Citrix Systems, Inc.
Q1 2021 Earnings Call Transcript

Published:

  • Operator:
    Good morning, and welcome to the Citrix Q1 2021 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference to Ms. Traci Tsuchiguchi, Vice President of Investor Relations. Please go ahead.
  • Traci Tsuchiguchi:
    Thank you, Ryan. Good morning, and thank you for joining us for today's first quarter 2021 earnings call. Participating on the call will be David Henshall, President and Chief Executive Officer; and Arlen Shenkman, Executive Vice President and Chief Financial Officer. Please note that we have posted our first quarter earnings letter to our Investor Relations Web site.
  • David Henshall:
    Thanks, Traci. Good morning, everybody and welcome, thanks for joining us today. I'm please with the momentum in the business, especially around our cloud adoption and the migration of our installed based. Our transition to cloud is progressing well, and we expect our first quarter results to mark the trough in terms of the impact on the business model, the income statement. So, beginning the second quarter, and then continuing throughout the year, we expect to see top line acceleration, our income statement metrics as these headwinds that we've been dealing with on the model transition turn and become a tailwind. To provide insights into the transitioning business model, we've been reporting ARR metrics for subscription and SaaS. And then, beginning today, we're also disclosing total ARR, which includes perpetual license maintenance contracts. In Q1, the organic performance of these metrics, excluding any contribution from the Wrike acquisition, showed continuing strength. In fact, SaaS ARR accelerated to 43% year-on-year growth, and total ARR was up 15% from last year. So, overall, the fundamentals in Q1 were actually quite strong. I'd like to note that this quarter involved -- really included three unique items that impacted recognized revenue, and I want to cover those briefly here in detail before we open up the call for Q&A. The first is the Wrike acquisition, which closed at the end of February. Second item is we experienced supply chain constraints in our hardware business, impacting over $10 million worth of product. So, we expect these issues may persist for several quarters, so we're adjusting our full-year expectations accordingly. And the third issue was the duration on-premise term-based subscriptions, really influenced by the limited use licenses we sold to customers at the beginning of the COVID pandemic. So as a reminder, in Q1 2020, it benefited by $47 million related to this license type. So far, we're either converted to cloud subscriptions or issued new term-based licenses for about $50 million of total bookings value against this group. We have ongoing conversations with many more about Citrix Cloud migration.
  • Operator:
    Thank you. We will now begin the question-and-answer session. The first question is from the line of Raimo Lenschow from Barclays. Please go ahead.
  • Raimo Lenschow:
    Hey, thanks for taking my question. David, can you talk -- like let's a little bit more on the limited licenses and the renewals here, like in terms of what were you able to do in terms of convincing clients to go one way or the other, and how did that play out and in realty? And then the follow-on is then -- a little bit is like if you think about the -- on the networking side just kind of -- you talked about the component shortage, like how, let's say, through for the rest of the year? Thank you.
  • David Henshall:
    Sure, Raimo. Let me start with networking and work backwards. There's definitely some component shortages, and I think supply chain constraints shouldn't be a surprise to anyone. It impacted our ability to ship over $10 million worth of revenue in the quarter. So, there's two things going on there. If you looked -- when you read through our earnings letter you'll see that the networking business actually is very heavily weighted towards subscription. In fact, 89% of bookings in Q1 were subscription. Underlying that is an increasing run rate of hardware appliances to support these pooled capacity licenses. So, while we don't disclose it externally, the ARR of that business has been accelerating over the last several quarters. And so, with that you see a little pressure on COGS given the increasing component prices, but also in a unique item in this quarter. The boxes out of Q1 will ship in Q2, but we're assuming that this is going to be a sliding problem, so there could be some issue moving out of Q2 into Q3, et cetera, et cetera. So, we just adjusted our full-year to account for that. We don't think the issue is more broad than that. And then the fortunate thing is that it is a reflection of just the underlying strength and our overall app-delivering security business.
  • Raimo Lenschow:
    Okay, perfect.
  • David Henshall:
    And as I said a minute ago, Raimo -- the last point I said a minute ago, is that in the aggregate we've booked about $50 million worth of commitments against this overall pool.
  • Raimo Lenschow:
    Okay, makes sense. Thank you.
  • Operator:
    Thank you. The next question is from the line of Brent Thill from Jefferies. Please go ahead.
  • Brent Thill:
    Good morning, David. I think there are a lot of questions around the expected duration shrinking, and it's kind of counterintuitive to what you did in helping companies during the pandemic, that they would come back and actually be shorter versus longer. Can you just explain a little more what you think is going on there?
  • David Henshall:
    Well, it's three things, Brent, and similar answer to Raimo's question. And so, those customers that have already adopted longer-term use cases, like those that are adopting a hybrid work model, those contracts are longer in nature. If you look at the duration in our SaaS business, unchanged. It's still targeting a three-year duration for our typical contract. Actual duration is just a little bit shorter than that. In this group of licenses that are truly business continuity and people are looking at those as business continuity, they're still related to the pandemic. Those customers haven't worked their way through yet. And so it would be natural for them to natural for them to opt for a shorter-term license as they figure out what their long-term plans are. Net-net, this has just allowed us to increase our installed base; it increases our pool and our opportunity, going forward, for conversions.
  • Brent Thill:
    And the $10 number you gave in cash flow, does that change in your view or are you still committed to that number?
  • David Henshall:
    Yes, we haven't changed that. I mean the '22 numbers are unchanged at this point in time. And I think the most important takeaway is that the duration is a limited impact item related to these unique one-off licenses that we created a year ago to help customers in need. That's not an ongoing phenomenon. The business model is transitioning nicely. You see the success across all of our ARR metrics, which have continued to accelerate. And we believe that Q1 was the trough in terms of that business model evolution headwind. We're going to start reaccelerating here, in Q2, and beyond. And that'll pull through the rest of the P&L metrics as well as cash flow.
  • Brent Thill:
    Great, thank you.
  • Operator:
    Thank you. The next question is from the line of Matt Hedberg from RBC Capital Markets. Please go ahead.
  • Matt Hedberg:
    Hey, thanks. Good morning, David. I don't think you've actually disclosed the mix of hardware and software on app delivery in Security. But in your letter you noted that you expect the software mix to increase. I'm wondering if you could just sort of give us general terms on maybe where that sits today and where that might go in the future.
  • David Henshall:
    Yes, Matt, we really haven't. I mean it isn't migrating more towards subscription and software right now. And then over a longer period of time it'll be migrating to SaaS. So if I step back a little bit and just provide a bit of context in that overall business, couple years ago it was largely hardware-based. And we have a software heritage that underlies our business. And we were able to deliver those technologies across a number of different form factors, virtual appliances, as a container, and coming soon as a service. And so, what that has afforded us is the opportunity to start transitioning customers to what we call a pooled capacity, just gives some incredible flexibility for delivering their network infrastructure across all types of hybrid cloud deployment models. And that's really resonated. That's one of the reasons why the volume of hardware and our subscriptions is up as much as it is. Going forward, it's going to continue to migrate, where it's more of a cloud-delivered platform for app delivery and security, being able to give customers a much more friction-free way to adopt different technology bundles based on their own network architecture, and help modernize IT. Overall, I think that this quarter being 89% subscription bookings was probably a bit of high mark. But it's definitely been trending up into the right. So, I think it's kind of bounced around a little bit. We're still going to always have a hardware component, so long as customers are focused on a hybrid multi-cloud model. So, I would expect that part of it to continue for the next several years, but gradually moving towards a more complete subscription, and then ultimately SaaS.
  • Matt Hedberg:
    Got it, okay. And then in terms of just sort of the geographic performance, total ARR was up, I believe, mid -- 15% organically, which was great to see. Total revenue down 10%, and when I look at, on geographic basis, obviously based on revenue, so all geos are down from a revenue perspective. I assume that's not necessarily the trends that you're seeing relative to ARR. I wonder if you can give us a bit more granularity on from a geographic perspective, maybe based on ARR, what you say, maybe which geos did better?
  • David Henshall:
    Yes, not a whole lot change on a geo basis. In the aggregate, our sales teams exceeded their plans for Q1, the way that they're measured on ACV bookings. The geos have all been executing well. I mean EMEA has been one that has done particularly well over the course of the last year or so. The America has been our largest business was kind of leading the transition early in the -- of the business model evolution. And I think that, really throughout all three geos, you're going to see their business reaccelerate as we go into Q2 and beyond. And as I've said a couple of times, these headwinds from the model transition become tailwinds. But we didn't necessarily have any problem geos whatsoever.
  • Matt Hedberg:
    Got it. Thanks a lot, David.
  • Operator:
    Thank you. The next question is from the line of Mark Moerdler from Bernstein Research. Please go ahead.
  • Mark Moerdler:
    Thank you very much, and appreciate the additional color. I'm going to stay on the Workspace side of the business, starting first on, can you give us more color on those term -- any sense of how much of the term licenses converted to SaaS versus term licenses, as some sort of presented. And as a follow-up, and then I got one more after that; I apologize. But how much is still remaining of that $47 million that could covert? Is it meaningful that could covert in Q2?
  • David Henshall:
    Mark, I mean most of the unique program for limited use business continuity was contained in Q1. I mean that's where the vast, vast majority of it, if you remember last year. And so, given that there's a lot of permutations in terms of license type in terms of what they bought and also where they're migrating, we've been trying to just aggregate it up into bookings dollars. And that way we just don't confuse people. And so, the way I look at it is we had a special set of circumstances year ago. We generated about $47 million in revenue. We've already booked $50 million of revenue commitment against that. And, we probably have a large pool -- an eight figure pool of licenses that we are continuing to discuss about cloud migration.
  • Mark Moerdler:
    Perfect. Then as a quick follow-up to that, when you put aside the limited use licenses, how did the team deliver otherwise on SaaS? Did you hit your numbers? Did you beat your numbers? Putting the term, special terms aside?
  • David Henshall:
    Well, it's hard to put aside when we talk about the overall business, and so -- because our teams are gold in the aggregate. So, when I look at it on what they are measured on, our teams exceeded their plans.
  • Mark Moerdler:
    Thank you. I appreciate it.
  • Operator:
    Thank you. The next question is from the line of Karl Keirstead from UBS. Please go ahead.
  • Karl Keirstead:
    Thank you. Two for me, one, David, just to clarify just curious whether shorter duration issue on on-prem term contracts was really a phenomenon from this pool of customer signing limited duration deals? Or did you also see that phenomenon of shorter-term commitments more broadly as your normal renewals came up in the quarter? So, that's my first question. And then, maybe I'll just ask my second question right away and it's for Arlen. Just on free cash flow, I know you've reaffirmed the comfort with the 10 bucks in 2022. But I think most investors and analysts are around eight bucks a share for this year. So, I just wanted to ask whether that's still a reasonable assumption for this year. And if it is, then it requires a pretty decent improvement in your operating income to cash flow conversion in 2022 to get to 10 bucks per share. So, this is probably the kind of bridge you'll offer at the next analyst day you do. But maybe you could sort of tease it out little bit with us on this call to give us comfort in that $10 number? Thank you so much.
  • David Henshall:
    Sure, Karl. Let me take your first question. So, just to be clear we did not see changes in duration in our SaaS business or strategic contracts. The duration either was simply reflection of the renewal of these limited use business continuity thing from a year ago. And, that's where this is isolated. This is not a broader scope issue whatsoever. In hindsight, it was a bad planning assumption on our part. We thought that these would extend from their short term duration originally to a long term contract. In reality, they rolled into another short-term duration because they are business continuity related. Again, it's a very isolated item. It's a little messy in Q1 versus our anticipation. But, it's not a broader issue.
  • Arlen Shenkman:
    And, Karl, on cash flow you are absolutely right. I mean as we noted in the letter, we will be holding an analyst day in the third quarter. We will be providing some additional details. In terms of your comment, we had commented in our yearend letter, that cash will be up modestly from '20 to '21. Obviously, we will walk you through additional when we get together. There will be an impact from the Wrike acquisition. So, we expect '21 to be a transition, but to go into '22 strongly and our guidance remains unchanged.
  • Karl Keirstead:
    Okay. Thank you, both.
  • David Henshall:
    Thanks, Karl.
  • Operator:
    Thank you. Next question is from the line of Sanjit Singh from Morgan Stanley. Please go ahead.
  • Sanjit Singh:
    Hi, thank you for taking the questions. And thank you David and Arlen for the ARR disclosure and sort of related to that, if I sort of just back into the maintenance ARR piece, it's about $1.4 billion. So two questions there, of the $1.4 million is there, you give us a rough sense of what the split between the workspace and networking looks like on the maintenance ARR side. And the second piece of that would be, we were seeing a SaaS mix of subscription bookings continue to move up into the right, I think those are targeting 50% to 60% of the year. As customers migrate over, are you seeing the type of uplift that you initially outlined a year or so ago in terms of seeing that 30% to 40% uplift? Thank you.
  • David Henshall:
    Sure, Sanjit. This is David. So, yes, we are seeing the uplift, it's actually been a very, very consistent. And so we're very happy with the progress we're making on the installed base. Like I just said on an earlier question, I mean that's been accelerating over the last few quarters. And I expect that to continue through the balance of the year. I mean, all the programs and the plans that we had talked about in the last nine months, they are delivering as expected. So happy with that, with that progress, and yes, directionally, we're of course trying to increase the mix around SaaS, obviously, on-prem term licenses, there's an accounting impact, like we saw in Q1, that just creates more noise than it's worth. And obviously, the long-term goal is to get everybody on our SaaS platform.
  • Arlen Shenkman:
    Could you repeat the first part of your question?
  • Sanjit Singh:
    Yes, just ARR the mix between workspace and networking?
  • Arlen Shenkman:
    Sure, the large, large majority of it is workspace, I mean, if you look at recognized revenue, it's probably an 80
  • Sanjit Singh:
    And then one more if I could just sneak in, I mean just a higher level one, in terms of what we've seen your user base grow; I think you're up to 10 million clouds. We talked about 100 million overall users, I think some of them are concurrent, but I mean, broadly since the pandemic, any sort of view on how much the base has grown since the pandemic has started?
  • Arlen Shenkman:
    Yes, definitely grown. I mean, I think the most important thing for us strategically is to be looking at, how many of those are paid subscribers on Citrix Cloud. And, you just mentioned that it was well over 10 million, in the aggregate the numbers up over 30% year-on-year. Interestingly, in Q1, the absolute rate of additions is, twice what it was a year-ago, when we entered in the pandemic, so we're seeing great progress there. So I'm very happy with that overall migration. And this was supposed to be the year where we start to accelerate installed base migration. That was absolutely true in Q1, and we expect that to continue to be the case. So, as far as I'm concerned, we're on track to ahead of plan in that aspect.
  • Sanjit Singh:
    Appreciate it. Thank you very much.
  • Operator:
    Thank you. The next question is from the line of Tyler Radke from Citi. Please go ahead.
  • Tyler Radke:
    Hey, thanks and good morning, David. Maybe if you could start with just ARR and again, appreciate the disclosure on total ARR, but if I look at the guidance, it would seem to suggest that maybe there's a slight sell from breakthrough in Q1 throughout the back half of the year, maybe just help us understand kind of your assumptions around the trajectory of that, kind of the puts and takes and what could potentially cause ARR to not decelerate in the year?
  • David Henshall:
    Yes, let me talk about the three ARRs just for a minute here. I mean subscription ARR and I'll speak exclusive of any contribution from that, I mean it continued to accelerate for, I don't know, the fourth or fifth quarter in a row now of 63% year-on-year. And that's clearly a reflection of the overall business model transition that we've been making. And so with that number now, at around $1.4 billion, that scale, we're very happy with that performance, SaaS ARR, again continue to accelerate, which is good. Total ARR is an interesting one. I mean, we're just releasing that metric right now. As we go through the year, we'll continue to disclose subsequent quarters and provide more visibility into historicals. Right now, we think that that total ARR, pretty good reflection of the underlying growth rate in the overall business. We've said in our earnings letter that we think somewhere in that, low teens range is probably a good plan for the balance of the year. And the only reason for a downtick of a point or two is just, if there was any uplift related to this, one-off limited use license. If that added a point or two, we just want to be a little bit careful there. So still think that's a double digit growth business and then we'll work to keep it at the top end of the range.
  • Tyler Radke:
    Thanks. That's helpful. And maybe just to follow-up on the networking business. So I understand that the component shortages, you're not the only ones kind of dealing with that, but what's your kind of expectations on when that gets resolved and for the products that you weren't able to ship, do you think this revenue is simply just gets deferred and you like kind of see a snap back in the future quarter once you've kind of resolved the supply chain issues. Just help us understand how are you thinking about that impact longer-term and how that gets resolved? Thanks.
  • David Henshall:
    Yes, there's definitely is component pressures in the supply chain right now. And you're right. We see that across a lot of people in the industry. For us it's not a huge number. We wanted to call it out because it was a unique item, but that $10 million revenue will ship in Q2, but we're just assuming that it's a sliding problem. So there's some amount of revenue that slides out of Q2 into Q3, Q3 into Q4, et cetera. And so when it does snap back, I mean, we'll talk about it and we'll talk about it openly, but again it's not a huge number in the overall debt, but our expectation is that it's going to continue through the balance of the year. If that changes again, we'll disclose that.
  • Tyler Radke:
    Thanks.
  • Operator:
    Thank you. The next question is from the line of Robert Majek from Raymond James. Please go ahead.
  • Robert Majek:
    Great thanks. On the 50 million of new term based licenses from pandemic convergence, can you just clarify whether the average duration was in fact around one year? And you mentioned that you don't expect the impact from the lower-term duration to recover in subsequent quarters. I believe your comment was just in reference to 2021. Can you just help us understand whether we might see duration -- term duration recover in 2022?
  • David Henshall:
    Yes. And just to be clear, I think, the term duration that we have talked about in relation to these licenses is a Q1 phenomenon, not a 2021 phenomenon. As we look into the balance of the year pipeline and our deal based forecast and others show a duration that is much, much more normalized. So this is a very, very isolated item. Those licenses did convert to Citrus Cloud. For example, Citrus Cloud durations are unchanged. They're much longer because those tend to be much more strategic contracts. This is just an isolated issue related to people that are employing business continuity in the face of a pandemic. It's not a broader issue than that.
  • Robert Majek:
    One more question if I can. In my check, I've been picking up a lot of momentum for desktop as a service offering. Can you just help explain the shortfalls of competing DaaS solutions and why the growth of DaaS won't negatively impact your VDI business?
  • David Henshall:
    Well, we have a DaaS solution as well. I mean, the reason why customers adopt DaaS is that it's just -- desktop as a service can be just a simple, easy way to turn on a handful of desktops in a fully managed outsourced kind of manner. And I think broader trends that we've seen throughout the pandemic is an adoption of clouds that's accelerated across the board, and you see that in just about every aspect of the industry. And so, one of the reasons why our business has been accelerating to cloud is just that, gives customers more agility, more ability to manage et cetera. So, our strategy of course is focus on the idea of hybrid and multi-cloud where a lot of our customers are somewhere in between. We want to give them the ability to run DaaS either Citrus DaaS or one of the cloud platforms, manage it with the overall Citrus Cloud and still maintain on premises licenses, running their workloads in public cloud, you name it. It's just that broad hybrid approach. And I think that's going to continue. And I think you'll certainly see more and more infrastructure move to cloud over time.
  • Robert Majek:
    Excellent.
  • Operator:
    Thank you. The next question is from the line of Kirk Materne from Evercore ISI. Please go ahead.
  • Kirk Materne:
    Okay. Yes, thanks. Thanks. David. Just a quick question for you around sort of the technology strategy as it relates to sort of the broader conversion to the cloud. Obviously one of the benefits customers get from the cloud with any companies to be in the most updated version of the technology. And I was just kind of curious this year if there's any upcoming releases that are going to make the benefits of being on the cloud even more apparent potentially to your existing base that might still be on perpetual. And if you're, I guess, anticipating any kind of inflection because of that, or that would be potential, I guess upside in terms of a faster rate of conversion. Just trying to get a sense of how you're thinking about sort of the technology releases in terms of being a little bit more of a -- I guess a caret for clients to move at a faster pace, potentially.
  • David Henshall:
    Yes, Kirk, I can talk about inflections in terms of the actual -- underlying bookings, because it's all subscription and SaaS, you don't see that typical inflection in the P&L the way you would have back in the old days of perpetual licenses. But we have seen an inflection and just the amount of customers migrating to the cloud. We talked about that beginning in the back half of last year, and really continuing here with. Overall bookings up well into the triple figures on a year-over-year percentage basis. And the reason that's happening are just the same things we've talked about before. It's easier to manage, it's easier to stay current, stay updated. In fact, the business that we're doing with some of our major partners like Microsoft, for example, is stronger than it's ever been. We can go in and demonstrate to a customer that, for example Citrix Cloud plus Microsoft Azure, and WVD. The three of them together is the cheapest alternative and the most flexibility for them to be able to manage and run their infrastructure. And so I think it's just a solid message. And that's the reason why it's been accelerating.
  • Kirk Materne:
    Okay, just to put a final point on it. I mean, are the things that are going into the cloud technology that won't be available to the on-prem customers at some point time meaning, at some point, there's a more explicit sort of strategy around that to -- that works in their benefit ultimately. But I'm just kind of curious if there's anything accelerating in terms of the gap between the technologies, just because cloud is going to innovate at a faster pace.
  • David Henshall:
    It is really already is Kirk. I mean, it's a really important point. I mean, most of our innovation is coming through the cloud, and all the things that we have delivered over the last year. I mean, the vast majority of that is cloud related. Whether we're talking about automation and micro wrap workflows, whether we're talking about DaaS as a prior comment, whether we're talking about the ability to add, secure internet access, which is effectively think of that is secure web gateway capabilities. And do it all in the context of a citrus cloud management profile. We now have instrumentation across all of our cloud properties including networking that allows you to aggregate up, analytics and give visibility into performance and security into other use cases that you just can't get on-prem. And that's one of the reasons why the migration has been accelerating, this is the value is there and more and more customers see it.
  • Kirk Materne:
    Okay, that's helpful. Thanks, David.
  • Operator:
    Thank you very much. That was the last question. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. David Henshall for any closing remarks.
  • David Henshall:
    All right. Thanks, Operator. So I just want to thank everybody again for joining us this morning. I'd like to leave you with a few closing thoughts. First is, we are accelerating our transition to the installed base to the cloud, as we've been forecasting and discussing this morning. We expect this to continue. Our acquisition Wrike really extends our strategy. And it's expensive to be neutral to 2022 non-GAAP earnings and cash flow, while obviously accelerating revenue pretty substantially. And finally, these secular trends, whether it's cloud or distributed hybrid work models should provide a healthy tailwind for our organic and combined businesses in the future. So, with that, look forward to speaking with many of you throughout the quarter. Thank you very much.
  • Operator:
    Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.