Citrix Systems, Inc.
Q3 2017 Earnings Call Transcript

Published: 26 Oct 2017

[Operator:]

[Call Starts Abruptly]. At this time, I would like to welcome everyone to the Citrix Systems' Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions]. Thank you. I would now like to introduce Mr. Eduardo Fleites, Vice President of 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 third quarter 2017 earnings presentation. Participating on the call will be David Henshall, President and Chief Executive Officer; and Mark Coyle, Interim 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 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 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 David, our President and Chief Executive Officer. David?

[David Henshall:]

Thank you, Eduardo, and welcome to everyone joining us today. I want to spend most of the time on today's call talking about our business transformation and multiyear financial goals. As you know our transition to a subscription model is starting to accelerate and were seeing the early impacts on our financial results. Today we want to walk you through how we plan to drive this move over the next several years. The financial outcomes and the metrics to measure our progress along this journey. Before we dig into that however let me take a few minutes to provide some brief color on our Q3 results and expectations for Q4. Our standard and deck including quantitative metrics has been posted to our investor relations. Mark Coyle, our Interim CFO is also here with me for the Q&A session. Overall, I'm pleased with our results for the third quarter. Our team has shown great focus executing despite all the changes we are driving within the company to set us off for the next few years. I've settled my view on Q3 simply as total revenue in line with expectations, accelerating and subscription revenue as the new model to begins impact the P&L and expenses that are back on track driving higher profitability. All in total revenue was up 3% year-on-year, this included subscription revenue which as I mentioned continued to accelerate growing 30% to 81 million in the quarter. The mix of annual subscriptions bookings to total product bookings was 19% in the quarter, up from 12% a year ago. And as we've discussed last quarter the growth in the underlying business has been several percentage points higher than the reported revenue this year due to this increased in the subscription mix. Just couple of things worth noting within product revenue. First, work space services decided to accelerate. Overall revenue in this business was up 5% with perpetual license increasing 3% however the real drivers coming from SaaS as the contribution of Citrix Cloud bookings are beginning to be material without this increase the overall growth rates. However, networking continues to be a mix bag. Then a hyper-scale cloud segment of our business, which we refer to you as SSP remains pretty volatile quarter-to-quarter. In Q3, product bookings for SSPs decline more than 40% from last year. Well our non-SSP business the one that we refer to as the enterprise segment saw product bookings increase by over 10% in Q3. This is due to increased go to market coverage and competitive takeouts. Operationally Q3 was strong, adjusted op margin rose to 32% an increase of nearly 550 basis points sequentially and tax flow from operation was up 7% from Q3 last year. We’ve started the process of rebalancing resources and freeing up capital to invest in those areas necessary to accelerate our business transformation and our multi-year financial plan. And finally, in Q3 we introduced Mark Ferrer is our new Chief Revenue Officer, joining us from SAP where he spent the last six years helping drive their transition towards subscriptions in cloud services. Looking at Q4, we feel good about the outlook and the opportunity pipeline and consistent with the last couple of quarters, we expect that customers will continue adopting subscription services for Citrix Cloud, both in hybrid and SaaS models. With this and the strength of Q3 we are increasing our full year guidance to include revenue between $2.82 billion and $2.83 billion and adjusted EPS of $4.79 to $4.81 per share. Now let’s talk about our business transformation and our multiyear financial plan. Citrix is transitioning to a new model because it makes business sense for the company its being driven by our customers and we’ll create a stronger operating model. It's important to understand the complete context for this move, so today I’d like to provide you with an overview of our strategic opportunity, the benefits to Citrix and our customers, improved financial reporting to really help you understand our business and our financial targets as we exit 2020. In addition to the materials we’ll walk you today on this call, a more detailed slide deck will be posted to our Investor Relations website. So, to understand the context behind our strategy, you need to step back and look at the infrastructure from a customer's point of view. They are adopting cloud services and SaaS applications on a broad basis. Many of our customers are juggling multiple cloud providers and dozens of new SaaS apps, yet over 90% of organizations expect that they will still have the majority of workloads running on prem for five years. When you combine this increased complexity with mobility and the new work styles it’s a fragmented user experience provides an increase in security risks and most IT teams are just struggling to keep up. For these reasons the customers have been driving our evolution, they are looking to operate a multi cloud hybrid cloud world. These challenges require a new approach and create this opportunity for Citrix to provide simple, secure and unified solutions, helping our customers address these challenges and simplify the roadmap. Keeping this in mind, we see three strategy motions, driving our opportunity for revenue growth. First, we’re building cloud services across our entire portfolio to address the fastest growing part of our – accelerating that delivery of our own innovation and simplifying customers adoption. Next, unifying our point product technologies into a secure digital work space both on premise and in the cloud for an integrated end user experience and simplified tool for IT. And third, we are unpacking many of our networking capabilities into a secure digital parameter, to be delivered as a cloud service, for reliable and secure app delivery across an extended surface area. With this strategy, we expect to expand our total addressable market by more than 35% overtime. We feel confident in our strategy for several reasons, most importantly of which is that this was what we are hearing from our customers. In fact, a recent ESG study of nearly 1,000 Citrix customers found that two thirds of the U.S. are a cornerstone of their security initiatives providing secure access and control. We also have an added advantage over point product providers because of our install base of hundreds of thousands of customers 100 million end point clients our layer 437 networking and nearly 2 billion documents shared per year. All in this puts us in the direct path of user device networking and content traffic to help optimize, secure detect and correct tissues before they become a problem in customer environments. And the Citrix Cloud mix the delivery of these benefits much, much easier. What we are doing is providing an integrated approach for administration, identity, authentication, provision and management. Citrix is hosting the management layer while the customers gets the choice where to run the workload from any clouds or from any on premise datacenter. We integrate the administration and control across all of these environments allowing them to embrace the hybrid-cloud architecture, while reducing their need for specialized IT skills. Inevitably this leads the faster innovation, greater control in a lower cost of ownership. So now let's look at the economics of the subscriptions and why this ultimately drives customer value. Moving to a subscription model provides significant economic benefits for Citrix. The model increases customer lifetime value while the new cloud services expand our use case opportunity. Expanding these to Citrix to secure and deliver a broader range of applications including SaaS and web apps. This should increase the number of fees and usage of our products overtime. In addition to that as an integrated suite the Citrix workspace service automatically attaches to our networking and content collaboration products. For customers the goal is to reduce PTO is the access and new innovation and simplify their infrastructure while increasing security and off course the flexibility and confidence to pursue hybrid multi cloud strategies. If you step back and look at the impact of this model on our financial statements the shift should really only have moderate financial headwinds. Currently our business is about 70% coming from recurring sources. Our non-ratable revenue to remain in 30% is made up of perpetual licenses of workspace services and networking. We expect that most of the non-ratable revenue will move to recurring over time as licenses are sold under the new model. Financially, subscription transition provides an opportunity for us to increase revenue from both new and installed base sources. The financial opportunity is pretty straight forward, when you look at it from a unit economics point of view of a new cloud customer as well as occur installed base customers adopting Citrix Cloud subscriptions. In each case the customer can consume Citrix Cloud s either SaaS or a hybrid cloud offering the ladder of giving them the choice between the two. First, for new licenses current pricing shows an average 2.5-year breakeven point as compared to the cost of purchasing perpetual license and maintenance creating an increase in life time value by year of three of beyond. Next you can see an example of the shift for existing installed base customers moving from maintenance to cloud. While still only small sample size, we've seen an average 42% price uplift as customers have converted so far for the purpose of our planning reduce a more conservative assumption our modeling and assume only a 33% price increase overtime on conversions from our CSS offering. Understand the customers are moving to cloud really at their own pace and the transition allows for hybrid rights which affords optionality to migrate to this Citrix Cloud platform over the term of the contract. We are hearing good feedback from early adopters, for example from customers that have been running older versions of our product, the move to Citrix Cloud has provided the opportunity to benefit from all the new versions and updates, without the cost and complexity of a normal upgrade cycle. Additionally, we have customers reporting consecutive quarters of reduced operating cost, post transition. Specifically looking at our large install base, there is really two opportunities in process that should increase recurring revenue. In addition to the Citrix Cloud move that– we just discussed, were also still migrating existing workspace services maintenance customers to our upgraded support offerings customer success services, or as we refer to it as CSS. This would be completed during fiscal year 2019. CSS is really important as it provides a significant increase in customer value including proactive monitoring, analytics, expert guidance, cloud migration tools, unlimited support and access to product updates. As a reminder for everyone, CSS is priced at 25% of original product license costs for annual subscription, versus just 15% to 18% for our older license update programs. As we previewed at our Analyst meeting, we will be introducing adjustments to our revenue reporting as well as new metrics, so you can better understand the businesses as we move through this shift, including a subscription revenue ARR, annualize subscription mix as a percent of product bookings and deferred and unbilled revenue. We have already posted historical financials in this format to our Investor Relations website, so you can build the bridge. While we are introducing these new metrics, the transition of our workspace service and networking business is actually going to cross us for several quarters. We are now starting to see the impact in the P&L with subscription revenue accelerating since Q1. In fact, subscription ARR in Q3 was north of $320 million up 30% from the prior year. Driving this as is the increased mix of annualized subscription bookings in the workspace service and networking business as percent of total product, steadily climbing to almost 20% last quarter. As we look forward, we are approaching the transition holistically, and have identified four business initiatives that we expect to drive customer and shareholder value and we have set goals for each one, to better understand how we are thinking about the shape of the business in a few years. First is the move to a subscription model driving value through more predictable recurring revenue while increasing customer lifetime value. We are targeting to exit 2020 with at least 40% of total revenue coming from subscription. Next is the delivery of Citrix Cloud, not only does this increase our addressable market opportunity and accelerate the pace of our innovation delivery but these services drive real customer value, by reducing complexity, TCO and providing a platform to ease the adoption of new Citrix services. We are targeting more than 60% of new bookings coming from Citrix Cloud subscription in three years. Third item is our commitment to a balance an efficient financial model. It's in 2020, we are targeting revenue growth of greater than 4% trending upwards while adjusted operating margins at the least 33%. And finally, as we move through the transition, we plan to continue to return significant capital to our shareholders, our current plan is to return 2 billion of capital between now and the end of the 2018. So, let’s take a closer look for a moment at the pace of our transition and how it will impact revenue growth rate. As I mentioned we are targeting an overall growth rate of more than 4% exiting 2020. And as expected as we move to a subscription model and we recognize more revenue on our ratable basis, we'll see a temporary decline in revenue growth rate and profitability as we have this year. However, as revenue growth should reaccelerate in 2019 and beyond due to the compounding of prior ratable bookings, growth of new customers and the CSS maintenance price increase. Ultimately the ultimate pace of adoption will drive how quickly we reach these levels. As the model changes you are going to see a rapid growth in subscription revenue where our estimate shows a compounded growth rate of more than 50% during this time frame. Partially offsetting this though will be the decline in this traditional license and maintenance model. On the operational side we maintain spending discipline while investing in innovation, customers success and the go-to-market capacity needed for long-term growth. As I've said as our revenue growth rate slows a little next year we'll expect the temporary impact and adjusted operating margin. As mentioned we are targeting to exit fiscal year '20 with adjusted op margin of at least 33%. Finally, let's address free cash flow. In the 2020 exit rate for free cash flow will be influenced by two factors. The pace of subscription adoption and the billing terms of this contracts. In order to provide further visibility into the impact of the billing terms will be again disclosing the change in unbilled revenue staring in Q1 earnings. Through the transition in the capital return programs we're driving the business to deliver more than $7 a share of free cash flow. We expect to achieve this in the 2020 and 2021-time frame dependent upon the rate and pace of subscription bookings the final billing terms in the capital return programs. The mix of free cash flow and unbilled revenue will depend on the average length of this customer contracts and off course the frequency of billing cycles. Transitions like ours typically take four to five years until the model normalizes and after that point you would expect to see an acceleration in free cash flow growth. So, when we bring it all together looking at where we expect to finish 2017 and the impact on the P&L from accelerating this move to subscriptions, our preliminary view on 2018 will include revenue growth in the range of 1% to 2% over this year and adjusted operating margin of 29% to 30%. Ultimately the pace of transition is really important. It is slower than expected results could be higher than this outlook conversely if the pace is faster than we expect than revenue growth and operational profitability could be a little lower in 2018. So really to sum it up, were happy with this plan and really happy with our result come together in the last three months. Our goal is to drive customers success and long-term value for shareholders, partners and employees. The new business model will provide visibility and drive leverage over the next several years and our innovation around Citrix Cloud will be at customers in the past that they need to a secure flexible multi cloud hybrid cloud environment that they've been asking for. We feel good about our direction in the future of Citrix we've set solid goals for 2020 and with the clear path to execute. It is an exciting time for the company and while any transition is challenging I'm confident that we're position for long-term success well under the future. Thank you. And as always, we look forward to your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Phil Winslow from Wells Fargo. Please go ahead. Your line is open.

[Phil Winslow:]

Thanks guys for taking my question and then also very thanks for all the new metrics you gave us for modeling out this transition. Question for you David, you mentioned obviously rate and pace attractive so it's going to be important here about just next year but over the next several years, how you are thinking about going to market with this and just how that rate and pace plays out, considering that sort of up to the customer, how you are kind of thinking 2018 and beyond and what sort of incentives that you have in place well it be for the customer for the sales force et cetera than just one quick follow up to that.

[David Henshall:]

Sure, I mean overall as you would imagine, we are working pretty quickly to make sure that we’ve got a holistic approach to the transition not just on the go-to-market side, but everything inside the organization as well, so we are 100% lined up against what this [Audio Gap] nearly 20% of the mix that I talked about before and if we look to accelerate that transition some of it is just taking our foot off the break and some of it is – as normalize in that from the sales standpoint, so we will do both.

[Phil Winslow:]

Got it and then just a follow-up on CSS obviously, last quarter you gave us some metrics of uptick on that obviously the terms of CSS have change now, just so curious if you guys update in terms of what you saw this quarter with CSS whether it be anything from clients, any sort of change in churn versus expectations et cetera?

[David Henshall:]

No CSS continues to move frequently, as you know we had a lot of success in Q2 we pulled in obviously some business at Q3 as well, just renewals business, we have migrated I say roughly half of the base so far, but remember of that some of these customers are multiyear step up from an ASP standpoint, so the financial impact will flow in overtime. Expect to be done with complete migration by fiscal year 2019.

[Operator:]

Your next question comes from the line of Abhey Lamba from Mizuho Securities. Please go ahead, your line is open.

[Abhey Lamba:]

Yeah, thank you. David thanks for the additional color it was really helpful. At the Analyst Day, you had also talked about $500 million for incremental revenue from cloud migration, are we still on track to that or do you think that we should expect more given that the [executed] base as an option there?

[David Henshall:]

It’s a good question Abhey. I would encourage everybody go back and look at the chart if you haven’t seen them it is part of the webcast that we posted on the websites. We have provided a lot more detail into this transition. But looking specifically at install base, my prepared remarks talked a little bit about the double half between migrating customers to CSS which is still in flight and then what we have seen so far is actually got 42% uplift of CSS for customers that are migrating Citrix Cloud subscriptions and just remind that just gives install base customers the optionality to adopt the Citrix Cloud platform or work play and the capabilities that come along with that. So, our model that we have laid out has a lower step up, we want to be conservative on that and model about a third. So, I think the opportunity is absolutely there, we will be migrating those customers at a little bit slower pace probably than net new, net new is where we will be more aggressive but we have a plan that we are putting in place right now to give them good incentives but it is a financial step up.

[Abhey Lamba:]

Got it thanks and the $2 million of capital return that you have laid out at the end of next year. Is it going to be primarily buybacks and are you thinking of ASR or some sort of program type of anything [indiscernible]?

[David Henshall:]

We can't give a lot of detail at this point, but I would say that it's fair to assume it will be largely buyback.

[Operator:]

Your next question comes from the line of Kirk Materne from Evercore ISI. Please go ahead. Your line is open.

[Unidentified Analyst:]

Hi, this is Tom now dialing in for Kirk. David, I realize this is a preliminary guide but does the ASC 606 change or does that have any impact on operating margins next year and just given expenses were kind of higher than expected in the first half of this year were a bit surprised you wouldn’t see a bit more leverage next year. Would you mind just walking us through some of the pieces as it relates to operating margins going forward?

[David Henshall:]

Sure. The simplest way to think about op margins in '18 and beyond is that we're just being conservative looking at accelerating this transition as everyone noticed when we push hard and we started driving a much greater incremental amount towards subscriptions there is a little bit of a depth into P&L as we spread out that revenue over an extended period of time before the base catches up and we get that acceleration. And so that's the way we are approaching it. We've taken the last 2.5 to 3 years to get to 20% of the mix and if we can double that in a year I think that would be probably as fast as we could go but that incremental piece is what impacts the top line and then conversely impacts the operating margin. We step back when we look at where we are want to make sure that we've got plenty capital invested in increased sales capacity, cloud offs customers success those things are going to really drive success over the next three or four, five years. So that's probably the best way to think about it right now.

[Unidentified Analyst:]

Got it, and just a quick follow-up. I know you talked about the CSS offering, what kind of revenue uplift should we expect to see in your customer base and to what extent is that already embedded in your guidance?

[David Henshall:]

Well, I think it depends how you are thinking about the install base because there is really two things just on a pure ASP uplift now it's back to buyers question and that's hundreds and millions of dollars of annualized recurring revenue that is an uplift from where we are today. I think more importantly that was when you think about what we are driving right now and the types of complexity we are trying to abstract away from a customer environment the secondary impact should really drive a broader set of used cases should allow us to increase seats under management and really expand our overall served addressable market. The latter statement though, none of that is included in our current outlook. We are being very conservative on that piece.

[Operator:]

Your next question comes from the line of Rob Owens from KeyBanc Capital Markets. Please go ahead. Your line is open.

[Unidentified Analyst:]

Hey guys this is [Michael Sato] on for Rob Owens. Given the broader hacking activity we've seen over the past few months how have you seen changes in the way customers engage with you? Is security resonating more with them. And has any of that attraction coming from new logos or replacements?

[David Henshall:]

Yes, it's a fairly broad question I would say that securities actually resonate obviously with all of our customer base it’s a huge strategic priority. One other things that I mentioned in prepared remarks was a recent study that we did with the thousands Citrix customers and the vast majority of those highlighted Citrix as a critical part of their overall security framework and so that is in itself is obviously a real testament. We are setting more time with customers thinking about security holistically because when you think about a lot of what the workspace services products do and more broadly the whole digital works space it allows them to really, really thinks the way that they are approaching everything from endpoint security, identity, contextual access and contextual performance. So, there is definitely a big security wrap around in it. When I look forward into really about the evolution of a lot networking capabilities as we embrace a perimeter approach to start bringing networking capabilities to the edge, that allows us to much more directly start trusting things that people will consider to be security specific activities, we have many of these services already embedded in side of [indiscernible] where do you see platform, but we can expose those and start delivering those standalone services everything from DDoS to firewalls, to secure gateways, to many others and those will be more directly related. So, I’d say the short answer is yes, absolutely security compliance are key drivers becoming more so and I think we have got a pretty exciting roadmap as I look into the future as well.

[Unidentified Analyst:]

On the sales side with Mark's new appointment to CRO, what is the initial areas of focus relative to the cloud transition effort and that’s it for me. Thank you.

[David Henshall:]

You bet. It's great to have Mark on board, as I said earlier this is -- he brings to company a tremendous amount of deep experience both across through go-to-market and general management, spent the last six years really driving a lot of this type of transformation of SAP, so it's going to be awesome having him onboard, from the first things of course he is doing working customer back, making sure that we have got everything from our engagement model our channel programs or [cord setting] and our overall messaging and engagement really aligned in a way that resonates with customers. And so, as you could imagine, he hits the ground running and it will be and we are very exciting to have him on board.

[Operator:]

Your next question comes from the line of Gregg Moskowitz from Cowen and Company. Please go ahead, your line is open.

[Gregg Moskowitz:]

So, David as you noticed in your networking business did struggle again and it was versus a fairly easy comp, do you have any visibility into SSP spending on net scalar over the next couple of quarters or so?

[David Henshall:]

Yeah, I mean it's interesting, I mean if you kind of look at that business it's pretty concentrated and I’d say overall spending in hyper scale is pretty volatile just by nature. So, looking into Q4 I think it grows year-on-year because Q4 was not a huge quarter, more specifically the places that we’re investing in that business that will drive long-term is around the enterprise. The things are most important to not only our overall strategy but how we’re going to drive incremental revenue growth, and that sort of bulk of the market is. As I mentioned earlier we are seeing double-digit growth in Q3. The reason is that it’s a really good story, we’ve had a software first approach, we got visibility to embrace hybrid cloud motion a lot of customers are asking about and then ultimately the delivery of cloud services. So, I think overall SSPs will be smaller and smaller part of the total overtime because the other is very much faster and them specific to them we are working on expanding the base to include what I guess you can call tier 2 clouds, MSPs and telecos and then just innovating really quickly to stay ahead of the ongoing live boxing that happens across normal hyper scale.

[Gregg Moskowitz:]

Okay, thank you. And then just as a follow-up. So, heading into today the [indiscernible] forecasting approximately 4% revenue growth and 31% and 32% margins for 2018 but that was off course prior to embedding any expectation of a cloud acceleration into the model. Is there any way to sort of tell us or give us a sense of what the estimated impact today is of that accelerated transition David on total revenue growth and margins in '18?

[David Henshall:]

I guess we would have to normalize it but the business trends have been moving up into the right. If you think about being in Q3 I mean Q3 we just posted the highest revenue growth, EPS growth and out margin of all three quarters this year and Q4 being the exact same, not only the highest percentage next to subscriptions likely but accelerating total revenue growth as quickly as accelerating subscription growth EPS and off margin. So, the fundamental trends of the business are actually really good. I mentioned earlier that probably the best way to normalize that is that if you step back and I look at the underlying bookings on a normalized ACV basis this shift to subscription has I guess underrepresented the overall growth rate of products by several percentage points this year.

[Operator:]

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

[Heather Bellini:]

But just was wondering if you can share with us what you've seen in regards to churn rates as the year has progressed and as we've seen some of these programs put into place, just what's the feedback from customers. I saw the examples that you gave in the slide deck but overall where is there push back if you are getting any and again what's the risk that maybe the churn rates could actually accelerate? How do we think about modeling those?

[David Henshall:]

Yes, Heather if I look at the churn rates overall for all types of subscription renewals they are unchanged in fact we anticipated there being a decline when we introduce CSS as the mandatory upgrade and that just hasn’t been the case and we've seen a higher ASP uptick. I think the reason behind that as if we've just been really successful in articulating the value because not only where we are moving up to a price point that frankly is right in line with the industry but we are just adding a lot more value as well as certain services to help customers in proactively managed environments, migrate to the cloud etcetera. As we go into through Citrix Cloud I think the only push back that I have heard directly is around making sure it’s not an either/or that we are not forcing customers to move to SaaS and that's why we've mentioned a few times that this is really more of a subscription transition in the first phase and allowing customers to adopt more of a true SaaS version overtime because they are all going to have a different pace may not be their entire infrastructure but that level of flexibility so we are taking a hybrid cloud approach, this will give them optionality and really align with their owned I guess call it them to the cloud road maps.

[Heather Bellini:]

And I just had one follow-up in just relation that what you just said about giving people the choice. If you are migrating with CSS right to the higher value programs is it going to be -- is it such where they decide two from now or five years from now that they want to start migrating more aggressively to the cloud, that still be able to just convert with that existing agreement.

[David Henshall:]

Yes.

[Operator:]

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

[Keith Weiss:]

Thank you, guys, for taking the question. And thinking about sort of the 2020 target, particularly if we can think about the $7 in free cash flow per share, how should we think on OpEx growth underneath that. You guys hit some initiatives to rebalance and sort of custom head this year. How should we think about the pace of OpEx growth between now on certain 2020 that would get it to that $7 in free cash flow.

[David Henshall:]

Yes, Keith, I say the way to think about our overall OpEx growth is we have got good discipline and focus back in the business model and you saw that show up in Q3 and Q4 guide as well. We will continue to invest in the business of course we are going to be investing in innovation, we are going to be investing in capacity but we’re going to do it on a pretty methodical thoughtful basis. The good news about the overall cost structure, if you think about the migrations that we have been talking about, our cloud service has not data or compute intensive, I mean most of our components are already fully multi-tenants, we are going to have a lot of leverage as we go into this and customers as I said are not really adopting the host conversions day one. So, you get a little bit of lag effect even on top of that. So, I am pretty confident we can maintain gross margins into the future as well, and then we will be growing revenue faster than we grow expenses over the period of the term. Had a lot of areas that we’re still looking to drive increased productivity, increased focus and alignment and we have taken some proactive steps already. We actually executed our structuring really part of this quarter, we did that to free up a lot of capital to reinvest in some of those things that we want to drive going forward. Of course, there is a profit element to it as well. but I think we are already well underway, we have been moving very quickly in the last three months.

[Keith Weiss:]

Got it. And then in terms of -- there is a lot of functionality that you guys could add into the services going forward you are talking about sort of all the security functionality you could add. Will that come primarily from organic development or do you see more inorganic sort of technology tuck-ins coming into the equation, because you guys have been pretty quiet on the M&A front the last couple of years as you have been sort of the changing around the focus, will M&A pickup, as you kind of roll out these cloud services?

[David Henshall:]

I think we will assume both, our pace and innovation has changed a lot over the last year or so what we have been doing behind scenes is really reorganizing our whole innovation engine, we have broken down all the silos of business units and aligned things against -- think of business cloud as a common platform and bring innovation to market on a weekly basis versus once or twice a year and I think in big releases. So, I feel really good about that, a fact lot of these capabilities that we can do ourselves, we will have to augment that of course with M&A, I think that’s going to be an important part of going forward as well and just make sure that we are not just innovating for the future but also really bringing big chunks as needed and as appropriate for our portfolio.

[Keith Weiss:]

Got it and then just last one. In terms of CSS migrated a bit thus far. Is there any sense you can give us of what sort of there is quarter revenue backwards from that CSS migration?

[David Henshall:]

No Keith I actually I can't. Not sure if we really calculate it quite that way I will say it overall, we have got an uptick in ASPs but I tend to look at it on more of a bookings basis and since these are all in subscriptions type contracts you have to go back and see what impact it had in period.

[Operator:]

Your next question comes from the line of Brad Reback from Stifel, please go ahead, your line is open.

[Brad Reback:]

Dave, I am not sure if I I missed or not but can you give us any commentary of what you are seeing cash flow from ops or free cash flow looks like into '18 and is it a step down given the model transition?

[David Henshall:]

We didn’t comment on '18 we are just thinking more about what the models is going to look like in 2020 and 2021 those were the stats that we gave and we are targeting north of $7 per share on a free cash flow basis and obviously that's dependent upon your billing terms and what not but just to help give really good visibility into that element what we are going to do is start disclosing unbilled revenue on a quarterly basis it's a new phenomenon for us we have typically billed everything upfront, we've started accumulated unbilled revenue just in the last three quarters it's already north of $50 million this year and it's been unreported so we will start disclosing that so I think it provides a much more accurate picture for everybody to understand that the true strength of the business as well as the impact of billing terms on cash flow.

[Brad Reback:]

Great, and then just one quick follow-up on the 2 billion dollars if we assume most of that's for repurchase you would assume that you exit '18 and sort of the 130 to 135 million share count seven times that gets you to about $900 million that's a right way to think about that?

[David Henshall:]

We will be exiting 2020, that's right.

[Operator:]

Your next question comes from the line of Raimo Lenschow. Please go ahead. Your line is open and it's from Barclays.

[Raimo Lenschow:]

David, quick question on the restructuring program that you announced. Can you talk a little bit about how that fits into the overall scheme because part of that if I look through the news flow, there was a lot of it seemed at least from a news flow, a lot of that happened around share file so I'm a little bit surprised can you give us a little bit more detail what you did, how you fit it and how it helps you in the overall margins story going forward? Thank you.

[David Henshall:]

Yes, I would caution you to ever look too closely to any external news flows because we didn’t provide any details around this and frankly there is a bunch of nonsense it was out there. So, I would tell you what we did do quickly. We started with looking at the overall portfolio, make sure that we have the right focus across our assets and we trimmed a couple of pieces that weren’t just deemed to be critical to the overall strategy and then we realigned a couple of things to really make sure that that what we are doing is truly aligned with the go forward enterprise type motion. So, the only thing that we have done in the share file business is just start to recast the focus more towards the enterprise versus SMB. Its historically we've been launching SMB types solution and the things that were really driving including deep integration with Citrix Cloud and some of the other more complete work space portfolio delivery pieces has been the only thing that we are doing there. So, it's full speed ahead with share file but a little of the shift in focus. In terms of the overall as I mentioned this and I did it earlier what we are doing is making sure that we've got assets in the right places, we've got efficiency in the way we are development organization has laid out from a geographic standpoint. We've got the right skill set as we look forward. So, part of that was really about freeing up capital to reinvest in those things that I think are really needed for the next few years. So, we will exit this whole restructuring process with more coded caring resources a greater mix of cloud for skills and that type of things as well as simplify the infrastructure in the few places. So, it wasn’t simply a cost exercise, off course there is a cost element but it's much more forward-looking in terms of where we are going.

[Operator:]

Your next question comes from the line of Michael Turits from Raymond James. Please go ahead your line is open. Michael please go ahead your line open.

[Michael Turits:]

So, I was just wondering and then driven back and forth, so sorry if I missed anything but, it looks to me in your slide we should see increased revenue over the next couple of years during the transition. But cash flow looks like it did combine, so I am sure that because of one build on, I don’t know if you walked through this but I want to make sure given that an importance of cash flow during the transition that, we know what the right metrics you really want us to focus on if we are going to see cash flow down for a couple of years?

[David Henshall:]

Yeah Michael. I would encourage you to go back and look at the transcript and then look at all the underlying metrics because we did cover this, but just to be clear, I mean we should expect revenue growth each year through the transition just a very a very small dip in the overall growth rate of revenue in the 2018 before we get the compounded fact in some of the underlying drivers that you are seeing already and then it's an acceleration up into the right. Cash flow, we have taken a conservative approach on cash flow right now, because the billing terms of contracts we’re still waiting to see where that lands, if it lands on annual billings versus something that a little bit longer than that, that puts a bit of a temporary influence on cash flow, so what we would do to give you the appropriate visibility, we will also be disclosing unbilled revenue of each quarter. So, if you want to add that to your cash flow you get a little bit normalized view of the kind of what’s going on inside the business. Obviously, that’s going to be overall impacted by the length of customer contracts and the frequency of billing, and so we will disclose enough details so everybody can see how that’s moving but the underlying trends are really unchanged. I think we are seeing a very modest impact in the short term and then we expect to see a nice acceleration as we go into 2019, 2020 and beyond.

[Michael Turits:]

Great, and if I get one follow-up and if it has been covered, my apologies. But anything else you can tell us -- I know you talked a little bit on the security opportunity but I think you can add to anything what you have already said on that because in terms of how long we should see that transition taking around that’s scale?

[David Henshall:]

Well as we continue, I mean we already have a number of services that are being delivered via Citrix Cloud now, they are very early, I mean the first of which think about around our -- we used to call Net Scaler Mass, which is management analytics and its providing really a key differentiator frankly in that space and one of the reasons why we are continuing to [indiscernible] the expansion of that is a first step when it becomes more general analytics and security analytics. So, over the course for the next six months you will see all of our elements be providing data into that base where you can apply the right level of algorithms on top of it to give our customers a really unique insight all the way back to user behaviors, the device behaviors, how applications are performing, anomalies along the way, those can be acted on the security context. I also talked briefly about the way a lot of these current networking services are going to be exposed as independent cloud services deployable across multiple instances and you start thinking about what we can do in that area across gateways and DDoS and firewalls and others. That’s just a normal progression of this market as customers continue to move more and more workloads to the cloud. So, stay tuned we will talk more about it each and every quarter.

[Operator:]

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

[Unidentified Analyst:]

Hey this is Tyler [indiscernible] for Walter Pritchard. Thanks for taking the question. David I was just hoping if you could walk us through your exit patients in 2018 for the maintenance uplift from the CSS program? Would you expect the maintenance revenue growth to accelerate from kind of level it is today and has the increase move towards subscription changed any of your assumptions there?

[David Henshall:]

I would say I mean the way we are thinking about '18 is pretty high level at this point in time. And we haven't broken it down and guided to the individual line items. Overall, I would say, we feel good about the pipeline, we expect customers to continue to adopt these subscription services for hybrid and SaaS as well as this CSS uplift so it's all moving in the right direction. We will provide quarterly updates but at this point it's a little premature to start guiding into the individual line items.

[Unidentified Analyst:]

Okay, and just in terms of the subscription impact does that change anything just given the higher uptick that you are seeing from customers?

[David Henshall:]

Well, I think the subscription impact and I mentioned this earlier Tyler, is that we've got a little under 20% of the base that is consuming right now new licenses net new licenses as a subscription service and that's up from somewhere 10% to 15% last year so think about the incremental jump and the impact that that's had on revenue this year. Going into '18 we want to look at probably at doubling of that incremental amount from year-to-year that's what's causing the slow pause. As we get into that I mean there is a few moving just in terms of how many customers are on the installed base are going to want to migrate versus net new and so as we get each and every quarter we will get a little bit more detail there.

[Unidentified Analyst:]

And then on the new subscription kind of line item that you guys broke up that includes term licenses, is it your expectation once you adopt the ASC 606 that you are going to have to kind of separate the term licenses from that bucket given the potential that those get recognized when the deal is booked.

[David Henshall:]

Yes, turns out of big part of what we do and we've been dialing to turn back for a while just in anticipation of 606 but for completing this we wanted to put all that together. So, I wouldn’t anticipate it's been a very large amount. I don’t think the revenue treatment does change under 606 but it's a small rounding error for us.

[Operator:]

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

[Phil Winslow:]

Just had a one more follow-up. David to your question you were asked earlier about what are the 2020 free cash flow if I scroll down to the bottom of your slide obviously you've got that unbilled component there and if you can't co-relate that back to the revenue slide if you are earlier obviously you were calling for a sort of acceleration in the transition in '19 and '20 sort of way from license, so therefore a buildup of that unearned, so should we think about what I would call the underlying cash flow power not necessarily being seven, but obviously you are kind of adding back so to speak that green box there on top of let's call it the underlying cash power that we've actually start to see but kind of in the outer years as you guys talk about '21 and beyond sort of call way and getting backlog there?

[David Henshall:]

Yes, Phil I think that's a great way to look at it and one of the reasons why we are going to be disclosing both because they can be influenced by doing terms and other things. So, it's appropriate for sure.

[Operator:]

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

[David Henshall:]

So want to say thanks again for everybody for joining us, this new business model is really going to improve our visibility and drive leverage over the next several years, it will help our innovation around Citrix Cloud and the security defined parameter, giving our customers a path that they really been asking for around a secure flexible hybrid cloud infrastructure, we feel very, very good about our direction and I think we’ve got a clear path to execute, and these are very exciting time for the company, I look forward to giving you an update in three months. Thanks again.

[Operator:]

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