Citrix Systems, Inc.
Q4 2017 Earnings Call Transcript

Published: 1 Feb 2018

[Operator:]

Good afternoon. My name is Christina and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems' Fourth Quarter and Fiscal Year 2017 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 period. [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:]

Good afternoon, everyone, and thank you for joining us for today's fourth quarter and fiscal year 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, this presentation does not reflect the transition impact of ASC 606 adoption which is effective January 1, 2018. Also we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I'd like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the U.S. Securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC. Copies are available from the SEC or on the company's Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures as defined by SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website. Now, I'd like to turn it over Mark, our Interim Chief Financial Officer. Mark?

[Mark Coyle:]

Thanks, Eduardo, and welcome to everyone joining us today. We have positive results across the business. Every geography grew and every business line grew as well, our transition cloud is accelerating. As you can see from the release, Q4 results from continuing operations were solid. Revenue was up 6%. Adjusted operating margin was 40%. Adjusted EPS was $1.66 a share and deferred revenue increased a 11% year-on-year. In Q4, we closed 107 transactions of greater than $1 million with strength in healthcare, financial services, technology and government. There was good balance across the portfolio with over 80% of these deals coming from workspace services and the balance from networking. Geographically, 4Q revenue grew by 8% in the Americas, 10% in APJ while EMEA grew 1%. Next, looking into Q4 results within our primary businesses. Our workspace services business was up 4% year-on-year to $479 million with product license and SaaS also up 4% year-on-year, a few dynamics worth noting. In the quarter, the contribution from the subscription contracts was about 40% of product bookings within the workspace business. We have strong growth of CSP subscriptions where total revenue in this area grew 37% year-on-year with an ARR now at approximately $115 million as this channel opens up new markets for us. And we continue to see good results from the customer success services program to redefine software maintenance programs we announced in the beginning of 2017 helping to drive strong growth in our deferred revenue. In the networking business, we’re seeing really good growth across the product line. The investments in sales capacity and organic innovation are paying off. Networking revenue increased 7% year-on-year in the quarter to $215 million with license revenue up 7% year-on-year, mostly coming from a low double-digit growth in NetScaler ADC and SD-WAN. Finally, our total content revenue was up about 20% year-on-year to $40 million in the quarter. While content makes up the majority of the total SaaS revenue, demand for our other Citrix Cloud delivered services is accelerating, building contractual backlog from long-term deals with annual billings. When we include revenue coming from SaaS and other subscription-based offerings like CSP subscription, the aggregate ARR was over $350 million in Q4. We expect the trend will accelerate in 2018 as more of our portfolios can sum as a service in the Citrix Cloud. Turning to operations. In Q4, adjusted op margin was 40%, up 412 basis points from last year. Cash flow from operations was $254 million, bringing the full year over $960 million. Deferred revenue increased to $1.86 billion, up 11% from last year due to the strength of Customer Success Services and subscription based sales. Exiting Q4 we had $2.7 billion in cash and investments on the balance sheet, which was up 7% year-on-year. In the quarter, we issued a $750 million 10 year note in order to fund the ASR program as the first phase of our $2 billion capital return program. So the expectations for private option and subscription-based sales to increase as a percentage of a mix and with the expected effects of the recent tax legislation, we expect that the full year of 2018 revenue between $2.86 billion and $2.88 billion adjusted operating margin of 29% to 30%. Adjusted EPS of $4.80 to $4.90 per share. For Q1, we expect revenue between $670 million and $680 million and adjusted EPS of $1.03 to $1.06 per share. Now I would like to turn it over to David to give further color on the quarter and our focus areas looking forward.

[David Henshall:]

Thank you, and welcome everyone. As Mark noted, Q4 is a great quarter, delivering strong financial results while at the same time aggressively driving operational transformation across the company in our go-to-market. I'm really proud how the team executed throughout all this change really without missing a beat. More importantly, partners and our customers are really embracing the new subscription model, driving a faster conversion story than even I had hoped for, jumpstarting the multiyear plan that we discussed in October. Despite the headwinds from the mix shift, reported numbers were still really strong, extending the second half reground across all major metrics. Let me add a little bit more color again on some of these numbers. Our revenue growth of 6% was the fastest we saw all year. Deferred revenue increased 11% year-on-year, but we also built $60 million in unbilled subscription revenue throughout 2017. The quarterly adjusted op margin of 40% was higher than any time over the last 15 years while at the same time, free cash flow was up 24%. Really good results. Looking specifically at the business transition, I want to highlight the metrics that we'll use each quarter to measure and communicate our progress. These include subscription revenue ARR, subscription bookings as a percent of total product bookings; the growth rate of subscription bookings as well as the change in deferred and unbilled revenue. In Q4, as Mark said, subscription revenue ARR, which accelerated for the fourth straight quarter, grew 36% to over $350 million. We expect this growth rate to continue to accelerate during 2018. The mix of product bookings coming from subscriptions in total was 30% versus 17% a year ago, leading to three to four points of revenue headwind for the year. For this current fiscal year, we're targeting a 40% subscription bookings mix, which will generate a similar headwind. In Q4, the growth rate of subscription bookings was just under 100%. And lastly, the balance of unbilled revenue from subscriptions increased over $20 million sequentially, while the year-over-year change plus deferred and unbilled revenue was a healthy 15%. To understand the true performance of our transition in any given quarter, you really need to look at the combination of unbilled revenue, deferred revenue and recognized revenue. As certain customers choose to sign multiyear contracts with annual billings, this amount of unbilled is going to increase. While we expect the sequential change is going to be volatile quarter-to-quarter, the overall balance should increase throughout 2018. What's happening in the business is that customers are realizing that Citrix Cloud can add a lot of value to their own initiatives in terms of simplifying the adoption of hybrid cloud, but also accelerating their own transformation through speed and flexibility. In total, there are now a dozen services live on Citrix Cloud with options for SaaS and hybrid models. We'll give you a few customer examples from Q4. Health First, which is a U.S.-based health care system, chose Citrix Cloud to replace a competitor's VDI solution, citing our hybrid cloud approach and our strong relationship with Microsoft. They're using Citrix to establish a cloud-enabled user workspace as a single pane of glass for delivering apps and content on a customer basis. Our integrations with Azure and Intune on the platform level and Office 365 at an app level were key decision points as well as our smart services that will help them reduce cloud consumption storage costs. An example of an existing Workspace customer adopting cloud was, one of the largest and most respected engineering firms in the world operating in 160 countries. A longtime customer, [indiscernible] is now starting to migrate to Citrix Cloud for the ability to locate both workloads and infrastructure closest to their users as part of a hybrid cloud strategy. Lastly, we saw a global investment management company purchase our mobile service on Citrix Cloud for 10,000 new users to replace their current MDM solution with Microsoft, Intune and Citrix. Our integration here provides the best user experience and enhance Office 365 with MicroVPN secure access to internal resources and really the overall solution for unified endpoint management. Here's a few examples of why Citrix Cloud services are proving to be so valuable for both our new as well as our existing customers. Let's talk about networking for a minute as this business was very strong in Q4, particularly in the enterprise accounts. All in, the license was up 7%, as Mark said, despite the SSPs, the hyperscale cloud segment of the business contributing only 25% of the bookings mix. mix. What's really driving this right here is three factors. For Workspace accounts, the integration we built across the portfolio create demonstrable value-add versus the competition, driving a healthy attach rate. For ADC accounts, our industry-leading software-first approach gives them unique flexibility to embrace hybrid cloud. And for all customers, Citrix Analytics is proving to be a big differentiator for visibility into the network, the workspace, the user and other important areas. In addition to these specific points, customers are responding to our road map for the secure digital perimeter, which is going to be increasingly important as more and more workloads move to the cloud and as businesses continue to adopt Native Web and SaaS apps. SAP market is also noticing, in fact, NetScaler was just highlighted by a leading industry analyst in their market update as the only product that can be recommended for all ADC use cases

[Operator:]

[Operator Instructions] Your first question comes from the line of Walter Pritchard [Citi]. Your line is open.

[Tyler Radke:]

Hey, thank you. This is Tyler Radke in for Walter. David or Mark, I was hoping just as we think about the subscription transition here, specifically in the Workspace business, I think you mentioned roughly 40% of bookings came from subscription. Could you give us some insight into how much of this was Citrix Cloud versus the CSP?

[David Henshall:]

Yes, let me give you this in a few steps. This is David. In the overall business, it was 30% of the mix when you combine product and subscription together. So the bulk of that is coming right now from – in Q4, it was coming from Citrix Cloud, both hybrid and SaaS model. That’s the part that’s growing significantly faster than others. The CSP piece right now, it’s a little over $100 million business. Just to remind everybody that CSP is a subscription program. We run with our cloud service provider partners and CSP. What this does is allow us to – really provide them the infrastructure to deliver as a service offerings to their customers, monthly subscriptions, business is drawing north of 30% in the last few quarters. So terrific changes, it has been just the uptake in both hybrid and full SaaS model to Citrix Cloud. To put it in context in just remind everybody some of the stats that came out of the prepared remarks. A year ago in Q4, it was 17% of the mix all-in. Q4 this year, it was 30% of the mix all-in, and we’re forecasting that to accelerate into 2018 to about 40% of the mix. It’s a little higher than our original excitations. We were thinking mid-30s, but just the uptake that we’re seeing right now, we’re going to bump that up and anticipate a 40% mix.

[Tyler Radke:]

Got it. So just to be clear, within that 30% in Q4 was the – what was the bigger factor? Was it still the CSP? Or was it Citrix Cloud?

[David Henshall:]

Citrix Cloud was more than 2 times the size of CSP.

[Tyler Radke:]

Got it, got it. And then also, as we think about deferred revenue, obviously, the growth there has been pretty impressive and in spanning multiple quarters. How should we think about that heading into 2018? I know there are some moving parts with the subscription transition as well. It’s kind of the higher maintenance programs that you’re rolling through your customer base.

[David Henshall:]

Yes. Tyler I mean, I’d given out a few stats in the prepared remarks. I think are going to be just helpful for everyone to really understand what’s going on in the business. And so what we’ve just talked about, obviously, being mix is one of the most important ones. We’ll continue to highlight subscription revenue and subscription ARR. We’ll talk about the growth rate of subscription bookings each quarter, and then just this last piece. We’re going to be disclosing on a quarterly basis unbilled revenue as well as deferred revenue. So to understand the strength of the underlying business, you have to look at all of the above. In Q4, for the first time, we started disclosing this unbilled portion. So throughout the year, it’s a new phenomenon for us, but throughout the year as we’ve been really driving this transition. We built it up to about a little over $16 million of subscriptions that are off balance sheet, more than $20 million sequential increase from Q3 to Q4. So if you’re just looking at the period, you really need to add that $20-plus million to the overall total. Just add it to deferred revenue, that gives you a better picture of underlying billings growth.

[Tyler Radke:]

Great, thank you.

[David Henshall:]

Thanks, Tyler.

[Operator:]

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

[Phil Winslow:]

Hey, yes. Thanks guys for taking my question. Just actually a couple. First, David, last quarter, you said in terms of just migrating the base over to CSS, you’re about halfway through in the first half of the year, you talked about 19%, 20% uplift in the pricing versus software Subscription Advantage. Wondering just what you saw Q4 kind of where are we in terms of going through the base and what sort of pricing uplift you’ve been seeing sort of any impacted churn and then just one quick follow-up to that.

[David Henshall:]

Sure, Phil. A few different questions in there, so let me just take a little step back and frame it up for everyone. So overall, CSS, moving from our product update motion to a much more holistic maintenance-type offering. As we migrate the base, its ballpark about a $200 million annualized opportunity. Remember, we’re going to step people up over a multi-year period of time. So exiting Q4, we’re probably 3/4 of the way through the renewing of contracts. We started to see a lot of that starting to flow through the P&L in terms of revenue. A lot is in deferred, and then the rest is going to come in through 2018, 2019, 2020, just as we continue to step that up. The bigger opportunity is that next step, as we move customers from CSS to full Citrix Cloud. So it's going to be an important motion more in the second half of this year. We're just doing a little bit right now is we're focused primarily on driving net new. But as we start to migrate the base, inherent in our multiyear model is about 30% uplift from that CSS. We described this publicly. That's about a $500 million incremental opportunity. What we've seen so far is north of a 40% uplift, but we just want to be conservative our longer-term outlooks. As far as the impact of CSS, no real change in renewal rates up to this point. We are seeing the similar type of an overall price uplift when we look at it on a per-seat basis. So better than we had originally anticipated. I think we've done a good job of really articulating the value that we're delivering to customers, both those that are moving into the cloud and also those that are really just staying on-prem. Because there's a number of cloud-delivered services, for example, that they now have access to

[Phil Winslow:]

Got it, thanks. And then just one quick follow-up. In terms of unbilled, the $6 million, but how should we think about the duration of that? I mean, is it sort of typically your three-year contract that you're signing just sort of sense of duration of that backlog.

[David Henshall:]

No exact duration of the $60-plus million. But in general, it tends to be – three-year contract tends to be our sweet spot. I'd say that at some combination of two to four years. So let's use three as a pretty good proxy at this point.

[Phil Winslow:]

Got it. Thanks a lot.

[Operator:]

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

[Abhey Lamba:]

Yes, thank you. David, can you talk a little bit about the NetScaler business – the networking business? It's been slow for some time, and you've historically talked about three major components to that business. So can you tell us how those three different buckets are doing in there?

[David Henshall:]

Sure, Abhey. NetScaler actually did well in Q4. We talked about licenses up 7% despite the fact that SSPs were only 25% of the mix. So the real story in networking is what's going on in the enterprise, and that's the place where I think we've just – kind of looking at it into the individual segments, I'd say for a Workspace account, somebody that's a typical Citrix Cloud customer already, we're building – have built lots of deep integrations across the portfolio, and we can demonstrate the added value of leveraging Citrix and the rest of the Workspace together as really on end-to-end. And that's improving the attach rate. The biggest part of the business is just around the overall ADC accounts. Net new where we're just leveraging our software-first approach. We create a lot of unique flexibility for customers that want to embrace hybrid cloud. Probably in addition, I'd say the Citrix Analytics is proving to be a differentiator, adding a lot of visibility into the network, into the workspace, user and other of areas. That's allowing us to continue to increase win rates and I believe take share. So that business, just the stand-alone NetScaler business, was up double digits in new license. The SSPs, we continue to think that's going to be volatile, but it's now a little bit less than 25% of the mix.

[Abhey Lamba:]

Got it. And can you quickly talk about churn rate of customers as they are evaluating the subscription offerings or the migration? Have you seen any difference in the churn rates versus historical? Thanks.

[David Henshall:]

No, we haven't. Renewal rates are the same as they have been for a couple of quarters.

[Abhey Lamba:]

Thank you. That’s it from me.

[Operator:]

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

[Unidentified Analyst:]

Thanks. This is John on for Heather. I was just hoping you could talk more broadly about the competitive environment and whether win rates have been rather consistent with historical trends. And maybe just a follow-up to the overall IT spending environment that you’re seeing from this space.

[David Henshall:]

Sure. I’d say overall the IT spending environment is pretty constructive around the world. There’s no spot that I would call out that is necessarily weak. In terms of overall competition, we operate in highly competitive markets, and no real change from a competitive point of view. I will say our win rates have been continuing to increase. If I look at the second half versus the first half of the year, we’re up about 400 basis points as we measure it internally across both of our major product areas. And I think the reason behind that is just that we’re executing really well right now. We have been evolving our go-to-market engine pretty aggressively over the last six months. We’ve got great leaders there that are just really, really doing a good job. Second part of that is all the innovation that I’ve talked about. We’re able to tell a very compelling story to customers, both across the workspace, networking – networking evolves into the secure perimeter. And both of those together just helping us continue to win more.

[Unidentified Analyst:]

Okay. Thanks.

[Operator:]

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

[Mohit Gogia:]

Thanks it’s Mohit Gogia on for Raimo. I was just wondering if you can provide an update on 606 so your expectations going into fiscal 2018, how do you see those expectations – the impact on that on top line and on margin from 606 and I have a follow-up question.

[Mark Coyle:]

Mohit, it’s Mark. We largely see the impact of 606 as immaterial on the income statement. There’s more impact on the balance sheet. But in terms of top line and bottom line, we see it as really immaterial, right? And we’ll put some updates out on the Investor Relations site in terms of the work we’ve done around 606 that you can look at.

[Mohit Gogia:]

Okay. And a follow-up question. So can you just give some high-level points on the cash flow performance this quarter, some of the puts and takes there? And I realized that you guys don’t guide to that, but if you look into fiscal year 2018, how do you see the impact of cloud transition on the cash flows, realize like we have to factor in the un-billed backlog when we sort of look on apples-to-apples basis, but just any further color on that would be helpful. Thank you.

[David Henshall:]

Yes, Mohit this is David. I mean, cash flow has been strong in the second half of the year. I mean, on – I called about 24% growth in free cash flow in Q4 over Q4, and that’s despite the fact that we’ve added about $60 million in un-billed backlog across subscriptions during that period of time. So you’re going to see those two things continue to grow, and so that’s why we’re going to provide this level of granularity so that everybody can understand how the business is building out. Because it’s not really transitioning into the balance sheet, it’s just deferring and transitioning the time when it starts to become recognized back in the P&L. So we’ll provide that level of granularity, but we feel good about cash flow as well as the growth in both deferred and un-billed into 2018.

[Operator:]

Your next question comes from the line of Rob Oliver [Robert W. Baird]. Your line is open.

[Rob Oliver:]

Hey, guys thank you for taking my question. David a question for you, I know the answer here might be you did raise your free cash flow – your cash flow return target on the call. So to dive in a little bit on that, on the innovation side, can you talk a little bit about how some of the acceleration here and the stability at the company is helping you potentially attract talent to go after some of these new areas? And then having had a full quarter after those long-term targets maybe talk a little bit how you're feeling about those targets and the spending – the internal spending necessary to get there. Thanks.

[David Henshall:]

Sure. Let me start with the last part of the question. The internal targets, we feel very good about it. I mean, obviously, our guidance we just rolled forward what he had given out last quarter. So no real change there. 1% to 2% on the top line and 29%, 30% on the op margin line. And from my point of view, it just gives us a level of conservatism to continue to execute within. When we put those numbers out originally, we were thinking probably a little bit slower migration to subscription, but even though we're seeing a faster pace, I feel comfortable maintaining in that guidance. And so it's just – it's a statement of the overall improved execution. In terms of investments and whatnot, it's all baked in there from my mind. I mean, we're seeing really good integration across our products, which I've referred to a few times. And the work that we've done to align the company model, the organizational model, the integration of the individual solutions backed up by simplified messaging and many other things, it's all just driving the same end-to-end strategic focus on what we're trying to achieve over the next couple of years around this transition. As we roll into mid-year and our customer conference Synergy, we're going to be putting out more and more innovation focused on really three big areas

[Rob Oliver:]

Great. Thank you.

[Operator:]

Your next question comes from the line of Nikolay Beliov [Bank of America]. Your line is open.

[Nikolay Beliov:]

Hi, this is Nikolay Beliov from Bank of America. Thanks for taking the questions. David, can you please talk a little bit more about the NetScaler transition to cloud? How much of the business is right now subscription-based NetScaler? What type of cloud services you can provide going forward? And lastly, in your prepared remarks, you talked about share licensing. If you can just give us more detail on that, how the revenue recognition is going to work on that new pricing model.

[David Henshall:]

Yes. We haven't broken a lot of detail, but I'll tell you, for Q4, in the NetScaler business, about 10% of it was coming from various subscriptions. And what we've done there is we've created a couple of interesting things. Not only are there networking services available now as part of Citrix Cloud, whether those are access services and WAF services and many others, but we've also created licensing models that allow our customers to share capacity across a different set of assets. And you think about where computing is going as more and more workloads are moving to the cloud, as compute is moving towards the edge. It just gives that hybrid environment that all of our customers are dealing with a lot more flexibility. So they can now share capacity across an on-prem device, a cloud-delivered instance and all of the other things that Citrix enables. Those basically get recognized as ratably over a term of an agreement. So think of it as more of a subscription. So that’s the way we’ll do a number of those. And it’s proving to be pretty interesting from a customer point of view. They’re really embracing that because of that flexibility that I talked about.

[Nikolay Beliov:]

And broadly speaking, in terms of go-to-market organization going into 2018, both on the direct sales side and the channel side, what did you guys make? And how incentivizing the Citrix Systems to push forward the cloud?

[David Henshall:]

Well, two things. So Mark Ferrer who’s our new Chief Revenue Officer. He’s been on board now for just over a quarter. He has been making some pretty aggressive moves across this organization. I think we’re set up well for 2018 to really drive a lot of worldwide centralization, worldwide execution, focus on customers and a lot of other things that we’re doing, a little bit less regionally than we had been and much more on a global scale. So consistency, scalability, et cetera, thematically. In terms of the overall focus, one of the things that we’ve also worked with partners on is really rebuilding the partner programs. And so we’ve taken what had been probably too complex in a number of different iterations and really simplified that. We rolled it out to partners in January at our sales kickoff. And really what that does is it strips away the complexity, get them focused on cloud and gives them incremental incentive not just to sell, but to drive enablement and onboarding over a period of time. So think of it as simplification, incentives towards where we’re going. And it receives rave reviews. So I mean, what we heard back from partners was very, very positive. In terms of our own teams, it’s just a matter of tweaking our compensation models such that it’s at, in some cases, in neutral between an on-premise and a cloud solution. In other cases, we can just use incentives to turn that dial up and down.

[Nikolay Beliov:]

Thank you.

[Operator:]

Our next question comes from the line of Gregg Moskowitz [Cowen and Company]. Your line is open.

[Gregg Moskowitz:]

Okay. Thank you very much and good afternoon guys. Most of my questions have been asked, but David, just getting back to the SSP business, you mentioned it was about 1/4 of NetScaler this quarter. Can you say about how much SSP-related spend declined this quarter on a year-over-year basis, if it did? And also, how do you characterize your visibility with the SSPs for2018?

[David Henshall:]

Yes. It was up a little bit year-on-year, just not that much. It was about 25% of the mix, roughly a year ago as well. I’d say overall visibility is okay from a yearly standpoint. It continues to be a little volatile quarter-to-quarter. Good news for us is that we had such a focus on the other 75% that’s what really building and growing. So the quarter-to-quarter volatility is going to be more muted going forward. In terms of overall, I think we’re still maintaining the same level of market share across the major cloud properties. We’re still focused on what I would call second-tier clouds and others from an expansion point of view. But in general, our forecast, as we’ve described before, is to that segment of the business, that 25% is probably trending down slowly over time just as much about unit compression and things like that. So no big change from our point of view, and the real story is about all the success and enterprise.

[Gregg Moskowitz:]

Okay. Perfect. And then just in light of tax reform and then also your second round of ASR plus additional buybacks throughout the year, what tax rate and share count are you guys assuming for 2018?

[Mark Coyle:]

The tax rate’s going to be about 20% – or pardon me, yes, 20% now. We’re going to be at about 16% to 17% for next year.

[Gregg Moskowitz:]

Sorry, Mark, 20% for 2018 and 16% to 17% for 2019? Is that right?

[Mark Coyle:]

No, 20% was for 2017. It’s going to be 16% to 17%

[Gregg Moskowitz:]

Perfect. And then do you have…

[Mark Coyle:]

We haven't really guided for share count, but I mean, we're – as I've said on the ASR, we completed $750 million just recently. We're going to launch another program here shortly, and then we're going to power through the balance of the $2 billion in – over the course of this year.

[Gregg Moskowitz:]

Great. Thanks guys.

[Mark Coyle:]

Thank you.

[Operator:]

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

[Tim Thornton:]

Hi guys, it’s Tim Thornton on for Mark Moerdler. I just had a quick question about operating margin. Could you dig into what drove the benefit there and then any outlook that you guys have for 2018?

[David Henshall:]

Yes. What drove the outlook was just the operating performance. It's – we're disciplined. We're investing, and we're focused on things that are going to drive future growth. In terms of next year, it's just a function of our guidance. We talked a lot about this on the last call and the context of a multiyear model where next year, we wanted to really hit the gas on – excuse me, this year now, for 2018 really hit the gas on for moving to subscription mix. And as that impacts more revenue on the balance sheet, it probably takes down margins in the short term. So that's all that's built into our guidance, and we'll continue to work through this year.

[Tim Thornton:]

Okay, thank you guys.

[Operator:]

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

[Tom Allen:]

This is actually Tom Allen for Kirk. David, can you discuss what you're doing to incentivize the channels to move customers over to your cloud offerings? And just how you're thinking about the pace of that relative to your guidance.

[David Henshall:]

Okay. Sure, Tom. I mean, I talked about some of these a couple of times in the prepared remarks, but just in terms of the big metrics to highlight. So mix is probably the best way to look at it. So of our total product mix in 2017, about 26% came from subscription. And 2018, we are looking at that to be upwards of 40%. So 40% up from 27%, 26% last year. So that's what we're doing right there. In terms of incentives, as I mentioned a few questions ago, we put up new program in place that is making it much more simplified for our partners to onboard customers onto the cloud, gives them incentives to do that, gives them some bonuses to make sure that we're driving cloud and net new. And then when it's appropriate, later in the year, we'll focus on migrations as well.

[Tom Allen:]

Got it. And then I guess do you have any broader thoughts on you talked about some of the but just on NetScaler is kind of growth opportunity into 2018 and also just relative to kind of the cloud provider enterprise side of the business for NetScaler?

[David Henshall:]

Yes. Tom, I actually just went through that business a little bit. But overall, I'd say the 75% is the enterprise. We are focused on driving that business. We think we've got a lot of opportunity to grow that and to take share in that overall market. We have a really comprehensive set of solutions across different architectures that really embrace where our customers are going in terms of hybrid cloud. As far as to be SSPs, maintain a lot of market share there. That is the remaining 25% of our business. We have stated publicly that we expect over time that business will trend lower just as ASPs are compressed. That's really the main driver there.

[Tom Allen:]

Got it. Thanks.

[Operator:]

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

[David Henshall:]

I want to say thank you for everyone for joining us today. We're really happy with the progress we're making right now. I think our transition is happening faster than we had originally anticipated, and we're going to continue to drive that through 2018. Look forward to providing the next update in three months. Thank you very much.

[Operator:]

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