Citrix Systems, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good afternoon. My name is Kyle and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Citrix Systems' Second Quarter 2015 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I'd now like to turn the call over to Mr. Eduardo Fleites, Vice President of Investor Relations. Sir, you may begin your conference.

[Eduardo Fleites:]

Thank you, Kyle. Good afternoon, everyone, and thank you for joining us for today's second quarter 2015 earnings presentation. Participating on the call will be Mark Templeton, 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 U.S. securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously these risks can 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 James Henshall:]

Thank you, Eduardo, and welcome to everyone joining us today. As you can see from the release, total revenue was $797 million, adjusted operating margin was up to 24.8%, adjusted EPS was $1 per share, up 20.9%, and we generated cash flow from ops of $201 million. The restructuring actions that we initiated last year are delivering good results, as we work on simplifying focus, portfolio and rebalancing of investments. The results for Q2 reflect the progress our team has made in absorbing and adjusting to the restructuring, org and leadership evolution and changes to our field in channel strategies that we implemented in Q1. In the quarter, we continued to see some FX impact, largely in EMEA, but in line with our expectations. From a geo perspective, excluding SaaS, total revenue in EMEA was flat in the quarter. Americas was up slightly, but results in the Pacific declined 8% year-on-year. In total, we closed 46, $1 million-plus transactions with more than half coming from the Workspace services business. Looking to Q2 results within our three primary groups; Our Workspace services grew 3% year-on-year to $406 million. We continue to drive a broad conversation with our customers about transforming their delivery of IT services, securely and efficiently across all types of applications and data. While overall net new license in this business declined modestly, this is the third quarter in a row that we saw improving year-on year-performance. And as we've discussed previously, there's a number of different initiatives we're driving to improve results in this business through simplification, innovation and aggregation of our unique assets. So for example, in Q2, we saw solid uptake of our Workspace suite, our comprehensive solution for securely accessing all types of applications, data, desktops, which contributed over 10% of license revenue for this group. It also drove the majority of the $20 million growth in long-term deferred revenue as a number of customers chose to enter into multi-year contracts. Additionally, we continue to grow our CSP business, where partners utilized XenApp and XenDesktop subscriptions to deliver as-a-service offerings to their customers. This quarter the Windows App Delivery CSP represented 6% of license revenue, growing 21% year-on-year. So we're delivering a complete mobile solution, allowing customers of all sizes to bridge between the worlds of Windows and mobile, on-premise or service based, and do it all in a customer-centric experience that only Citrix can provide. So next in our delivery networking, total revenue decreased 3.5% in the quarter to $173 million. The decline is driven by two factors. First, license contribution from our ByteMobile business declined by about 50% from last year. As we indicated in our release, we've been in the process of exploring alternatives for this business over the past several months, and as you'd imagine, this process has been significantly disruptive to the team and ultimately the results. Second factor was the very difficult comp in the cloud services segment of the NetScaler business. As we talked about last quarter, we expected this segment to be down significantly from last year. In Q2, the segment declined 40%, only representing about one quarter of the NetScaler mix. Offsetting this was the enterprise ADC segment, which increased by more than 8% from Q2 a year ago. For more context on the enterprise segment, let me touch on a few metrics for the quarter. First, solution sales led to over 650 virtualization orders that included networking as part of the solution. This is roughly a 10% attach rate, which is an increased contribution from a year ago. We sold to roughly 2,200 unique customers in the period, with approximately 40% of those being net new. From a mix perspective, both the NetScaler SDX platform and the VPX family of virtual appliances grew by more than 40% and 20% respectively. Together these two platforms represented 40% of the total NetScaler license mix. And finally, our SaaS-based solutions delivered revenue of $178 million, up 10%. The communications cloud remains the largest part of this business, contributing over 60% of the mix and growing about 11%. Our secure data platform, ShareFile, was up 44% in subscription revenue with the majority of this growth coming across document-centric verticals and enterprise customers. As you saw in our announcement, we're planning to review strategic alternatives for our GoTo family of products. This decision comes from ongoing work to simplify the portfolio and focus on our core enterprise markets for secure app delivery of apps and data. We've built GoTo into a great business over the past decade, and our belief is that there may be opportunities to create further value for this pure-play SaaS business if not constrained by the company's overall operating model. However, please note that we're just at the very beginning of the process, so we won't be sharing further details at this time. Turning to operations; we're seeing results from the restructuring initiatives that we've been discussing over the past few quarters. In Q2, our adjusted op margin was 24.8%, up more than 500 basis points sequentially and more than 300 basis points year-on-year. In total, operating expenses declined sequentially, despite continued investments into our higher-growth businesses. We're happy with the current progress and will be working with the Operations Committee of the Board to continue to drive efficiencies and focus growth throughout the company. Our adjusted tax rate in Q2 was 16% as compared to 16.9% a year ago. And similar to 2014, the closing of certain tax audits contributed to the lower rate. On the balance sheet, cash and investments totaled $1.8 billion at the end of the quarter. Cash flow from operations, as I mentioned, was $201 million, leading to about $850 million over the trailing 12-month period. This represents approximately $5.23 a share. Deferred revenue increased $24 million sequentially to $1.54 billion, representing a 2% sequential growth and 8% year-on-year. A large part of this growth is coming from long-term deferred. This is through the multi-year customer engagements that I referenced earlier. And finally, we repurchased 700,000 shares in the quarter at an average price of $66. This leaves approximately $116 million remaining under the current buyback program. So turning to our current outlook and expectations for Q3 and fiscal year 2015, I'd like to first provide a little bit of context around our guidance. Last quarter we said that we would continue to optimize the business model by taking the actions necessary to drive our targets. Streamlining the organization, initiating a multi-year expansion of margins and simplifying focus on our core growth markets. And this afternoon we made a number of additional announcements aligned with these outcomes. We're confident that these can lead to even better execution, greater efficiencies and profitable growth. However, given the level of change occurring in the business, we do want to be mindful of the potential for short-term disruption in the second half. So our expectations for the full year of 2015 include maintaining the current range of total revenue at $3.22 billion to $3.25 billion, while raising the adjusted EPS range to $3.65 to $3.75 per share. Additionally, we've previously committed to increasing full-year op margins by at least 100 point points over 2014. Based on this outlook, we currently expect to finish the year significantly ahead of this goal. For Q3 2015, our expectations are for a total revenue growth in the range of $780 million to $790 million, and adjusted EPS of between $0.83 and $0.85 a share. And finally, once the process around ByteMobile is completed, we'll provide an update to guidance as appropriate. So now I'd like to turn it over to Mark to give you additional details around the quarter's ongoing businesses. Mark?

[Mark B. Templeton:]

Thank you, David. Greetings, everyone and thank you for joining the call today. We're sharing a lot of news with you and I'd like to help you parse through it with a strong eye toward what all this means for our future. First, let me say I'm pleased with our Q2 results, and how they reflect the benefits of the Q1 restructuring actions we took to improve our operating margin, broaden sales through our channel, leverage the integrations between NetScaler, XenApp and ShareFile and continued growth of our as-a-service offerings. The additional actions we're announcing today are designed to ensure we're directing more of our energy toward our core secure app and data delivery offerings, setting the company up for even better execution, greater efficiency and profitable growth. Last month I began my 21st year on the Citrix team and my passion for our team, our partners and our customer vision is unwavering. A little more than one year ago when the board asked me to remain as CEO, I began to conclude that a simpler message, greater product focus, and operational efficiency would accelerate the realization of our strategy, a strategy to catch a paradigm shift where legacy PC era desktops are replaced by more flexible cloud era workspaces. Where IT is delivered as an on-demand service, and where solutions are centered around secure, consumer-like delivery of apps and data in an ever more hybrid world of devices, apps and people. My full energy over the past year has been devoted to five primary goals. First, to establish a sustainable next generation strategy for the company, in the light of a rapidly changing customer industry and technology landscape. Secondly, to build around our core competencies to drive profitable, sustainable growth, and that's by eliminating, refocusing and optimizing Citrix around our core assets. Third, to increase our focus on business and technical innovation by returning the company to thought leadership, differentiated solutions and operational excellence. Fourth, to protect and nurture our strong culture, which is critical for attracting, retaining and developing the talent we need. And fifth, to create a CEO succession plan with a goal of leadership continuity and suitability to the future. We've been making good progress, requiring many difficult and complex decisions, all by a leadership team of which I'm very, very proud. In October last year, we began a three-phase process to reorganize, restructure and optimize the company. Since then, we have been acting thoughtfully and urgently to execute on many fronts, driving operational and strategic change and sequencing that change with sensitivity to employees, partners and customers. In just the past seven months, we completed a significant restructuring, introduced new leadership in sales, marketing, strategy and product development, all while launching new releases and innovations to our core products. So, we're in flight with a range of initiatives that continue to reinforce the progress we're making across the goals I outlined a year ago. So here's what to expect next. First, further simplification of our customer value proposition through greater focus on our secure app and data delivery products. Secondly, improved focus on channel driven, low touch, high-margin sales. And third, ongoing improvements in operational efficiency. David discussed a number of the specifics in these areas, many of which have been in process, including the outcomes we expect over the second half. My goal for Citrix is to enter 2016 with the kind of focus, team, partners and momentum that will again set us apart when it comes to solutions for secured delivery of apps and data, with clear differentiation in user experience, information security, and flexibility for our customers. Next I'd like to say just a few words about our channel-specific objective. As we've scaled to serve the world's largest governments and enterprises, the center of our go-to-market program has shifted away from the lower touch, higher profit revenue generated by the broader channel base we've historically served. We also believe we've under-exploited distribution partnerships around the globe that can increase our reach with lower go-to-market costs. So we're working to address our channel strategy, and we've hired a talented, worldwide channel success officer to spearhead all of this. As I mentioned earlier, one of my key goals has been to create a CEO succession plan. Since the search for the right successor can take significant time, I've asked the board to begin that process now. This will allow me to continue to focus on the objectives I've outlined today without distraction and with confidence in the thoughtful transition process. My heart and soul are committed to making Citrix a success in this new chapter of our journey. I can assure you, I'll be intensely focused on driving us forward until we identify the best person to take the reins, however long that may take. So in conclusion, the announcements we've made today will drive greater focus, effectiveness and efficiency. Way back in 2003, we made a bold decision to extend our Windows-based remote access franchise and completely reposition the company around a long-term value creation strategy based on a broader set of secure app and delivery solutions, addressing the breadth of customer needs across Windows, Linux, web and mobile. So we're refocusing on that core strategy. As we look to the future, we clearly see a hyper-connected world and exploding variety of devices, greater application diversity, increased regulatory environments, and demand for consumer-like experiences. All of which have been drivers for the markets we serve. We are in a unique position to help our customers master this complexity just as we have for hundreds of thousands of customers over the last decade. And now, I'd like to open it up for questions.

[Operator:]

Your first question comes from the line of Philip Winslow from Credit Suisse. Your line is open. Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker) Hi. Thanks, guys, for taking my question. Just have two parts here. First, I know you guys don't break out license between NetScaler and the Xens anymore. But wondering if you can give us a sense for just the directionally what you were seeing in those this quarter, and any deviation from Q1? And just kind of what your thought process is when you gave guidance for the second half here. And then as far as some of the announcements made after the close here, you discussed obviously the online assets. Would that be including or excluding ShareFile when you discuss Citrix online and what is the rationale behind that? Thanks.

[Mark B. Templeton:]

Hi, Phil. It's Mark. Let me take the GoTo question first. And as you saw in the release, really we're going to start with an exploration of the GoTo assets, which really the flagship is GoToMeeting, GoToTraining and GoToWebinar. We consider the delivery of data to be part of the core because delivery of apps and data are very adjacent to each other, common buyers and a lot of synergy there.

[David James Henshall:]

And, Phil, on the first part of your question, the impact was largely driven by the networking business for the reasons that I outlined. On Workspace services, I'd refer back to my prepared comments where we've got a lot of good momentum on some of the newer initiatives, and we're moving in the right direction, and certainly the third or fourth quarter in a row that we're seeing better progression on a year-over-year basis. So we're happy with the progress. Philip Alan Winslow - Credit Suisse Securities (USA) LLC (Broker) Got it. Thanks guys. And, Mark, congratulations on the next phase of your career here and it's really been a great ride. So thank you.

[Mark B. Templeton:]

Thank you, Phil. I've got, Phil, a lot of work to do until we find a successor.

[Operator:]

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

[Nicole Hayashi:]

Hi. Thanks. This is Nicole in for Heather. I just had a quick question about – a little more about the GoTo business and your plans there. What percent of this business – what percent of the revenue does this business represent, first of all? I think last time you said it was roughly 90% of the business?

[David James Henshall:]

No, Nicole. We've broken it out in the past. I mean GoTo is the vast majority of what is represented by SaaS on our P&L.

[Nicole Hayashi:]

Right. Thank you. And then I think just in terms of some of the sales changes that have happened over the last six months. Could you talk about where you are in that journey right now?

[David James Henshall:]

Yes. One of the things that I called out earlier, I think that we're adjusting to the changes that we made, all driving better focus on customers, partners, and the core solutions. So I'd say the teams have stabilized through this process. As Mark referenced, we've got more work and more focus that we're driving against our partners. So we've hired a brand new channel chief. And we're going to continue to march down that path through the second half of the year.

[Nicole Hayashi:]

Okay. Thank you.

[Operator:]

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

[Walter H. Pritchard:]

Hi. Thanks. David, I'm wondering if you could talk a little bit about the sales and marketing being down, I think it was 7% year-over-year. How much of that was related to head count and how much of that was related to perhaps shifting around or reduction in marketing and other spend that might not be calculated?

[David James Henshall:]

Walter, I'd say most of the actions that we've taken this year have been related to permanent costs. I'd say this is not simply a shifting of variable costs from place to place. We've talked a lot about the restructuring actions. And I will say that those have been across the enterprise side of our business. And in fact we've been investing incrementally into many of our SaaS based businesses. And so you're seeing a lot of the leverage, and really actually, all of the leverage coming out of the enterprise side and a lot of that through some of the sales and marketing initiatives that we've talked about, both in terms of just account coverage, channel coverage, the segmentation work that we've done, all focused on again driving better focus on the customer, better clarity in terms of the solutions, and higher productivity long-term.

[Walter H. Pritchard:]

Got it. And then, David, also on, within the app virtualization or the app desktop virtualization business, any color – I know last year the kind of transactional XenApp business had been fairly challenged and you hadn't released a new product in a while, can you refresh that. I'm wondering if you can give us any sort of commentary on how that business is trending. And then also sort of qualitative color on XenMobile, which had been growing well ahead of that overall business and had been becoming a meaningful partner of that app delivery business?

[David James Henshall:]

Let me talk generally about those two pieces. So, in XenMobile we're happy with the progress that we're seeing on that front as well. We've had a couple of a really important product releases that we've talked about publicly in the past to be able to make it easier to adopt scale and manage these products. And we've got some large scale transactions. I'd say that we are seeing an increasing trend of the mobile solutions being consumed as part of the suite. I referenced that earlier where it wasn't a product a year ago, but has become quickly over 10% of the license mix for that group. So we are seeing more customers opting for the complete solution about delivering apps, whether they are Windows apps, web apps, mobile apps, et cetera. And that's why that solution is so differentiated. In terms of the overall app and desktop business, there's a couple of things going on. One is that many of the more accessory or ancillary products that we have referenced in the past; we've been going through the process of portfolio optimization and I won't go back into those details, but as that has happened you'd imagine that the revenue streams that existed for those have been coming down, putting the headwind on the growth rate. So that's one thing that will normalize here before long. Other than that, I mean the initiatives that we've talked about I think are moving in the right direction. Our CSP business, which many people equate to DAS, continues to do really well. That business is growing north of 20%. I think that that's also been impacted frankly by FX. So unit growth is substantially higher than that. And that's attacking a part of the market that we really haven't serviced in the past. So, happy with that. And then on the core XenApp, release 7.6 came out fairly recently. New feature pack at the end of the quarter bringing in some awesome new enhancements to user experience and security and many of those features. So, feeling pretty good about it.

[Walter H. Pritchard:]

Great. Thanks. That's helpful.

[Operator:]

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

[Keith Eric Weiss:]

Excellent. Thank you, guys. A lot of continued change that we're talking about in the business on a going forward basis. A question for David in terms of how we should think about the forward guidance. It seems like in this quarter you guys saw some continued disruption on the ByteMobile side of the business from the distraction of potentially spinning it off. To what extent are you looking for a similar type of distraction on the GoTo side of the business now that you've publicly announced that you're looking alternatives to their? I would guess that if we could see a similar type of disruption, is that accounted for explicitly in the guidance? And then maybe a broader question of how are you guys looking to sort of manage the business and keep overall Citrix's focus now that we have Elliot Management on the board, and now that we're spinning out businesses, now that Mark has announced his intention to retire. How are you guys making sure that the overall business remains focused on good operation?

[David James Henshall:]

It's quite a few questions in there, Keith, so let me just start at the top and work my way down. I'd say the first message is, everything we've been doing over the course of the last two or three quarters is focused on simplification, it's focused on the core markets, portfolio optimization and efficiencies. These all equate to a similar business model, easier to execute. In terms of the disruption, the SaaS businesses are largely targeting a different customer set than our core enterprise, right? So they have a different route to market, in many cases just different dynamics at play. So – and the nature of simply being SaaS I would expect much less disruption to those businesses as we go through this process. ByteMobile is a little bit different because as you know we have taken the team out of the field where they used to reside, put them into a holistic unit and then go on through an examination process that has been very disruptive. So certainly don't expect that to be the case on the SaaS side.

[Mark B. Templeton:]

Yeah, Keith, the thing I would add is that we're executing to a pretty detailed plan that includes product roadmap, competitive strategy, building strength in various parts of the team. And shifting some of our weight across product lines in markets. And I've announced today that I've asked the board to begin a search for a successor, but I do expect that to take some time. And in the meantime, I am passionately and intensively leading this change and working in partnership with the best executive team ever with I think more clarity than ever around getting to our core, leveraging assets that are on board. Making them work better together and yielding that value in the marketplace through our partners where we've got plenty of innovation and excitement ahead over the next six months. So there's lots for the team to focus on that will be exciting because it'll be exciting for partners and customers because of the value that we'll be delivering.

[Keith Eric Weiss:]

Okay. Thank you, guys.

[Operator:]

Your next question comes from the line of John DiFucci from Jefferies. Your line is open.

[John Stephen DiFucci:]

Thank you. Mark and David, you say you're going to focus on secure app delivery. And as David just noted, the GoToMeeting or the GoTo product family, even though it focuses on app delivery, it's really different user set. And I guess you've already had engagement for third parties for potential sale of ByteMobile. But when I look at all this and some of our previous discussions as to how the GoTo fits in with everything, I'm just curious are there any other products or family of products that might not fit in that – in how you're simplifying this secure app delivery sort of vision today versus yesterday? Like for instance, the network acceleration business, it certainly saw your vision when you actually purchased that and get into that business. But at the same time, and it does contribute but at the same time it does seem like it could be separate. Is that something – might we think of any other businesses that might be separated going forward?

[Mark B. Templeton:]

John, I'd say two things. So, first of all, as I've said on prior calls, we've been optimizing the portfolio, including taking some low-performing products to their end of life and end of sale. And that's a continuous process that we've done. And we're well down the road with a lot of that. So we're always doing that, so that's sort of point number one. Point number two, we're not going to speculate about any other piece of the business because frankly, we think the other pieces of the business are at the core. So you talk about – I think you mentioned NetScaler in the context of app acceleration. It's actually we consider it to be the parallel technology to XenApp only for web apps. That's exactly why we acquired the company back in 2006. Whereas, NetScaler provides the kind of performance, which is about user experience, the kind of security, which is about protecting the web app, and the kind of economics, which is about really being able to have a much more efficient backend system to run the web app. And those are exactly the same value propositions for a web-based app as XenApp delivers to a Windows app. So we consider in ourselves now getting back to that core of app delivery and data delivery. And app networking is an essential part of it. I mean the way I think of it is the world's largest down to the world's smallest web apps are delivered by NetScaler. I do think that there are segments of the market that we can perform better in. And I think we have a plan to do that. I don't want to outline that right now because it is a very competitive market. And I don't want to tip our hands to our competitors at this point.

[John Stephen DiFucci:]

Okay, Mark. That makes sense. If I might, Mark, just one follow-up sort of a question for you. Sort of higher level about the whole desktop business and frankly – what I'm really focused on is what was once called VDI, no one likes to use that. You don't hear it as much anymore because it didn't really take off. But frankly it all made sense. When you guys sort of painted that vision, it all made sense. It just seems to me and it seemed to me at the time that the world just wasn't ready for it and what I'm talking about are just think about the networking technology and storage technology, the cost of those and also the performance of those. What was really required to make this user experience satisfactory and make the cost reasonable just didn't seem to be there yet. But those technologies continue to improve out there. And your part of it and the networking technology, too, right? But I'm just curious, are you – it doesn't feel like we're there yet. But I'm just wondering if there will be a time when people will sort of shy away from like this concept of VDI a little bit, at least in the investment community. But I wonder if there's a time when you know what, it does make sense for the masses to start to adopt something like that and maybe we call it something different because people like to call it different, when it maybe didn't work out as well as we thought the first time around. Are we getting there or is there something like that in the future perhaps?

[Mark B. Templeton:]

John, I love how you formed your question. I'd say this that we continue to believe that virtual apps and desktops, whether they are Windows-based, or Linux-based, continue to be a great opportunity for us. We have leading share. We have leading technology. And it's a marketplace that has definitely evolved. Now, specifically, the VDI marketplace has been very tepid because of the costs involved in storage and in compute. That is changing, partially via what our partners are doing, but a lot of the innovations that we've directed at that problem. And so, yes, there is a potential for that marketplace, including new use cases that are driven by some of the innovations that we introduced in the spring time at synergy around 3D graphics, capabilities, hosting synergy really rich apps in the cloud, being able to imbed those in line. There are just a tremendous number of possibilities there. And so I think we're – we believe in that market. Believe in the investments we're making. And it's likely as you look forward, and you imagine how people work, a desktop or an individual Windows app is probably a large – a smaller piece of how someone gets their work done. And that's why we've invested in the delivery infrastructure for web apps, for mobile apps, Linux apps, and the data that goes with them and to do that from end to end in a secure way. So, what you'll see us do is go where the growth in those areas are. That's reflected in the value, the core value proposition of app virtualization. And the value proposition is pretty straightforward. TCO, security, device independence and management efficiency. And so any sectors that have a significant mix of legacy devices, legacy apps, have a high cost of a security breach and have a user population where they don't actually control the endpoint. Those are rich opportunities for us and you'll see us attacking those very more – with a lot more focus through how we go-to-market, our partnerships, how we package and price product et cetera. So we're being really thoughtful I think and aggressive in how we grow that business.

[John Stephen DiFucci:]

Thank you.

[Operator:]

Your next question comes from the line of Steve Ashley from Robert W. Baird. Your line is open.

[Steve M. Ashley:]

Thank you very much. I wanted to ask about the SaaS business. You mentioned that you're very early in process. But what might be your thoughts on use of proceeds from any divestiture that might occur down the road?

[David James Henshall:]

Hey, Steve. It's David. It's really too early to speculate on that. We'll provide updates as appropriate in the future.

[Steve M. Ashley:]

Great. And in terms of Citrix, Workspace, Cloud, you really have been kind of been driving towards the launch of that product and kind of re-orientating the business around it. I'm assuming that still remains a commitment that that is still an important product initiative and when you talk about possible future changes to the channel that you might be thinking about better a lining some partners around that. Can you talk about that a little bit?

[Mark B. Templeton:]

Absolutely, Steve. We felt on this call that we should focus on the performance in the quarter and the range of announcements that we've made. But I'm happy to pontificate on Workspace cloud to keep it brief. We're – it's going to go live in Q3 as we've – as planned and promised. We're very excited about it. The pilots are exciting. The partners are excited. And we think that this becomes the core way that our partners will transact and conduct business with us providing the control plane and some of the complex aspects of secure app and data delivery and where they can focus on solutions and connecting to business problems and business opportunities. So, yeah, it's full speed ahead on Workspace cloud.

[Steve M. Ashley:]

Terrific and congrats on a great run there, Mark. Thanks.

[Mark B. Templeton:]

Thank you, Steve.

[Operator:]

Your next question comes from the line of Matt Taylor from Barclays. Your line is open.

[Raimo Lenschow:]

Hey. It's Raimo here. Can you hear me?

[Mark B. Templeton:]

Yes, Raimo, we can.

[Raimo Lenschow:]

Okay. Sorry I don't know how I got a new name? Raimo was too complicated anyway. Two quick questions. First of all, can you talk a little bit about how you think the mobility space will evolve with kind of Microsoft making more noise, it's been a good partner for you for quite a while. They obviously are slightly unique in what they do, but they're starting to make more noise. How will that change the environment in the market? And then I had one follow-up question.

[Mark B. Templeton:]

Yeah, Raimo, I think that Microsoft's work in the market will actually catalyze and grow the primary market more rapidly than smaller players have been able to do that. So I think that's the primary impact of Microsoft's focus on it. I think the second thing is because of all of the mobile app management players out there, only one has a tight and strong relationship with Microsoft, and that's Citrix. So it has great potential for partnering. And just as we did in desktop virtualization, we'll have an opportunity to do that more and more and more going forward with Microsoft in the enterprise mobility space.

[Raimo Lenschow:]

Okay. Perfect. Thank you. And then one follow-up, David, for you, on the gross margin side, we've been talking for a while that the gross margin will improve because we have a positive mix effect from more desktop less NetScaler. If I look at the results this quarter, where you obviously came out better than you kind of talked about, is that already the fact that you've been talking about or were there other drivers at work? Thank you.

[David James Henshall:]

No, Raimo, I think that's exactly right. As we've been saying that we would expect it to plateau in this 84%, 85% range and so we're a little bit ahead of that in Q2 based on mix. One of the things in our guidance is expect to have a stronger networking quarter on a relative basis than we did in Q2. And so I wouldn't be surprised if gross margin declined a little bit sequentially, but I expect it to remain generally in this range going forward.

[Raimo Lenschow:]

Lovely. Thank you. I might think about the new name.

[Operator:]

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

[Kasthuri G. Rangan:]

Hi. I actually like the name Raimo and my suggestion would be that you should look at Raimo's name, you should look at the analysts that have the longest questions on this conference call, you should consider for the CEO position.

[Mark B. Templeton:]

Good to hear you, Kash.

[Kasthuri G. Rangan:]

Just a funny comment. It would not hurt to have a friend as the next CEO, although Mark, you were a friend, for the next CEO to be a sell side analyst would be a nice thing from my perspective. It'd be good to have another friend, so anyway, getting to more serious aspects of the business. Can you – you've really piqued my interest on this new channel strategy comment. How do you see the channel strategy looking like the next 12 months? What are the things that you envision Citrix doing differently? Because you've been a very channel-friendly company in the past obviously, but do you recognize something needs to change. If you can expand on that. And also, secondly, the EUC share gains that VMware had, any thoughts on how you plan to reverse that? Thank you. That's it for me.

[Mark B. Templeton:]

Thank you, Kash. So, all right, first, I'd say, our, as we've really developed the marketplace for especially Windows app delivery, we've focused more and more and more on the largest customers and largest transactions and the partners that actually drive those, including some of our own efforts around our named account program. And I think what I was referring to in my prepared comments is that we've done that not because it's wrong but to the exclusion or – and really not get – staying focused on the partner and the customer that are in the land, expand, middle market, sort of that end of the spectrum, the spectrum that actually we have been so strong in for so many years. And so the focus of our channel programs have already begun. If you look at how we reorganized the Americas, we've separated the direct touch field organization from what we call the commercial organization. The commercial organization is 100% focused on driving business through and with partners, where partners actually lead the business. We think that we can modify and optimize our partner program to actually incentivize those partners even more. And also give them some new products that will be very consistent with how they like to go to market and provide simpler solutions for the smaller and mid-market type customer. So, that's what you'll see us do. And frankly, it's kind of the answer to the second question as well because where we see softness in that part of the business, in the EUC area of the business, is at that end of the marketplace. And we think the combination of channel programs, plus Citrix Workspace cloud, plus some yet-to-be-announced exciting things that we'll wait on, we think that that's how we can actually compete more aggressively there. And reclaim lost ground at that end of the market.

[Kasthuri G. Rangan:]

Awesome. My very best wishes.

[Mark B. Templeton:]

Thank you.

[Operator:]

Your next question comes from the line of Daniel Ives from FBR Capital Markets. Your line is open.

[Jim R. Moore:]

Great. Thanks. This is actually Jim Moore in for Dan Ives. Can you actually just talk a little about the competitive landscape on the NetScaler front with the cloud specifically and I guess what changes you might have seen now versus like a year ago?

[David James Henshall:]

Yeah, Jim, it's David. I'll take that. In terms of the cloud segment, I wouldn't say there's competitive changes there, it's more of a timing issue that we've described in prior periods. If you recall we had a very strong performance in the first half of last year that created some really difficult comps. Going into this year, we thought it was going be a bit more balanced. And that's what we're seeing; certainly saw that in Q1 and Q2. I've described the percent of the mix that has come from that cloud service provider segment in the past. So, no change competitively, but certainly change in just the overall timing of what is a highly concentrated market.

[Jim R. Moore:]

Great.

[David James Henshall:]

I'd say – one follow up I'd add is that the enterprise segment of course is highly competitive and that's one where I mentioned that we're growing in the high-single digit range. And so we're making good progress there and I think that's a combination of the solution sales where we are – be able to create a differentiated solution by leveraging capabilities of NetScaler and virtualization together, by being able to leverage our installed base to a greater and greater degree, et cetera. And so that business continues to grow. It represented the majority of NetScaler in the second quarter.

[Jim R. Moore:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of Katherine Egbert from Piper Jaffray. Your line is open.

[Katherine R. Egbert:]

Hi. Good afternoon. You put up a really nice result in terms of operating margins far exceeding what you've done in this period in the past. But you didn't update guidance for the year. I mean is it safe to assume that you're still going to be over 100 bps for the year? And how much more can it be?

[David James Henshall:]

Yeah, Katherine, it's – we didn't give a guide here because it's clear that our current guidance is substantially ahead of the target we set out. So I mean we're in the beginning of what we believe to be a multi-year expansion of margins. We've talked about that a few times. We are very focused on driving efficiencies throughout the business, not just this year but over a protracted period. So, we're not planning on updating the number. But just looking at where consensus will shake out with our current guidance, it'll put you north of 24% for 2015.

[Katherine R. Egbert:]

Right. Okay. How big is ByteMobile? It sounds like that one is maybe the closest to being sold?

[David James Henshall:]

Yeah, Katherine, we haven't broken out the contribution from that and really since the acquisition. So, upon the conclusion of this process we'll provide an update to guidance and the numbers as appropriate.

[Katherine R. Egbert:]

Okay. And then last question. How do – I just wanted to ask this before, but just to put a fine point on it, I mean how do you sort of stay focused both internally but also how do you keep your partners engaged given what's going on with company and the three press releases today? How do you keep resellers and customers engaged when I think a natural thought is, is Citrix going to be the same as it is a year from now or two years from now or will you be independent?

[Mark B. Templeton:]

Actually, Katherine, I see this exactly opposite. I think that this is a case where the message that we're sending to our customers and our partners is that we're absolutely focused on the core, the core of secure app delivery. One of the things that has come from partners and customers in the past, just making sure they understand the clarity of our strategy, the clarity of vision and innovation. And really this whole process through this year has been about simplifying that, focusing that and reminding everybody of the tremendous assets we have around products like XenApp and NetScaler.

[Katherine R. Egbert:]

Okay. Thank you. And, Mark, congratulations.

[Mark B. Templeton:]

Thank you, Katherine.

[Operator:]

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

[S. Kirk Materne:]

Thanks very much. David, you might have addressed this on the prepared remarks, and I missed it, but Asia-PAC, I guess was there any impact on the business from a stronger dollar? Or is that mainly just operational, it being down I think around 8% this quarter?

[David James Henshall:]

Kirk, less from FX and more just operational and continued challenges in certain markets.

[S. Kirk Materne:]

Okay. And then just one other question. Just in terms of the SaaS business. I know obviously GoTo and ShareFile were kept separate for a long time. I believe there was some combining of sort of some operations and management. Has that been I guess re-separated out as you look at that? I'm just trying to get a sense on how, I guess, potentially disruptive it would be to separate the two from one another. I realize they sort of started out separate, but can you just give us an update on that?

[Mark B. Templeton:]

Sure, Kirk. The – generally both products are built on separate platforms so that they're not inextricably intertwined from a release cycle perspective. And so I think there are lots of degrees of freedom here around not only how we imagine a potential strategic alternative, but also how we imagine further integrations with our Windows, Linux et cetera mobile side of the business, as well as on the other side. So I think they are separate platforms. That's how they're built.

[S. Kirk Materne:]

Okay. Great and best of luck in terms of your next steps, Mark.

[Mark B. Templeton:]

Thanks so much, Kirk.

[Operator:]

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

[Mark L. Moerdler:]

Thank you very much. Two questions. The first one is with the new focus on channel, how much of the revenue is channel driven now? What do you think you'd like it to be? And then I have a follow-up.

[Mark B. Templeton:]

Well, Mark, our channel driven – our channel fulfilled revenue on the enterprise side of the business is somewhere in the high 90% range in terms of how it's delivered, through distribution, through a channel partner. What we're talking about here is really adding focus to increase revenue through the broader channel that services smaller and mid-market companies, and with the same product set that we have. So that's how the mix works. But one sort of dimension is how we actually drive the business where we're touching the customer and the partner is following through with the fulfillment. But at the other end of the marketplace, the partner is really driving and touching the customer, and we're supporting them with the right kinds of incentives and programs for fulfillment. So really that's what we're talking about when we talk about refocusing and optimizing our partner program.

[Mark L. Moerdler:]

Excellent. That's very helpful. I appreciate it. Can you also give us some more color on APAC and Pacific, and what was going on there?

[Mark B. Templeton:]

I'd say the biggest change on a year-over-year basis has been business in China as well as business in kind of greater ANZ has been moving more towards subscription and CSV. A little combination of those two factors. We also had a couple of large transactions in Q2 a year ago which created a little bit more of a difficult comp.

[Mark L. Moerdler:]

Perfect. I appreciate it. Thank you.

[Operator:]

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

[Gregg S. Moskowitz:]

Great. Thank you very much. I just had a follow-up to a prior question. David, you said earlier your enterprise ADC business grew 8% this quarter, although I believe it had consistently been growing quite a bit higher than that. Is there anything that you would call out here that could be behind the deceleration this quarter? And also just how are you thinking about the growth prospects specifically for enterprise ADC going forward?

[Mark B. Templeton:]

Yeah, Gregg. It does move around depending on the quarter and what the comp looks like. And the good news is this business continues to grow nicely. And I think that it's a competitive market and it'll continue to be. The underlying market growth rates, I think you can pull those from the industry analysts, but we've got a good position and I think we've got a lot of really good assets to go drive, whether that's our installed base, our optimizations of the virtualization and mobile products, et cetera. And so I think we're optimistic about the capabilities there and are going to keep driving it.

[Gregg S. Moskowitz:]

Okay. Great. And just a quick follow up, just wondering what the approximate timeframe by which the newly formed operations committee would hope to complete their initial review?

[Mark B. Templeton:]

No timeframe mentioned right now. As appropriate we'll come back to all shareholders.

[Gregg S. Moskowitz:]

Okay, great. Thanks very much.

[Operator:]

Your next question comes from the line of Karl Keirstead from Deutsche Bank. Your line is open.

[Karl E. Keirstead:]

Yeah, hi. Thanks. I've got two. One a follow-up to the question just asked, not so much about the timing of the operations committee but more if you could expand on the mandate and scope of that committee. Are we talking about a fresh look at cost cutting, or will that committee also evaluate what assets Citrix should keep in its portfolio beyond the decision to divest the go to business? And I guess fundamentally how does the work of this committee differ from the restructuring review that you and the team made last year and started implementing early this year? Thank you.

[Mark B. Templeton:]

Sure. At a high level the role of the committee is around operations and capital. And really what that means is working closely with management on the next phase of our growth in evolution. I think we're all very much aligned in terms of opportunities to grow efficiencies, to grow shareholder value, and we'll be working on the best way to do that. I think it's really that simple.

[Karl E. Keirstead:]

Okay. And then my follow up is just on the second half revenue guidance. I realize that this is – Citrix is more of a cost turnaround story, but just on the top line guidance you mentioned that you are mindful of the short term disruption from all of these actions but the guide still requires the total revenue growth to accelerate somewhat in the second half. And David, maybe you could just outline a couple of the reasons that you feel confident that it can? Thanks.

[David James Henshall:]

Sure. I think the biggest reason is that we're seeing incrementally better progress over the last several quarters. We're moving in the right direction on a number of these things. And then the primary headwinds that we have called out, whether it's ByteMobile or the Cloud service providers or others should abate as we look into the second half.

[Karl E. Keirstead:]

Okay. Thanks very much.

[Operator:]

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

[Abhey R. Lamba:]

Yeah, thanks. Mark or David, we don't get to hear much about your mobile solutions from the field as much, but it seems to be performing in line to better than your internal expectations. Can you discuss your go to market strategy in the space and how you're planning to expand your reach? Is it currently an install-base play or are you trying to reach out to new customers as well?

[David James Henshall:]

The answer is both. To this point, it's been very much an install-base play where we have very close relationships with customers around the conversation that occurs around app and data delivery. So it's a very natural incremental and adjacent conversation to have with them. In terms of new customers, and there – while we have a huge base, there's still many, many new customers that are out there for us. And we see that on the mobile side the primary vector there is through the Workspace Cloud and making the XenMobile capabilities available through Workspace Cloud through our partners that really specialize in the small and mid-market segments. So that would be where we'd see incremental opportunity going forward, especially as Workspace Cloud really reduces the sort of technical skills required to stand up a full Workspace environment. That includes the ability to deliver Windows apps and desktops, Linux apps and desktops, mobile apps and all the data that goes with them as well. So that's where we see a potential greenfield for the business going forward.

[Abhey R. Lamba:]

Got it. Thanks. And, Mark, congrats and good luck for the next chapter of your life, but quick question on that. Is there a time line to look for the new CEO and how will the search process be different this time versus the last time in terms of the experience the board is looking for in the new leader? Thanks. That's it for me.

[Mark B. Templeton:]

There's – thanks for the question and the kind comment. There's no timeline as you know on these kinds of processes. You can't define them by time. They have to be defined by outcome and a successful outcome, finding the right successor. And the committee is just getting started. And we're talking about – I'm not on the committee – but talking about what the profile might be, et cetera. And in the meantime, while I appreciate everyone's remarks and congratulations, I can promise you I'm intensely passionate about what we're doing and driving forward whatever time that takes, because I want the board to have plenty of time. I mean I think one of the things that I learned from the last search is that the amount of time that it took and I ended up obviously retaining my role, but it does show that succession is a tough and difficult process that you have to be very thoughtful about and we don't have any time constraints on it.

[Abhey R. Lamba:]

Thank you.

[Operator:]

Your next question comes from the line of Brent Thill with UBS. Your line is open.

[Brent John Thill:]

Thanks. David, you've got pretty easy license comps in the back half. I'm just curious how you're thinking about returning to growth on license? And then just tying into that I was curious if you're seeing in some of the contract composition your customers taking these contracts over time versus the traditional upfront and seeing the recurring shift bursting across the industry towards subscription over time versus the upfront?

[David James Henshall:]

Yeah, Brett, I agree with you. I think that we're obviously focused on growing the business and a lot of the headwinds that prevented that in the last four, five quarters are things that we're working to move away. And so I'm happy with that progress. In terms of the overall contracts we have seen a bit more of a shift towards longer-term arrangements. It's not tremendous, but I called that out in deferred revenue. We've seen this for a few quarters now. And all the growth in long-term deferred revenue is simply related to customers that want to engage in multiple years of license updates or maintenance contracts or in some cases term licenses. We will manage the whole subscription evolution with Citrix Workspace Cloud et cetera towards more consumption. But at this point we really believe those are addressing net new markets more than a transition market. So that's certainly the way to think about it in the short term.

[Brent John Thill:]

Okay. So you don't see the traditional model changing anytime soon?

[David James Henshall:]

Not rapidly.

[Brent John Thill:]

Great. Thank you.

[Operator:]

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

[James Wesman:]

Hey, guys. Good afternoon. It's James Wesman sitting in for Michael. Mark, can you talk about deal sizes in the quarter? I believe last quarter that had been a bit of a struggle, and so I was curious if you give us more color on if those deal sizes recovered and if this is a function of the sales reorg settling?

[Mark B. Templeton:]

Yes. I think David can give you some data, but clearly relative to Q1, closing large deals was much simpler and more straightforward than in Q1 in the midst of the restructuring. We've seen a lot of settling down in the sales in the field organization. As a reminder, in Q2 we still had some of that restructuring work going on in certain countries that require up to three or more months of notice. And so we're delighted with the strategic end of the business, that is the seven and above figure deals that we were able to close.

[David James Henshall:]

James, specifically when we talk about that as referring to the larger transactions, not across the entire board, but of the large transactions, the average transactions size increased between 5% and 10% year-on-year and north of 40% sequentially.

[James Wesman:]

Great. And one follow up, Dave. Just on the Cloud service provider business inside of NetScaler, I know you'd mentioned it was down about 40% year-over-year this quarter. Do you guys feel going forward that this has flattened out? And can you talk about your outlook for this piece of the NetScaler business for the rest of the year?

[David James Henshall:]

Yeah, I think it's a difficult one to forecast exactly the timing of the transactions because they're predicated on a handful of extremely large companies doing data center buildouts largely related to new services that they're rolling out. And so it does track that fairly closely. The strategy of our business has been to continue to expand largely the enterprise and that's the area that continues to grow. And so the volatility of this becomes less and less overall. We work very closely with these partners to make sure we understand the requirements. In some cases, putting together unique capabilities as required. And that helps us stay out in front of the roadmap.

[James Wesman:]

Great. Thank you, guys.

[Operator:]

Your next question comes from the line of Derrick Wood from Susquehanna Financial Group. Your line is open.

[Derrick Wood:]

Thanks. David, you called out Workspace Suite gaining some traction. I'm just curious, is there still a focus on the Trade-up program to drive engagements or are there other routes to market or tactics you're taking that give you some increased confidence on attach going forward?

[David James Henshall:]

Sure, Derrick. I think it's both. I mean it's obviously we'll engage with customers if there's opportunities to take an existing customer and migrate them to a more holistic solution that includes mobile and data and some things like that. We'll obviously drive that, but as you'd imagine, a lot of the focus is on addressing net new customers or what would be net new seats and opportunities inside of existing customers. So it's got to be both.

[Derrick Wood:]

Okay. Then I think you've shared some of this at past Analyst Days, but can you give us some color on the gross margin profile of the GoTo business?

[David James Henshall:]

Yeah, we haven't really broken that out since the annual look that we do on our Analyst Day. But in general last time it was in the mid-70%s.

[Derrick Wood:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Scott Zeller from Needham & Company. Your line is open.

[Scott Zeller:]

Hi. Thank you. I may have missed earlier but looking for a NetScaler specific number within the networking group, how did NetScaler perform year-on-year?

[David James Henshall:]

Well, NetScaler is down year-on-year for the reasons that we referenced earlier. They are largely driven by the SSP engagement – or I'm sorry, we call it service provider segment and the enterprise segment grew. That's the way to think about NetScaler.

[Scott Zeller:]

Okay. Thank you.

[Operator:]

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

[Brad R. Reback:]

Great. Thanks a lot. David, can you give us a sense of how much cash flow the GoToMeeting business generates?

[David James Henshall:]

No. We actually haven't broken that out in the past. We'll have to hold that until we get further into the process.

[Brad R. Reback:]

Okay. Is there any reason to think that it's materially different than the revenue contribution?

[David James Henshall:]

Again, we haven't broken it out in the past and so I would just – I'd caution you to wait until we get further down in the process.

[Brad R. Reback:]

Okay. And then I'm not sure if it's for you or for Mark. Ten weeks ago at Synergy we heard how instrumental GoToMeeting was. Today we hear about it being a, in essence, discontinued asset. What's changed?

[David James Henshall:]

Well, I think that at Synergy we talked about GoToMeeting in the context of being one of our product lines. It's not actually bundled into, for example, XenMobile. ShareFile is part of XenMobile. We're very proud of GoToMeeting and what we've done to build that brand and that business. And I think that what we've seen is that in that marketplace, on the enterprise side it is really a marketplace that's dominated by Microsoft with Lync and Skype for Business, and certainly Cisco has some products in that area. And we feel that GoToMeeting has its core and its strength in SMB markets, in premium SMB markets and verticals, which is really not very synergistic with our enterprise delivery infrastructure business. So our perspective has changed on it as we look at where we should be investing more and less. And as we've said on the prepared comments, we think that the potential for value creation with the GoTo family can be greater if it's operated without the constraints of enterprise software business model. SaaS-based models, like especially in the GoTo area, will operate at half the operating margin that we need as an enterprise software company. And that constrains that kind of business at a time when it needs investment to drive growth in what is a very competitive market. So that's our thinking on it and why we're looking at the strategic alternatives.

[Brad R. Reback:]

Great. Thanks very much.

[Operator:]

Your next question comes from the line of John Rizzuto from SunTrust. Your line is open.

[David James Henshall:]

John?

[Mark B. Templeton:]

John?

[David James Henshall:]

Operator, I think we have time for one more question.

[Operator:]

Your final question comes from the line of Pat Walravens from JMP. Your line is open.

[Pat D. Walravens:]

Oh, great. Thank you very much. I'm just wondering how you managed this transition when you're going be retiring and a new CEO will come in. How much leeway will the new person have in terms of implementing his own strategic ideas and building the team that he wants around him? Or her, I should add? Thank you.

[Mark B. Templeton:]

Yeah, thank you, Pat. When you transition leadership you're looking for a level of continuity and suitability to the future. And so one of the dimensions we have to look at is someone that understands the market spaces we're in and can bring in a point of view, and then enable that person as CEO to do what they need to do. When the baton was handed to me many, many years ago, our first CEO Roger Roberts told me – gave me some advice. And he said the best advice I can give you is make it your own. And that really means don't think about decisions in terms of how would Roger make this decision. But in fact, what do I believe. And that's what I've done and that's what I expect we will enable the successor to do. And then I don't think it's any secret amongst all of you listening, you spend 21 years of your life, but the privilege I've had on this team over 21 years – this is a bit – the way I spell work is L-O-V-E around here. And that means that I'll be available at the request of a new CEO and to help in any way that person wishes, and because I'm – I've been in it for the long run and I'm going to stay in it for the long run even though I might be in a very, very different role.

[Pat D. Walravens:]

Great. Thank you for that perspective.

[Mark B. Templeton:]

Thank you, Pat.

[Mark B. Templeton:]

Okay. Looks like we're at the top of the hour, so I'd really like to thank everyone for joining us today, and we look forward to speaking with you again in three months. And thank you, everyone, for the very kind words of support and confidence in us as we continue to transform the company, write the third chapter of Citrix and write it around our core competencies and assets in a culture that sets us apart. Thank you very much.

[Operator:]

This concludes today's conference call. You may now disconnect.