Citrix Systems, Inc.
Q1 2016 Earnings Call Transcript

Published: 21 Apr 2016

[Operator:]

Good afternoon. My name is [Skinner] and I'll be your conference facilitator today. At this time, I'd like to welcome everyone to the Citrix Systems First Quarter 2016 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:]

Thank you, [Skinner]. Good afternoon, everyone, and thank you for joining us for today's first quarter 2016 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 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 US securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC. Copies are available from the SEC or on the company's Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures as defined by SEC’s Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website. Now I'd like to turn it over to David Henshall, our Chief Operating Officer and Chief Financial Officer. David?

[David Henshall:]

Thank you, Eduardo, and welcome to everyone joining us today. As you can see, we continue to show great progress with the operational initiatives we introduced last year. We’re focusing our energy towards our core strategy, the secure delivery of apps and data, really setting the company up for even better results, efficiency and growth as we look forward. As you can see from the release, total revenue was up 9% year-on-year in Q1 with perpetual product license up 10% and SaaS up 17%. Adjusted operating margin jumped to 29%. Adjusted EPS was $1.18 per share, up 80% from Q1 a year ago, and we generated a record $340 million in cash flow from operations. In total, we closed 51 $1 million plus transactions across product and services, an increase of 30%. The Americas region booked the majority with 42 of these, while EMEA had 5 and APJ had 4. A couple of points worth noting was that the average value of these large deals increased significantly from last year and at a product level there was good balance across the portfolio with roughly half coming from Workspace services solutions and half from delivery networking. From a geo perspective, when you exclude SaaS, the Americas was really the big driver in the quarter with revenue up 13%. EMEA finished up 1% while results in APJ declined by 8% year on year. Since our restructuring last year occurred earlier in the US versus the other geos, the Americas teams really had the most time to stabilize and adapt to this new structure, the key contributor to this performance. Next, let's take a look at the Q1 results within our three primary groups. Our workspace services business grew 3% to about $400 million, including flat license revenue. Really more than any other, workspace services should benefit from the work we're doing to simplify our focus and strategy. And as we’ve reviewed before, there's a number of really specific initiatives we're driving to accelerate growth in this area through faster innovation, a more verticalized focus and aggregation of our unique assets. Within this business, there's a few dynamics I'd like to point out. First, growth in the workspace suite which is our comprehensive solution for secure app and data delivery was up more than a 100%, contributing 8% of license revenue as compared to just 3% a year ago. Second, we continue to grow our CSP subscriptions where partners primarily utilize XenApp to deliver cloud based offerings to their customers. Overall, CSP revenue grew over 30% in the quarter. Third, customer interest was more focused on application delivery versus DDI in Q1, lifting XenApp standalone license sales by more than 10% from Q1 a year ago. And finally, we saw really good results in the Americas geo for overall workspace service license. In total, it grew 7% and reflected the success of the restructuring within this business. This compares to flat year-on-year license growth in EMEA and a decline of 24% in the APAC region. Next, let's look at the delivery networking business where total revenue increased 20% in the quarter to $195 million. This includes license revenue growth of 25%. Focusing on NetScaler, I’ll remind everybody that the business is essentially made up of three segments

[Kirill Tatarinov:]

Thank you, David. Hello and welcome everybody. Obviously I'm very pleased with our performance this quarter on both the top line and the bottom line. It's clear that our efforts to refocus the company are starting to work. As we simplified our portfolio and sharpened our message, it made it easier for our sellers and channel partners to execute and deliver. This is really the case where refocus and restructuring is producing not only bottom line results but also driving the revenue growth. In particular, I'm really excited about double-digit growth in license revenue. All in all, this was another quarter of great execution by our worldwide sales team. It also gives us confidence that the new commercial leadership together with a revitalized channel program sets us up on a path for continued healthy execution. With a large number of significant customer adds, we continue to demonstrate growth in our targeted industry verticals, especially in public sector, financial services and health care where customers are transitioning from other virtualization networking and mobility providers to Citrix. Specifically, John Hopkins has chosen Citrix XenDesktop for VDI deployment, expanding our longstanding application virtualization partnership. The decision to replace the competitive offering was driven by the need to unify their client virtualization solutions and improve performance. On the network delivery side, Salem Health moved from another vendor to Citrix NetScaler because of the seamless integration with the rest of our portfolio, richness of the experience and reduced TCL. In enterprise mobility, we were selected multiple times over competition due to our unique capabilities such as microVPN for application security and our integrated cross device platform. Customers choosing XenMobile included the country's leading commercial real estate development firm and a major energy provider. These were all great wins and they are just a few of many examples where Citrix was chosen over the competition. Our engineering teams performed very well in Q1 and product delivery was strong. Specifically, we announced and delivered capabilities to accelerate and simplify the deployment of Microsoft Skype for business into enterprise. We see very strong interest among the largest customers deploying Skype for business to roll it out on Citrix virtualization infrastructure. Overall we see our workspace services business trending very positively. In addition to introducing new releases for the entire Xen family of products this quarter, we also launched our new secure browser service which expands secure remote access to web and SaaS applications. Q1 was also a big quarter for networking innovation. We see a growing interest in our advanced SD-WAN capabilities that we announced in the quarter. We also hit a new performance milestone for the industry, releasing Virtualized NetScaler VPX with delivery speeds starting 100 gigabytes per second. In Q1, we also released NetScaler CPX. Basically NetScaler in a Docker container giving dev ops teams the production grade tools they can use to speed development of new apps. We also expect NetScaler CPX to help accelerate IoT strategies. Finally, we have further extended the enterprise class security and usability of our ShareFile portfolio, allowing customers to securely share data and files from any of source, or location on premise in the cloud or across other file sharing services. Overall I feel great about product deliverables in Q1. I feel they set us really well for the future and I'm super excited about the product roadmap. I’d also like to give you a bit of a context on how we're evolving the Citrix strategy. Organizations of all size is experiencing dramatic changes in the way businesses operate and the way people work, moving more workloads to mobile devices into the cloud and across an array of networks. The growing number of new connected things or end points are creating huge volumes of data that need to be accessed, secured, transported and managed. And as I approach this mythical 90 days milestone as CEO of Citrix, there are two recurring themes that I'm hearing in my dialogues with customers, partners and key industry analysts. First, CIOs, IT networking professionals feel overwhelmed by the heterogeneous environment they're being asked to manage today. They're even more concerned about all the new cloud apps, mobile devices and other connected things they're being asked to control. Cyber security is the top concern for all of them and therefore their ability to securely deliver apps and data to their people is top of mind. The second thing I learned from several surveys and direct dialogue with customers and the industry is that the Citrix brand is very well trusted and that our customers really love working with us. They love our products and the value they deliver. However in many cases, they don't yet see our end-to-end strategy, the breadth of our portfolio and how the whole is more than the sum of the parts. And this is precisely where I feel Citrix has a huge opportunity. It all starts with our vision. We aim to power a world where people, organizations and things are securely connected and accessible to make the extraordinary possible. And our strategy is to build the world’s best integrated technology services for secure delivery of apps and data anytime, anywhere, on any device from any cloud. We enable people to work and live better by giving them secure, reliable and performance enterprise store front, get access to all the apps and data they need to excel at their jobs. Security is the core underlying feature and the most important outcome of deploying Citrix technology with our network delivery through NetScaler, workplace services through Xen family, and secure file and sync sharing through ShareFile, all integrated and working together to deliver on the singular mission. We will provide more details on our strategy in the upcoming analyst day at synergy event next month. But even today's results clearly demonstrate that the market is beginning to validate our vision and our strategy. When we examine the primary reasons why we're winning in the market, it’s because of our reliable product performance and scalability, the openness and flexibility of our solutions, low TCO and our ability to provide it all as integrated solutions working together. Thank you. And now we look forward to your questions.

[Operator:]

[Operator Instructions] And our first question comes from Raimo Lenschow from Barclays.

[Raimo Lenschow:]

Hey congratulations to a great start guys and Kirill, welcome on-board. First question for you, Kirill. Can you talk a little bit about -- you came from Microsoft. Microsoft has their own mobile solution. How do you envision that relationship with Microsoft to evolve for Citrix going forward with you on board now?

[Kirill Tatarinov:]

Yes, thank you very much and thanks for the welcome. Obviously Citrix and Microsoft have a longstanding history of partnership and terrific relationship. And that partnership certainly continues and expands to many areas. I think the work that we've done together on Skype for business is one example of that terrific partnership. The work that we're doing with Microsoft on Windows 10 and helping Microsoft customers roll out Windows 10 quickly is another example of that partnership. And we're looking for many other ways to collaborate and we continue to work very closely together in many other areas, including enterprise mobility.

[Raimo Lenschow:]

Okay, perfect, thank you. And David, one question, like you obviously had a very very strong start to the year on the operating margins. How much of that was just coming -- stuff coming through quicker than expected versus actually you were identifying new areas? Thank you.

[David Henshall:]

Raimo, if you're asking in terms of -- from the expense point of view, obviously largely it’s a function of [Indiscernible] plus expense but our restructuring is a little bit ahead of plan. I mean, we've been executing across the company very effectively. I think we've taken a bottoms up approach as we discussed over the last couple of quarters and this just allows the teams to really really own the business and own the restructuring items. I think we're just doing a great job across the company. So obviously we're taking up our full year margin expectations by about 100 basis points already here in Q1. So really feel good about that as well.

[Operator:]

And our next question comes from Kash Rangan from Bank of America - Merrill Lynch.

[Kash Rangan:]

I’d like to add my congratulations as well. When I look at the way in which you beat the operating income, more than two-thirds of that came from gross profit beat, so it doesn't look like it's purely an expense reduction story. So can you talk to the drivers of upside performance on the Xen side, and I think clearly for years we've been hearing Xen license flat to down, so this time it's flat which is obviously a nice positive reversal. And also I don't believe that we’ve seen a strong double-digit growth on the networking side. Can you just talk to the industry fundamentals versus how much of this is fundamentals in your end industry versus your execution, and the color on why Asia Pacific was down so much as well, notwithstanding otherwise a great result? Thank you so much.

[David Henshall:]

A few questions in there, so let me parse that out a bit. Overall talking about the industry and the demand environment, I’d say that the big stories in the quarter were the Americas performance, really did a great job, drove a lot of the revenues – lot of the revenue upside as well. So those teams have been working through the restructuring from really the beginning of ‘15. They're just coming along. We’re a little bit further behind, when it comes to the other two regions in terms of the work that we've been operating against. From a product standpoint, yes. NetScaler had a terrific quarter again, similar to -- really the last nine months have been very strong. It’s a combination of strength across the big trends around cloud build out, cloud services et cetera. We're also continuing to expand the customer opportunity size. I called out more than 20% growth in customers within that segment. Interestingly enough we're also seeing a pretty rapid growth of NetScaler being consumed as a cloud service. And so while still only a kind of mid single digits of the mix, that business is growing well over 100% as well. Shifting gears and talking about workspace services, couple of things to point out. Clearly we've been making good progress over the last several quarters. Some of the stats that we referenced in the prepared remarks, the suite being the complete solution for talking with customers about app and data delivery, that was up about 100%. The overall CSP business which we remind you is full subscription, was up about 30%. And one data point that I didn't put in the prepared remarks but it's also interesting is that when I look at units -- units are actually growing year on year in the mid-single digit range and that's just a function of the mix of license type. So overall for the workspace services business, about 18% of license this quarter was coming via subscription. That compares to 14% a year ago. We've got a couple of different dynamics in play. But the overall message is that we're up into the right across all of our major product areas. We're seeing terrific execution out of the Americas. We were happy and above kind of our internal expectation in multiple product areas and we still see further upside because there's more work to do.

[Kirill Tatarinov:]

Yeah, perhaps just a couple of things on the secular trends that we're seeing that are clearly playing the role in driving results for the business. On the networking side, we all see the tremendous build-out of the data centers that continues and NetScaler offering unique capabilities in a software defined fashion truly participates in that buildout and that's what we’re seeing the growth in the cloud provider segment. At the same time the growth in ecommerce and the fact that even those companies that historically weren’t participating in delivery of online goods and services are now right in there and they need to increase their networking throughput and capacity. That plays a significant role and of course many view NetScaler as essentially security product -- part of their cyber security strategy. And that's another trend that plays to that. On the app virtualization and on the overall workspaces services, XenApp is – we’re seeing significant interest in XenApp. And we see a significant interest in large customers going to virtualized application. And we see actually good growth in that particular product. From the trends point of view, I would say, the introduction of Windows 10 in the enterprise is starting to be a driver that we're seeing and many large customers that I had a chance to have a dialogue with in the last few weeks certainly are looking at XenApp and XenDesktop as a very significant important infrastructure for them to roll out Windows 10 in the enterprise. And we obviously expect that to grow and accelerate and continue and the new product introductions that happened in Q1 will only help with that also through the type of business and secure web browser.

[Operator:]

Our next question comes from Walter Pritchard from Citi.

[Walter Pritchard:]

Hi, thanks. Just following on, on the last question. This XenApp resurgence, I think many of us are trying to understand. You saw good business there last quarter. And you've had like the 7.6 release which I think may have released some pent-up demand. Kirill, can you help us understand just how sustainable you think growth I guess in XenApp license is? And maybe as part of that, could you highlight some of the use cases or value propositions beyond the sort of generic app virtualizations that are driving demand there? That product has gone through sort of phases of growth and maturity and it's surprising to see how well it's doing.

[Kirill Tatarinov:]

Well, I think it's worth remembering that about two or three years the company went through very significant engineering effort to lay out DDI, XenDesktop and XenApp on the same infrastructure. And as we've seen in some examples and John Hopkins in particular that we mentioned. We see customers who want to run both virtualized desktop and virtualized app off the same infrastructure. And that’s becoming more and more prominent and we see more and more of that. We also see customers who want to essentially create one single store front for all of their employees to access their workspace whether it’s virtualized desktop to access, virtualized app or a file. They basically want to create the enterprise portal, enterprise store for them to use and that's precisely where the unification plays important role and where all of that working on the same infrastructure is quite significant. These are just a couple things that we're seeing in that going through many customer discussions. To me sort of create both excitement of what happened the last couple quarters but at the same confident that we see some bright future for XenApp in particular.

[Walter Pritchard:]

And then David on the cost side, the one area that stuck out to us was the R&D spend, which was down -- because we calculate somewhere in the mid-teens year over year. That strikes me as, maybe down more than it should be or more than it can be for some sustained period of time, could you help us understand what's driving that and how we should think about your level of R&D spend going forward?

[David Henshall:]

Yeah, I wouldn't focus too much on the individual line items quarter to quarter. Let’s get a couple more quarters into the year. There's really two things. The first of the reason I say that is that there is always individual projects going on that may or may not have large consulting expense. There’s events, other things that flow through there. The second one is, a large part of our focus in streamlining was around the portfolio. And so as we have removed or sold or shut down product initiatives, that comes with the expense that was everything from engineering through support through sales et cetera. So that's really what you're seeing there. Overall we've talked about freeing up capital so that we can reinvest in the areas that are strategic, that are going to drive growth long term. And that’s the core part of the strategy and we’re executing on that. So overall R&D somewhere running in that 12% to 16% of revenue is pretty difficult. And I think that's where we're going to be as well.

[Operator:]

Our next question comes from Heather Bellini from Goldman Sachs.

[Heather Bellini:]

Great, thank you. I guess, David, I had a question – two questions. The cloud providers, I believe you said they were 60% of sales in the period and obviously the NetScaler business looks really good. I'm just wondering that just seemed higher than normal. I thought in the past you've talked about it being more like 25% to 30%. And I'm just wondering, are these guys kind of buying bigger first [ph] less frequently than they've had in the past, are you seeing any change I guess in their buying behaviour? And then the other would be -- the question on top of that would be, how do we think about the dip down sequentially off of what’s a huge number in Q1 and then I just had a follow up on long term deferred.

[David Henshall:]

Sure. On the middle part of your question, about the sequential change from Q1 to Q2, it’s just a function of -- as you said the really strong outperformance in Q1, we want to be conservative going into Q2, nothing more than that. In terms of the cloud service providers, represented about 60% of the mix in Q1. It's all of the above from your earlier question. We’re continuing to build out just core infrastructure as the mega trend of cloud continues. There are new services being delivered all the time that require incremental capacity and as I mentioned a little earlier, we've been expanding that base. So trying to keep the size of the opportunity expanding at the same time. So we added a couple of hundred customers to that segment and it’s really a combination of all three of those that are driving the growth. Over the past few quarters, Q4 for example, have represented about 45% of the mix. It was 60% in Q1. And so it does have the potential to be a little volatile and that’s one of the reasons why we’re being conservative for Q2. But nothing beyond that.

[Kirill Tatarinov:]

I was just going to add that the base is expanding and there are more customers that’s being added to the pool.

[Heather Bellini:]

And then the question on long term deferred was really -- it looks like your contract duration, people are willing to pay more upfront, your long-term deferred trends over the last three quarters, have been way stronger than what kind of seasonality would suggest in the past, can you just talk a little bit about what's driving that?

[David Henshall:]

Yes, customers are driving that actually. I mean, we're not incenting the teams to drive multi-year arrangements more so than customers are simply asking for that. It’s just a function of becoming more and more strategic in their infrastructure. I can think of the largest transaction in the quarter which was with a US federal entity that included four years of underlying maintenance and that was part of the overall contract, and mapped to the outsourcing that they were doing with an additional provider. And so this is [ph] like that, that are really driving the long term deferred but overall it's just a function of -- it's critical part of their infrastructure and we are becoming more strategic and I think that trend, as it's continued over the last couple of years, should continue going forward.

[Operator:]

Our next question comes from John DiFucci from Jefferies.

[John DiFucci:]

Thank you. I had two questions. The first one is, it's being asked quite a bit here, and David, I think I asked you, might ask this question last quarter. I mean I think when you first got into this -- the business with NetScaler there was some criticism – not criticism – some concern that there was a high concentration that NetScaler sold to cloud providers. And -- but now this turns out to be -- looks to be anyway a good thing. You've typically said that this is going to be really lumpy going forward but as you just pointed out, we see nine months of pretty strong results here. And I'm just curious, if now your view on that has changed and as now -- this looks more to be a trend, versus just sort of a pretty lumpy business.

[David Henshall:]

Yeah, I call it slightly volatile more than lumpy. But it is still concentrated into a couple of hundreds cloud providers. We know with the top 50 being very very large household names of course. I think that it’s just a reflection of the mega trend that's going on across our industry around cloud and cloud build-outs. So I wouldn't call it an insatiable appetite for capacity but it's been extreme. And so there will continue to be some quarter to quarter volatility, I think that should the expectation. But overall it's a really important segment for us and one that we expect to see solid growth in for the full year.

[John DiFucci:]

And if I might as the follow up to Walter's question, because I noticed on the cash flow statement. Cash paid for licensing agreements in technology, which I'm not sure – it’s usually a small number. This quarter it was $24.3 million which is I think more than two times that was all of last year. There’s usually a little bit in there every quarter. And I'm just curious if that had any impact on as to why R&D was lower. And maybe you can explain that a little bit just like what is in there, especially the big jump this quarter.

[David Henshall:]

Not a lot of explain. I mean there's always the different things we're doing from in-bound licensing point of view, asset purchases, technology purchases and other M&A. Those are generally the four buckets of one-off items that show into R&D. Not a reflection on why OpEx was higher or lower, really an unrelated item.

[John DiFucci:]

Why did it jump this quarter though? What is in -- like what was special this quarter that it would jump to two times what it was less last year and it's usually pretty steady at low single digit millions?

[David Henshall:]

Yeah, we did a one-time licensing agreement for a technology that will become an entitlement for our customers on subscription and maintenance.

[John DiFucci:]

So we shouldn’t expect that going forward -- go back to sort of the low single digits of millions. I mean there might be something like that happening but generally?

[David Henshall:]

Yes, generally back to what it has been.

[Operator:]

And our next question comes from Scott Zeller from Needham & Company.

[Scott Zeller:]

Another question on XenApp, there have been several. But I believe, we've heard over the past year or so of the developments and that was mentioned in the prepared remarks, the two to three years of development. And wondered if this is really a refresh cycle more than anything else. Could you add some color around that, because it seemed that, I think before the investment in the rewrite, we heard that it had not been touched for I believe five or eight years. So is this actually a refresh cycle?

[Kirill Tatarinov:]

I think it's a refresh cycle from two vectors, it’s absolutely technology refresh cycle from Citrix point of view. There was massive engineering effort conducted over the last few years as we mentioned earlier, that resulted in this highly scalable, highly performing solutions that is built on single platform which is highly performing with patented protocol. That's one angle and that certainly drives adoption. And the other angle, there is Windows 10 phenomenon in the enterprise that essentially drives, so that reinvigoration of desire to put traditional apps legacy, as for a lack of better word, into the modern desktops, or deliver modern desktops through XenDesktop to the legacy part of it, both trends would be playing here in the future without a doubt.

[Scott Zeller:]

Okay and then just a follow up, any comments about your initial thoughts you've given on fiscal ’17, previously the 30% operating margin and 45% top line.

[David Henshall:]

No, we haven't updated the ’17 numbers and we really aren’t planning to until we get further in the year. Just the one comment that I made earlier, obviously we're tracking ahead of our prior guidance when it comes to operating leverage. We feel good about all the progress we're making there.

[Operator:]

And our next question comes from Michael Turits from Raymond James.

[James Wesman:]

Hey guys, good afternoon. It’s James Wesman sitting in for Michael. First question for Kirill or David. Can you just talk about the competitive environment in desktop versus VMware this quarter and your other competitors? And I have a follow-up for David on the NetScaler.

[Kirill Tatarinov:]

Well, obviously competition continues and competition is very strong, and it is quite a competitive environment. As we share, we have seen some strong wins and I'm quite excited about those, and we see customers who really want to work with us, customers who love our unified story, customers who love our capabilities, there was one particular one that I would mention, that I had a chance to sit down, last Friday actually in Paris. It's a large financial institution. They’ve just selected XenDesktop over VMware VDI for two main reasons. One, was overall cost of ownership and implementation, and two, was capabilities and set of scenarios that only Citrix could support and in particular, they discovered in their proof of concept that only Citrix solution could support all broad range of peripherals that they want to turn [ph] around for virtualized desktop and that drove them to us and again that is just one example of many that we're seeing but at the same time it’s competitive environment we see. We see our competitors discounting their solutions heavily and in many cases it's a combat. But we're here to win.

[James Wesman:]

And David, a follow up on NetScaler, I know several people have been asking this but just given that the recent success of it, and within the cloud providers and the business overall, and you've grown the top line and license double digit plus over the last nine months or so. Do you feel like this is a sustainable growth rate into 2016? Should we be thinking that this is a double-digit grower going forward?

[David Henshall:]

Yeah, we're obviously being conservative and cautious when we provide forward outlook. We're incredibly happy with the business over the last -- really over the last 10 years. But as you pointed out, the last nine months have been particularly strong. And so we're clearly taking share -- share is not broken out in terms of individual segments but we took several points of share last year. I think we've got the capabilities to do that going forward. If you look across our product portfolio, we’ve got a unique technology approach where -- we are a software company and that gives us capabilities to deliver these types of technologies in the form factor of an appliance, in a highly virtualized appliance, in a software package or in the cloud consumption. And I think that the ability to do some really unique things with customers are going to play very very well with all the mega trends that are going on around us.

[Operator:]

And our next question comes from Phillip Winslow from Credit Suisse.

[Phillip Winslow:]

Just going back to the XenApp and Desktop, on the Workspace suite side. And you’ve talked about obviously the back end infrastructure, the upgrade that you had, but also, there was some releases where you're adding back in, call it, your front end capability as well, and then obviously with Workspace suite bundling in XenMobile capabilities. But you guys also talked about just sort of the messaging to the channel on how it was back on track beginning last year, and was building. So I guess as you sort of balance these -- all of these together, are we past the point where sort of -- there are no product issues and people are kind of ready to go in terms of upgrading the back end, and similarly where it's like, if there had been confusion in the past in the channel, are we kind of complete there too and this is sort of the run rate to expect, or is there another leg that still needs to build here in terms of the turnaround?

[Kirill Tatarinov:]

I think our refocusing and restructuring efforts are clearly paying off. And the feedback that we're getting from the channel, from customers and even from our own sellers have been resoundingly positive. I'd say our suite message resonates incredibly well because this is precisely what customers want to implement. Our latest releases are very strong, XenApp and Desktop, 7.8 has regions of functionality and lots of features that our competitor is simply missing at the same time. They're clearly providing this integrated environment. XenMobile 10.3, our latest release in that area is very competitive and we saw some very interesting takeouts with application management -- a mobile application management being the core strength area of ours. And that’s again a case where XenMobile working together with NetScaler, working together with ShareFile provides this unique better together scenario and those are simply unmatched by competitors. So I think this is a case where we have something unique in our hands. Of course there's always more things we need to do. Of course, we continue to evolve our solution and continue to invest in continuous research and development to add those new unique scenarios and embrace the need for the new modern infrastructures and help enterprise move with the trends of digital transformation. But we feel very good with where we are and very energized about the future.

[Phillip Winslow:]

And then David, a follow-up for you. In terms of just the cost savings from the realignment you've done. Obviously you talked about in the past a certain percentage actually bleeding into next year, sort of just the quarter end into 2016 here, any sort of change on that split of when these cost savings start showing up ’16 versus ’17?

[David Henshall:]

I think, a lot of the short term actions are things that we executed at the end of Q4, into Q1 those are around people related items. The longer term items, the big structural things like bringing down facilities capacity and optimizing there which up to date we've touched about 27 facilities which is over 20% of the overall portfolio. Those things have long term tails on it but there are also permanent benefits. Changes to our procurement sourcing organizations, things like that will be layering in gradually over time, plus the elimination of other types of events, and programs, and projects et cetera. These things will layer in. I think the teams are running full out right now in terms of execution capacity. And as I said a couple of times, we’re a little ahead of our internal plan on the timeline there. I think we'll just keep focus on that. More to do.

[Operator:]

Our next question comes from Kirk Materne from Evercore ISI.

[Unidentified Analyst:]

It’s Patrick Fong [ph] for Kirk. David, [indiscernible] was there anything from a macro competitive backdrop any different versus prior quarter or do you think this is really just about you and your channel partners just getting better?

[David Henshall:]

Well I think that from a macro standpoint, I mean Q1 always tends to be a little different than Q4. Most organizations are still finalizing and locking down budgets or absorbing the uplift of purchases that they incurred in Q4. And so it tends to start out a little bit slower and that's just very very typical across IT buying patterns. So I’d say Q1 was as expected, US we are executing well, the teams are doing well as I pointed out a couple of times. Competition as Kirill said is very very strong in all regions. I think we've seen a high level of discounting from a lot of vendors. We've seen a high level of bundling, not just kind of a different type of discounting and that's persisted. So very competitive. Customers are very focused on the big same themes, cloud, mobility, security, et cetera, ways to simplify their own infrastructure. And so at this point I would just call it execution.

[Operator:]

Next question comes from Steve Ashley from Robert Baird.

[Steve Ashley:]

My congrats as well. I'd like to ask about the channel. I think a lot of the discussions of ours have been on the products. But I know that making changes in channel was an important part of the recent quarter. Just like to ask you to maybe call out where you think or some of the bigger or more important things that might have changed here in the first quarter.

[Kirill Tatarinov:]

Well, obviously the channel plays hugely important role in our future success and has been part of our go to market strategy for many years. And I think every time you have a larger vibrant channel like we have, having elements that help reinvigorated and encourage growth, something that we need to continuously do. And that's precisely what we've done and communicated in the last quarter. It's basically a program that encourages acceleration of customer adds and growth in the business, essentially rewarding our channel partners for doing more of that.

[David Henshall:]

And Steve, we're still working our ways through that. There's more work to do from a channel standpoint, getting the message out lighting [ph], training and certain vacations, everything else. But in terms of an early data point of the aggregate contribution from reseller -- reseller part of our channel was north of 10% Q1 to Q1, we’re seeing good vibrancy in that respect and then contribution from the really large named partners was substantially higher than that. So strong quarter from an SI point of view.

[Steve Ashley:]

And then another thing that you talked about on terms of go to market, was maybe doing some more targeting of the mid market and really trying to make an extended effort to reach out. Any update there, is that something that, that has begun here in the first quarter?

[David Henshall:]

Yeah. Early days, but that's going to be a combination of both go to market and product. And so some of the product areas that we've talked about releasing in Q1 like the browser service which gives really businesses of all size but targeted towards mid-market in many dimensions, the ability to deliver browser based stats while managing performance, security, browser compatibility et cetera in a more simplified fashion. Consumption across areas like CSP has been growing so quickly, targeted towards that smaller mid sized customer and where they can consume cloud services and not have to manage the infrastructure. I mean those are all trends moving in that direction. But in terms of the go to market efforts, we're just getting going on that front, and you should expect more through the balance of the year.

[Kirill Tatarinov:]

And I would add one very important elements of our strategy and execution, as it relates to ShareFile which has been a fantastic solution for mid market and essentially optimize for mid market -- and SMB essentially with its cloud based self-serve delivery model. And now as the ShareFile becomes very integral -- integrated part of the portfolio, those ingredients from the product side and those characteristics on self-service easy to deploy type methodologies is starting to resonate across Citrix and we certainly expect to see more of that happening through the rest of the portfolio which from the product side will position us much, much better in the SMB segment with a cloud delivery model.

[Operator:]

And our next question comes from Gregg Moskowitz from Cowen and Company.

[Gregg Moskowitz:]

Thank you and I will add my congratulations. Getting back to the strength of the delivery networking business this quarter, you noted David that there were more than 100 new customers in this segment. Actually it sounded more like a couple of hundred. Just in answer – in your answer to Heather's question. Can you give us a sense of how those net adds compare to a typical quarter, excluding of course seasonally strong Q4?

[David Henshall:]

When I called that out, it was specifically in a quarter one quarter one comparison, not because there is some seasonality that goes around. Also, as compared to last quarter, so overall it’s up and I think it’s just a function of NetScaler becoming more visible and it’s a solid solution. So not much more I'd add beyond that.

[Gregg Moskowitz:]

Okay and then on the NetScaler market share, I believe what you said in the past is that you expect your NetScaler business to grow in line with or faster than the market in 2016. Based on how you've started the year from an execution standpoint, has your level of optimism increased as it relates to market share gains going forward?

[David Henshall:]

We're certainly happy with the performance of Q1, optimistic about our ability to execute for the balance of the year. So I'm optimistic about this business for sure.

[Kirill Tatarinov:]

And there are additional elements to this business that are also quite interesting, in particular in SD-WAN which is new unique capabilities that we have had in pure software delivered fashion. IDC just came out with their assessment of SD-WAN market and it’s going to grow quite phenomenally and we will have opportunity to participate in it.

[Operator:]

Our next question comes from Brad Reback from Stifel.

[Brad Reback:]

Thanks very much. David, could you give us a sense of what the core Citrix operating margin was in the quarter?

[David Henshall:]

Brad, we haven’t broken it out yet. I think the expectation should be that when we file the Form 10 which will happen later this quarter, we'll give clarity into the two operating segments. But consistent with what we've talked about in the past core Citrix is higher than what we call spin co [ph] at this point. So it operated north of the 29% margin that we posted for Q1.

[Brad Reback:]

And then just one quick follow up. The APJ, is that a macro issue or an execution issue?

[David Henshall:]

That’s a little of both. I mean the teams are working hard to evolve the GoTo market model there to be little bit more direct and that's more on the execution side. There's clearly macro issues and political issues that we deal with some of the larger geos over the last year plus.

[Operator:]

Our next question comes from Keith Weiss from Morgan Stanley.

[Sanjit Singh:]

Hi, this is Sanjit Singh in for Keith. Thank you for taking the question. Wanted to toggle back to the workspace services division. When you talk about overall license growth being flat, I guess my question is here is –how much does – to what percentage does – that we need to get to in terms of the CSP business and the workspace services business as a percentage to get that license growth, to start to accelerate to low to positive – low to mid single digit license growth?

[David Henshall:]

Well it's not just a function of what percentage, but that’s a two variable equation. But I’d say that overall we’re working on growing all of them for that business. I called out a few statistics earlier. But the fact is in the aggregate we are approaching 20% coming from subscriptions, which was 14% a year ago. And that's the direction this business will continue to move over time. Plus all the work that Kirill and I have talked about around the product area just addressing some broader trends in the industry, making the products more integrated and everything that we're doing to drive on the fully baked suite approach all the tops down. So I think it's a combination of all those. Clearly we see this as a business that needs to grow, we’re working really hard to make it into a sustainable growth business on the license line.

[Sanjit Singh:]

And a quick follow up – with a couple quarters of really strong performance on the top line, is there anything that makes you think about accelerating the investment profile given some of the strong topline results you’ve seen the past couple quarters? And also from a strategic point of view, is there anything that needs to be refined strategically, given the health of your state of the business as we look at it today?

[David Henshall:]

I’d say strategically, I mean we're starting to talk a little bit more about that, I’d invite you to come and join us at our analyst day at Synergy at the end of May, we’ll be talking much more about overall Citrix strategy and how to think about that going forward. In terms of both revenue outperformance, clearly that's been driving an acceleration of our margin goals. We're fully on target for delivering that 30% plus a year, and that's not going to change. We're always investing in things that we believe are going to drive long term growth. And I think that's our responsibility to make sure we’re investing in just those things that are aligned tightly to the strategy, very focused and have the highest probability returns. As we see those, we will be investing in -- the reason why we've gone through so much hard work on a restructuring is that it frees up the capital to be able to do that and deliver the upside the margins on an ongoing basis. So that's the goal.

[Operator:]

Our next question comes from Ed Maguire from CLSA.

[Ed Maguire:]

Hi, thanks for taking my question. I had a question about Windows 10 and its potential upgrade cycle in the enterprise, how you look at that as really an opportunity to kind of reintroduce some of your newer products and new offerings and whether you see that impacting the demand profile in your core customer base?

[Kirill Tatarinov:]

That's a great question. And obviously we see Windows 10 as a huge opportunity. It's a reality in the enterprise. And we see enterprise upgrades accelerating to Windows 10 and Citrix has a very important role to play in that, very important role on delivering apps to Windows 10 desktops that people and organizations just bring and upgrade by themselves but at the same time giving IT professionals and infrastructure managers the ability to deliver, manage and control Windows 10 desktops too, so they have more control regulated environment. And I think both of that -- both of those are very important trends and our customers are telling us that this is really -- I would say a very significant beginning of this upgrade cycle that we certainly look forward to participating.

[Operator:]

Next question comes from Mark Moerdler from Bernstein.

[Unidentified Analyst:]

Hi, this is Zane Crane [ph] for Mark. Thanks for taking my question, and congrats on a great quarter. I was just wondering if you could give an update on some of the retention rates across Workspace services and NetScaler, especially with Windows 10 coming out? Any potential positive impacts on retention rates in Workspace? Thank you.

[David Henshall:]

Sure if you're referring to subscription and maintenance retention rates, they've been basically unchanged. We went in the mid to high 80s, continued to do that in Q1.

[Operator:]

Our next question comes from Abhey Lamba from Mizuho Securities.

[Unidentified Analyst:]

Hi, this is Pavlove [ph] sitting in for Abhey. Thanks for taking the question. On the capital allocation front, what are your thoughts on paying a dividend? Is it something that's on the table post spin-off?

[David Henshall:]

Well we haven't discussed it publicly, of course but I think right now that the message that we've talked about on the last couple of quarters is capital strategy is something that we will be addressing in the post spin and the rest of it with no clarity in terms of how we're thinking about the balance sheet, how we're thinking about capital use going forward et cetera. So I'd say let’s just hang tight until we get through the spin and we can have a more focused conversation on capital structure.

[Operator:]

And our next question comes from John Rizzuto from SunTrust.

[John Rizzuto:]

Yes, hi. Just a point of clarification David or Kirill, when you were talking earlier about XenDesktop, or XenDesktop as it's used at John Hopkins I believe as an example, something driving XenApp sales, that unified infrastructure. I was under the impression that if you are getting XenDesktop, you are still getting XenApp as part of that XenApp virtualization. I'm wondering how you -- is that true? And well, is that true?

[Kirill Tatarinov:]

But if you're getting a suite you’re getting both. If you’ve got a standalone product, and now you want to expand, you would want to expand either by adding another product or expanding into a suite, and that’s the best dynamic that we're seeing and – it’s very easy to do now because the two are on the same infrastructure. And that expansion becomes natural for customers unlike –

[John Rizzuto:]

So XenDesktop does not come with application virtualization then, correct? Is that what you are saying, because that is what I am asking?

[David Henshall:]

John, the underlined examples that we talked about was where our customer is using VDI solutions from a different vendor and still using XenApp to deliver application.

[John Rizzuto:]

Oh, it wasn't your VDI solution? Okay, got you.

[David Henshall:]

Correct and this is about unifying the two together.

[John Rizzuto:]

Okay. Because, I guess, what I was after is, if you have -- if there's a lot of XenDesktop out there historically, is there a potential for XenApp upsell, and is that one of the things that might be driving the adoption there or that wouldn't make sense, because the XenDesktop does comes with the XenApp inclusion?

[David Henshall:]

John, there's an upsell opportunity to Workspace suite – for existing XenApp customers. But more broadly it's just about expanding the applicability of the solution to drive greater penetration.

[John Rizzuto:]

Okay. And then, in that being said, when did the new -- because for a while there, you didn't have the SKU for XenApp, and then you reintroduced the SKU, is that correct?

[David Henshall:]

We reintroduced the product over a year ago. When -- effectively end of life of the product when we reintroduced at that point in time. We've been just moving it forward since then. End of Q&A

[Operator:]

And we have no further questions at this time and I will now turn the call back over to management for closing comments.

[Kirill Tatarinov:]

Well, thank you very much for joining us today and thank you for calling Citrix as we move our business forward. After almost 90 days with the company holding many discussions with our customers, analysts and many of you actually, I'm convinced that Citrix today has the right focus and exciting product roadmap and the right strategy for the future. I look forward to seeing many of you at the end of May for our analyst day where we will be sharing details of our strategy of growing the business further. Thank you all very much. Have a great day.

[Operator:]

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