Citrix Systems, Inc.
Q1 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Good afternoon. My name is Chantelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Traci Tsuchiguchi, Vice President of Investor Relations. You may begin your conference.

[Traci Tsuchiguchi:]

Good afternoon, everyone, and thank you for joining us for today's first quarter 2019 earnings call. Participating on this call will be David Henshall, President and Chief Executive Officer; and Jessica Soisson, Interim Chief Financial Officer. This call is being webcast on Citrix Systems' Investor Relations website, and a webcast replay will be posted immediately following the call. Please note that we have posted our first quarter earnings memo to our Investors Relations website. This memo replaces the prepared verbal comments accompanying earnings slide deck and supplemental web information. Beginning next quarter, it will also replace our earnings press release. As a reminder, today's call may contain forward-looking statements made under the safe harbor provision of the U.S. securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those anticipated. Additional information concerning these and other factors are highlighted in today's earnings memo and in accompanying filings with the SEC. Copies are available on our Investor Relations website. On this call, we may also discuss various non-GAAP financial measures as defined by SEC's Regulation G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of our earnings memo and press release. Now, I'd like to turn it over to David, our President and Chief Executive Officer.

[David Henshall:]

Thanks Traci, and thanks everyone for joining us today. Hopefully, everybody has had a chance to read through our quarterly result summary and all the new disclosures that we’re going to be breaking out going forward. The idea here of course is designed to really simplify the understanding of our business and the success across our subscription model transition. Before we get started, though, I want to welcome Jessica Soisson to the call. Now, you know, she’s my long-term colleague, our current Chief Accounting Officer, and as Traci said, Interim CFO as Drew is leaving to pursue other opportunities. So, as you saw in the summary, we had a really good quarter. We exceeded forecast on both revenue and EPS. And frankly, can boil it down into three key areas. First one is that the strength is coming from the Workspace. Workspace revenue in total was up 13% year-on-year. It's the fastest growth we’ve seen in many-many years. Second is that total SaaS revenues for the Company was up 43% and this was due to the strength of our ongoing subscription bookings. In fact, the strength of subscription drove future commitment revenue which consists of deferred and unbilled up 21% from last year. In fact, the subscription mix is running ahead of plan and I expect that to be the case throughout the year. Third item is, as we've talked about a couple of times, the strategic service provider customers really those three historically largest hyperscale networking customers just continue to be a headwind to revenue due to timing. We expect this to persist into the second quarter as I’ve previously stated. However, when you exclude these three SSP customers, revenue for the rest of the Company was just under $700 million which is up 10% year-over-year. So all-in just really happy with the performance of the quarter. And so, now, let’s open it up for Q&A.

[Operator:]

[Operator Instructions] Your first question comes from Heather Bellini with Goldman Sachs. Your line is open.

[Heather Bellini:]

Thank you so much David and we really appreciate. I think everybody really appreciate the new disclosures. So thank you for giving us that. I wanted to take a look -- you mentioned Workspace services revenue grew, the fastest you have seen since 2012. Can you talk about kind of how you see the durability of that type of growth rate? What seems to be causing it? And if you had to give us take for the year, how would you say you think that business evolved? And then I have a follow-up.

[David Henshall:]

Sure, I'd say overall, the business is continuing the trends that we have seen over the last, probably the last 6, 8 quarters in raw now. I mean, more specifically, we have been talking about the Workspace in broader terms than we ever had in the past. I mean, we created virtualization years and years ago. We still have an amazing business in that area. But what's really resonating with customers is the broader vision around providing a holistic workspace for all application types, whether those are virtualized, SaaS, mobile, and really making that something that can help engage employees, drive productivity, simply the infrastructure et cetera. And so, that's a lot of what we have been talking about. And we're getting a lot of great response from customers, that's allowed us to sign more and more up for longer term subscription deals, generate a higher number of large enterprise deals. And so, we feel good about it. Right now, we have got, I'd say, the amount of revenue coming from subscriptions is significantly higher than that of perpetual license and that should continue. The growth rate will move around a little bit quarter-to-quarter just based on mix. It’s still -- whether it's perpetual license or on premise term that can tend to have a little higher rev rec. So, directionally, it's up and right but I would expect it to bounce around a little bit along that trend.

[Heather Bellini:]

And then just follow-up question is just related to the revenue outlook looks like it was a little bit better than the midpoint, the midpoint was a little bit better than the consensus. I noticed though it looks like the earnings forecast that you are giving is a little bit below and I apologize, if you might have said this earlier. But like, is there anything that you could talk to us about that might be impacting the margin in the second quarter?

[David Henshall:]

No, we are in the full year, still expecting full year guidance of about 4% top line growth, margin up to about $32.6 of EPS. And I'd say the only thing that I'm thinking about in terms of the full year is that, subscription mix is running hotter toward subscription, so that caused us a little bit of headwind. Specific to Q2, we've never given 2Q guidance before.

[Heather Bellini:]

Yes.

[David Henshall:]

Q2, if you look back over the last couple of years, tends to be our lowest margin quarter because it is our highest expense quarter. And the reason that is, Q2 has a lot of seasonal items like our big synergy conference, that's when we do merit increases. And correspondingly, that's our highest marketing quarter historically. So, it tends to pop and then come back down in Q3 and Q4. And I would expect that to be the case in this year as well.

[Operator:]

Your next question comes from Ittai Kidron from Oppenheimer. Your line is open.

[Ittai Kidron:]

Thanks and good quarter guys. I guess I wanted to dig into the SSP business, and I understand the lumpiness of it. But I guess it's been under pressure for four quarters in a raw now and considering who the customers are, you would think that they won't hold up on large purchases for such a long time. So help me get my hands around your visibility there and how do you get a sense that there isn't a bigger issue with those customers? Have they moved to elsewhere, developed their own, moved to another vendor? How do you get a sense and confidence that that's not the reason for the weakness?

[David Henshall:]

Yes, I want to put a couple of things in context as we are talking about, just so you understand. So, when we are talking about the SSP business, let me remind everybody, it's about 3% of total revenue. It's not a big number, but it is subject to both cyclical and secular pressures. Cyclically, it's lumpy and it's always been that way. If you look at last year, there was about $100 million business in the first half of the year and $50 million in the second half, and the year prior it had similar lumpiness. And so, as I've stated many times over the years, we have pretty good visibility into the full year, but the quarterization is a little harder. And that's the primary reason why we're going to break it out going forward. And so that everybody can look past, there is a lot of clarity to understand, when it's hurting and where it's contributing to quarter. So, on the broader secular trend, yes, it's been declining at rate of about 10% for several years now. And so, it's very consistent with the way we have talked about it, and that's just the normal scaling that the three big hyperscales are going to have.

[Ittai Kidron:]

And then as a follow-up, you've talked about how early you are in the subscription position at a networking business and it's predominantly still hardware. Although, I was surprised with the new disclosure, and again, thanks like Heather, that is great to see that already it’s 25% of the product revenue within networking -- of booking, I am sorry, subscription bookings. Help me think about the pace by which you think you can pivot networking business into subscription? Should we look at the Workspace transition as a good proxy for the pace where which this would move or given the high hardware mix here, it should take longer to get to the same levels?

[David Henshall:]

Yes, two things. One, it's definitely going to go slower than Workspace. Workspace is a software product and it's a much more natural transition there. On networking, I think that's important to think a little bit of step back and think about strategically what we're driving. I mean, we're a software company by nature. That's what we do. And so, our approach to networking has been to really disaggregate the functionality from the hardware appliance itself and that's always been the strategy. But giving customers that flexibility to consume networking hardware in the form factor of a hardware appliance, a virtual appliance as a container and in some instances as a service, and sharing capacity in some instances across those different types of form factors. That's really our strategy to be able to address a number of -- let's call it different secular trends that are going in networking entirely. So, it will continue to move more toward software. I think that should be the expectation, but it will be more gradual than on the Workspace business.

[Operator:]

Your next question comes from the line of Michael Turits with Raymond James. Your line is open.

[Michael Turits:]

Back at Workspace, David, how much of a boost have you been getting from the Windows 10 transition, which isn’t really getting towards its end? And are you at all concerned about incremental competition in the desktop as a service market from either Azure or AWS? And what's your strategy there?

[David Henshall:]

Yes, two things. I mean if you think about Windows 10, I mean it's one of the drivers. I'd say that the platform drivers are less in these days than they would have been five years ago. And that's simply because most of the use cases that I talked to customers about tend to be around security or enabling mobility or enabling workforce productivity. It’s those types of things, but it also includes platform evolution. So, I’d say that that’s one of many. In terms of DaaS, we actually don’t compete in DaaS today. We’ve announced that we are building a DaaS product on top of our Azure Virtual Desktop, which we’ll talk about a little bit later in the year. But it’s a different category than we've competed in historically. We do think it’s important. It’s one of the reasons why we’re doing this natively on top of Microsoft. We’re actually becoming a cloud service provider so that we can bundle certain capabilities in the infrastructure together with our solution, the idea to really focus on customer simplicity and simplification. And that’s going to be our strategy going forward. We’ve been embracing and extending the Microsoft platform for 30 years now. I think we’ll continue to do that especially in new categories like DaaS that are just new opportunities going forward.

[Operator:]

Your next question comes from Raimo Lenschow with Barclays. Your line is open.

[Raimo Lenschow:]

Hey, thanks for taking my question and thanks again for the extra disclosure for me as well. And David, just more an accounting question, can you talk a little bit about to the cash flow in Q1? And just talk us through the impact that the subscription transition has on the cash flow seasonality here and going forward?

[David Henshall:]

Yes, cash flow is the area that you’re going to have to look at in conjunction like future committed revenue because our billing -- kind of our billing cycles are changing as we go through this. And it's the same as we’ve talked about for a long-long time. I mean as we go to book SaaS contracts, the typical contract is a three years of total contract value annualized billings. And that’s what’s building this unbilled deferred that we’re disclosing. That unbilled increased by about $300 million year-over-year. In a historical model, we would build all that upfront. So it’s just the timing conversation more than anything else. Remind everybody that total future committed revenue that was up to about $2.1 billion now, grew 21% year-on-year.

[Raimo Lenschow:]

And then, one follow-up. If you think about the CFO transition, obviously, we wish Drew all the best back on the West Coast. What’s the timeframe that you’re thinking about?

[David Henshall:]

He'll be leaving immediately.

[Raimo Lenschow:]

I know. And so you start the search now already.

[David Henshall:]

Yes, we’ll start to search shortly, but Jessica has been my colleague for a long time we’re not going to miss a beat here as we go forward.

[Operator:]

[Operator Instructions] Your next question comes from the line of Phil Winslow with Wells Fargo. Your line is open.

[Jerry Diao:]

Hi this is Jerry Diao filling in for Phil. Congratulations on the strong first quarter. I just want to build upon Heather's question and your comments on, how Workspace has evolved? Could you give some specific color on kind of what’s precisely driving this reacceleration in terms of whether its sales reengagement or just customer better understand the new functionality et cetera? Thank you so much.

[David Henshall:]

Sure, Jerry. I’d say, it’s very consistent with the strategy that we’ve been talking about now for year and a half to two years. It's about thinking about the Workspace much more broadly than simply virtualization and that allows us to address really all customers in a way that -- we talk about this kind of general purpose and what that means is. It’s the opportunity to expand beyond traditional virtualization in the installed base. And think about providing customers with the platform upon which automation, security, analytics can reside that provides value even to the users that have really light application use, including those who don't need any virtualization whatsoever. So, all applications, all potential seats inside of an account really anywhere in the world et cetera. And that overall core message is resonating with customers and I think that's allowed us to re-engage and start accelerating that business over the past couple of years.

[Operator:]

Your next question comes from the line of Brad Reback with Stifel. Your line is open.

[Brad Reback:]

David, can you give us a sense of what the Americas growth rate look like ex the SSP business? Thanks.

[David Henshall:]

No, we haven't broken it out ex SSP. We're going to try and keep the level of breakout at a pretty high level. I mean, if you look at the memo, you will see that the international geos both grew double-digits. Workspace, I mean, SSP was really the influence of course on the Americas. Those are really pretty much all in the Americas and that's been the case over the last two quarters.

[Operator:]

There are no further questions at this time. I will now turn the call back over to David Henshall.

[David Henshall:]

Okay, that was awfully quick. I guess the memo and the new format is doing its job of providing this incremental level of information that we're asking for. So, I really just want to thank everyone again for joining us today. Overall, as I said, we're very happy with how the business performed in Q1 and expect to continue, driving our subscription transition throughout the year. Hopefully many of you are joining us at our Annual Synergy Conference in May or at least tuning in, in June to our Analyst Meeting. Thank you, again. Talk to you soon.

[Operator:]

This concludes today's conference call. You may now disconnect.