<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-27084
CITRIX SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2275152
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6400 N. W. 6TH WAY 33309
FORT LAUDERDALE, FLORIDA (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 267-3000
NOT APPLICABLE
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of April 28, 2000 there were 185,114,935 shares of the registrant's
Common Stock, $.001 par value per share, outstanding.
===============================================================================
<PAGE> 2
CITRIX SYSTEMS, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
CONTENTS
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets:
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income:
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Qualitative & Quantitative Disclosures About Market Risk 25
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 265,142 $ 216,116
Short-term investments ............................................. 238,381 221,978
Accounts receivable, net of allowances of $6,956 and $8,242 at March
31, 2000 and December 31, 1999, respectively.................... 82,974 55,327
Inventories ........................................................ 10,489 7,731
Prepaid taxes ...................................................... 89,566 30,394
Other prepaid expenses ............................................. 5,617 4,970
Other current assets ............................................... 4,828 7,184
Current portion of deferred tax assets ............................. 25,556 26,544
---------- ----------
Total current assets .................................................. 722,553 570,244
Long-term investments ................................................. 321,920 325,755
Property and equipment, net ........................................... 36,438 31,530
Intangible assets, net ................................................ 84,107 63,396
Long-term portion of deferred tax assets .............................. 24,928 30,197
Other assets, net ..................................................... 15,863 16,735
---------- ----------
$1,205,809 $1,037,857
========== ==========
</TABLE>
CONTINUED ON FOLLOWING PAGE.
3
<PAGE> 4
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(in thousands, except par value)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses ..................... $ 77,424 $ 59,561
Accrued royalties and other accounts payable to stockholder ..... 263 427
Deferred revenues ............................................... 35,732 27,907
Current portion of deferred revenues on contract with stockholder 39,898 39,898
Income taxes payable ............................................ 6,676 9,202
----------- -----------
Total current liabilities .......................................... 159,993 136,995
Deferred revenues on contract with stockholder ..................... 43,972 53,912
Convertible subordinated debentures ................................ 317,951 313,880
Stockholders' equity:
Common stock at $.001 par value: 400,000 shares authorized;
184,857 and 181,093 issued and outstanding at March 31, 2000
and December 31, 1999, respectively ........................ 185 181
Additional paid-in capital ...................................... 411,455 309,321
Retained earnings ............................................... 264,650 226,105
Accumulated other comprehensive income (loss) ................... 7,603 (2,537)
----------- -----------
Total stockholders' equity ......................................... 683,893 533,070
----------- -----------
$ 1,205,809 $ 1,037,857
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE> 5
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ---------
(in thousands, except per share
information)
<S> <C> <C>
Revenues:
Net revenues ....................................................... $ 117,575 $ 75,166
Net revenues--related party ........................................ 9,940 9,873
--------- ---------
Net revenues ................................................. 127,515 85,039
--------- ---------
Cost of revenues:
Cost of revenues (excluding amortization presented separately below) 4,967 4,280
Cost of revenues--related party .................................... 162 242
--------- ---------
Total cost of revenues ....................................... 5,129 4,522
--------- ---------
Gross margin .......................................................... 122,386 80,517
Operating expenses:
Research and development ........................................... 12,112 8,406
Sales, marketing and support ....................................... 41,189 24,769
General and administrative ......................................... 12,655 6,410
Amortization of intangible assets .................................. 6,819 3,778
--------- ---------
Total operating expenses ..................................... 72,775 43,363
--------- ---------
Income from operations ................................................ 49,611 37,154
Interest and other income ............................................. 9,596 3,513
Interest expense ...................................................... (4,143) (404)
--------- ---------
Income before income taxes ............................................ 55,064 40,263
Income taxes .......................................................... 16,519 14,495
--------- ---------
Net income ............................................................ $ 38,545 $ 25,768
========= =========
Earnings per common share:
Basic earnings per share ........................................... $ 0.21 $ 0.15
========= =========
Weighted average shares outstanding ................................ 183,151 172,983
========= =========
Earnings per common share--assuming dilution:
Diluted earnings per share ......................................... $ 0.19 $ 0.14
========= =========
Weighted average shares outstanding ................................ 208,309 187,363
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE> 6
CITRIX SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................... $ 38,545 $ 25,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................ 10,783 5,400
Tax benefit related to the exercise of non-statutory stock options and
disqualified dispositions of incentive stock options ....................... 63,735 7,860
Provision for (recovery of) doubtful accounts ................................ 313 (37)
Provision for product returns ................................................ 1,813 3,695
Provision for inventory reserves ............................................. 971 860
Accretion of original issue discount and amortization of financing cost ...... 4,143 390
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ....................................................... (29,087) (14,633)
Inventories ............................................................... (3,729) (1,550)
Prepaid taxes ............................................................. (59,172) --
Other prepaid expenses .................................................... 1,789 3,994
Other assets .............................................................. 801 (7,613)
Deferred tax assets ....................................................... 6,257 (14,581)
Accounts payable and other accrued expenses ............................... 17,522 14,861
Accrued royalties and other accounts payable to stockholder ............... (163) 307
Deferred revenues ......................................................... 7,825 4,761
Deferred revenues on contract with stockholder ............................ (9,940) (9,872)
Income taxes payable ...................................................... (2,526) 16,794
--------- ---------
Net cash provided by operating activities ....................................... 49,880 36,404
INVESTING ACTIVITIES
Purchases of investments ........................................................ (56,143) (102,411)
Proceeds from sale of investments ............................................... 53,713 50,308
Cash paid for acquisitions, net of cash acquired ................................ (28,112) --
Cash paid for licensing agreement ............................................... -- (250)
Purchases of property and equipment ............................................. (8,670) (2,691)
--------- ---------
Net cash used in investing activities ........................................... (39,212) (55,044)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock ...................................... 38,404 11,755
Net proceeds from issuance of convertible subordinated debentures ............... -- 292,458
Payments on capital lease obligations ........................................... (46) (15)
--------- ---------
Net cash provided by financing activities ....................................... 38,358 304,198
--------- ---------
Increase in cash and cash equivalents ........................................... 49,026 285,558
Cash and cash equivalents at beginning of period ................................ 216,116 127,546
--------- ---------
Cash and cash equivalents at end of period ...................................... $ 265,142 $ 413,104
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE> 7
CITRIX SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
adjustments which, in the opinion of management, are considered necessary for a
fair presentation of the results of operations for the periods shown are of a
normal recurring nature and have been reflected in the unaudited condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of the results expected for the full
fiscal year or for any future period. The information included in these
unaudited condensed consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in this report and the consolidated financial
statements and accompanying notes included in the Citrix Systems, Inc. (the
"Company") Annual Report on Form 10-K for the fiscal year ended December 31,
1999.
2. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the condensed consolidated financial statements
and accompanying notes. While the Company believes that such estimates are fair
when considered in conjunction with the condensed consolidated financial
position and results of operations taken as a whole, the actual amount of such
estimates, when known, will vary from these estimates.
3. REVENUE RECOGNITION
Revenue is recognized when earned. The Company's revenue recognition policies
are in compliance with the American Institute of Certified Public Accountants
Statement of Position ("SOP") 97-2 (as amended by SOP 98-4 and SOP 98-9)
"Software Revenue Recognition." Product revenues are recognized upon shipment of
the software product only if no significant Company obligations remain, the fee
is fixed or determinable, and collection of the resulting receivable is deemed
probable. In the case of non-cancelable product licensing arrangements under
which certain Original Equipment Manufacturers ("OEMs") have software
reproduction rights, initial recognition of revenue also requires delivery and
customer acceptance of the product master or first copy. Subsequent recognition
of revenues is based upon reported royalties from the OEMs as well as estimates
of royalties due through the Company's reporting date. Revenue from packaged
product sales to distributors and resellers is recorded when related products
are shipped. In software arrangements that include rights to multiple software
products, post-contract customer support ("PCS"), and/or other services, the
Company allocates the total arrangement fee among each deliverable based on the
relative fair value of each of the deliverables based on vendor-specific
objective evidence ("VSOE"). The Company sells software and PCS separately and
VSOE is determined by the price charged when each element is sold separately.
Product returns and sales allowances, including stock rotations, are estimated
and provided for at the time of sale. Non-recurring engineering fees are
recognized ratably as the work is performed. Revenues from training and
consulting are recognized when the services are performed. Service and
subscription revenues from customer maintenance fees for ongoing customer
support and product updates and upgrades are based on the price charged or
derived value of the undelivered elements and are
7
<PAGE> 8
recognized ratably over the term of the contract, which is typically twelve
months. Service revenues, which are immaterial when compared to net revenues,
are included in net revenues on the face of the consolidated statements of
income.
4. EARNINGS PER SHARE
Basic earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and dilutive common share
equivalents outstanding during the period. Dilutive common share equivalents
consist of shares issuable upon the exercise of stock options. The shares
related to the convertible subordinated debentures were excluded from the
computation of diluted earnings per share due to their antidilutive effect.
All share and per share data have been retroactively adjusted to reflect the
two-for-one stock split in the form of a stock dividend paid on March 25, 1999
to stockholders of record as of March 17, 1999 and the two-for-one stock split
in the form of a stock dividend paid on February 16, 2000 to stockholders of
record as of January 31, 2000.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
Numerator:
Net income.......................................................... $ 38,545 $ 25,768
========= =========
Denominator:
Denominator for basic earnings per share--weighted average shares.... 183,151 172,983
Effect of dilutive securities:
Employee stock options........................................... 25,158 14,380
--------- ---------
Denominator for diluted earnings per share--adjusted weighted-
average shares............................................... 208,309 187,363
========= =========
Basic earnings per share................................................ $ 0.21 $ 0.15
========= =========
Diluted earnings per share.............................................. $ 0.19 $ 0.14
========= =========
</TABLE>
5. ACQUISITION
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex"), a privately owned e-business consulting
services organization specializing in the design, development and implementation
of Web-based solutions and systems integration, for approximately $47.8 million,
of which $28.7 million was paid at the closing date and the balance is payable,
in equal installments 18 and 24 months after the closing date, contingent on
future events, as set forth in the acquisition agreement.
The acquisition was accounted for as a purchase. The cost in excess of net
tangible assets acquired was approximately $45.5 million, of which $9.0 million
was allocated to the acquired workforce and $13.5 million was allocated to
goodwill. The acquired workforce and goodwill are both being amortized on a
straight line basis over four years. The results of operations of Innovex are
included in the Company's results of operations from the date of acquisition.
The allocation of the purchase price was based on an independent report.
Contingent payments made at a future date, if any, will be accounted for as
additional purchase price and amortized over the remaining life of the
intangible assets acquired.
8
<PAGE> 9
6. SEGMENT INFORMATION
The Company operates in a single market consisting of the design,
development, marketing and support of client and server-based computing
software for enterprise applications. Design, development, marketing and
support operations outside of the United States are conducted through
subsidiaries located primarily in Europe and the Asia Pacific region.
The Company tracks revenue and gross margin by geography and product
category but does not track operating expenses nor identifiable assets on
a product category basis. The Company does not engage in intercompany
transfers between segments. The Company's management evaluates
performance based primarily on revenues and profit in the geographic
locations in which the Company operates. Segment profit for each segment
includes sales and marketing expenses directly attributable to the
segment and excludes certain expenses which are managed outside the
reportable segments. Costs excluded from segment profit primarily consist
of cost of revenues, research and development costs, interest, corporate
expenses, including income taxes, as well as non-recurring charges for
purchased in-process technology, and overhead costs, including rent,
utilities, depreciation and amortization. Corporate expenses are
comprised primarily of corporate marketing costs, operations and other
general and administrative expenses which are separately managed.
Accounting policies of the segments are the same as the Company's
consolidated accounting policies.
Net revenues and segment profit, classified by the major geographic area
in which the Company operates, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
-------- --------
(in thousands)
<S> <C> <C>
Net revenues:
Americas............................. $ 66,691 $ 40,383
EMEA................................. 43,731 28,024
Asia Pacific......................... 5,176 5,010
Other (1)............................ 11,917 11,622
-------- --------
Consolidated......................... $127,515 $ 85,039
======== ========
Segment profit:
Americas............................. $ 56,764 $ 31,772
EMEA................................. 35,050 22,449
Asia Pacific......................... 2,591 3,074
Other (1)............................ 11,917 11,622
Unallocated expenses (2):
Cost of revenues................. (5,129) (4,522)
Overhead costs................... (18,640) (10,157)
Research and development......... (12,112) (8,406)
Net interest..................... 5,453 3,109
Other corporate expenses......... (20,830) (8,678)
-------- --------
Consolidated income before income taxes....... $ 55,064 $ 40,263
======== ========
</TABLE>
(1) Primarily represents royalty fees earned in connection with the License,
Development and Marketing Agreement with Microsoft and OEM revenue.
(2) Represents expenses presented to management only on a consolidated basis
and not allocated to the geographic operating segments.
9
<PAGE> 10
Additional information regarding revenue by products and services groups is as
follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
-------- -------
(in thousands)
<S> <C> <C>
Revenue:
Windows Application Servers.................................... $91,382 $64,333
Web Application Servers........................................ 4,123 --
Management Services Products................................... 13,481 5,624
Computing Appliances Products.................................. 1,976 2,119
Microsoft Royalties............................................ 9,940 9,872
Other Revenue.................................................. 6,613 3,091
-------- -------
Net Revenues................................................... $127,515 $85,039
======== =======
</TABLE>
7. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three month
periods ended March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
2000 1999
------- -------
(in thousands)
<S> <C> <C>
Net income..................................................... $38,545 $25,768
Unrealized gain on available-for-sale securities, net.......... 10,140 --
------- -------
Comprehensive income........................................... $48,685 $25,768
======= =======
</TABLE>
8. INCOME TAXES
In July 1999, the Company changed its organizational structure whereby it moved
certain operational and administrative processes to overseas subsidiaries. The
restructuring resulted in foreign earnings being taxed at lower foreign tax
rates. Effective January 1, 2000, these earnings will be permanently reinvested
overseas in order to fund the Company's growth in overseas markets. As a result,
the Company's effective tax rate was reduced to 30% for the three month period
ended March 31, 2000 from 36% for the same period in the prior year.
9. CONVERTIBLE SUBORDINATED DEBENTURES
In March 1999, the Company completed a private placement of $850.0 million
principal amount at maturity of its zero coupon convertible subordinated
debentures (the "debentures") due March 22, 2019. The debentures were priced
with a yield to maturity of 5.25% and resulted in net proceeds to the Company of
approximately $291.9 million, net of original issue discount and net of debt
issuance costs of $9.6 million. Except under limited circumstances, no interest
will be paid on the debentures prior to maturity. The debentures are convertible
at the option of the security holder at any time on or before the maturity date
at a conversion rate of 14.0612 shares of the Company's common stock for each
$1,000 principal amount at maturity of debentures, subject to adjustment in
certain events. The Company may redeem the debentures on or after March 22,
2004. Holders may require the Company to repurchase the debentures, at set
redemption prices (equal to the issue price plus accrued original issue
discount) beginning on March 22, 2004. Interest expense related to the
Debentures was $4.1 million and $0.4 million for the three month periods ended
March 31, 2000 and March 31, 1999, respectively.
10
<PAGE> 11
10. STOCK REPURCHASE PROGRAM
On April 15, 1999, the Board of Directors approved a stock repurchase program
authorizing the repurchase of up to $200 million of the Company's common stock.
Purchases, if any, will be made from time to time in the open market and paid
out of general corporate funds. As of March 31, 2000, none of the Company's
outstanding common stock had been repurchased under this program.
11. RECLASSIFICATIONS
Certain reclassifications have been made for consistent presentation.
12. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement 133. The Statement defers the effective date of
SFAS 133 to fiscal 2001. Management is evaluating SFAS 133 and does not believe
that adoption of the Statement will have a material impact on its financial
statements.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company develops, markets, sells and supports innovative client and
server-based computing software that enables effective and efficient deployment
and management of enterprise applications that are designed for Microsoft
Windows(R) operating systems. The Company's Windows Application Servers, which
comprise the largest source of the Company's revenue, primarily consist of the
MetaFrame(TM) product line and related options. The MetaFrame product line,
which began shipping in the second quarter of 1998, permits organizations to
deploy Windows applications without regard to location, network connection, or
type of client hardware platforms.
On May 9, 1997, the Company and Microsoft entered into a License,
Development and Marketing Agreement, as amended (the "Development Agreement"),
which provides for the licensing to Microsoft of certain of the Company's
multi-user software enhancements to Microsoft's Windows NT Server and for the
cooperation between the parties for the development of certain future multi-user
versions of Microsoft Windows NT Server, Terminal Server Edition ("NT Terminal
Server"). As a result of the Development Agreement, the Company continues to
support the Microsoft Windows NT platform, but the MetaFrame products and later
releases will no longer directly incorporate Windows NT technology. The Company
plans to continue developing enhancements to its MetaFrame product line and
expects that this product and associated options will constitute a majority of
its revenues for the foreseeable future.
The Company's revenue recognition policies are in compliance with the
American Institute of Certified Public Accountants Statement of Position ("SOP")
97-2 (as amended by SOP 98-4 and SOP 98-9) and related interpretations,
"Software Revenue Recognition" as described in Note 3 of the Notes to Condensed
Consolidated Financial Statements included in this report.
In February 2000, the Company acquired all of the operating assets of the
Innovex Group, Inc. ("Innovex"), a privately owned e-business consulting
services organization specializing in the design, development and implementation
of Web-based solutions and systems integration, for approximately $47.8 million,
of which $28.7 million was paid at the closing and the balance is payable, in
equal installments, 18 and 24 months after the closing date, contingent on
future events.
The discussion below relating to the individual financial statement
captions, the Company's overall financial performance, operations and financial
position should be read in conjunction with the factors and events described in
"OVERVIEW" and "CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS" which may
impact the Company's future performance and financial position.
12
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the Company
expressed as a percentage of net revenues and as a percentage of change from
period-to-period for the periods indicated.
<TABLE>
<CAPTION>
Change From
Three Months
Three Months Ended Ended
March 31 March 31, 2000
--------------------- vs.
2000 1999 March 31, 1999
------ ------ --------------
<S> <C> <C> <C>
Net revenues ......................................... 100.0% 100.0% 49.9%
Cost of revenues (excluding amortization presented
separately below) .................................. 4.0 5.3 13.4
----- -----
Gross margin ......................................... 96.0 94.7 52.0
Operating expenses:
Research and development .......................... 9.5 9.9 44.1
Sales, marketing and support ...................... 32.3 29.1 66.3
General and administrative ........................ 9.9 7.5 97.4
Amortization of intangible assets ................. 5.3 4.4 80.5
----- -----
Total operating expenses ........................ 57.0 50.9 67.8
----- -----
Income from operations ............................... 39.0 43.8 33.5
Interest and other income ............................ 7.5 4.1 173.2
Interest expense ..................................... (3.2) (0.5) 925.5
----- -----
Income before income taxes ........................... 43.3 47.4 36.8
Income taxes ......................................... 13.0 17.0 14.0
----- -----
Net income ........................................... 30.3% 30.4% 49.6%
===== =====
</TABLE>
NET REVENUES. Net revenues are presented below in six categories: Windows
Application Servers, Web Application Servers, Management Services Products,
Computing Appliances Products, Microsoft Royalties and Other Revenue. Windows
Application Servers revenue represents fees related primarily to the licensing
of the Company's MetaFrame product, subscription for product updates and
upgrades, and additional user licenses. Web Application Servers revenue
represents fees related primarily to the licensing of the Company's MetaFrame
for UNIX product and related subscriptions and additional user licenses.
Computing Appliances Products revenue consists of license fees and royalties
from OEMs who are granted a license to incorporate and/or market the Company's
multi-user technologies in their own product offerings. Management Services
Products consist of system option products such as Load Balancing Services,
Resource Management Services and other options. Microsoft royalties represent
fees recognized in connection with the Development Agreement.
In terms of product mix, the increase in net revenues in the first quarter
of 2000 compared to the first quarter of 1999 was primarily attributable to an
increase in the volume of shipments of Windows Application Servers,
specifically, the MetaFrame product and additional user licenses. To a lesser
extent, the increase in net revenues was due to an increase in the volume of
shipments of Management Services Products, specifically, Load Balancing Services
and Resource Management Services products, as end users continued to implement
larger scale MetaFrame solutions, and the introduction of the Web Application
Servers, which began shipping in March 2000.
13
<PAGE> 14
An analysis of the Company's net revenues by category is presented in the
table below:
Revenue
Growth for
the Three
Three Months Ended Months Ended
March 31, March 31, 2000
---------------- vs.
2000 1999 March 31, 1999
---- ---- --------------
Windows Application Servers . 72% 76% 42.0%
Web Application Servers ..... 3 -- *
Management Services Products 11 7 139.7
Computing Appliances Products 1 2 (6.7)
Microsoft Royalties ......... 8 11 0.7
Other Revenue ............... 5 4 114.0
---- ---
Net Revenues ................ 100% 100% 49.9
=== ===
* Not meaningful.
INTERNATIONAL AND SEGMENT REVENUES. International revenues (sales
outside of the United States) accounted for approximately 39% of net revenues
for the three months ended March 31, 2000 and March 31, 1999. See Note 6 to the
Company's Condensed Consolidated Financial Statements appearing in this report.
The increase in international revenues was primarily due to the Company's
increased sales and marketing efforts in Europe and Asia.
An analysis of net revenues by operating segment is presented in the table
below:
Revenue
Growth for
the Three
Three Months Ended Months Ended
March 31, March 31, 2000
---------------- vs.
2000 1999 March 31, 1999
---- ---- --------------
Americas........................ 52% 47% 65.1%
EMEA............................ 34 33 56.0
Asia Pacific.................... 4 6 3.3
Other (1)....................... 10 14 2.5
--- ---
Consolidated net revenues....... 100% 100% 49.9
=== ===
(1) Primarily represents royalty fees earned in connection with the Development
Agreement and OEM revenue.
In terms of operating segments, the increase in net revenues in the first
quarter of 2000 compared to the first quarter of 1999 was primarily attributable
to continued demand for Citrix products in the Americas and Europe, Middle East
and Africa ("EMEA") regions and larger scale MetaFrame implementations in these
regions. The EMEA revenue increase is also due to greater sales and marketing
efforts in Europe and the opening and expansion of additional sales offices in
that region. Other revenue has remained relatively stable, from the first
quarter of 1999 to the first quarter of 2000, but has decreased as a percentage
of net revenues due to the growth of the other segments.
The Company expects to continue investing in international markets and
expanding its international operations by establishing additional foreign
operations, hiring personnel, expanding its international sales force and
continuing to add third party channel partners.
COST OF REVENUES. Cost of revenues consists primarily of the cost of
royalties, product media and duplication, manuals,
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packaging materials and shipping expense. All development costs incurred in
connection with the Development Agreement were expensed as incurred as a
separate component of cost of revenues. The Company's cost of revenues excludes
amortization of core technology.
GROSS MARGIN. Gross margin increased in the first quarter of 2000 compared
to the first quarter of 1999 primarily due to higher sales volumes of the
MetaFrame product line and additional user licenses compared to sales of the
WinFrame product line since the MetaFrame product line has a relatively high
gross margin contribution as it bears no royalties. To a lesser extent, the
increase in gross margin was attributable to higher sales volumes of Management
Services Products, particularly Load Management Services, and the introduction
of Web Application Servers both of which have relatively high gross margins. The
Company anticipates gross margin as a percentage of net revenues will decrease
as the Company increases its consulting services offering which has a lower
gross profit margin.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
consisted primarily of personnel-related costs. To date, all internal software
development costs have been expensed as incurred. The increase in research and
development expenses resulted primarily from additional staffing, associated
salaries and related expenses required to expand and enhance the Company's
product lines. All development costs included in the research and development of
software products and enhancements to existing products have been expensed as
incurred except for certain intangible assets related to certain acquisitions
and licensing arrangements.
SALES, MARKETING AND SUPPORT EXPENSES. The increase in sales, marketing
and support expenses resulted primarily from increased corporate branding and
advertising activities related to specific product lines. The increase was also
due to higher headcount levels of sales, services and marketing staff and
associated salaries, commissions and related expenses in order to increase the
Company's sales, consulting and marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSES. The increase in general and
administrative expenses is primarily due to increased expenses associated with
additional staff, associated salaries and related expenses necessary to support
overall increases in the scope of the Company's operations.
AMORTIZATION OF INTANGIBLE ASSETS. The increase in amortization of
goodwill and identifiable intangible assets is primarily due to the acquisition
of ViewSoft, Inc. ("ViewSoft") in July 1999 and Innovex in February 2000 which
resulted in additional goodwill and identifiable intangible assets of $31.1
million and $26.7 million, respectively. As of March 31, 2000, the Company had
net goodwill and identifiable intangible assets of $84.1 million associated with
these and other transactions which will be fully amortized over the next three
to four years. The Company anticipates that amortization of goodwill and
identifiable intangible assets will increase as the Company continues its
acquisition efforts.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the acquisition of
certain in-process software technologies from ViewSoft, the Company allocated
$2.3 million of the purchase price to in-process research and development
("IPR&D"). During 1998, the Company completed acquisitions of certain in-process
software technologies in which it allocated a portion of the purchase price to
IPR&D. The Company allocated $10.7 million and $2.4 million for IPR&D related to
the APM Ltd ("APM") and VDOnet Corporation, Ltd ("VDOnet") acquisitions,
respectively.
Since the respective dates of acquisition, the Company has used the
acquired in-process technology to develop new product offerings and
enhancements, which have or will become part of the Company's suite of products
when completed. Functionality included in products using the acquired in-process
technology have been introduced at various times following the respective
transaction dates of the acquired assets. The Company currently expects to
complete the development of the remaining projects at various dates in 2000.
Upon completion, the Company has offered and intends to offer the related
products to its customers.
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The nature of the efforts required to develop and integrate the acquired
in-process technology into commercially viable products or features and
functionalities within the Citrix suite of existing products principally relate
to the completion of all planning, designing and testing activities that are
necessary to establish that the products can be produced to meet design
requirements, including functions, features and technical performance
requirements. The Company currently expects that products utilizing the acquired
in-process technology will be successfully developed, but there can be no
assurance that commercial viability of any of these products will be achieved.
Furthermore, future developments in the software industry, particularly the
server-based computing environment, changes in technology, changes in other
products and offerings or other developments may cause the Company to alter or
abandon product plans.
Failure to complete the development of these projects in their entirety,
or in a timely manner, could have a material adverse impact on the Company's
financial condition and results of operations. No assurance can be given that
actual revenues and operating profit attributable to acquired in-process
research and development will not deviate from the projections used to value
such technology in connection with each of the respective acquisitions. Ongoing
operations and financial results for acquired assets, and the Company as a
whole, are subject to a variety of factors which may not have been known or
estimable at the date of such transactions, and the estimates discussed below
should not be considered the Company's current projections for operating results
for the acquired assets or the Company as a whole.
A description of the in-process research and development and the estimates
made by the Company for APM, VDOnet, and ViewSoft is summarized below. After the
acquisition of each technology, the Company has continued the development of
these in-process projects. The updated status of completion for each project is
set forth in the table below.
APM
The in-process research and development acquired in the APM acquisition
consisted primarily of one significant research and development project. The
project is a Windows NT-based application server which runs Java applications.
At the date of the acquisition, APM was shipping a Java application server
solution that allowed an enterprise user to access Java-applets from the
Internet and execute these applets outside the corporate firewall in a
server-based computing configuration in a fashion that was transparent to the
enterprise user. APM was in the process of modifying its software product to
incorporate changes necessary for it to interface with Java 2.0, which was a
major new release that included significant rewrites to the Java desktop.
Following the acquisition, the Company planned on continuing the process of
incorporating changes necessary to interface with Java 2.0, and in addition,
planned on further developing the software product into an application server
for Java 2.0 that would operate in a MetaFrame server environment.
The remaining efforts to complete the project are primarily the continuing
incorporation of changes necessary to interface with Java 2.0 and the
utilization of acquired technology to develop an application server for Java
that will operate in a MetaFrame server environment. The research and
development risks associated with this project relate primarily to updating the
acquired technology to be compatible with Sun Microsystems' Java 2.0
application, integrating and porting such technology into a variety of
server-based computing architectures.
VDONET
The in-process research and development acquired in the VDOnet acquisition
consisted primarily of one significant research and development project, ICA
Video Services. This project allows video applications and applications
containing video to be viewed on an ICA client, and is targeted for the
server-based computing market. At the date of the acquisition, VDOnet was
shipping a client server video streaming product that was not operational in a
Windows NT or in a MetaFrame environment. VDOnet was in the process of modifying
its software to be operational in a Windows NT environment. In addition, VDOnet
was developing enhancements that would provide for a live camera feed and
multicast, which is intended to direct a video stream to multiple client devices
simultaneously. Following the acquisition, the Company continued the process of
modifying
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the VDOnet software to be operational in a Windows NT environment and is
continuing the development of enhancements that would provide for live camera
feed and multicast. In addition, the Company plans on further developing the
software to be operational in a MetaFrame environment.
The remaining efforts to complete the project are primarily the continuing
modification of the VDOnet software to be operational in a Windows NT
environment and the continuation of enhancements that provide for live camera
feed and multicast functionality and the utilization of acquired technology to
develop a video server that is operational in a MetaFrame server environment.
The research and development risks associated with this project relate primarily
to integrating this product into the server-based computing environment.
VIEWSOFT
The in-process research and development acquired in the ViewSoft
acquisition consisted primarily of one significant research and development
project, ViewSoft Internet 4.0. This project enables multi-tier, Web-based
application development and deployment. At the date of the valuation, ViewSoft
was in development with this product. The product was intended to operate in the
multi-tier web application market and was not intended to operate in a MetaFrame
environment.
The remaining efforts to complete the project relate primarily to on-going
stress testing and, to a lesser extent, bug fixes and documentation. The
research and development risks associated with this project relate primarily to
potential design flaws revealed during testing.
The actual and estimated costs to complete and completion dates of the
in-process and core technology acquired for each acquisition are as follows:
<TABLE>
<CAPTION>
APM VDOnet ViewSoft
----------------- ------------------- ----------------
(dollar amounts in thousands)
<S> <C> <C> <C>
Date Acquired........................... June 1998 July 1998 July 1999
Cost Incurred to Date................... $4,200 $4,180 $1,990
Estimated Cost to Complete.............. 770 630 1,800
----------------- ------------------- -----------------
Total Estimated Project Cost............ $4,970 $4,810 $3,790
================= =================== =================
Estimated Cost to Complete at Date of
Valuation............................... $4,000 $ 200 $ 660
================= =================== =================
Estimated Completion Date at Date of First Quarter Second Quarter of Fourth Quarter
Valuation............................... of 1999 1999 of 1999
Current Estimated Completion Date...... Third Quarter Third Quarter of Third Quarter
of 2000 2000 of 2000
</TABLE>
The estimated completion date of the in-process and core technology
related to the APM acquisition has been extended as certain personnel working on
this project have been allocated to other projects. The completion date of the
in-process and core technology acquired from VDOnet has been delayed from the
originally anticipated completion date due to changes in the development of
these technologies resulting from end user feedback. The estimated completion
date of the ViewSoft project has been delayed from the originally anticipated
completion date due to increases in project scope and a longer testing period.
The Company is currently unable to determine the impact of such delays on its
business, future results of operations and financial condition. There can be no
assurance that the Company will not incur additional charges in subsequent
periods to reflect costs associated with completing these projects or that the
Company will be successful in its efforts to integrate and further develop these
technologies.
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INTEREST AND OTHER INCOME. The increase in interest and other income for
the three months ended March 31, 2000 was primarily due to interest earned on
the invested net proceeds from the issuance of the zero coupon convertible
subordinated debentures in March 1999. The Company may acquire or make
investments in companies it believes are related to its strategic objectives.
Such investments will reduce the Company's cash and/or investment balances and
therefore may reduce interest income.
INTEREST EXPENSE. The increase in interest expense for the three months
ended March 31, 2000 was primarily due to interest related to the zero coupon
convertible subordinated debentures issued in March 1999.
INCOME TAXES. The Company's effective tax rate amounted to 30% for the
three months ended March 31, 2000 and 36% for the three months ended March 31,
1999. In July 1999, the Company changed its organizational structure whereby it
moved certain operational and administrative processes to overseas subsidiaries.
The restructuring resulted in foreign earnings being taxed at lower foreign tax
rates. These earnings will be permanently reinvested overseas in order to fund
the Company's growth in overseas markets.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2000, the Company generated
positive operating cash flows of approximately $49.9 million. Cash provided by
operating activities related primarily to tax benefits from the exercise of
non-statutory stock options and disqualified dispositions of incentive stock
options of $63.7 million, net income of $38.5 million, an increase of $17.5
million in accounts payable and other accrued expenses due to increased accrued
taxes and increased expenses resulting from higher levels of operating activity,
and depreciation and amortization of $10.8 million. These cash inflows were
partially offset by an increase in prepaid taxes of $59.2 million primarily due
to a receivable from estimated tax payments in excess of the tax liability and
an increase in accounts receivable of $25.8 million due to higher revenue
levels. Cash used in investing activities of $39.2 million related primarily to
the purchase of investments of $56.1 million and net cash paid for the
acquisition of Innovex of $28.1 million. This cash outflow was partially offset
by cash inflows from the sale of investments of approximately $53.7 million.
Cash provided by financing activities of $38.4 million related primarily to
proceeds from the issuance of common stock under the Company's stock option
plan.
As of March 31, 2000, the Company had approximately $825.4 million in cash
and investments and $562.6 million of working capital. The Company's cash and
cash equivalents are invested in investment grade, highly liquid securities to
minimize interest rate risk and allow for flexibility in the event of immediate
cash needs. At March 31, 2000, the Company had approximately $83.0 million in
accounts receivable, net of allowances, and $119.6 million of deferred revenues,
of which the Company anticipates $75.6 million will be earned over the next
twelve months.
On April 15, 1999, the Board of Directors approved a stock repurchase
program authorizing the repurchase of up to $200 million of the Company's common
stock. Purchases will be made from time to time in the open market and paid out
of general corporate funds. As of March 31, 2000, none of the Company's
outstanding common stock had been repurchased under this program.
In February 2000, the Company completed its acquisition of all of the
operating assets of Innovex for approximately $47.8 million, of which $28.7
million was paid in cash at the closing date and the balance is payable, in
equal installments, 18 and 24 months after the closing date, contingent upon
future events.
The Company believes existing cash and investments together with cash flow
expected from operations will be sufficient to meet operating and capital
expenditures requirements through 2000. The Company may from time to time seek
to raise
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additional funds through public or private financing. The Company may also
acquire or make investments in companies it believes are related to its
strategic objectives. Such investments will reduce the Company's available
working capital.
YEAR 2000 READINESS DISCLOSURE
Last year, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its identification
and testing of systems. As a result of those efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company has not incurred any
material expenditure in connection with identifying or evaluating Year 2000
compliance issues. The Company estimates it will not incur any material levels
of expenditure on this issue during 2000 to support its compliance initiatives.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its computer
systems and those of its suppliers and vendors to ensure that any latent Year
2000 matters that may arise are addressed promptly.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE RESULTS
We do not provide financial performance forecasts. Our operating results
and financial condition have varied in the past and may in the future vary
significantly depending on a number of factors. Except for the historical
information in this report, the matters contained in this report include
forward-looking statements that involve risks and uncertainties. The following
factors, among others, could cause actual results to differ materially from
those contained in forward-looking statements made in this report. Such factors,
among others, may have a material adverse effect upon our business, results of
operations and financial condition.
OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON OUR STRATEGIC RELATIONSHIP WITH
MICROSOFT
Microsoft is the leading provider of desktop operating systems. We depend
upon the license of key technology from Microsoft, including certain source and
object code licenses, and technical support. We also depend upon our strategic
alliance agreement with Microsoft pursuant to which Citrix and Microsoft have
agreed to cooperate to develop advanced operating systems. Our relationship with
Microsoft is subject to the following risks and uncertainties:
o COMPETITION WITH MICROSOFT. NT Terminal Server is, and future product
offerings by Microsoft may be, competitive with our current MetaFrame
products, and any future product offerings by Citrix.
o EXPIRATION OF MICROSOFT'S ENDORSEMENT OF THE ICA PROTOCOl. Microsoft's
obligation to endorse only our ICA protocol as the preferred method to
provide multi-user Windows access for devices other than Windows
clients expired in November 1999. Microsoft may now market or endorse
other methods to provide multi-user Windows access to non-Windows
client devices.
o DEPENDENCE ON MICROSOFT FOR COMMERCIALIZATION. Our ability to
successfully commercialize our MetaFrame product depends on
Microsoft's ability to market NT Terminal Server products. We do not
have control over Microsoft's distributors and resellers and, to our
knowledge, Microsoft's distributors and resellers are not obligated to
purchase products from Microsoft.
o PRODUCT RELEASE DELAYS. There may be delays in the release and
shipment of future versions of NT Terminal Server.
If our relationship with Microsoft were terminated or adversely affected
for any reason, our business, operating results and financial condition would be
materially adversely affected.
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OUR CONTINUED GROWTH DEPENDS UPON BROAD-BASED ACCEPTANCE OF OUR ICA PROTOCOL
We believe that our success in the markets in which we compete will depend
upon our ability to make the ICA protocol a widely accepted standard for
supporting Windows applications. Microsoft includes as a component of NT
Terminal Server its Remote Desktop Protocol (RDP) which has certain of the
capabilities of our ICA protocol, and may offer customers a competitive
solution. We believe that our success is dependent on our ability to enhance and
differentiate our ICA protocol, and foster broad acceptance of the ICA protocol
based on its performance, scalability, reliability and enhanced features. In
addition, our ability to win broad market acceptance of our ICA protocol will
depend upon the degree of success achieved by our strategic partners in
marketing their respective product offerings, product pricing and customers'
assessment of our technical, managerial, service and support expertise. If
another standard emerges or if we otherwise fail to achieve wide acceptance of
the ICA protocol as a standard for supporting Windows applications, our
business, operating results and financial condition could be materially
adversely affected.
THE SUCCESS OF OUR BUSINESS ALSO DEPENDS UPON OUR STRATEGIC RELATIONSHIPS WITH
PARTIES OTHER THAN MICROSOFT
In addition to our relationship with Microsoft, we have strategic
relationships with IBM, Compaq, Hewlett Packard and others. We depend upon our
strategic partners to successfully market and promote the use of the Company's
products and incorporate our technology into their products and to market and
sell such products. If we are unable to maintain our current strategic
relationships or develop additional strategic relationships, or if any of our
key strategic partners are unsuccessful in incorporating our technology into
their products or marketing or selling such products, our business, operating
results and financial condition could be materially adversely affected.
WE FACE SIGNIFICANT COMPETITION FROM OTHER TECHNOLOGY COMPANIES
The markets in which we compete are intensely competitive. Most of our
competitors and potential competitors, including Microsoft, have significantly
greater financial, technical, sales, marketing and other resources. The
announcement of the release and the actual release of products competitive with
our existing and future product lines, such as NT Terminal Server and related
enhancements by Microsoft or third parties, could cause our existing and
potential customers to postpone or cancel plans to license our product lines.
This would adversely impact our business, operating results and financial
condition. Further, our ability to market MetaFrame and other future product
offerings may be affected by Microsoft's licensing and pricing scheme for client
devices implementing our product offerings which attach to NT Terminal Server.
In addition, alternative products exist for Internet commerce that
directly or indirectly compete with our products. Existing or new products that
extend website software to provide database access or interactive computing
could materially impact our ability to sell our products in this market. As
markets for our products continue to develop, additional companies, including
companies with significant market presence in the computer hardware, software
and networking industries, may enter the markets in which we compete and further
intensify competition. Finally, although we believe that price has historically
been a less significant competitive factor than product performance, reliability
and functionality, we believe that price competition may become more significant
in the future. We may not be able to maintain our historic prices, and any
inability to do so could adversely affect our business, results of operations
and financial condition.
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OUR RELIANCE ON A FEW PRODUCTS FOR A MAJORITY OF OUR REVENUE COULD ADVERSELY
AFFECT OUR BUSINESS
The Company anticipates that its MetaFrame product line and related
enhancements will constitute the majority of its revenue for the foreseeable
future. The Company's ability to generate revenue from its MetaFrame product
will depend upon market acceptance of NT Terminal Server products. Declines in
demand for products based on MetaFrame technology may occur as a result of new
competitive product releases, price competition, lack of success of its
strategic partners, technological change or other factors.
FAILURE TO PROPERLY MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
We have recently experienced rapid growth in the scope of our operations,
the number of our employees and the geographic area of our operations. In
addition, we have recently completed certain acquisitions. Such growth and
assimilation of operations and personnel of such acquired companies has placed
and may continue to place a significant strain on our managerial, operational
and financial resources. We believe we have made adequate allowances for the
costs and risks associated with these expansions. However, our systems,
procedures or controls may not be adequate to support our current or future
operations. In addition, we may not be able to effectively manage this expansion
and still achieve the rapid execution necessary to fully exploit the market
opportunity for our products and services in a timely and cost-effective manner.
Our future operating results will also depend on our ability to manage our
expanding product line, expand our sales and marketing organizations and expand
our support organization commensurate with the increasing base of our installed
product. Our failure to properly manage our growth could adversely affect our
business, operating results and financial condition.
We plan to increase our professional staff during 2000 as we implement
sales, marketing and support and product developments efforts, as well as
associated administrative systems, to support planned growth. As a result of
this planned growth in the size of our staff, we believe that we will require
additional facilities during 2000. Although we believe that the cost of such
additional facilities will not significantly impact our financial position or
results of operations, we anticipate that operating expenses will increase
during 2000 as a result of our planned growth in staff. Such an increase in
operating expenses may reduce our income from operations and cash flows from
operating activities.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO PROTECT OUR PROPRIETARY TECHNOLOGY
We rely primarily on a combination of copyright, trademark and trade
secret laws, as well as confidentiality procedures and contractual provisions,
to protect our proprietary rights. Our efforts to protect our proprietary
technology rights may not be successful. The loss of any material trade secret,
trademark, tradename or copyright could have a material adverse effect on us.
Despite our precautions, it may be possible for unauthorized third parties to
copy certain portions of our products or to obtain and use information regarded
as proprietary. A significant portion of our sales are derived from the
licensing of our products under "shrink wrap" license agreements that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, our ability to protect our proprietary
rights may be affected by the following:
o Differences in International Law. The laws of some foreign countries
do not protect our intellectual property to the same extent as do the
laws of the United States and Canada.
o Third Party Infringement Claims. Third parties may assert infringement
claims against us in the future. This may result in costly litigation
or require us to obtain a license to intellectual property rights of
such third parties. Such licenses may not be available on reasonable
terms or at all.
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IF WE FAIL TO INTRODUCE NEW PRODUCTS AND ENHANCE OUR EXISTING PRODUCTS TO KEEP
UP WITH RAPID TECHNOLOGICAL CHANGE, DEMAND FOR OUR PRODUCTS MAY DECLINE
The markets for our products are relatively new and are characterized by:
o rapid technological change;
o evolving industry standards;
o changes in customer requirements; and
o frequent new product introductions and enhancements, including
enhancements to certain key technology licensed from Microsoft.
These market characteristics will require us to continuously enhance our
current products and develop and introduce new products to keep pace with
technological developments and respond to evolving customer requirements.
Additionally, we and others may announce new products, new product enhancements
or technologies that could replace or shorten the life cycle of our existing
product offerings.
We believe we will incur additional costs and royalties associated with the
development, licensing or acquisition of new technologies or enhancements to
existing products. This will increase our cost of revenues and operating
expenses. We cannot currently quantify such increase with respect to
transactions that have not occurred. We may use a substantial portion of our
cash and investments to fund these additional costs, resulting in a decrease in
interest income, unless such decrease is offset by cash flows from future
operations.
We may need to hire additional personnel to develop new products, product
enhancements and technologies and to fulfill our responsibilities under the
terms of the Development Agreement. If we are unable to add staff and resources,
future enhancement and additional features to our existing or future products
may be delayed, which may have a material adverse effect on our business,
results of operations and financial condition.
IF OUR PRODUCTS CONTAIN ERRORS, THEY MAY BE COSTLY TO CORRECT, REVENUE MAY BE
DELAYED, WE COULD GET SUED AND OUR REPUTATION COULD BE HARMED
Despite significant testing by us and by current and potential customers,
new products may contain errors after commencement of commercial shipments.
Additionally, our products depend upon certain third party products which may
contain defects and could reduce the performance of our products or render them
useless. Since our products are often used in mission-critical applications,
errors in our products or the products of third parties upon which our products
rely could give rise to warranty or other claims by our customers. The
occurrence or discovery of these types of errors or failures could have a
material adverse effect on our business, operating results and financial
condition.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE DISTRIBUTION CHANNELS
AND MAJOR DISTRIBUTORS
We rely significantly on independent distributors and resellers for the
marketing and distribution of our products. We do not control our distributors
and resellers. Additionally, our distributors and resellers are not obligated to
purchase products from us and may also represent other lines of products.
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OUR SUCCESS DEPENDS UPON OUR ABILITY TO EXPAND OUR DISTRIBUTION CHANNELS
We intend to leverage our relationships with hardware and software vendors
and systems integrators to encourage them to recommend or distribute our
products. In addition, an integral part of our strategy is to expand our direct
sales force and add third-party distributors both domestically and
internationally. We are currently investing, and intend to continue to invest,
significant resources to develop these channels, which could reduce our profits.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT LARGE ENTERPRISE CUSTOMERS
We intend to attract and service large enterprise customers by expanding
our direct sales force and offering consulting services. Our inability to
attract large enterprise customers could have a material adverse effect on our
business, operating results and financial condition. Additionally, large
enterprise customers usually request special pricing and generally have longer
sales cycles which could negatively impact our revenues. Further, as we attempt
to attract large enterprise customers, we may need to increase corporate
branding activities which will increase our operating expenses, but may not
proportionally increase our operating revenues.
OUR SUCCESS DEPENDS UPON BROAD-BASED ACCEPTANCE OF INTERNET-BASED BUSINESS
SOFTWARE SOLUTIONS
We intend to leverage our relationships with application service providers
("ASP") to encourage them to use our products in providing their solutions to
end users. The ASP market is in its nascent stage of development but is evolving
quickly. We cannot predict when or if the ASP market will fully evolve into a
commercially viable market. We are currently investing, and intend to continue
to invest, significant resources to develop these channels, which could reduce
our profits.
IF OUR GROWTH RATE DOES NOT CONTINUE OUR FINANCIAL CONDITION COULD BE AFFECTED
Our revenue growth rate in 2000 may not approach the levels attained in
recent years. To the extent our revenue growth continues, we believe that our
cost of revenues and certain operating expenses will also increase. A
significant portion of our expenses, such as employee compensation and rent, are
relatively fixed in the short term. Moreover, our expense levels are based, in
part, on our expectations regarding future revenue levels. Our income from
operations and cash flows from operating and investing activities may decrease
as a percentage of revenues in 2000.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE
Our quarterly operating results have in the past varied and may in the
future vary significantly depending on a number of factors, including:
o the success of our MetaFrame products;
o the effects of acquisitions or licenses of additional technology;
o the size, timing and recognition of revenue from significant orders;
o increased competition;
o changes in our pricing policies or those of our competitors, including
Microsoft;
o new product introductions or enhancements by competitors;
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o delays in the introduction of products or product enhancements by us
or our competitors;
o customer order deferrals in anticipation of upgrades and new products;
o market acceptance of new products and technologies offered by us;
o changes in operating expenses, including for the addition of
personnel;
o foreign currency exchange rates; and
o general economic conditions.
We continually re-evaluate our programs, including specific license terms
and conditions, to market our current and future products and services. We may
implement new programs, including offering specified and unspecified
enhancements to our current and future product lines. We may recognize revenues
associated with such enhancements after the initial shipment or licensing of the
software product or over the product's life cycle. We modified our licensing
fees with certain customers to a per usage basis. We may implement a different
licensing model, in certain circumstances, which would result in the recognition
of licensing fees over a longer period which may result in decreasing revenue.
The timing of the implementation of such programs, the timing of the release of
such enhancements, the timing of the implementation of a new licensing
arrangement and other factors will impact the timing of our recognition of
revenues and related expenses associated with our products, related enhancements
and services. As a result of these factors, we currently cannot quantify the
impact of the re-evaluation of our programs on our business, results of
operations and financial condition.
We operate with little order backlog because our software products
typically are shipped shortly after orders are received. In addition, like many
systems level software companies, we recognize a substantial portion of our
revenues in the last month of a quarter, with these revenues frequently
concentrated in the last weeks or days of the quarter. As a result, product
revenues in any quarter are substantially dependent on orders booked and shipped
in that quarter, and revenues for any future quarter are not predictable with
any degree of certainty. We may also choose to reduce prices or increase
spending in response to competition or to pursue new market opportunities. New
competitors, technological advances or other factors could result in lower
revenues and may require us to incur additional expenses, which, in turn, would
materially adversely affect our operating margins in the future.
INSUFFICIENT RESERVES FOR PRODUCT RETURNS AND PRICE REDUCTIONS COULD ADVERSELY
AFFECT US
We provide certain of our distributors with product return rights for stock
balancing or limited product evaluation. We also provide certain of our
distributors with price protection rights. To cover these product returns and
price protection rights, we have established reserves based on our evaluation of
historical trends and current circumstances. These reserves may not prove to be
sufficient in the future, in which case our business, operating results and
financial condition could be adversely affected.
OUR SUCCESS DEPENDS ON OUR ABILITY TO EXPAND AND MANAGE OUR INTERNATIONAL
OPERATIONS
Our continued growth and profitability will require further expansion of
our international operations. To successfully expand international sales, we
must establish additional foreign operations, hire additional personnel and
recruit additional international resellers. Such international operations are
subject to certain risks, such as:
o difficulties in staffing and managing foreign operations;
o fluctuations in foreign currency exchange rates;
o compliance with foreign regulatory and market requirements;
o variability of foreign economic and political conditions;
o changing restrictions imposed by regulatory requirements, tariffs or
other trade barriers or by United States export laws;
o costs of localizing products and marketing such products in foreign
countries;
o longer accounts receivable payment cycles;
24
<PAGE> 25
o potentially adverse tax consequences, including restrictions on
repatriation of earnings;
o difficulties in protecting intellectual property; and
o burdens of complying with a wide variety of foreign laws.
ECONOMIC AND MARKET CONDITIONS MAY AFFECT DEMAND FOR OUR PRODUCTS
The demand for our products depends in part upon the general demand for
computer hardware and software, which fluctuates based on numerous factors,
including capital spending levels and general economic conditions. If capital
spending levels or general economic conditions are affected, our business,
financial condition and results of operations could be materially adversely
affected.
POSSIBLE VOLATILITY OF OUR COMMON STOCK PRICE
The market price for our common stock has been volatile and has fluctuated
significantly to date. The trading price of our common stock is likely to
continue to be highly volatile and subject to wide fluctuations in response to
factors such as actual or anticipated variations in operating and financial
results, anticipated revenue or earnings growth, analyst reports or
recommendations and other events or factors, many of which are beyond our
control. In addition, the stock market in general, and The Nasdaq National
Market and the market for software companies and technology companies in
particular, have experienced extreme price and volume fluctuations. These broad
market and industry factors may materially and adversely affect the market price
of the common stock, regardless of our actual operating performance. In the
past, following periods of volatility in the market price of a company's
securities, securities class-action litigation has often been instituted against
such companies. Such litigation, if instituted, could result in substantial
costs and a diversion of management's attention and resources, which would have
a material adverse effect on our business, financial condition and results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discussion about the Company's market risk includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
The Company does not use derivative financial instruments for speculative
or trading purposes. The Company maintains a non-trading investment portfolio of
investment grade, highly liquid, debt securities which limits the amount of
credit exposure to any one issue, issuer, or type of instrument. The securities
in the Company's investment portfolio are not leveraged and are generally
classified as available-for-sale and therefore are subject to interest rate
risk. The Company does not currently hedge interest rate exposure. The modeling
technique used measures the change in fair values arising from an immediate
hypothetical shift in market interest rates and assumes ending fair values
include principal plus accrued interest, dividends and reinvestment income. If
market interest rates were to increase by 100 basis points from December 31,
1999 levels, the fair value of the portfolio would decline by approximately $4.5
million. If market interest rates were to increase by 100 basis points from
March 31, 2000 levels, the fair value of the portfolio would decline by
approximately $4.9 million.
25
<PAGE> 26
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits, which are filed with this report as set forth on the Exhibit
Index appearing on page 28 of this report, are incorporated herein by this
reference.
(b) There were no reports on Form 8-K filed by the Company during the first
quarter of 2000.
26
<PAGE> 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on this 12th day of May 2000.
CITRIX SYSTEMS, INC.
By: /s/ MARK B. TEMPLETON
--------------------------------------------
Mark B. Templeton
President, Chief Executive Officer and
Director (Principal Executive Officer)
By: /s/ JOHN P. CUNNINGHAM
--------------------------------------------
John P. Cunningham
Chief Financial Officer and Senior
Vice-President of Finance and Administration
(Principal Financial Officer)
By: /s/ DAVID D. URBANI
--------------------------------------------
David D. Urbani
Vice-President, Corporate Controller
(Principal Accounting Officer)
27
<PAGE> 28
EXHIBIT INDEX
27.1 Financial Data Schedule
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 265,142
<SECURITIES> 238,381
<RECEIVABLES> 89,930
<ALLOWANCES> 1,709
<INVENTORY> 10,489
<CURRENT-ASSETS> 722,553
<PP&E> 55,527
<DEPRECIATION> 19,089
<TOTAL-ASSETS> 1,205,809
<CURRENT-LIABILITIES> 159,993
<BONDS> 317,951
0
0
<COMMON> 185
<OTHER-SE> 683,708
<TOTAL-LIABILITY-AND-EQUITY> 1,205,809
<SALES> 127,515
<TOTAL-REVENUES> 127,515
<CGS> 5,129
<TOTAL-COSTS> 5,129
<OTHER-EXPENSES> 72,775
<LOSS-PROVISION> 313
<INTEREST-EXPENSE> 4,143
<INCOME-PRETAX> 55,064
<INCOME-TAX> 16,519
<INCOME-CONTINUING> 49,611
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,545
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.19
</TABLE>
