Citrix Systems, Inc.
Q4 2016 Earnings Call Transcript

Published: 26 Jan 2017

[Operator:]

Good afternoon. My name is Doris and I will be your conference facilitator today. At this time I'd like to welcome everyone to the Citrix Systems Fourth Quarter 2016 Financial Results Conference Call. [Operator Instructions] Thank you. I would now like to introduce Eduardo Fleites, Vice President, Investor Relations. Mr. Fleites, you may begin your conference.

[Eduardo Fleites:]

Thank you, Heidi. Good afternoon, everyone and thank you for joining us for today's fourth quarter and fiscal year 2016 earnings presentation. Participating on the call will be Kirill Tatarinov, President and Chief Executive Officer and David Henschel, 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 Henschel, our Chief Operating Officer and CFO. David?

[David Henschel:]

Thanks Eduardo and welcome to everyone joining us today. We continue to show good results and execution from the operational initiatives driving record profitability to the strength in product portfolio driving growth and increased win rates. We're focusing all of our energy on our core strategy of securely delivering apps and data, setting the company up for sustainable profitable growth throughout 2017. As you can see from the release, total revenue was flat in the quarter and up 4% for the year. Adjusted operating margin expanded to 35% in Q4 and 31% for fiscal ’16. Adjusted EPS was $1.61 per share bringing the year to $5.32, up 23%. And we generated record deferred revenue up more than $190 million sequentially and 8% year-on-year due to strength in cloud and multi-year customer commitments. In Q4, we closed 96 $1 million plus transactions with strength in cloud, financial services, health care and government verticals. There is good balance across the portfolio, with more than half of these deals coming from the workspace services and the balance coming from networking and SaaS. Next, looking at the Q4 results within our four primary businesses. Our workspace service business which includes virtualization of mobility grew 3% year-on-year to $464 million with product license also growing 3%. Momentum here continued for the fifth quarter in a row as our strategy and focus is showing results often in accounts where security and compliance are major concerns. As we've discussed, there are several specific initiatives we're driving to accelerate growth in this area including much faster innovation, integration of our unique assets, stepped up competitive positioning and reinvigoration of our channel partnerships especially Microsoft. All of these efforts have resulted in an increase in win rates and competitive opportunities. A few other dynamics that are worth noting include the continued license revenue growth in the Americas, up 10% in the quarter and 15% for the year. We're also beginning to see traction of our APJ restructuring with workspace license revenue of 9% in Q4. We had stable growth in our CSP subscription where partners primarily utilize XenApp to deliver cloud-based offerings to their customers. Overall revenue in this area was up 30% within an ARR now over $80 million. Next, we're seeing great early traction from our new Citrix Cloud offerings including three seven figure transactions. And finally a really good response to Citrix Customer Success Services, the redefined software maintenance programs we announced at the beginning of the quarter helping to add to the strong increase in deferred revenue. In the delivery networking business, total revenue decreased 9% in the quarter to 201 million with license revenue down 20%. This result is line with our guidance for Q4 as we forecasted the sequential decline in cloud infrastructure and e-commerce bookings which were really strong over the first three quarters of the year. I remind everyone that the NetScaler business is essentially made up of three groups, cloud infrastructure and ecom, solution attached sales and enterprise ADC. In the quarter, solution attached represented over half the mix with a number of app and mobile opportunities that included networking as part of the overall Citrix solution, up about 20% year-on-year. Cloud and ecom and the enterprise ADC segment were each about 20% of the mix. These last two areas are the ones that should benefit most in 2017 from the capacity and the management investments that we made in the second half of last year. All in, we sold over 2,000 networking customers in the period with 40% of them being net new, which reflects the strong competitive position as well as provides expansion opportunities in the future. We’re also encouraged by the results of our emerging SD-WAN business, while still small in absolute terms this new product was up nearly 200% in the quarter, 60% for the full year and should be an additional growth lever as we look into next year. Finally, our total SaaS revenue was up 8% year-on-year to 210 million in the quarter. The contribution from the GoTo business was 174 million, up 5%. And as for the merger of GoTo and LogMeIn, we expect this to close at the end of this month. Looking at the cloud-based services that are part of core Citrix, we recognized 36 million in revenue growing about 25% in the quarter. The bulk of this is coming from ShareFile, our secure data platform with other new offerings addressing the workspace-as-a-service and networking needs of our customers. So clearly we continue to see a shift in the way our products are being delivered evolving slowly towards a more ratable model where unit growth will exceed revenue in the short term. When we include the revenue that's coming from the Citrix Service Provider subscriptions plus our core cloud-based services and annual term license, the aggregate ARR was over 250 fifty million in Q4. We expect this trend to accelerate this year as more of our portfolio is being delivered as part of Citrix Cloud. Turning to operations, we've driven a lot of efficiencies in the company over the past couple of years. The actions across the business were designed to generate permanent expense reductions, while reallocating investments towards those areas that will drive profitable growth in the future. In Q4, adjusted op margin was 35%, up more than 350 basis points from last year. We've been executing more than a year ahead of our stated goals and in 2016, for the full year delivered adjusted op margin of 31%. This focus on leverage has also helped drive an increased cash flow profile for the company. In Q4, our cash flow from ops was about 260 million. And over the trailing 12 months, we generated over 1.1 billion in operating cash flow. As you begin to model the core business for fiscal ’17, I'd like to point out that historically between 80% and 90% of cash flow from operations can be attributed to the core business with the remainder coming from GoTo. Exiting Q4 we had nearly 2.7 billion in cash and investments on the balance sheet which is up sharply from last quarter. Over the last several years, our stated target has been to utilize at least half of free cash flow for capital return, a level which we've clearly regularly exceeded. As you know this program has been on hold due to the pending separation of GoTo business. Today we announced that our Board has approved an increase of $500 million to our existing share repurchase program bringing the total current authorization to over $900 million. So we expect to be active again as soon as the GoTo LogMeIn transaction closes later this month. So our growth strategy and operational programs have clearly been working, we’re happy with the results and confident our plans as we look into the coming year. But before I discuss our expectations for 2017, I'd like to provide a little color around our plan. As always, at the beginning of the year we're maintaining a conservative outlook on the next four quarters. Our view on workspace services opportunity continues to strengthen and we expect cloud adoption to accelerate as we move through the year. In networking we're taking a conservative view on the timing of NetScaler cloud infrastructure and e-com orders which we expect to be more concentrated towards the middle of the year. And finally, since the GoTo transaction is expected to close by the end of this month, our guidance will exclude all of the GoTo results for the quarter and just include core Citrix. We’ll begin reporting GoTo as discontinued operations beginning in Q1 and we'll plan to provide the historical comparison each quarter as we go through the year. So for 2017, we expect revenue between 2.81 and 2.84 billion for the core business which is an increase of 3% to 4% over 2016 and adjusted EPS for the year of $4.60 to $4.65 a share. For Q1, we expect revenue between 655 to 665 million and adjusted EPS of $0.93 to $0.95 a share. So we're feeling good about the continued improvement in results, and our product innovations and the early returns on cloud. We're also continuing to make those go-to-market investments around capacity that should drive additional growth as we move throughout the year. So now I'd like to turn it over to Kirill to provide further color on the quarter and our focus areas looking forward.

[Kirill Tatarinov:]

Thank you David. Hello and welcome everyone. As you see overall, this was a strong quarter demonstrating that our commitment to improve focus and streamlined execution is resonating well in the marketplace. Most notably this was yet another quarter of growth in workspace services proving that our efforts in accelerating product innovation and improving operational effectiveness is clearing working. We are also continuing to see great early traction of our cloud transformation with strong double digits growth. 2016 was a transformational year for Citrix where we focused on our core products and made significant strides advancing our long-term vision, strategy and culture. Our efforts have helped us outperform on profits and EPS, speed the pace of innovation, increase our competitive position and put us in a path for sustained growth in our core business and accelerated growth in strategic areas such as Citrix Cloud. As a next step in our transformation, we have transitioned Citrix to a unified functional organization bringing out three business units, three core business units into one agile structure enabling us to drive even stronger integrated innovation going forward. Our progress positions us well for accelerated and sustained profitable growth in the years ahead. We’re very pleased that our global field teams executed very well exceeding plan in all geographies in 2016. And with new leadership in place in APJ and overall strengthening of the team in EMEA and APJ, we’re well positioned for even more success in the future. As always during the quarter, I had a direct opportunity to engage with our customers and partners in North America and EMEA. The feedback on the focused and reinvigorated Citrix has been overwhelmingly positive. Similarly, the feedback on our newly launched customer success services has been positive, with customers stating that this model of support has established a new standard for software maintenance in the industry. I'm also very encouraged by the record number of $1 million plus transactions and several seven figure cloud deals almost them. As more and more large enterprise embrace the cloud first approach to secure and manage their workspaces. Now a few extra comments on our solution areas. With now three quarters of consecutive growth in workspace services or our Xen family of products, it is clear that our efforts on innovation and execution are delivering solid competitive edge. Our Americas team has yet again delivered double-digit growth with Xen family in the quarter. On the technology side, we continued with an accelerated quarterly update cadence for our cores and apps and depth of products delivering December release which featured expanded Microsoft integration, enhanced application monitoring and reporting tools. And now with acquisition of Unidesk and world best app layering technology we further expanded our leadership position. Our customers and partners have applauded the deal. With some more than 850 competitive wins in virtual client computing this quarter and our win rates continue to improve. And one significant win, a large European software company selected Citrix XenApp for their 15,000 users over the competition because of XenApp’s clear position of market leader and also motivated by security concerns that the company had. In 2017, we set a priority for our sales and partners to lead with the Citrix Workspaces Suite which pushes us towards our mission to providing the industry most comprehensive and integrated platform for the secure delivery of apps and data. Already one large Q4 win, CenturyLink selected Citrix Workspace Suite choosing the full Citrix portfolio of products. Moving on to our networking business. Coming on the heels of incredibly strong first nine months of the year and recognizing some unique characteristics and volatility of the service provider segment, our Q4 results for networking came well as expect. However, despite muted performance in Q4, we’re enthusiastic about networking and the expanded the opportunities we have there. We are innovating rapidly, most notably with new NetScaler form factors enabled by our unique software defined approach and NetScaler Management and Analytics Systems or MAS which gives IT pros better analytics and visibility into security of network applications amongst other benefits. Our networking solutions are also shifting to a cloud delivery model, beginning with our recently announced release of NetScaler Gateway and management analytics service as a service. Another great growth opportunity for Citrix is in fact, SD-WAN market. While still not yet maturely significant, our NetScaler SD-WAN solution grew strong triple digits. As an example of a large SD-WAN transaction, Pilot Travel Centers selected Citrix NetScaler SD-WAN for branch wide area network optimization across all of their retail solutions. And Pilot has already seen revenue growth from implementation of SD-WAN. In 2017, we've made it a priority for our sellers and our partners to increase focus on networking solutions by both driving better coverage and attach rates. Onto data delivery, ShareFile continues to prove itself as a leader in the business file sync and share markets growing over 25% year over year. As with previous quarters, we'll continue to drive rapid innovation with ShareFile, further improving usability and connectivity for our customers. Such secure data collaboration has proven valuable to companies of all sizes and has helped us accelerate our expansion into new market segments. For example, Erie Insurance, a mid-sized multi-line insurance company has standardized on Citrix ShareFile to empower their secure file sharing and collaboration capabilities across their national network of more than 5,000 independent insurance agents. As we mentioned, our cloud transformation is picking up momentum and we're seeing strong demand from both existing and net new customers delivering overall strong double digit growth. For example, Partners HealthCare, the largest healthcare system in Northeast selected Citrix Cloud to support their Windows 10 migration, VDI expansion, while at the same time decreasing management overhead and infrastructure cost. Broad focus on cyber security continued to be a strong catalyst for Citrix. More and more customers recognized that Virtual Client Computing is in fact a key part of their cyber defenses. During the quarter, we significantly enhanced our overall positioning in the security space. At our annual sales and partner kickoff this month, we trained the entire team on our security positioning and highlighted our key security differentiators. This resonated tremendously well with our sellers and our partners alike. A points on our partnerships, I’m very happy to report that our partnership with Microsoft continues to gain strength and momentum. On the product side, we’re now delivering to what we promised last year, XenApp, XenDesktop and XenMobile Essentials for Azure. Citrix also remains the only solution in market that can virtualize Skype for Business across platforms, including Windows, Mac, Linux and now also Raspberry Pi. And Citrix ShareFile offers the only way to deliver Microsoft OneDrive in a virtualized environment. Our product teams are aligned, and our sales organizations are capitalizing on this effort. And one example of joint customer win with Microsoft, Vestus, the world's largest wind turbine company selected Citrix XenMobile and Microsoft MGM to provide true mobility for its global workforce of more than 15,000 users. And this was only one of many proof points of how a partnership is working. Additionally, earlier this month, we announced our new Citrix rated [ph] hyper-converged appliance program and Hewlett Packard Enterprise became the first partner to sign up for the program announcing the delivery of hyper-converged appliance running end-to-end Citrix platform in first half of this year. This will allow us to accelerate growth in mid-market where such full integrated out of the box solution are truly required. On a broader set of partners, we’re seeing stable growth and in 2017, we will continue to reinvigorate our partner channel. In fact as I mentioned earlier this month, we held Citrix Summit, the annual conference for our sellers and partner teams around the world. We have more than 4,000 attendees from 70 countries. We communicated a broad range of product innovations and new partnership deals, some of which I highlighted and mentioned earlier today. We’ve also delivered a comprehensive cloud and cyber security training. The feedback from partners was incredible, in their own words, Citrix is back on track and demonstrating clear purpose and vision. On a personal note, today is my first year anniversary as CEO of Citrix. Looking back at the year, I'm incredibly proud of what we were able to accomplish. Our vision is clear, our strategy is firmly in place, we have the right leadership, and talented and unified team to drive sustained profitable growth and continue to delight our customers. I am pleased with our result and more enthusiastic than ever about the future of Citrix. Thank you and we look forward to your questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Raimo Lenschow.

[Raimo Lenschow:]

I got a new name, thanks. Hey, thanks for taking my question. Two quick questions if I may. First of all, David, you were talking about like improved visibility into NetScaler into the middle of the year. Can you just expand a little bit on that one? Obviously that's going to be a key focus for investors. And then, Kirill, on the second question, it's on XenMobile. You mentioned like a joint project with Microsoft. How does the market understand like the Microsoft positioning, versus kind of what you guys or some other guys are offering in this space? Is it kind of competitive or like are people understanding where these two different products fit? Thank you.

[David Henschel:]

Sure Raimo, it's David, let me take that first question about NetScaler SSPs. It's the same story we've been talking about for a couple of years, nothing has changed, it’s simply that we have pretty good visibility into a full-year demand profile from the cloud infrastructure vendors. It's just that those orders tend to be concentrated within certain quarters. Historically that's been two quarters per year that we've seen a big uptick and then two quarters the demand is a little bit less. Last year we had three very, very strong quarters and that's why we had forecasted Q4 and Q1 now to me a bit less strong. When we look at the full year, we feel very good about our position and so, what we understand at this point in time is that it's more of a Q2 to Q4 cycle this year. So nothing unexpected, I will add that you know as we talked about last quarter, one of the major investments we've made in the back part of last year was around capacity adds and leadership across networking and that was to not only expand the enterprise ADC, our ability to service customers and compete for business, but it's to also expand into what I would call Tier-2 cloud providers and other e-commerce so that segment of that business has a much broader base. And over the coming years, we'll be able to diversify away some of the volatility of it.

[Kirill Tatarinov:]

Onto Microsoft question and specific to XenMobile and Intune. The core part of our Microsoft partnership that was announced mid of last year was complete alignment of our product roadmaps and with that we essentially eliminated any friction which may have existed in the past in enterprise mobility space. And from that point on our teams work very closely together and collaborated on delivering XenMobile essentials on Azure, which essentially expands Intune capabilities by adding unique Citrix functionality such as our secure apps such as more security profiles and settings, and also Micro VPN capabilities among most notable things. It is a special skew for EMS essentially expanding Microsoft capability. As you saw from at least one example that we highlighted and there were many more customers are clearly recognizing [indiscernible]. It's going to be generally available this quarter and we expect a great traction with Microsoft on that front amongst everything else we’re doing with them.

[Operator:]

Our next question is from the line of Walter Pritchard. Walter, your line is open.

[David Henschel:]

Okay operator next question.

[Operator:]

Our next question is from the line of Philip Winslow.

[Philip Winslow:]

See, I would not leave you guys hanging. Thanks for taking my question. Once again, congrats on a great quarter on the margin side. You guys have continued to come in ahead of consensus with the OpEx and the COGS lines for multiple quarters now. And David, I know you gave commentary about just operational efficiencies, and obviously, where you are in executing that plan. But as you kind of look forward into ’17 versus the plan that you guys laid out over a year ago, on those cost savings, sort of, what has fully come out of the model, what's still left that can trickle into ’17? And I think on the last call, you said for the core margin would be 32 to 33 for ’17, any update on that too, just help us kind of correlate all these things, that could be great.

[David Henschel:]

Sure, Phil. Absolutely. On core margins, yeah, 32, 33, same guide that we gave last quarter that continues into ’17. In terms of what's left, I mean a lot of the work that we've been doing has been both to take cost out, permanent cost reductions that allow us to have better scalability and efficiencies and also a broad reallocation of costs to things that are going to drive growth long term and the investments we've been making across ShareFile data platform across Citrix cloud, across capacity ads and a few other areas in the business and we’ll continue to make those, because right now, we've been driving nearly 1000 basis points of op margin over the last couple of years. We still expect to expand into ’17, but the stated plan right now is a lot of those investments are expected to help accelerate growth. And so as we make that trade off, it's a profitable growth story. We will do both. And so, and as we fully expect to do, as we look into the year. In terms of things that we still have, I mean, there's a lot of efficiencies that are still out there. And I think more importantly, we're getting into a continuous cycle now where we can have an office of efficiency effectively set up that looks into continuous improvement and making that and ongoing discipline inside the company. And so, it's never over and in fact I still think there's a little room to run on that front. And we’ll just balance based on how the year plays out, how much of that gets reinvested and how much of that becomes incremental profit.

[Kirill Tatarinov:]

Yeah. And I think I would absolutely emphasize the point of improved discipline on managing OpEx and running disciplined operations, there's a new operating rigor that was introduced last year. It is firmly in place. There's a completely different cadence of how we manage expenses and how we manage headcount, how we manage allocations. There's also much improved sharing between different engineering teams that are now working much closer together, which helps us reinvest and producing great products and eliminate duplication. So all of those processes we believe will really help us drive the sustained profitable growth in ‘17.

[Operator:]

Our next question is from the line of Walter Pritchard. Walter, your line is open. We’ll move on to our next question. Our next question is from the line of Mark Moerdler.

[Mark Moerdler:]

Thanks. I appreciate. So, David, can you help us better understand the GoTo spinout impact on 2016, so we can compare the FY17 guide to the FY16 numbers. You said that GoTo contributed about 174 million of revenue this quarter, but can you give us a bit more on the annual revenue, the margins, the EPS impact, just something so we can get a sense of year-over-year growth within the guidance. Thanks. And then I’ve got a follow-up.

[David Henschel:]

Yeah. We're going to be actually providing the quarter-by-quarter as we go through the year and some of that is just, we don't want to incur all the cost upfront to go back and do those historicals. And right now, we're focused on actually the split in the spin. And so when we back out those numbers, we talked last quarter about how much the core business represented in terms of 2016 and that was core-core business, just Citrix only was about 2.73 billion of the consolidated numbers. So you can kind of back into the math on that upfront. In terms of what we're going to be providing, as you would imagine, when we're doing a spinout like this from an integrated operations, it will basically go down to about the operating income line. Below that, it's just a pure allocation estimate because those are all shared costs. So we’ll be providing revenue breakouts and cost breakouts down to the operating line. In terms of how that business has performed, earlier in the year, it was running at an operating margin, the core business excuse me was running at operating margin that was about a point and a half higher than the consolidated entity. That number shrank a little bit as we went through the year. So exiting Q4, they were both around the same amounts. So I would expect the core business to be a little bit higher on a full-year basis and again we’ll provide this quarter-by-quarter guidance as we go into the year.

[Mark Moerdler:]

Can you also give us some sense on the time horizon or how to think about the $900 million buyback?

[David Henschel:]

Yeah. We haven’t stated a specific one, but we've been out of the market for a long time and accumulating a lot of cash. And historically, we've wanted to spend at least half of our free cash flow and we've usually been above that. And so once we get this separation done here at the end the month, we're going to be active again and don't really want to communicate exactly how much, but I would expect that we’ll be back active managing dilution going forward and we continue to talk and look at capital structure on a broader basis. So it's not, I wouldn't call it mutually exclusive. These are two separate topics that we'll continue to talk about through the year.

[Operator:]

Our next question is from the line of Kirk Materne.

[Unidentified Analyst:]

Hey. It’s actually [indiscernible] for Kirk Materne. Congrats on the strong year. Could you all discuss how you're thinking about M&A going forward in terms of both during the app delivery and app networking businesses?

[David Henschel:]

Sure. In terms of M&A, we've been active obviously for a long time and looking at a lot of things that are not only incremental net new, so long as they're very related to our core strategy of absent data delivery, but more recently over the last couple of years, just changed our focus around discipline to make sure that the things we're adding are tightly coupled with our existing products that we can integrate with a low risk low capital outlay and we announced one of those in Q4. We had a tuck-in acquisition that was actually really hailed by our field and our channel partners where we're bringing frankly one of our ecosystem partners inside of Citrix, which just further extends the capabilities of the app delivery solution. Going forward, we'll look across the portfolio of both adjacencies and tech stock answer is really no change in strategy. I'd say our discipline is very, very high and as you can imagine, we’re evaluating everything, but have a pretty high hurdle that we want to get over before we actually move forward.

[Kirill Tatarinov:]

Absolutely. I would add Unidesk tuck-in is certainly indicative of types of transactions that fits square in our strategy, incredibly well received by our customers, partners and sellers alike and positions us for success with constantly on the outlook, but what's really important for us and staying true to our strategy of building the best in the world integrated cloud solutions for secure delivery of apps and data on any device anywhere in the world at any time. That strategy actually gives us permission to look at additional adjacencies and as the company has transformed, there's certainly ongoing activity that you should expect us to see, but everything we do, we’ll stay very disciplined and very aligned with our strategy.

[Operator:]

Our next question is from the line of Gregg Moskowitz.

[Gregg Moskowitz:]

Okay. Thanks very much. Kirill, can you talk about XenDesktop essentials briefly and the demand that you expect to see from managing Windows 10 Enterprise and Azure and then I just have a follow-up?

[Kirill Tatarinov:]

Yeah. It’s a great solution. The solution coming out of Microsoft Azure marketplace later this quarter. We see tremendous amount of increase and very strong interest, indicating that the solution will certainly be a very strong driver. First and foremost, as you may recall, in the middle of 2016, Microsoft essentially announced discontinuation of Azure remote access, which XenApp XenDesktop essentials will be replacing. And so first and foremost, we expect the solution to be very well received by those [indiscernible] Azure remote access. And then, we certainly see in lighter weight scenarios where the lighter weight solution would fit appropriately well, very high demand and obviously for customers who want to run virtualized Windows desktops and virtualized windows apps, the most logical place to go is Azure and so whether it's XenDesktop, XenApp essentials coming from Microsoft marketplace or full solution, expanded solution or the entire Citrix cloud suite coming from Citrix either way, they will get what they need.

[Gregg Moskowitz:]

Okay. That's very helpful. Thanks, Kirill. And then, David, so you did around 1.1 billion in cash from ops this year and taking the midpoint of the 80% to 90% [indiscernible] that you articulated, so that would I think get us to about 945 million as a starting point and I would assume you will be growing off that base, given revenue growth and margin improvement that you've guided to this year, but first of all, is that a fair assumption. And secondly, just given that GoTo was a more capital intensive business for you, can you give us a sense of what 2017 CapEx might look like as well?

[David Henschel:]

Sure, Gregg. I think that yes, those are fair assumptions. In terms of CapEx, it's probably, it depends on exactly what we do from an infrastructure standpoint, real estate and some of the big items, but in general I would expect CapEx to be down a third or so from last year. It's probably worth noting in cash flow, I mean cash flow is a little bit tricky right now, just given the separation. And so Q4 was impacted by separation and Q1 will be as well. And so starting in Q2, we’ll be back to normal. In this past quarter, there was a few kind of unique swings around prepaid, the increase in payables and decrease and a lot of those were just due to out of cycle items related to the separation and then the timing of VAT payments. And a few one-offs like that, but for the full year, I think that's the right set of assumptions. And yes, we do expect to grow off that base.

[Operator:]

Our next question is from the line of Heather Bellini.

[Heather Bellini:]

Great. Thank you. I was just wondering if you could give us a little bit more color on what's driving the increased win rates in virtual computing, how are you seeing the competitive market evolve and how are you seeing the appetite for the solution? Thank you.

[Kirill Tatarinov:]

Yeah. Thank you. Great question. And there are two things, two broad categories that's worth highlighting. First, changes that we implemented within Citrix and that secular trends in the industry. For Citrix, essentially with XenApp XenDesktop 7.12 that was introduced in December and previous releases, three other releases that were introduced early in 2016, we have the strongest product and our innovation engines run full cylinders and the team have done an amazing job, delivering great technology, truly rich functional set of scenarios with necessary level of simplicity that is required in modern applications. That was enhanced by two tuck-in acquisitions. We did small acquisition in Q3, Norskale that added end user experience and now, Unidesk. So that’s one chunk of real important technology innovation that always drive success in technology world. Increased focus on the core, and it’s really helped, not only on the bottom line, but also on the top line and really being clear with our sellers and with our partners what's important and what's the core and what's expected and how this aligns with our overall strategy. With that, implementing much improved discipline on competitor figures, setting up war room, making sure that we're really disciplined to track every competitive transaction and put the right level of attention and the right people on it. And that’s certainly helped and that gave us a chance to essentially start tracking from about Q2 of last year how we’re doing competitively. Frankly and honestly, that was not in place in the past. And then there are, I would say three secular trends in the industry that kind of raised the waterline of the overall virtual client computing marketplace. Number one is security and this is truly the case where cyber security is becoming stronger and stronger catalyst for Citrix and for the overall virtual client computing, computing industry. More and more customers realize that virtualizing the endpoint may impact the most secure way to run it, not putting anything on that end point is what truly and honestly secures it completely. So that’s one. Then Microsoft upgrade cycle. In the second half of 2016, we started to see acceleration of Win 10 migrations. And we certainly know that many customers run their desktops virtualized and we actually see shift to more customers wanting to run them virtualized as same clients and the same form factor starts playing even in traditional desktop environments. And that’s, we started to see that accelerating in Q3 and we saw more of that in Q4 as you saw in some concrete deal examples that we highlighted like partner healthcare. And last but not least, it’s the cloud. The cloud will drive acceleration in the business. The cloud will be the catalyst. The cloud is starting to take much more concrete shape in conversations related to running workspaces for organizations of all cybers. And I think our alignment with Microsoft on cloud and on Azure is certainly helping us and I believe will be helping us more as the cloud transformation will occur.

[David Henschel:]

Hey, Heather. This is David. I’m just going to add a couple of points on workspace services that I think are really worth noting. So I called out in the prepared remarks that in the Americas, work space service grew double digits in the quarter. Net new license, that's actually the fourth quarter in a row of double digit growth. For the full year, it was about 15%. APJ is actually coming back due to some of the restructuring we’ve done. They grew positive in the mid to high single digits on net new license. We are also seeing the continued phenomenon, where unit volume is growing faster than recognized license volume. Some of that's coming from CSP. Other elements coming from term based and then Citrix cloud. So I think, they all point to more robust market looking forward.

[Operator:]

Our next question is from the line of Abhey Lamba. Your line is open. We’ll move on to our next question. Our next question is from the line of Ed Maguire. Ed, your line is open. We’ll move on to Keith Weiss.

[Keith Weiss:]

I wanted to see if I can get -- understand a little bit about the impact of the new software maintenance program, both on your overall billings growth, given the nice deferred that you've guys have posted this quarter, but also in terms of margins and EPS? If there's any way to quantify that impact? And I guess, the follow up there would also be, how much of the base has been transitioned to the new software program, and where can that go over the next year to two years?

[David Henschel:]

Sure, Keith. I will take the last part of the question first. It's going to go to 100% of the base, the active base over a period of time. The way we have structured the customer success services is this. We have stopped selling subscription advantage on net new licenses as of January 1st. We will stop renewing subscription advantage as of July 1st. And so we've got this interim period right now where if customers are coming up for renewal on their subscription advantage, we will give them the opportunity to renew for one year. We are no longer doing multi-year renewals or anything else. We're actually going to start transitioning the base pretty aggressively in the second half of the year. Remind everybody that know in many cases, this is a material price uplift for customers. And therefore, we are stepping some of them up over the course of three years. So this will flow into the model beginning in the second half of this year, much more aggressively into 18 and 19. In terms of the percentage of the base that's already migrated, prior to Q4, we had roughly 20% of the active installed base had migrated to the maintenance offerings. During Q4, about 20% of the eligible base chose to upgrade voluntarily to the new program, even though it wasn't mandatory yet. And that is some of what's driving the really, really strong deferred revenue growth we saw. That plus some of the unique Citrix cloud transactions that we called out, which are all multi-year and just many, many multi-year transactions that tend to be aligned with the number of large deals like we saw in Q4. Hopefully that answers your question?

[Keith Weiss:]

That's really helpful. Just to follow up. If there's any sense on how, on this view, the adoption of the new maintenance program might, how much of that is a catalyst to your margin trajectory next year? And then, my last follow-up is, if you’ve got any comments on Europe, that business, in terms of did you see any weakness there, on how the trends performed there, particularly post-election and your views going forward?

[David Henschel:]

Sure. In terms of the maintenance progression on actual margins, there is less impact in the current guidance in 2017. The impact will occur in a much more pronounced fashion in 2018 and ’19 and that's because these are all ratable contracts. If we start a more aggressive migration in the back half of the year, there's only a small portion of that that actually hits the P&L. You'll see more of it show up in growth in deferred. In terms of customer adoption, we've actually had a tremendous feedback. It's one of those things that we spend a lot of time actually working with customers and partners and others to understand the value that we're delivering. And so this is not a simple migration to a -- back into a price increase, but really approaching it from what types of value do we need to add to customers and what type of incremental services can we give them to, a, make them very successful with their current implementations and, b, really give them the tools to migrate to the cloud when it's appropriate for their business. And so some of it is about uplifting opportunity and the rest of it is about really laying the foundation for the bigger opportunity over the next several years. And so it's I’d say better than expected reception so far.

[Kirill Tatarinov:]

Yeah. And I would just stress one thing than David just said, it is, don't think of it as a price increase and don't think of it as some folks in the industry have done in years past. This is truly new program with dramatically increased service. And every analysts and we spend time with all of the usual industry analysts aspect who studied this program provide us terrific feedback and really told us that this is game changing. And therefore, all the customers, we see this program, they see this sort of dramatic new modern way to deliver service from a software and cloud company versus what was there in the past. So it's not just price increase, it's much greater service and it's truly unique product that delivers terrific service to our customers. And we are really excited about it and therefore the feedback has been terrific. Now, on the second part of your question, on EMEA, I had an opportunity to spend some time in EMEA during the quarter and we didn't see any anomalies. To be honest with you, unlike in past quarters, I did hear some anecdotal commentary from some of our partners and couple of our sellers in several large transactions that were delayed and those delays were blamed on BREXIT. Again, this is anecdotal evidence, but we didn't hear any of that in Q3. We’ve heard a little bit of that in Q4. None of that were linked to the elections here in the United States. And overall, I would say our execution in EMEA have increased dramatically in Q4. Also, in prior quarters, we talked about some execution challenges in Northern Europe, specifically in UK and Ireland and I'm very pleased that during Q4, we’ve brought on board new leader who will be based in the UK. She came to us from Vodafone. She has tremendous cloud background and networking background and we have very high confidence that we will see just as much improvement in Northern Europe as we’re now already seeing in APJ, since we brought on board a new leader there in August.

[Operator:]

And we do have a question from the line of Abhey Lamba. Abhey? Abhey, your line is open. So we have no other questions in queue at this time.

[Eduardo Fleites:]

All right. Well, that’s terrific operator. Well, folks, really thank you for joining us today. And thank you for following Citrix over the years and the past few quarters as we continue our journey to make Citrix greater than ever. We clearly have a very exciting year ahead of us, tremendous product roadmap, really new operating rigor and discipline to execute on all cylinders as we are -- as we move forward into 2017. So we’re excited to see how our hard work is being validated by the results and we're very excited about the future. Thank you all very much and have a great rest of the day.

[Operator:]

Ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.