Citrix Systems, Inc.
Q2 2018 Earnings Call Transcript

Published: 26 Jul 2018

[Operator:]

Good afternoon. My name is Ian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems 2Q 2018 Financial Results and Business Outlook 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 period. Thank you. I would now like to introduce Mr. Eduardo Fleites, Vice President-Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you. Good afternoon, everyone, and thank you for joining us for today's second quarter and fiscal year 2018 earnings presentation. Participating on the call will be David Henshall, President and CEO; and Drew Del Matto, Executive Vice President and CFO. This call is being webcast on Citrix Systems Investor Relations website. The webcast replay will be posted immediately following the call. Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the U.S. securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC. Copies are available from the SEC or on the company's Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures as defined by SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website. Now, I'd like to turn it over to Drew, our Executive Vice President and Chief Financial Officer. Drew?

[Andrew H. Del Matto:]

Thanks, Eduardo, and welcome to everyone joining us today. We experienced excellent results across Citrix in Q2. Our transition to the cloud continues to gain momentum with our Synergy announcements resonating in our markets. In summary, total revenue grew 7% year-on-year; subscription revenue grew 49% year-on-year; subscription bookings grew to 42% of total product bookings; adjusted operating margin was 30%, up more than 400 basis points versus last year; adjusted EPS was $1.28 per share, up 24% versus last year; and combined deferred and unbilled revenue grew to $1.94 billion, up 10% over Q1 of FY 2018. Our subscription metrics, along with our deferred revenue and unbilled metrics, highlight our success in our cloud transition. We're well on our way to achieving the 2022 metrics we communicated at Synergy in May. As stated last quarter, we adopted the new accounting standard, ASC 606, using the modified retrospective method beginning in January of 2018, the effects of which were immaterial to revenue in Q2. You can find more details posted to our Investor Relations website. Now, looking back at Q2, our Enterprise business continues to be strong. We closed 83, $1 million plus transactions compared to 79 in the prior year, with strength in healthcare, technology, financial services and government. There was a good balance across the portfolio, with strength in both cloud and on-premise Workspace Services and Networking. Our focus on cloud and hybrid cloud, along with our Synergy messaging, provided the tailwind to our Enterprise business. We saw a consistent 7% to 8% growth in each of the geographies. Customers are realizing the value of reduced infrastructure complexity, strengthened security and flexibility to align with their business initiatives. Citrix Cloud simplifies hybrid cloud adoption, providing the same infrastructure on-premise or in the cloud. Next, let's take a closer look at Q2 results within our primary businesses. Workspace Services had a great quarter, with revenue up 7% year-on-year to $455 million. This is the fastest growth in this business in several years. More importantly, Workspace Services product and subscription revenue grew by over 20% year-over-year. This was driven by a continuation of recent trends toward hybrid cloud subscriptions for our unified Workspace and CSP offerings. Within Workspace Services, Q2 subscriptions reached 50% of the product bookings mix for the first time. Results were steady within the Networking business. Q2 2018 Networking revenue increased 5% year-on-year to $207 million, with subscription revenue more than doubling over last year. Finally, our Content Collaboration revenue grew about 13% year-on-year to $46 million in the quarter. Our investments in our go-to-market initiatives this year, such as increasing our sales capacity and focused demand generation activities, are paying off in both higher growth and more strategic alignment with our customers. Given our success, this will continue to be an area of focus as we move forward. Let's now turn to operations. In Q2, our adjusted operating margin was 30%, up more than 400 basis points from last year. While we continue to maintain a disciplined approach to spending, we've also been increasing investments in demand generation and awareness of the integrated Workspace and Networking strategy. We'll continue to balance margin expansion with the investments needed to keep growing pipeline and sales capacity as we transition the business model. As mentioned, cash flow from operations was $170 million for the trailing 12 months. For the trailing 12 months, cash flow from operations was over $1 billion. Deferred revenue was $1.72 billion, up nearly $40 million sequentially. Unbilled subscription revenue increased sequentially by over $70 million. Combined, deferred and unbilled revenue grew 10% over Q1 of FY 2018, reflecting our strength in the quarter. Please note that the adoption of the new revenue accounting standard, ASC 606, creates about a 500 basis point headwind that you would need to adjust out when comparing deferred and unbilled revenue for Q2 2018 to Q2 2017. We also closed Q2 with approximately $38 million of product backlog. At the end of Q2, we had over $2.3 billion in cash and investments. We also repurchased 1.8 million shares in the period and still have approximately $500 million under our remaining share repurchase authorization. Since we announced our $2 billion capital return program in November of 2017, we've repurchased almost 17 million shares for approximately $1.5 billion at an average share price of approximately $90. As we announced at our Investor Day in May, we intend to declare a dividend of $0.35 per share starting in fourth quarter of this year. Now, turning to Q3 2018 and full-year 2018 guidance. In line with our multi-year strategy, we expect to see the continued acceleration in the adoption of our Cloud Services and subscription-based offerings which creates some headwinds to reported results. However, given our recent results and momentum, we are raising our expectations for Q3 and for 2018. We now expect for the full-year 2018, revenue between $2.92 billion to $2.95 billion, improving our growth rate for the year by more than 100 basis points at the midpoint from prior guidance; adjusted operating margin of 30% to 31%; and adjusted EPS of $5.30 to $5.40 per share. For Q3 of 2018, we expect revenue between $715 million to $725 million, and adjusted EPS of $1.23 to $1.26 per share. I'd now like to turn it over to David to give further color on the quarter and more color on Q2, our vision, strategy and areas of focus.

[David James Henshall:]

Welcome, everyone, and thanks for joining us today. As Drew noted, Q2 was yet another strong quarter, posting upside to financial expectations while continuing to execute on the strategy transformation across the company. I'm really proud of how this team has performed over the last year. More importantly though, customers and partners are embracing our strategy, driving the multi-year plan. Despite the headwinds from the continued mix shift, the reported numbers are clearly stronger than most anticipated in Q2, largely due to the strength of new product bookings for the Citrix Workspace. In fact, our reported revenue growth rate more than doubled from last year, while at the same time the contribution from subscription license increased from 11% to 15% of total revenue. Couple this with cost discipline, and we continue to demonstrate a lot of upside against margin and EPS goals. Looking specifically at the business transition, I want to reiterate the important metrics that we use each quarter to measure and communicate progress. In Q2, subscription revenue, which has been accelerating over the last year, grew 49% to over $110 million, as Drew mentioned. On a TCV basis, the mix of product bookings coming from subscriptions was 42% versus 32% a year ago, driving greater forward visibility. For the current fiscal year, we're still targeting up to 40% subscription bookings mix for the full year. And this has led to the balance of unbilled revenue from subscriptions increasing over $70 million sequentially, further demonstrating just how strong bookings were in Q2. This is most evident in the Workspace business which, as Drew mentioned, has now seen its strongest growth rate in many years. What's happening here is that the strategy and vision that we laid out over the last year is really resonating. Customers are seeing that Citrix adds a lot of value to their long-term initiatives in terms of simplifying hybrid cloud environments, reducing the burden of IT and accelerating the adoption of Citrix innovations. Additionally, due to our support for all major infrastructure providers, we give customers the flexibility to migrate workloads to and amongst the different clouds of their choice. In total, Citrix Cloud now includes more than a dozen services with options for SaaS and hybrid models, as well as services for those customers with only on-prem implementations to help them manage and monitor their infrastructure more effectively. I'd say customer momentum really stepped up after our Synergy event in May. We've had great feedback regarding alignment and clarity of our strategy, as well as the record volume of new innovations and announcements we made with partners like Microsoft, Google and others. Our message there focused on the future of work and how we can help IT lower infrastructure costs while driving higher employee productivity. The current cloud mobile era of technology has really created unprecedented flexibility in compute and work styles. However, what we're seeing is that most customers are deploying a growing number of discrete point product solutions in order to manage this; an approach that is really both complex and expensive. Our focus has been to abstract away much of the complexity associated with these niche products and highlight the benefits of our complete integrated Citrix solutions. I'd say, of all the innovations at Synergy, of particular interest to customers was the Citrix Workspace app, the Analytics platform and our next-generation unified, networking and security vision that we call the Secure Digital Perimeter. So the Workspace app provides access to all application and content needed to be productive. This includes differentiated capabilities such as federated identity, unified experience, out-of-the-box integration to leading SaaS apps and a broad approach to universal endpoint management. Most importantly, we've built a general-purpose solution to provide security management for all application types, including value for those customers that chose not to deploy or use app virtualization or DDI. And this opens up a much broader commercial opportunity for us. Attendees were also positive about the launch of Citrix Analytics platform for real-time detection and automated resolution of potential security threats across user, device, network and file elements. This leverages the instrumentation that we built across the portfolio to provide very unique capabilities and a generation of actionable insights. And finally, as I said, we received good feedback on our unique security approach that supports trusted computing outside the corporate data center, as our Networking products have been extended into the cloud more than ever before. This included announcements such as Citrix Cloud app control, SD-WAN service for MSBs and SD-WAN on Azure, which leverages Azure's Virtual WAN service to enhance overall app performance and user experiences at branch operations and at the edge. Basically, our transformation isn't about just porting our existing discrete products to cloud service, but unifying our products into complete solutions that more holistically address the needs of the market. And, in the process, giving us an increasing advantage over traditional and upstart competitors who continue to deliver just point products. So lots of great stuff. Turning back to Q2, let me give you some large customer examples to highlight the diversity of use cases, the accelerating adoption of our services and our continued competitive advantage in the market. All in, we had a really big quarter for large deals which you can see in the results and in the growth in unbilled revenue. This is a reflection of our increased focus on C-level conversations and the confidence that our customers are seeing in our ability to partner with them well into the future. For the first time, we closed 4 transactions greater than $10 million each in a quarter; and all the top 10 largest Citrix Cloud deals this quarter exceeded $1 million. In one such transaction, seeking cost savings, flexibility, increased security and improved end-user experience, Willis Towers Watson, a leading global advisory, brokering and solutions company with more than 40,000 employees worldwide, selected Citrix Cloud for its workspace delivery needs as they execute on a cloud-first vision. It was our close partnership with Microsoft that created the alignment needed to deliver a seamless solution to help this company shift easily from an on-premise delivery model to an Azure-focused model powered by Citrix Cloud. In another transaction, which is a major win against two primary competitors, Braskem, the largest petrochemical company in Latin America, chose Citrix Workspace, delivered as a service, to fulfill their vision of moving to the cloud with a truly integrated workspace experience. Compliance and security were the top concerns for Braskem, and the Citrix Workspace was the only solution that allowed them to control all of their apps, desktops and, most importantly, their content, while also delivering a unified, consumer-grade experience for their employees and their customers. Here are just a couple examples why our Cloud Services are proving to be so valuable to both new and existing customers and why we're winning these types of opportunities. These examples also demonstrate how our customers are committing to us for multiple years, validating our direction as part of their current and future road maps. So let's talk about Networking for a minute, as this business was stable in Q2 across both the hyperscale SSP segment and the Enterprise accounts, as Drew mentioned. In fact, the mix was 41% SSP, same as last year. What's driving this is really three factors. For customers focused on a digital workspace, the integrations we built across the portfolio create demonstrable added value for security, identity and performance. For ADC accounts, our industry-leading software-first approach gives them the unique flexibility to embrace the hybrid cloud. And really for all customers, Citrix Analytics is a differentiator for visibility into the network, the workspace, the user and other important areas. Networking wins in Q2 included a large Internet-based publishing company choosing Citrix Networking to help drive their multi-cloud strategy, helping them future-proof the organization with a hybrid model which will scale easily as this company grows through acquisition. A U.S. auto parts manufacturer replaced a competitor's ADC solution with Citrix to facilitate their secure connection to external contractors, citing our superior long-term vision for cloud and networking services. And, finally, there was also several new SD-WAN wins in a variety of areas, including cross-sell to existing Workspace customers to provide optimization of HDX traffic and to net new customers invest in our larger strategy of integrated networking delivered via Citrix Cloud. So entering the second half, I feel really good about our momentum and our purpose. We're more aligned and more focused on customer success than ever before. Clearly, financial results are strong, and we're proving that you can drive a cloud transition and accelerate revenues and margins together and it's a powerful combination. Looking forward, our focus is going to remain on three strategic motions

[Operator:]

We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Philip Winslow from Wells Fargo.

[Philip Winslow:]

Hey. Thanks, guys, for taking my question and congrats on a great quarter. David, just wanted to focus in on Workspace Services because, as you mentioned, that's the highest growth rate we've seen in a while in that segment. And as you pointed out too, we even saw the mix toward subscription move higher quarter-to-quarter and a lot year-over-year. And it seemed like license was strong and subscription was strong. But what is the feedback that you're getting from customers that's driving essentially like both those two to move up? And how should we think about sort of the big deals impacting that dynamic? And I've just got one follow-up to that.

[David James Henshall:]

Sure, Phil. Thanks very much. I mean you take a step back and let me add a little context here. So, I mean, we laid out a strategy in the second half last year and we're executing against that strategy. I'm really happy with the performance of the team and the reception from customers and partners as well. And, obviously, the results in the aggregate are well ahead of the original timeline. So, as we said, we had a terrific Workspace quarter. Things came together in Q2. I'd say, a lot of it was good momentum coming out of Synergy and the customer feedback that we got on the vision and the strategy was really positive. And I think that provides more confidence when it comes to signing up for larger and even longer term transactions. So the confidence that we can deliver solutions they need for today's initiatives, but more importantly partner them over a protracted period of time. Our sales teams around the world are executing extremely well, and they've been focused on building more direct strategic relationships at the C-level, as well as investments and capacity. Those are really helping. So when you look specifically to Workspace business, we did have a record number of million-dollar-plus transactions. We had multiple eight-figure transaction, good balance across the geos. Both the EMEA area and North America, we're well into the double digits from a demand point of view on that side. I'd say that we had a quarter where you also saw perpetual license very strong as well. So while subscription was huge, and that drove a lot of the unbilled, come back to in a minute, we also had a good perpetual license quarter. So the rising tide really lifted both. Citrix Cloud is the big driver. All 10 of the largest deals there were all over $1 million each. The subscription mix within the Workspace crossed 50% for the first time. Much higher if you include installed base trade-up as well. That's an early program, the one that's starting to get some good transaction. And CSP, which we haven't talked too much about. But just as a reminder, that's for our partners that are looking to build the infrastructure to deliver some sort of vertical services for their end customers. I mean that business is still growing in the 30% to 40% range. So really across the board, very happy with that.

[Philip Winslow:]

Great. And then just a follow-up on cash flow. I mean, obviously, we've seeing a big increase year-over-year in the first half. I know the second half of last year was particularly strong too. But if I just say, hey, the second half of this year is flat with the second half of 2017, I mean that puts you almost on path for a $7-plus of free cash flow per share this year. And I know your guidance for 2020 is $7-plus and at Analyst Day you said, okay, that might shift into 2019. But maybe kind of help us think through kind of second half free cash flow, but also sort of the progression to those 2022 numbers? Thanks.

[David James Henshall:]

Yeah. Good question. I mean, it's clear that we're, from a booking standpoint, running well ahead of our original expectations. So on a trailing 12-month basis, we're well over $1 billion of cash flow from ops, and that translates into the low $7 free cash flow a little bit behind that. So the way to think about cash flow, just as a reminder to everybody, that as we go through this transition, one of the things that we are doing is reducing the frequency of billing cycles. So we're putting more and more revenue off the books. That was that big step-up in unbilled revenue that you saw. And so, that really needs to be looked at in concert with actual reported cash flow. And when you're trying to calculate bookings, look at the change in deferred, the change in unbilled and then recognized revenue. Those are really the three pieces to really triangulate what future cash flows are going to look like for us.

[Philip Winslow:]

Great. Thanks, guys.

[David James Henshall:]

You bet. Thanks, Phil.

[Operator:]

And our next question is from the line of Rob Owens from KeyBanc Capital Markets.

[Rob Owens:]

Hi, guys, and thanks for taking my question as well. If you look at the strength that you saw in new product bookings from Citrix Workspace, how much of that's coming from new customers and customer acquisition versus kind of selling into the legacy base, the new capability. Can you provide any color there?

[David James Henshall:]

Sure, Rob. It's both, of course. So you need to look at it probably in three ways. One is when we talk about Trade-up and Transition or TTU that we have referenced a couple of times. That is more of an installed based customer that we're migrating Citrix Cloud. That is, we kept that entirely out of the conversation so far, and I want to keep everything focused on net new. And so, TTU is a motion that's now into the eight figures, but it's still pretty early. We're going to focus more on that in the second half of the year. So net new is where the bulk of all the demand is coming from. That is, in some cases, because we're so broadly distributed, we're already touching almost all of the global 5,000. But these are net new opportunities within those accounts, to a large degree. And then truly net new, companies that we have never done business with in any product in our history, we add several hundred per quarter.

[Rob Owens:]

And usually when companies are going through a product transition especially within your largest category to more subscription, you don't see the product and license strength that you saw this quarter. So could you provide a little more context or color around exactly what's going on there? And as you kind of evaluate the puts and takes then for Q3 and I guess some of the conservatism around growth, is it not sustainable relative to product and license? Was there something in the quarter that was an aberration or something of that nature?

[David James Henshall:]

Rob, no aberration I'd say. I mean, listen, we're super happy with the progress that we've made. I think this is the fourth quarter in a row that we've been able to raise our external expectations. I mean, we're taking full year guidance up by 100, 150 basis points from a growth rate point of view. And that's despite having a really large Q2. We're also raising expectations for Q3. So really positive, but I don't want to get ahead of ourselves as well. Seeing growth in product and subscription for this business at 20% is a growth rate we haven't seen in 8 years. So it's nice to see that happening, but I want to see a few more data points before we start talking about what the real trend of the rate is. So we're going to maintain a very positive, but an appropriate point of view going into Q3. Also, Q3, as you as you know, it's a summer quarter where customers are out for large parts of it. So it tends to be back end loaded. So once we get through Q3, we'll think about where we think the new trend line is.

[Rob Owens:]

Great. Thanks, David.

[Operator:]

And our next question is from the line of Heather Belini from Goldman Sachs.

[Ted Lin:]

Hi. This is actually Ted Lin on for Heather. Thanks for taking the question and congrats on the quarter. A couple from me. Can you give us, I guess, some more color into the unified and integrated Workspace and Networking offerings in terms of the ability to open new conversations or drive higher level conversations?

[David James Henshall:]

Sure, Ted. I mean the way to think about it is when we talk about the integrated Workspace, I mean, that's a combination of three big forces that we laid out middle of last year that are really shaping the way we're driving operations in the company. The first one is by unifying the portfolio. That's simply bringing point products and their development teams together so that we can create truly integrated solutions. That's one. Second piece was accelerating into the cloud so that we can build out a portfolio of cloud solutions to allow us to meet customers wherever they are on their journey. And, frankly, I think most are going to be on a hybrid cloud model for some – period of many years. And it's important for us to be able to help them bridge that, regardless of what they're trying to do in real-time. And then the third area is a little bit more about vision, and that's where the secure perimeter comes in where we can talk about the evolution of networking services and how they are ultimately going to be impacted as more workloads move to the cloud and as compute moves out to the edge, it becomes more of a measure of services over time. A lot of companies aren't deploying that way yet. But when they look at engaging with a partner like Citrix for a current project, being able to communicate the vision and where we're going to give them confidence that we're going to be there as their projects catch up to that is really important. And that's one of the reasons why we've been focused so much on enabling our teams to sell at a more strategic level to be able to talk about the business from a top-down point of view, and give this broader perspective of infrastructure versus point projects along the way. And I think that's one of the things that has really led to the uptick in large transactions. And, again, like I said, it's very early coming out of Synergy, but the feedback that we received from that on some of the newer initiatives that are, frankly, all hitting the market either in the last couple of weeks or in the next couple of weeks, great feedback. And we'll just work with customers to get those started in their infrastructure and see where we go from there.

[Ted Lin:]

Great. That's very helpful. And then on maintenance, I think you're now on year two of the mandatory migrations to CSS maintenance. What are the types of uplifts that you're seeing? And what were your expectations going in?

[David James Henshall:]

Drew, why don't you take that question?

[Andrew H. Del Matto:]

Sure. Great question, Ted. Yeah, we're really pretty much through the CSS uplift. That really started over a year ago. And so, most of that's rolling into revenue now. But in terms of the new business, the uplift that we're really seeing as we build deferred – as David pointed out or as we pointed out earlier, deferred and unbilled were up $170 million sequentially. And the bulk of that's really coming out of new business, primarily the subscription business. And, again, 42% of the product bookings this quarter were subscriptions. So you could see the growth there. It's really driven off the new business on the subscription side.

[David James Henshall:]

One interesting thing to add to that is that when we adopted ASC 606 last quarter, we had to take a haircut of a better part of $100 million on deferred revenue as well. So some of that price uplift that we're able to achieve over the second half of last year kind of got washed away from an accounting change. But that said, it's definitely one of the things that's helping drive the overall acceleration of revenue growth over the last five quarters.

[Ted Lin:]

Great. Thank you very much.

[Operator:]

And our next question comes from the line of Raimo Lenschow from Barclays.

[David Rainville:]

Hey. This is David Rainville actually on for Raimo. Thanks for taking our question, and congrats on a nice quarter once again. Maybe another question around – more high-level question around Workspace, if that's okay. It seems that both subscription and perpetual did well this quarter, highlighting a strong percentage in subscription bookings in the segment too. I'm just wondering can you give us a little bit more color about what's driving customers to go for one or the other and what you're seeing in the Workspace, like, competitive landscape at the moment.

[David James Henshall:]

Yeah, let me take the last part of that question first. The landscape continues to be very, very competitive as you'd imagine. So no change on that front. But if you step back for a minute, it's the broader forces that we've talked about for a long time and were a key element of our overall Synergy conference. I mean the fact is, people are concerned – CIOs, CEOs – about getting more productivity and engagement out of their workforce. And while this current era of computing – and we call it the mobile cloud era – has created unprecedented flexibility from a compute standpoint and from a device standpoint, in most customers, their environment, all that does is add complexity. And so, what they're doing is they're employing a number of little point product solutions to help address everything from app delivery, to identity, to managing SaaS and connectivity. And that's expensive and it's complex. And so, our approach has been to abstract away as much of that complexity as we can and provide this vision for a unified workspace, and one that helps them cut costs, helps them simplify, but more importantly kind of drive that enablement around productivity of the workforce, but do it in a secure manner, do it in a way that embraces the way that people are working today. So that's kind of the uber backdrop and the message. And when it comes to individual customers, it depends on really what they're driving immediately from their own initiatives. I mean, the two that we referenced by name in the script, like Willis Towers Watson, everybody knows they're a leading advisory and brokerage firm with tens of thousands of employees. I mean they're adopting a cloud-first approach. And so, they're very much focused on Azure. And because of the partnership with Microsoft, being able to help manage their entire workspace as a cloud-delivered service from Azure was really the critical part of the conversation there. So that's one good example. Customers that also have large on-premise deployments, sometimes in very highly-regulated industries or maybe outside the U.S., they're just going to continue to expand that. And that's what we saw at the same time. So it just depends on where they are. I'd say, longer term, most will migrate towards some form of hybrid cloud. That's certainly a core part of our strategy. But we want to make sure that we're not pushing customers to adopt faster than they're ready. And it's important for us to have this support for both architectures.

[David Rainville:]

That makes sense. And maybe just a quick follow-up. At the Analyst Day, you mentioned roughly 400,000 enterprises as a Citrix customer. What is the wider long-term opportunity for Workspace-as-a-service as a subscription when you think in the long-term? And, of course, not looking for an exact number, but just more of a framework on how you think about this?

[David James Henshall:]

I'll tell you, Mike, the high-level framework. This is an important way that we talk about it internally, is that the Citrix Workspace app was designed as a general-purpose solution. What I mean by that is it adds value to applications of all types, SaaS, mobile, virtualized, et cetera, and as well as content and doing that in a way that doesn't rely on virtualization. And so, that's an internally important way for people to think about it. It's not just a renaming or a reimplementation of a virtualization solution, but it's truly general-purpose infrastructure and it allows you to address those use cases very individually and tailor those for every user inside of every enterprise. So when we think about it, that's strategically where we're going and why we announced some of these new capabilities like cloud app control service and others that are a critical part of that Workspace vision. We're just bringing those to market now. There's obviously a long ways to go from an execution standpoint, but general purpose is clearly the way that we unlock a much broader opportunity than we might have been looking at in the past.

[David Rainville:]

That makes sense. Thank you so much.

[David James Henshall:]

Thanks, David.

[Operator:]

And our next question is from the line of Nikolay Beliov from Bank of America.

[Nikolay Beliov:]

Hi, thanks for taking my questions. David, the first question is for you. With the new product you introduced at Synergy, how do you create a bridge between the endpoint buyer, security buyer, and I think buyer – and networking buyer within the organization? How is the selling motion changing in light of the diversified portfolio?

[David James Henshall:]

It's interesting, the portfolio has gotten a lot simpler over the last two or three years. I mean, that was a critical element. Part of our strategy was about focusing on the things that are truly important to the customer, and then stripping away everything else. And that's, frankly, allowed us to go much faster from an execution point of view. When we think about the Workspace and some of the new elements today, the core strategy, if you want to talk at a high-level, it's a C-level conversation, it's an infrastructure conversation; it's not for the project buyer. That said, all of these advancements that we're making and the individual capabilities, be it in ADC or be it in a file sync and share, or virtualization, all of those are designed to enhance their category competitiveness, as well as differentiation for those customers that are still looking at it purely from a project basis. But by the time you start talking about a large transaction, you're generally dealing with a CIO, VP of IT or somebody at a very senior level that can help coordinate what might have historically been a point product buyer. And, again, that's part of the enablement that we're working through right now. It's one of these things that when we bring customers into the briefing center, you'll see a mix nowadays of executive leadership, security, networking and others. Just depends on where the customer is. And, frankly, it depends a little bit on the customer size.

[Nikolay Beliov:]

Got it. And my second question is on share file, the growth rate has accelerated here to the low-teens versus 20%, 30% in the past. Is the low-teens kind of like the new normal? What is the trend here? Are there plans to rejuvenate the business?

[David James Henshall:]

Well, I think, as everyone knows, we had a pretty major strategy shift in that business over the course of the last year. The thing that we articulated was we were going to emphasize the integration with the holistic Workspace and focus more on the Enterprise than it had been as a cloud storage solution with a lot of SMB type focus. And that's a core part of the strategy. And so, less of a stand-alone sale and more a sale in the context of the Workspace. I mean, that's the direction we're going. So I think the growth rate right now is just a reflection of that. I mean, we're not allocating dollars in between the bundles, so it's going to be consumed that way more and more over time. Probably a year to two years out, we'll be talking about the Workspace as largely the one element of revenue as the one that matters most from a visibility standpoint. But, today, it's still important to look at them individually.

[Nikolay Beliov:]

Thank you.

[Operator:]

And our next question is from the line of Gregg Moskowitz from Cowen and Company.

[Gregg Moskowitz:]

Okay, thank you very much. So, David, it's terrific to see 4 transactions over $10 million each in the quarter, especially for Q2. How would you characterize the large deal pipeline at this time? And then also, I know that you don't explicitly high to it, but what are your high-level expectations for unbilled in Q3 and Q4?

[David James Henshall:]

Yeah, let me take the last question. I mean unbilled – I mean as everybody has seen, unbilled had a really big spike in Q2. We had very, very strong bookings in the second quarter. We're not going to forecast that going out. It's one of those things that, as we went through this transition, we committed to reporting to because we wanted to make sure that everybody has the elements necessary to truly measure the progress against our transformation. But we're just not going to forecast that at this point. Incredibly happy with the number in Q2. It was certainly well above over our internal expectations. As I mentioned before, the two largest geos, both showed double-digit growth, which was great. We haven't disclosed it yet, but on an ACV basis, we had similar growth rates to the TCV. And so, we're not changing duration at all. It's just a function of a really strong quarter. In terms of looking forward, and I'll repeat what I said earlier that we're happy with where we are. We've been showing better and better progress every quarter. But I also want to just remain normally cautious like we always are in terms of forward outlook. And let's not get ahead of ourselves. It's a summer quarter. So come back in Q3 and talk about if we're on a different trajectory or not. But as of right now, we're executing against our 2022 plan that we laid out. We're ahead of the ramp rate, clearly. But that's the backdrop that we're executing on right now.

[Gregg Moskowitz:]

Okay, perfect. And then in terms of that third geo, so the APJ business did perform better this quarter at least in terms of revenue growth. Is there anything in particular that you would attribute that to?

[David James Henshall:]

It's just APJ is the smallest of the three regions. It tends to be a little bit more volatile from a result standpoint. It's surprisingly consistent having all three geos at that 7%, 8% at the same time. I wouldn't expect it to be that way. And from an underlying demand and booking standpoint, as I said, the two strongest in Q2 were North America and Europe. Actually, the Americas and EMEA, let's put it that way, and APJ was trailing. That reverses itself, probably, in Q3 or Q4. But, overall, we're just happy with the progress we're seeing across the globe. I think our sales teams are continuing to execute better and better all the time.

[Gregg Moskowitz:]

Great. Thanks very much.

[Operator:]

And our next question comes from the line of Mark Moerdler from Bernstein Research.

[Mark L. Moerdler:]

Thank you. Congratulations on the quarter; really nice.

[David James Henshall:]

Thanks, Mark.

[Mark L. Moerdler:]

Got two questions for you. First one is, as everyone has discussed, we've seen the stronger Workspace result. And even that was given the negative impact of the subscription transition. Can you give us a sense of how much that transition impacted what the reported number would be?

[David James Henshall:]

Mark, I'm not sure I 100% understand your question. But I will say that over 50% of the TCV bookings for Workspace were subscription leading to very little recognized. When we look at the growth in subscription from an unbilled standpoint, I mean subscriptions increased, what, a little over $70 million, Drew, sequentially?

[Andrew H. Del Matto:]

Yeah.

[David James Henshall:]

And the vast majority of that is just Workspace cloud – Citrix Cloud that's used for the Workspace. So that's really the driver. The underlying bookings were clearly in the double-digit range.

[Mark L. Moerdler:]

Great. But if you'd not have been moving to subscription, obviously, the growth would have been faster than what was reported.

[David James Henshall:]

Oh, sure.

[Mark L. Moerdler:]

Okay. No sense of how much, right?

[David James Henshall:]

Well, I don't think it's important to break it out at this point. I'd rather not get into the habit of disclosing that because moving to subscriptions really is the – it is the strategy right now, and that's where we're going. And the fact that we can actually post accelerating growth while we're driving an even bigger percentage mix is pretty cool. We're very happy with that right now.

[Mark L. Moerdler:]

Great. A quick follow-up. Roughly, the discussion is about the continuing or increasing relationship at the C-level between Citrix and the larger clients. Can you give us a sense if that's part of a trend in terms of a move more to direct? Or is there any change in terms of how much of the revenue, how much of the relationship is through the channel versus direct and how you expect that to change as you continue through the subscription change?

[David James Henshall:]

Well, sure. I think that as we've been talking for the last year or so, I mean, we've been making a very direct effort to enhance our relationships at a strategic level with our customers. And we've been investing in everything from a number of global roles to do that, more quota-carrying capacity. Mark Ferrer and team have been driving just a lot of operational changes across the board. That said, we still fulfill the vast, vast majority of our business through partners. The partner network is changing, as you would imagine, changing with the landscape of technology. So we have been recruiting new partners along the way, folks that are more comfortable with selling cloud and are participating with Microsoft network in areas like that. And we're continuing to work on enablement for our existing partners. I think we're still pretty early in the game from an enablement standpoint. And, frankly, it's one of the reasons why the various channel check notes that I read pre-quarter, some were wildly positive and some were negative. And I think that's just a reflection of a channel in transition and it's a matter of who you talk to. And so, we have several thousand partners that transact with us any given quarter. Some are moving much faster than others. And it's incumbent upon us to keep driving enablement, making sure we've got programs in place so that people can make a lot of money. And just from a program standpoint, we are trying to drive more aligned with the strategy and much less about trading up an installed base customer. And so, there's a strategy shift going on at the same time.

[Mark L. Moerdler:]

Excellent. I really appreciate it. That was very helpful.

[David James Henshall:]

Thanks, Mark.

[Operator:]

And your next question is from the line of Kirk Materne from Evercore ISI.

[Peter Levine:]

Hey. Thanks, guys. This is actually Peter Levine in for Kirk. So just two quick questions. Can you discuss some of the competitive dynamics that you're seeing on the Network side of the business? Do you feel like it's more kind of taking share or it's just kind of an overall uptick in the Networking side?

[David James Henshall:]

Well, Networking is – no change in the competitive dynamics. I mean it's always been a highly competitive market. And I think that if you look backwards, the business in ADC, we've been taking share gradually for probably a decade now. And when we look at it, it's just a combination of SSPs continuing to be a little lumpy, but I think we're doing a better job of broadening that base to help reduce some of the volatility there. But the bulk of the business is coming from the Enterprise. And I'd say there's really three factors. One is that the customers that are focused on the Workspace, we have built nice integrations across that. And so, you can do unique things with the combination of the solution that really differentiate, can drive value, whether it's security, identity, performance, et cetera. In a typical competitive ADC account, we've got a really good hybrid cloud story. We've always been a software product that can be deployed across hardware appliances, virtual appliance and a container, et cetera. And that just gives us a lot of flexibility to (48

[Peter Levine:]

Thanks. And then, can you provide us any updates on the Microsoft partnership? How much of that is influencing some of the growth in the larger deals you guys talked about in the call? Thanks.

[David James Henshall:]

Yeah, the partnership is great. I mean, it's been strong now for two decades. It's a really important part of what we do because Microsoft is so synonymous with applications and a critical part of our customer environment. We continue to work very closely on a lot of different initiatives, whether it's integration and extension on the mobile side, they're an important part of what we're doing to integrate with Intune and with apps. The cloud side is obviously super important as we have leveraged Azure in not only as the foundation for our cloud, but when we go and drive joint solutions with customers. Azure is certainly getting a lot of traction when it comes to Enterprise workloads. So a lot of mindshare on that side. And when we can talk about bringing things together relatively seamlessly, that's a nice value-add. And then just as we've leveraged the platform for resource zones, like we made an announcement at Synergy that we're going to be working with Azure Gov for those types of customers that want Citrix Cloud in a highly regulated environment. So it's pretty multi-faceted and just a great partnership for a long time now.

[Peter Levine:]

Great. Thanks a lot. Appreciate the commentary.

[David James Henshall:]

Thank you.

[Operator:]

And our next question is from the line of Drew Foster from Citigroup.

[Drew Foster:]

Hi, thanks for taking the question and congrats on the quarter. Wondering, given the strong results this quarter and really year-to-date at what point you might consider raising what many might consider to be conservative 2020 targets laid out at Synergy this year? And then, a quick follow-up. Thanks.

[David James Henshall:]

Yeah, I'd say that in terms of raising the 2020 and 2022, I mean, we're three quarters in when we laid them out the first time and it's great to be well ahead. And, yeah, we'll come back and revisit that from time to time. I mean, when we were in May, which was just a couple months ago, we added another couple of years to that which shows the further inflection and the power of the model transition. So we'll see. I don't think we're in any rush to update the longer-term targets, but we certainly will when it becomes obvious that we're just running well ahead of plan. No timeline at this point.

[Drew Foster:]

Great. Okay. And then last question was you mentioned expanding to new growth areas as a – strategic growth area that you pointed out. And does that imply that we should be thinking about a step-up in M&A? And if so, what particular areas are most attractive?

[David James Henshall:]

Yeah. When I talk about that, you look at some of the adjacencies around the newer initiatives; newer meaning, the Analytics side of the house, the Secure Digital Perimeter. And it opens up some opportunities for us. But in terms of M&A expectations, like everybody, we're constantly looking at opportunities. But we're going to have a good discipline. We have a good discipline for answering the question of what exactly do we get synergies from, whether it's a buyer, or out-to-market, or technology platform. And we don't have a desire to acquire for the sake of acquiring. And so, we'll continue to be active looking, and then it's just got to be the right fit for us to actually move forward.

[Drew Foster:]

Got it. Thanks.

[Operator:]

And our next question is from the line of Michael Turits from Raymond James.

[Robert Majek:]

Hi. This is actually Robert Majek on for Michael today. Can you just talk about Zed Mobile and how that offering is doing? And perhaps give us an update on the competitive landscape in EMM?

[David James Henshall:]

Yeah. Actually, we don't talk too much about stand-alone mobile that much anymore. We talk about it in the context of the Workspace. And if you roll the clock back a couple of quarters, I mean a large part of our strategy around mobile was to get out of the commodity side of mobility and MDM, MAM, it's kind of a commodity-type service, and look at it in the context of the Workspace. So what we've done is drive integrations across the Workspace and really expanded that from a universal endpoint management standpoint. So if you look at some of the new announcements around Synergy, we really have probably the broadest approach to universal endpoint management now, including certain IoT devices and other things. And our approach is going to be less stand-alone and more integrated. That's a common theme across our portfolio right now because, like I said earlier, the challenge that all of our customers are having of managing all of these discrete point products is complex and it's hard. And the more that we can simplify, I think the more interesting that's going to be. Now, I have a thing that I mentioned just a minute ago on an earlier question, is the work that we'll continue to do with Microsoft to embrace and extend Intune in the ways that really help those customers that have what is a great solution, but there's just more we can do on that to partner.

[Robert Majek:]

Thanks a lot.

[Operator:]

And our next question is from the line of Rob Oliver from Baird.

[Rob Oliver:]

Hi, guys. Thanks for taking my question. One for Drew. Drew, you mentioned the increased investments in demand generation. Can you add a little bit of color there and talk about it? I know, David, you just talked a lot about some of the partnerships and adding new channel partners, particularly those focused on Azure. But, Drew, could you provide a little bit more color on kind of where you see some of those investments being most necessary? Thank you, guys, very much.

[Andrew H. Del Matto:]

Sure, Rob. Again, just looking forward, we do feel like we've got a bit of a tailwind off of Synergy and we wanted to make sure we're building out for the rest of the year and next year. And we've obviously been very disciplined on spending. What we wanted to do was just get really focused, laser-focused on where we saw opportunities for return. And so, we've been investing really in two things, I think, demand generation, lead generation and then turning that back into the sales force and building capacity and quota-carrying reps and SEs. And that's been the focus of it. And, obviously, we saw a strong close for the quarter as you can see in the numbers. And really just focusing on delivering the messages from Synergy about the cloud. And so far, everything we've seen has paid off and we're going to continue to do that into the future. But you could see we've obviously, during the year, taken up the op margin guidance that overperformed this quarter as well. So it's looking very good.

[David James Henshall:]

Let me just add on top of that. There's two other areas that are important. One is just the overall awareness in branding. I mean we need to be a little bit more visible. Part of this transition and transformation is it's helping reshape Citrix in terms of more general-purpose versus being focused historically on virtualization. So that's one. And on a related note is also around enablement, which I've mentioned a couple of times. And we've got a lot of work to do, as you would imagine, in terms of just continuing to drive enablement forward across both our internal teams and our partners around the world.

[Rob Oliver:]

Thank you, guys, very much.

[Operator:]

And our next question is from the line of John DiFucci from Jefferies.

[John DiFucci:]

Thanks for taking my question. David, I'd like to go back to Rob Owen's question because I just want to make sure we understand the results here. And you gave a lot of data, but it's not quite broken out the way it used to be. And it really goes into the product and license line which grew 1% this quarter, but it was $20 million or more better than what was implied in guidance. And that line used to see a lot of volatility because of the Networking space because of large Internet providers that you sold to. And I'm just curious, is that what – did that this quarter too? You talked a lot about the strength in Workspace Services. But the line grew 1%, which it's nice to see growth. It's decent. But it is a lot better than what was implied in guidance. So just trying to understand that line. I know there's transition going on, but it'd be helpful with a little more color here.

[David James Henshall:]

Yeah. John, as you know, I guess it's probably over a year ago now when we laid out a new way we wanted to report revenue, maybe six quarters ago, in anticipation of lining the strategy up so it'd be easy to really get a view of where we're going. And that's why we broke out subscription as a primary focus. When I look at the business, I tend to look at the combination of product plus subscription together as a way to measure the success of each product. And so, if I look at Networking, for example, the product plus subscription in Networking was about 7% growth and the product plus subscription in Workspace was about 20% growth. And so, that's how we look at it internally. There was no weird anomalies in terms of SSPs on the Network side. Networking growth was 5%. And within that, the slowest element was around maintenance. Maintenance grew at like, 3%. And then the rest of it was the 7% that I mentioned. Does that help?

[John DiFucci:]

Yeah, it does. So it doesn't sound like you've got any huge product sales to large Internet providers. So that is helpful. Thank you. And I think someone asked this question and Drew addressed it, but I just wanted to be sure I understood it too. Under the Workspace Services and sort of the CSS program, it sounds like you've sort of lapped that benefit. So the benefit you're seeing now, it sounds like it's more of an underlying foundational build versus sort of a pricing increase benefit, which was sort of what was going on there for a while.

[Andrew H. Del Matto:]

Yeah, John...

[John DiFucci:]

Is that accurate?

[Andrew H. Del Matto:]

Yeah. I mean, look, what's really happening is we're building the new business; it's the cloud and subscriptions. And you can see it in the combination of the deferred and unbilled growth. So $170 million quarter-on-quarter. That's where you're really seeing the new business build. The great thing is there, obviously, you get predictability of revenue. You're creating better economics because it's a recurring revenue stream, I think, which we all like. And then from the CSS perspective, yeah, there's a little bit left. But I think we're really through anything material there. And there's always a little bit of a tail there, but it's very small at this point. We lapped that earlier in the year.

[John DiFucci:]

Okay. Thank you very much, guys.

[David James Henshall:]

Thanks, John.

[Operator:]

And our next question is from the line of Keith Weiss from Morgan Stanley.

[Sanjit K. Singh:]

Hi, this is Sanjit Singh for Keith and my congrats on a very nice quarter as well. David, I wanted to go back to CSS. I think at Analyst Day you mentioned, I think, that 81% of the base on CSS. Has the early conversation started to happen in terms of getting some of those CSS customers to move to Citrix Cloud? Any early indications on what percentage of those customers are beginning to convert to Citrix Cloud to maybe avoid the rest of the price increase on CSS?

[David James Henshall:]

Well, let me clarify one thing. I mean there's no way to avoid necessarily. Because when we look at the upgrade path, if you're an existing customer, there's one path that moves from a support offering; and then there's another path that moves from CSS. And the only difference is really price. I mean we're working backwards from what the cloud price is, and it's not a price increase. I also want to be pretty careful when we talk about this because this is really about just demonstrating incremental value when we talk about cloud. This is back to the enablement point that I mentioned before. And so, when we deliver cloud, like I said, it's not just about our infrastructure, but all of the new innovations that are only available as a cloud service. Like, for example, unified experience, the analytics platform, the cloud app control service I mentioned before, federated identity, integrated content. All of these things are really the value-add that a customer gets when they consume Citrix Cloud; granted that they'll all be consuming that at a different pace. But that's really been the main driver. When we talk about installed base, there is a program called Trade up and Transition, or TTU. That's what we've referenced for a few quarters now. And that business is starting to ramp. It's now into the eight figures from a TCV point of view, but it's really a second half focus item more than anything else. So as we laid out on Analyst Day, the first part of this year is about just driving net new demand, net new customers and really getting that engine going, and trying to incent both our field teams, our go-to-market on those items. And so, that's where the very big bulk of compensation comes from. And then the TTU piece is a little bit downstream. So again, a critical part of our subscription transition, but one that we wanted to sequence behind the net new.

[Sanjit K. Singh:]

Appreciate the clarification there, David. And I guess my follow-up question is also sort of going back to Analyst Day. One of your messages there was around the corporate mid-market SMB opportunity that still seems relatively under-penetrated. This quarter seemed to be more Enterprise-heavy, and I just wanted to get a sense of how you're feeling about the traction or the programs that you have to drive growth in some of those under-penetrated markets. What's your assessment of that as we go to the second half?

[David James Henshall:]

Yeah, a few things. I mean, one is, when we look at the CSP, I know there's a lot of acronym, the cloud service provider part, that business is largely – well, it's all partner-driven and it's largely focused on that SMB segment. That is well into the plus $100 million run rate at this point in time and it's growing somewhere north of 30%. And so, that's probably the most direct way that we look at that. I mean, as we go forward, some of the other initiatives that we are thinking about is continuing to simplify the approach to the cloud, make the products more applicable to a smaller, simpler use case. But just really where the infrastructure gives the most value is when you typically have a larger, more complex environment, some concern around security, governance, compliance. I mean those are the types of attributes that are driving such success in markets – or verticals like financial services and government and healthcare and others. So I wouldn't say we're more focused on the Enterprise today, it's just that the Enterprise is – it's a strong market.

[Sanjit K. Singh:]

Appreciate the thought. Thanks, David.

[Operator:]

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to management for closing comments.

[David James Henshall:]

I want to thank everybody for joining us today. Obviously, we're working really hard on continuing to executing against our strategy. We're very happy with the results in Q2 and the ability to continue to increase our outlook as we go forward. Thank you very much, everyone, for your support and thank you for joining us today. Look forward to talking to everybody again in about three months. Thank you.

[Operator:]

Thank you for participating in today's Citrix conference call. You may now disconnect.