Citrix Systems, Inc.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

On behalf of Citrix, hello, and welcome to today's webcast entitled 1Q 2017 Financial Results and Business Outlook. My name is Ian, and I will be your Web event specialist today. During the presentation, we'll have a question-and-answer session. You can ask questions at any time during the presentation. It is now my pleasure to turn the webcast over to Eduardo Fleites. Eduardo, the floor is yours.

[Eduardo Fleites:]

Thank you, Ian. Good afternoon, everyone, and thank you for joining us for today's first quarter 2017 earnings presentation. Participating on the call will be Kirill Tatarinov, President and Chief Executive Officer; and David Henshall, Chief Operating Officer and Chief Financial Officer. 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 expectation 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 the David Henshall, our Chief Operating Officer and CFO. David?

[David James Henshall:]

Thanks, Eduardo, and welcome to everyone joining us today. We continue to show good results and execution from the operational initiatives driving leverage to the strength in product portfolio that's fueling growth and increased win rates. We're focused on our core strategy of securely delivering apps and data both on-premises and in the cloud, setting the company up for success in 2017 and over the long term. As a note, throughout the call today, we'll only be discussing results from continuing operations, excluding the one-month impact from the former GoTo products. As you can see from the release, Q1 results were as forecasted. Revenue was up 1%, adjusted op margin was 28% and adjusted EPS was $0.97 a share. However, the mix of sales in the period saw a large increase in subscription-based items like CSP, annual term license and Citrix Cloud sales. This contributed to billings growth of over 5% year-on-year as well as total deferred revenue, which was up 11%. I'll talk more about these trends here in a couple minutes. In Q1, we closed 47 $1 million-plus transactions, with strength in technology, fin services and health care. There's good balance across the portfolio with approximately two-thirds of these deals coming from the Workspace Services area including the full suite and the balance from networking and cloud. So next, let's look at the Q1 results within our primary product areas. Workspace Services, which includes virtualization and mobility, was flat year-on-year at $400 million. As we've discussed before, there are several specific initiatives we're driving to accelerate growth in this area including faster innovation, integration of our unique assets, greater competitive positioning and the reinvigoration of our channel partnerships, especially with Microsoft. These efforts have steadily increased our win rate and competitive opportunities. There are, however, a few dynamics that are worth noting from Q1. First, the sales mix in this business is where we're seeing the most pronounced shift to subscription-based offerings. In total, the contribution from contracts of this type was over 20% of product license sales, up from just 11% a year ago. Next, on a recognized basis, license revenue growth in the Americas was up over 5% in the quarter, continuing the above-market growth seen in this region over many, many quarters, and we're also seeing good traction from our APJ restructuring, where Workspace Services license was up 9% in Q1. Third, we had strong growth in monthly CSP subscriptions, where partners primarily utilize XenApp to deliver cloud-based offerings to their customers. Total recognized revenue in this area grew 36% and now has an annualized run rate of $90 million. And finally, we've had a really good response from the newly launched Customer Success Services, the redefined software maintenance program that we announced at the beginning of last quarter – really helping to drive growth in deferred revenue as well. Turning to the Networking business, total revenue decreased 1% year-on-year in the quarter to $193 million with license revenue down 9% year-on-year. This result is in line with our forecast as we expected a decline in the Cloud Infrastructure segment due to the difficult comps from a year ago. I will remind everybody that the NetScaler business is essentially made up of two main segments

[Kirill Tatarinov:]

Thank you, David. Hello and welcome, everyone. This was indeed a significant quarter in our transformation, so let me add a few qualitative highlights. Our global field teams exceeded their bookings plans in all geos. The new leadership in both APJ and EMEA demonstrating much improved execution, growing bookings in the double digits. And as in previous quarters, the Americas team continued growth momentum in the first quarter. For the first time in more than four years, our Workspace Services product bookings grew double digits. One could say that we have turned the tide here. We've added over 1 million new users, which is about 50% faster user base growth year-on-year, with mix strongly shifting towards subscription as David mentioned. 139 customers chose Citrix Cloud in Q1 to run their workspaces, with most of them being existing Citrix customers transitioning to the cloud, with several of them were seven-figure cloud deals. Both CSP and ShareFile did very well, adding to the overall subscription ARR which exceeded $275 million, as David mentioned. In addition, our innovation and increased competitive positioning are paying off with over 1,000 competitive wins in Workspace Services and Networking in Q1, with overall win rates continues to accelerate. Our momentum is building, making it clear that our strategy and execution are focused in the right direction. Now let me add a few extra comments on our solution areas. We've continued with an accelerated quarterly update cadence for our core XenApp, XenDesktop products, delivering the 7.13 release in Q1. We've also fully integrated recently acquired Unidesk technology into our solutions set, adding to the overall momentum. Among many Q1 wins against the competition, two major global financial institutions chose Citrix for application delivery driven primarily by our unique capability with Skype for Business. As we moved into 2017, we set the priority for our sellers and partners to lead with Citrix Workspace Suite, and this quarter we're already seeing results. Among many large wins, Saab chose CWS to enable the company's digital transformation and desktop delivery. Our unified product organization is now much more focused on integrated innovation, making CWS even more appealing in the future. Moving on to networking products. We've continued to innovate rapidly here, stressing our unique pure software-defined and application-first approaches. In Q1, we introduced NetScaler SD-WAN as a service in Azure with Zero Touch Deployment, and we released NetScaler Gateway through Microsoft EMS, and also NetScaler SD-WAN 9.2 with improved scalability and throughput. This rapid innovation makes us very enthusiastic about our future prospects with NetScaler, particularly in SD-WAN where our years of experience in application-aware networking and scalability make a huge difference and paying off already. For example, a major European home furnishings company chose SD-WAN for branch reliability, driven by the performance and app-aware capabilities of our solution. While David mentioned NetScaler SSP results remained muted in Q1 due to the cyclical nature of this business, we saw growth for NetScaler ADC in the enterprise. For example, a major Asian electronics company and a major North American insurance company both chose NetScaler ADC for the reliability and security that it offers. We also saw many switching opportunities with NetScaler, driven by a combination of scalability, performance and security that only Citrix can offer. For example, the Nemours Foundation chose NetScaler to replace a competitor to support their needs for hosting the number one most visited children's health website in the world, KidsHealth.org. Very exciting undertaking by the Citrix team. On to the secure data delivery. ShareFile had a very strong quarter in the enterprise, demonstrating the proven value that ShareFile brings to companies of all sizes. We're seeing particularly strong traction with ShareFile in EMEA, where data residency is of particular concern. For example, a major global auditing firm chose ShareFile for better (15

[David James Henshall:]

Operator, let's now open up for questions.

[Operator:]

Your first question comes from the line of Raimo Lenschow. Your line is open.

[Raimo Lenschow:]

Thank you. Thanks for taking my question. I have two quick questions. First of all, the speed of the transition towards more subscriptions seems to be picking up here. Can you think about how you kind of continue to plan the business then? Because if you can't really plan what's coming on-premise, what's coming as subscription, I mean, can you help us understand a little bit about the speed that you can see here? Is it like a steady speed? Is it increasing, et cetera? And then, David, can you talk a little bit about, if I look at your investments at the moment and it looks more loaded into – it looks more focused on the first half, can you talk a little bit about the linearity for the year because I still try to get to the full year EPS number? Thank you.

[David James Henshall:]

Sure, Raimo. Let me start with the second question about investments. We did frontload a fair bit of investment this year. And so when you look at it in the aggregate, it would be fair to expect it to actually trend down as we go through the year. And let me point out a couple of things. First, there are incremental costs in period in the first half. For example, our big Synergy event, our Summit event, our partner event, et cetera, those are all first half initiatives. Also, there's a fair bit of our ongoing efficiency programs that have been held up a little bit just based on the GoTo spin that's done now. So those will float through in the back half of the year, frontloaded marketing and demand spend, things like that. So that's how you get to it on a modeling basis. When you step back and think about the overall economic model, it is a shift going on. I think it's fair to say that we are managing that. We're actually holding it back a little bit. Customer demand and customer conversations are very strongly focused on cloud these days. It's aligned with where they're going and fortunately it's very much aligned with our strategic focus as well. We are focused in 2017 much more on new customers. Of the cloud, in this period, 75% were new, 25% were installed base customers migrating. So that's a good dynamic. And we're going to keep that focused on net new for now and frankly keep a governor on it because as we've talked about a few times, this is our year to slowly ramp and make sure that we are hardened in the infrastructure areas that we need to be, et cetera. And so we'll be building out our processes. And because of that, we'll have a better ability to manage the financial model. Our plan right now in May is to – at our Analyst Meeting to talk more about the longer-term economics and how it impacts the model. Obviously, the shift to subscription is a big upside from a customer lifetime value point of view, so the economics look great for us, and we just have to make sure it's managed effectively and appropriately within the financial model.

[Raimo Lenschow:]

Thank you.

[Operator:]

Your next question comes from the line of Phil Winslow from Wells Fargo. Your line is open.

[Philip Winslow:]

Hey. Thanks, guys, for taking my question. A question to David and also just Kirill. On the shift to the cloud that's obviously impacting the recognized revenue upfront for the Workspace Services business, David, just in terms of the guidance that you guys have obviously reiterated for the full year, it seems to be progressing a little faster than you thought. How should we think about what you've baked in in terms of that shift kind of directionally maybe versus your original expectations? And how – Kirill, too, sort of what is driving this in your opinion?

[David James Henshall:]

Yeah. In terms of what we've baked in, I mean, and think about the mix that I referred to a couple of times in Q1 with about 20% of bookings coming out of the ratable-type license. There's a combination of term-based license, cloud, CSP, et cetera. CSP is – when we think of those kind of one by one, so CSP has been accelerating because we put more investment in that area. We've been investing in the capacity to recruit, onboard and manage those partners, and so that business has accelerated. Term and cloud are really just a function of how customers are looking to purchase software these days. I mean, you're seeing this increasing trend towards that, most likely driven by cloud and what a lot of other software vendors are doing from a solution point of view. So it's becoming much more common now. We will manage that balance between term and cloud, obviously pushing towards cloud has customers are willing to accept that. But as I was telling Raimo, I think we'll manage that this year, keep the focus on new license, a little bit less so on the installed base, and we'll save that for when the real acceleration of the transformation over the next few years.

[Kirill Tatarinov:]

Yeah. I think it's absolutely correct. And just to build on what David just said, the balance is the key word. Building out of our cloud capabilities is the key word as we'll continue in 2017. And it's also worth noting the new services that we just launched on Microsoft Azure in their marketplace an opportunity that it creates, and in fact in the SMB segment, that historically we've not been able to reach. We saw some early successes that are really positively surprising to many technical analysts who have been following us, like, for example, a customer who was able to get XenApp going in under four hours. And historically, in virtual client computing, as you've been following it on the technical side, it was just not possible. And now we have a solution that enables that to happen. So we view that as sort of a balanced approach whereas David mentioned we will be regulating it and building out our capacity in the enterprise. At the same time, it opens up new opportunities for us in the lower end.

[Philip Winslow:]

Got it. Thanks, guys.

[David James Henshall:]

Thanks, Phil.

[Operator:]

Your next question comes from the line of Heather Bellini from Goldman Sachs. Your line is open.

[Heather Bellini:]

Great. Thank you very much. David, I was wondering – or Kirill – you mentioned reinvigorating the channel community. I'm wondering if you could share with us just a little bit more detail on what specific steps there you've made to kind of reinvigorate the channel. And how would you gage your success thus far? And then I just had a follow-up for David.

[Kirill Tatarinov:]

Well, I think – so, obviously we've been engaged with partners since the beginning of time at Citrix here. And last year we took a very deep view on what else we need to do to enable our partners. And it starts with enablement. It starts with education. It starts with sort of building up to enable their success. Our Summit event in early part of Q1 was a central point of this reinvigoration with also new leadership that we've brought into the program. Some new adjustments to the program that we implemented in 2016 that are now starting to work and starting to pay dividends like our partner-sourced opportunities and shifting of our partner compensation to comp to essentially encourage that behavior. All of the things are in place, and we're starting to work. But as I'm sure you're aware, to manage a large partner channel, and we have over 4,000 transacting partners in Q1, it is a process of continuous tweaking, and it's a process of continuous enablement and optimization. That's precisely what we plan to do for the remainder of the year.

[Heather Bellini:]

Okay. And then the follow-up for David, if I could, is just if I go back over the last, I don't know, probably three or four years, I always feel like Q1 people are usually on point with when you guide Q4, but it seems like we all seem to get Q2 seasonality wrong. And I guess I'm just wondering, how much of this is the business model shift versus just for your Q2 revenue guidance being a little bit below where people were looking versus kind of the shifting business dynamics that you mentioned?

[David James Henshall:]

Yeah. I hate to say it but it's largely just a modeling exercise. Every year it seems to be the same drill. Because we haven't provide Q2 guidance at this point, there's a pretty wide range out there. So usually once we get past Q1, it starts to settle out for the balance of the year.

[Heather Bellini:]

Yes. That's what I thought. Thank you.

[Operator:]

Your next question comes from the line of Walter Pritchard from Citi. Your line is open.

[Tyler Maverick Radke:]

Great. Thank you. This is Tyler Radke on for Walter. David, I was hoping you could talk to us about the maintenance revenue. I thought it declined sequentially. Could you just kind of walk us through the reason for that?

[David James Henshall:]

Yes. Maintenance revenues, it's got a lot of moving parts in it right now as licenses are moving towards a cloud or subscription, things that are coming out of the base, and that'll show up in different parts of the P&L. But I think the more important thing around maintenance right now is you look at the shift that's ongoing towards CSS, and that's what's going to play out over the course starting right now but really over the back half of the year and into the next couple of years. We've talked about this a couple of times is that we've migrated to this new program. It's going to provide an incremental revenue stream that we've been estimating north of a couple hundred million dollars layered in over a few years. The reason is that we are metering the increase to customers to not exceed a certain level year by year. I will say though, however, in Q1, the facts are better than what we had been modeling. We've had a faster level of adoption for customers doing a voluntary. In fact, the average ASP from a booking is up about 24% for those customers that are migrating, which is ahead of our original 15% planning estimate. So just one data point – a couple of data points that give us confidence in hitting that transition with probably a more positive outcome than we had originally anticipated. And we're just trying really hard to make sure we're touching every customer, selling that value. You'll see that start to flow through the recognized license piece as we go into the next few quarters. On a billings basis, obviously that's one of the things that contributed to the big growth in deferred revenue year-on-year and one of the reasons why billings is outpacing revenue by several percentage points in Q1.

[Tyler Maverick Radke:]

Great. And then just a follow-up on the cloud side and NetScaler. We've seen some hardware vendors talk about some impact from cloud spending or possibly the competitive environment. I was just hoping you could kind of touch on what you've seen there, if the cloud spending patterns or competitive situation changed at all.

[David James Henshall:]

Sure. Nothing unexpected. I mean, for the last six months, we've been talking about the cyclical patterns that we expect. Given that the first three quarters of last year were extremely strong, we expected two or three quarters of not as strong business as compared year-on-year. One of the stats I called out in my prepared remarks was that on a sequential basis, from Q4 to Q1, that cloud infrastructure spending on NetScaler was up over 100%. And so it is starting to come back, but it's compared year-on-year against a monster quarter in Q1 a year ago. So we do expect the growth rates to be higher and stronger and positive in the second half of the year. Just the same thing we've been saying for the last couple of these calls. No real change in the overall competitive environment. Continues to be competitive but nothing unexpected.

[Kirill Tatarinov:]

Yes. And I'll just add that this is really the case where we continue to benefit from our software-first approach that enables us to deploy NetScaler in a broad range of form factors, including NetScaler-as-a-Service in both AWS and Azure, NetScaler Docker (31

[Tyler Maverick Radke:]

Thank you.

[Operator:]

Your next question comes from the line of Abhey Lamba from Mizuho Securities. Your line is open.

[Abhey Rattan Lamba:]

Yeah. Thank you. Two questions, David. And the one, what was the impact of greater-than-expected adoption of subscription in this quarter in terms of revenues and earnings? Can you quantify it for the quarter and for the guidance for the year? And secondly, how should we think about cash flow margin for the year? Should there be upside effect from the shift in the model? And was there any onetime impact on cash flows this quarter?

[David James Henshall:]

Okay, Abhey, let me parse out all those questions. Take the last one is in terms of onetime impact, there was a big onetime impact to cash flow related to the discontinued operations, really the GetGo spin, that was a negative impact of over $42 million, and so that's the largest of the one-offs. Cash flow is a little bit messy this quarter just because of that spin. We'll be reporting it on a very clean basis going forward and then calling out the GetGo business as discontinued operations in every prior period. In terms of the actual impact on the quarter, we're not prepared to talk about a perpetual equivalent right now or try to normalize that. And I think it's a little too early for that given where the financial model is. But I'd say the best way to look at that in the short term is just the difference between billings and revenue and deferred and deferred expectation. Those are probably the places that I would point you to. If I was looking at it, it would be in probably the ACV terms, and we are starting to measure the business this way. And we'll provide that level of incremental metric as we go through our Financial Analyst Meeting and talk about the multiyear transformation. At this point, I'd rather just keep it very focused on the reported financials.

[Abhey Rattan Lamba:]

Got it. Thanks. And what's – about the cash flow margin for the year? And that's it for me.

[David James Henshall:]

Yeah. I think cash flows are actually going to benefit as we go through this. I mean, we've got a couple of dynamics going on. We've talked about them a few times. A lot more in the case of multiyear transactions. We are still billing a large portion of those upfront. We are starting to build a balance of – well, what we can call unbilled backlog or off-balance sheet backlog. We're not planning on reporting that at this point. It is measured in the several million dollars this quarter, but it's not material at this time. So, fortunately, we'll be collecting a lot of cash from these multiyear transactions, and as we go into cloud, it will start to outpace revenue in the short term.

[Abhey Rattan Lamba:]

Thank you.

[Operator:]

Your next question comes from the line of Kash Rangan from Merrill Lynch. Your line is open.

[Nikolay Beliov:]

Hi. This is actually Nikolay Beliov sitting in for Kash. You guys mentioned that APJ and EMEA bookings grew double digits and overall billings were up 5%. Can you please speak to the Americas business? That implies that maybe Americas was weaker in Q1. What happened there? Any puts and takes?

[David James Henshall:]

Yeah. This is the danger of talking about bookings because you're combining recognized plus the change in deferred, of course. But if I look at it on a recognized basis, Americas was up 1 point, APJ was up 10 points and EMEA was down a couple points. On a bookings basis, I think the important takeaway is that all three geos exceeded plan. It's the first time in a long time we've had all three geos north of 100%. They all had nice positive growth there. So I'd probably want to just stay at that level and not try to go down too far because the real takeaway is the work that we've been doing in rebuilding the teams, the capacity and some of these execution challenges that we've talked about in the last year or so, really showing great progress. The Americas team has been the growth engine of this business for a long time. They continue to do extremely well, and the improving results you've seen in the international geos are just going to help as we go through the balance of the year.

[Nikolay Beliov:]

Got it. And as a follow-up, you mentioned that the win rate in Workspaces has been increasing in the marketplace despite the pressure from the shift to subscription. Can you please talk about why are you guys winning at an increasing the rate and how you are differentiated versus VMware? And are you seeing Amazon Workspaces in the marketplace? Thank you.

[Kirill Tatarinov:]

Yeah. It's a great question. And we have seen an increased win rate and we have seen the record number of wins this quarter. Obviously, the product is the number one driver. We continue to innovate rapidly with our Xen family. Four releases in 2016, another very significant release in first quarter of 2017, full integration of Unidesk that adds to overall win momentum, and we've seen that it's really starting to make a difference. And it's very exciting to see. I think our partnership with Microsoft, which essentially now has come to a point of sort of well-run operating machine. We spoke about – at least one win we can name and report. There were many more, and that continues to help. We still have unique capability for virtualizing of Skype for Business. We play very unique role in Windows 10 migrations. And all of that combined has certainly been driving the overall win rate. It's also fair to say that our field and our partner channel demonstrate a lot more energy and enthusiasm even compared to what we saw a year ago. And this is all a result of the continuous focus, continuous education and continuous cultural transformation of the company to be more courageous as we take on competitive situations.

[Nikolay Beliov:]

Thank you.

[Operator:]

Your next question comes from the line of Gregg Moskowitz from Cowen. Your line is open.

[Gregg Moskowitz:]

Okay. Thanks very much and good afternoon, guys. Kirill how would you characterize sales cycle this quarter? And going forward, is there some risk of sales cycle elongation among your installed base as customers perhaps liberate the architecture that makes the most sense for them? How do you see that playing out? And then I just have a follow-up for David.

[Kirill Tatarinov:]

Yeah. I think – I don't believe we've seen any material change in the sales cycle in Q1 in our core businesses. I think if we sort of look across the portfolio, I think we've seen probably a slightly accelerated velocity in XenApp, XenDesktop, primarily driven yet again by increased innovation and just by much more focus of being clear on what we deliver and articulating our value proposition with a whole lot more clarity than in the past. I think it's also the case where the entire company is being more focused and our strategy being much more aligned with our core product value proposition continued with slightly accelerated deal velocity. In the networking space, in SD-WAN in particular, I would say that this is new market, and I would say it's driven by large transactions, and I think this is the place where proof of concepts are taking time, and people are really trying to assess what's going on. We continue to stay very focused on that. We're very bullish on SD-WAN going forward, and we certainly participate on those proof of concepts with our partners and also educating the channel. So I would say no material change. Slight acceleration in our core business on the deal velocity.

[Gregg Moskowitz:]

Great. Thank you. And then just for David, I wanted to confirm because there's a little confusion among investors since I don't believe we have all the historicals ex GoTo from a balance sheet perspective. Did you say earlier that your total billings growth this quarter was 5% on an apples-to-apples basis?

[David James Henshall:]

Yes, I did.

[Gregg Moskowitz:]

Okay. Perfect. Thanks for the clarification.

[Kirill Tatarinov:]

Thank you.

[Operator:]

Your next question comes from the line of Mark Moerdler from Bernstein Research. Your line is open.

[Mark L. Moerdler:]

Thank you. Got a question for both; one for Kirill, one for David. As you discussed, the Microsoft partnership is helping, but is the partnership yet firing on all the cylinders? Or do you believe the ability, especially relating Azure, to drive acceleration adoption is still ahead of you? And then a follow-up.

[Kirill Tatarinov:]

Yeah. It's a great question. I think Microsoft partnership, which has been in place for about a year now, sort of reached a point of operational maturity in most part of the world, and we continue to make it a truly global phenomenon. So I think while it's working in major geographies, I think there is opportunity for us to see more upside from that as we expand globally. And as you know, for that partnership, the most important thing is to get the sort of people on the ground in countries to work very closely together, and we continue to make sure it does happen as we made it happen in the center and have very good cadence of engagement. I think there is an upside. Clearly there is an upside in XenApp, XenDesktop Essentials services that were just made available at the end of March on Azure Marketplace. And we view that as a great new opportunity. You can kind of characterize it as a second-party service. It's not first-party by Microsoft. It's branded Citrix, yet it is sold in Azure Marketplace by Microsoft, and early traction has been significant. And on top of that, at the end of Q2, we plan to make available similar service for XenMobile, which is XenMobile Essentials, which is yet again a multi-tenant, cloud-native service released in Azure Marketplace as essentially a wrap or add-on to Intune and Microsoft EMS. And our sort of early signals from customers who previewed this solution has been incredibly positive and we're expecting good uplift from that solution as well. So, great traction so far and yet we absolutely continued to see upside. And obviously with our major customer event coming up next month, we're certainly going be unveiling some other interesting tricks that we're going to do together with Microsoft.

[Mark L. Moerdler:]

Perfect. David, how should we think about the gross margin impact of the cloud shift both on this year and the longer term?

[David James Henshall:]

Sure, Mark. I mean, longer term, we'll talk about that later in the year. We'll preview some of that at our Analyst Meeting, but no impact this year. I think gross margins for 2017 are still going be in that range of 86%, 87% where we've been forecasting all year.

[Mark L. Moerdler:]

Excellent. Thank you.

[Operator:]

Your next question comes from the line of Kirk Materne from Evercore. Your line is open.

[Tom Mao:]

Hi. This is Tom Mao on for Kirk. For Kirill, in terms of the booking strength for Workspace Services, do you feel like this is due to better execution on your end or kind of taking share versus competition? Or has there been a broader pickup in spending on desktop delivery technology? And if it's a bit of both, can you just provide some context on how we should think about these macro and micro factors?

[Kirill Tatarinov:]

I think there is a broad set of factors. And first and foremost, we're a technology company and innovation is the number one driver for any uplift. And this is the case where focus on the core and investing in core product in the last 18 months is clearly paying off. So this is one. A few secular trends, cybersecurity. The fact that more and more customers are viewing virtual client computing as core part of laying down secure and a reliable architecture for their IT is certainly taking place, and we're seeing customers choosing XenApp, XenDesktop for securing of their enterprise. And this is across industries, financial services, health care, essentially across the board. Win 10 migration is certainly serving as a sort of very important pivotal point in IQ re-architecture, and through that IQ re-architecture and move to Windows 10. We see customers shifting towards thin clients, whether it's a thin client "laptop" with Chromebooks where Citrix has a unique capability to offer to essentially legitimizing Chromebook in the enterprise or whether it's something like Raspberry Pi for larger screen type deployment. Yet again we have unique capabilities there through Citrix Receiver baked on a chip. So that's taken place. And last but not least, we're seeing shifts to Citrix Cloud, and I think that shift is certainly also serving as a catalyst. Historically, we all know that one of the blockers for VDI adoption and for virtual client computing adoption in the enterprise has been complexity of the overall solution. It's not the easiest part of IT infrastructure. We also know that in the last five to seven years, we've seen continuous shortage and increased shortage of IT talent. And so now we essentially, with Citrix Cloud, removed that complexity and all of a sudden made it easier for organizations of all sizes to adopt virtual cloud computing and VDI. And that's also served as a driver here. So broad range of factors. I think it's – last quarter we said that 2016 was the year when we'll lay down the foundation for future growth in the core, and now we're seeing the results of that foundation being laid out. And all of that, coupled with strong execution in the field, David spoke about much-improved leadership and execution globally. We're seeing that taking place. And yet again, our global field organization being much more courageous as they talk on the competition and win against them with stronger product.

[Tom Mao:]

And just a follow-up to that, how are you thinking about M&A in terms of helping you continue this transition to the cloud?

[Kirill Tatarinov:]

Well, as we've demonstrated in the last 12 months, we've favored tuck-in acquisitions that are clearly immediately benefit our customers and easy for us to integrate. And we always look for more and we look for more opportunities. That relates to sort of cloud foundation. This is really something that a company like Citrix needs to build and needs to own. And we've made huge progress building out Citrix Cloud and really laying down all of the operating tools that enable us to deliver that scale with high velocity. And obviously, we always look for ways to augment it with both parts of infrastructure that can help us and potential future M&A activities that would help us accelerate and add capabilities.

[Tom Mao:]

Great. Thanks.

[Operator:]

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

[Austin Dietz:]

Hey, guys. This is Austin Dietz phoning in for Michael. How much deployment both on-prem and in the cloud are you seeing with NetScaler VPX? Thanks.

[David James Henshall:]

Yeah. NetScaler VPX is still a minority product. I mean, from a volume standpoint, it would obviously be much, much higher than revenue. But on a revenue basis, it's generally 10% or 15% of the mix, units, of course, being much, much higher. I don't think we have great visibility in terms of whether there – it depends on where the customer purchases them. If they purchase through a marketplace on one the mega clouds, of course, the assumption is it's being deployed in the cloud. If they purchase it through a typical license agreement, we're not sure exactly where they ultimately deploy that. But I think the bigger takeaway it that it is a software solution and it gives you that flexibility, whether that cloud is a hybrid cloud that you own some of the infrastructure or it's a public cloud. And you can move those capabilities around very, very easily. And because we're a software-first solution, NetScaler allows you to do that, and whether that's VPX in a container focused on DevOps or in a traditional appliance form factor. And so that's our strategy from a product point of view.

[Austin Dietz:]

Great. Thanks.

[Operator:]

Your next question comes from the line of Keith Weiss from Morgan Stanley. Your line is open.

[Sanjit K. Singh:]

Hi. This is Sanjit Singh for Keith Weiss. Thank you for taking the question. David, I had a quick clarifying question on the ARR of $275 million. On the 22% growth that you cited, did that (48

[David James Henshall:]

No. That's totally excluding all GoTo impact.

[Sanjit K. Singh:]

Okay. Great. And then I guess moving to the cloud transition, I think just from a philosophical point of view, is the operating principle in terms of how you're going to manage this transition, if the transitions happen faster than you expected, is that something that you guys would be happy with or do you guys feel you need to manage the transition of the cloud to sort of maintain the near-term, intermediate-term financial profile?

[David James Henshall:]

Well, I'd put the financial profile second, and I'll explain that in a minute. It's more a practical answer when it comes to just making sure that everything necessary to transform a company to a different model is in place. And that's true from a technical standpoint, from an infrastructure point of view, from systems and processes and people. And all those things take time. You want to make sure that you get it right so the customer has an amazing experience, and that's the primary reason why we meter. If I look at it from a financial point of view, I mean, financially it provides a tremendous amount of upside long term from a customer lifetime value, assuming you get part A of that answer correct. And so that's why you've got to start there, get the foundation in place, get the processes in place and then help customers. And we'll add a tremendous amount of value when we do that, but that's the primary reason why we're throttling the growth rates.

[Sanjit K. Singh:]

Understood.

[Kirill Tatarinov:]

I would just add that even the last two quarters, we spoke about our approach to cloud transition being crawl, walk, run, and we certainly in Q1 entered a walk year. And this is a bit of a speed walking, and we will continue to moderate our pace as we go through the year. We also see balanced demand from our customers, and I think the sort of operative word for a cloud transformation in 2017 will be balance.

[Sanjit K. Singh:]

Understood. That's helpful context. And then just a last follow-up, and I know we'll probably get into this more on the Analyst Day, but just as a starting point of discussion, in terms of the gross margins on your cloud/ratable business, approximately where do they stand today and where could we see that going once we sort of really start to accelerate in terms of scale?

[David James Henshall:]

Yeah. I'd rather just hold off until we can talk about it at scale. It's not appropriate at this point. Let's stay focused on the 86%, 87% that's embedded in our guidance for the full year.

[Sanjit K. Singh:]

Great. Look forward to the Analyst Day. Thanks.

[Operator:]

Your next question comes from the line of Matt Hedberg from Wells Fargo (sic) [RBC] (51

[Matthew Swanson:]

Yeah. This is Matt Swanson on for Matt Hedberg from RBC. Kind of circling back to your comments during the call about cybersecurity becoming increasingly a catalyst, I know you had an article come out earlier in the month talking about GDPR. We hear that a lot from our security companies, maybe a little less from infrastructure. So could you talk a little bit about how GDPR could affect your European business and what products specifically you feel like it'd be benefiting?

[Kirill Tatarinov:]

Yeah. That's a great question. And having spent a bit of time in EMEA during the quarter, I can certainly attest that GDPR is a big topic of conversation for CIOs and for our people and our partner channel as well. It comes into effect in 2018. We're absolutely going to be ready with all of our products and full compliance, and absolutely ready for the new regulation. In our secure file sync and share solution, ShareFile, we have the unique capability. We have the unique capability compared to all of the other cloud-based file sync and share solution, and that is we have an option to deploy in customer managed zones, whether it's in the local cloud and whether it's on-prem. And I think this is certainly the case where ShareFile is likely going to be the beneficiary of this new regulation on an ongoing basis.

[Matthew Swanson:]

That's great. And then if I could just have one follow-up. We talked a lot obviously about the shift towards more subscription and also a lot about the Microsoft partnership. With so many of their products now going cloud or subscription-based, do you feel like that partnership is at all accelerating this transition for you?

[Kirill Tatarinov:]

I think this is certainly the case where Microsoft, along with other cloud infrastructure providers, has played a pivotal role in effectively convincing enterprises that cloud is something that they need to embrace. I think this is also the case where continuous improvement and performance, scalability and security of cloud offerings, whether it's driven by Microsoft or other cloud providers, is also serving as a catalyst of the broader cloud adoption and customers of all sizes. So we have certainly seen this. We have certainly absolutely seen this. Also, Microsoft has been incredibly focused on Azure as a company, and that has certainly been a driver and been a catalyst for the overall broader cloud transformation in Microsoft customer base, where effectively we have a very, very strong presence. So, yes, indirectly it has been a driver and it continues to be a driver.

[Matthew Swanson:]

All right. Thank you for your time.

[Kirill Tatarinov:]

Thank you.

[David James Henshall:]

Thanks, Matt.

[Operator:]

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

[Brad Reback:]

Great. Thanks. David, in the cash flow statement in the first quarter here there was a deferred tax item that added about $67.5 million. What's that related to and will it reverse over the course of the year?

[David James Henshall:]

Yes, I'd have to follow up with you on the detail of that. It's related to the GetGo spin, but in terms of how much of that is embedded, we'll follow up on that. If you look down the financial statement, it should be netted out by the impact of discontinuing operations.

[Brad Reback:]

Okay. But below the line on – or is that in cash flow from ops?

[David James Henshall:]

Yeah, cash flow from ops. We'll follow up with you on much more granularity though.

[Brad Reback:]

Thank you.

[Operator:]

There are no further questions at this time. I'd like to turn the call back over to the presenters.

[Kirill Tatarinov:]

Well, thank you, everybody, for joining us today, and thank you for following Citrix as we continue in our journey to transform the company. The new Citrix has clearly taken shape in the last few quarters and we look into the future with high degree of confidence, excitement and enthusiasm. Our vision is clear, our strategy is focused, and our execution and innovation engines are working well. We look forward to seeing you next month in Orlando for a deeper discussion on cloud transformation and future prospects. Thank you, all, very much.

[Operator:]

Thanks to all participants for joining us today. We hope you find this webcast presentation informative. This concludes our webcast. You may now disconnect. Have a good day.