for this transaction was approximately $43.6 million, net of $1.7 million of cash acquired, and was paid in cash. Transaction costs associated with the acquisition were approximately $0.5 million and were expensed during the three months ended March 31, 2012 and are included in General and administrative expense in the accompanying condensed consolidated statements of income. In addition, in connection with the acquisition, we assumed non-vested stock units, which were converted into the right to receive up to 127,668 shares of our common stock, for which the vesting period reset fully upon the closing of the transaction.
2012 Other Acquisitions
During the first quarter of 2012, we acquired all of the issued and outstanding securities of a privately-held company for total cash consideration of approximately $24.6 million, net of $0.6 million of cash acquired. This target's business became part of our Infrastructure segment. Transaction costs associated with the acquisition were approximately $0.5 million, of which we expensed $0.4 million during the three months ended March 31, 2012 and are included in General and administrative expense in our condensed consolidated statements of income. In addition, in connection with this acquisition, we assumed non-vested stock units which were converted into the right to receive up to 13,481 shares of our common stock and assumed certain stock options which are exercisable for 12,017 shares of our common stock, for which the vesting period reset fully upon the closing of the transaction.
During the second quarter of 2012, we acquired all of the issued and outstanding securities of two privately-held companies for total cash consideration of approximately $15.4 million, net of $0.2 million of cash acquired. The targets' businesses became part of our Infrastructure segment. Transaction costs associated with the acquisitions were approximately $0.4 million, of which we expensed $0.2 million during the three months ended March 31, 2012 and are included in General and administrative expense in our condensed consolidated statements of income. We recorded approximately $7.3 million of goodwill, which is not deductible for tax purposes, and acquired $14.4 million of identifiable intangible assets, of which $12.3 million is related to product related intangible assets and $2.1 million is related to other intangible assets. In addition, in connection with these acquisitions, we assumed non-vested stock units which were converted into the right to receive up to 66,459 shares of our common stock, for which the vesting period reset fully upon the closing of each respective transaction.
During the third quarter of 2012, we acquired all of the issued and outstanding securities of two privately-held companies for total cash consideration of approximately $5.3 million. One of the targets became part of our Infrastructure segment and the other became part of our SaaS segment. Transaction costs associated with the acquisitions were approximately $0.2 million. No transactions costs were recorded during the three months ended March 31, 2012. We recorded approximately $2.4 million of goodwill, which is not deductible for tax purposes, and acquired $3.6 million of identifiable intangible assets, all of which is related to product related intangible assets. In addition, in connection with these acquisitions, we assumed non-vested stock units which were converted into the right to receive up to 13,487 shares of our common stock, for which the vesting period reset fully upon the closing of each respective transaction.
We have included the effects of all of the companies acquired in 2012 in our results of operations prospectively from the date of the acquisition. Critical Accounting Policies and Estimates Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. For more information regarding our critical accounting policies and estimates please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the year ended December 31, 2012, or the Annual Report, and Note 2 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There have been no material changes to the critical accounting policies disclosed in the Annual Report.


Results of Operations
The following table sets forth our unaudited condensed consolidated statements
of income data and presentation of that data as a percentage of change from
period-to-period (in thousands):
                                                Three Months Ended           Three Months Ended
                                                     March 31,                 March 31, 2013
                                               2013             2012         vs. March 31, 2012
Revenues:
Product and licenses                      $    193,083     $    178,364               8.3  %
Software as a service                          137,566          120,733              13.9
License updates and maintenance                315,738          264,525              19.4
Professional services                           26,512           25,873               2.5
Total net revenues                             672,899          589,495              14.1
Cost of net revenues:
Cost of product and license revenues            25,794           18,804              37.2
Cost of services and maintenance revenues       64,411           51,004              26.3
Amortization of product related
intangible assets                               24,709           16,535              49.4
Total cost of net revenues                     114,914           86,343              33.1
Gross margin                                   557,985          503,152              10.9
Operating expenses:
Research and development                       130,492          103,622              25.9
Sales, marketing and services                  297,682          248,457              19.8
General and administrative                      62,785           59,856               4.9
Amortization of other intangible assets         10,418           10,467              (0.5 )
Total operating expenses                       501,377          422,402              18.7
Income from operations                          56,608           80,750             (29.9 )
Interest income                                  1,962            3,078             (36.3 )
Other (expense) income, net                       (766 )            722                 *
Income before income taxes                      57,804           84,550             (31.6 )
Income tax (benefit) expense                    (1,884 )         16,283                 *
Net income                                $     59,688     $     68,267             (12.6 )

* not meaningful

Revenues
Net revenues from our Infrastructure products include Product and licenses, License updates and maintenance, and Professional services. Product and licenses primarily represent fees related to the licensing of the following major products:
• Mobile and Desktop is primarily comprised of our desktop virtualization products, which include XenDesktop and XenApp and our mobility products which include XenMobile MDM and CloudGateway; and

• Networking and Cloud is primarily comprised of our cloud networking products, which include NetScaler, CloudBridge and Bytemobile Smart Capacity, and our cloud platform products which include XenServer, CloudPlatform and CloudPortal.

In addition, we offer incentive programs to our VADs and VARs to stimulate demand for our products. Product and license revenues associated with these programs are partially offset by these incentives to our VADs and VARs. License updates and maintenance consists of:
• Our Subscription Advantage program, an annual renewable program that provides subscribers with automatic delivery of unspecified software upgrades, enhancements and maintenance releases when and if they become


available during the term of the subscription, for which fees are recognized ratably over the term of the contract, which is typically 12 to 24 months; and
• Our maintenance fees, which include technical support and hardware and software maintenance, and are recognized ratably over the contract term.

Professional services are comprised of:
• Fees from consulting services related to implementation of our products, which are recognized as the services are provided; and

• Fees from product training and certification, which are recognized as the services are provided.

Our SaaS revenues, which are recognized ratably over the contractual term, consist of fees related to our SaaS products including:
• Collaboration products, which primarily include GoToMeeting, GoToWebinar and GoToTraining;

• Data Sharing product, ShareFile;

• Remote Access product, GoToMyPC; and

• Remote IT Support products, which primarily include GoToAssist.

                                   Three Months Ended       Three Months Ended
                                       March 31,              March 31, 2013
                                   2013          2012       vs. March 31, 2012
                                                 (In thousands)
Product and licenses            $  193,083    $ 178,364    $             14,719
Software as a service              137,566      120,733                  16,833
License updates and maintenance    315,738      264,525                  51,213
Professional services               26,512       25,873                     639
Total net revenues              $  672,899    $ 589,495    $             83,404

Product and Licenses
The increase in Product and licenses revenue for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 was primarily due to increased sales of our Networking and Cloud products of $29.0 million, led by NetScaler, partially offset by a decrease in sales of our Mobile and Desktop products of $15.4 million primarily related to our Desktop products. These Product and licenses revenue results were primarily due to the factors discussed in the Executive Summary Overview above. We currently target Product and licenses revenue to increase when comparing the second quarter of 2013 to the second quarter of 2012.
Software as a Service
Software as a service revenue increased for the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily due to increased sales of our Collaboration and Data Sharing products of $18.4 million, partially offset by a decrease in our Remote Access and Remote IT Support . . .

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