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Edited Transcript of CTXS earnings conference call or presentation 24-Apr-19 8:45pm GMT

Q1 2019 Citrix Systems Inc Earnings Call

FORT LAUDERDALE May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Citrix Systems Inc earnings conference call or presentation Wednesday, April 24, 2019 at 8:45:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David James Henshall

Citrix Systems, Inc. - CEO, President & Director

* Traci T. Tsuchiguchi

Citrix Systems, Inc. - VP of IR

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Conference Call Participants

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* Brad Robert Reback

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Heather Anne Bellini

Goldman Sachs Group Inc., Research Division - MD & Analyst

* Ittai Kidron

Oppenheimer & Co. Inc., Research Division - MD

* Jieli Diao

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Michael Turits

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst

* Raimo Lenschow

Barclays Bank PLC, Research Division - MD & Analyst

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Presentation

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Operator [1]

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Good afternoon. My name is Chantelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Citrix Systems First Quarter 2019 Earnings Conference Call. (Operator Instructions) Thank you.

Traci Tsuchiguchi, Vice President of Investor Relations, you may begin your conference.

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Traci T. Tsuchiguchi, Citrix Systems, Inc. - VP of IR [2]

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Good afternoon, everyone, and thank you for joining us for today's first quarter 2019 earnings call. Participating on this call will be David Henshall, President and Chief Executive Officer; and Jessica Soisson, Interim Chief Financial Officer.

This call is being webcast from Citrix Systems' Investor Relations website, and the webcast replay will be posted immediately following the call. Please note that we have posted our first quarter earnings memo to our Investor Relations website. This memo replaces the prepared verbal comments accompanying earnings slide deck and supplemental web information. Beginning next quarter, it will also replace our earnings press release.

As a reminder, today's call may contain forward-looking statements made under the safe harbor provision of the U.S. securities laws. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from these -- from those anticipated. Additional information concerning these and other factors are highlighted in today's earnings memo and in accompanying filings with the SEC. Copies are available on our Investor Relations website.

On this call, we may also discuss various non-GAAP financial measures as defined by SEC's Regulation 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 our earnings memo and press release.

Now I'd like to turn it over to David, our President and Chief Executive Officer.

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [3]

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Thanks, Traci, and thanks, everyone, for joining us today. Hopefully, everybody has had a chance to read through our quarterly results summary and all the new disclosures that we're going to be breaking out going forward. The idea here, of course, is designed to really simplify the understanding of our business and the success across our subscription model transition.

Before we get started, though, I want to welcome Jessica Soisson to the call. She's my long-term colleague, our current Chief Accounting Officer, and as Traci said, Interim CFO as Drew is leaving to pursue other opportunities.

So as you saw in the summary, we had a really good quarter. We exceeded forecast on both revenue and EPS. And frankly, can boil it down into 3 key areas. First one is that the strength is coming from the Workspace. Workspace revenue in total is up 13% year-on-year. This is the fastest growth we've seen in many, many years.

Second is that total SaaS revenue for the company was up 43%, and this is due to the strength of our ongoing subscription bookings. In fact, the strength in subscription drove future committed revenue, which consists of deferred and unbilled up 21% from last year. In fact, the subscription mix is running ahead of plan, and I expect that to be the case throughout the year.

Third item is, as we've talked about a couple of times, the strategic service provider customers. Really, those 3 historically largest hyperscale networking customers just continue to be a headwind to revenue due to timing. We expect this to persist into the second quarter, as I've previously stated.

However, when you exclude these 3 SSP customers, revenue for the rest of the company was just under $700 million, which is up 10% year-over-year. So all in, just really happy with the performance of the quarter.

And so now let's open it up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Heather Bellini with Goldman Sachs.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [2]

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And we really appreciate -- I think everybody really appreciates the new disclosures so thank you for giving us that. I wanted to take a look -- you mentioned Workspace Services revenue grew the fastest you've seen since 2012. Can you talk about kind of how you see the durability of that type of growth rate? What seems to be causing it? And if you had to give us a take for the year, how would you say you think that business evolves? And then I have a follow-up.

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [3]

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Sure. I'd say, overall, the business is continuing the trends that we've seen over the last -- probably the last 6, 8 quarters in a row now. I mean more specifically, we've been talking about the Workspace in broader terms than we ever had in the past. I mean we created virtualization years and years ago, and we still have an amazing business in that area. But what's really resonating with customers is the broader vision around providing a holistic workspace for all application types, whether those are virtualized, SaaS, mobile, and really making that something that can help engage employees, drive productivity, simplify the infrastructure, et cetera.

And so that's a lot of what we've been talking about, and we're getting a lot of great response from customers. That's allowed us to sign more and more up for longer-term subscription deals, generate a higher number of large enterprise deals. And so we feel good about it. Right now, we've got -- I'd say the amount of revenue coming from subscriptions is significantly higher than that of perpetual license, and that should continue. The growth rate will move around a little bit quarter-to-quarter just based on mix. It's still -- whether it's perpetual license or on-premise term that can tend to have a little higher rev rec. So directionally, it's up in the right, but I would expect it to bounce around a little bit along that trend.

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Heather Anne Bellini, Goldman Sachs Group Inc., Research Division - MD & Analyst [4]

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Okay. And then, just the follow-up question is just related to -- the revenue outlook looks like it was a little bit better than the midpoint. The midpoint was a little bit better than consensus. I noticed, though, it looks like the earnings forecast that you're giving is a little bit below. And I apologize if you might have said this earlier, but like is there anything that you could talk to us about that might be impacting the margin in the second quarter?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [5]

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No. We are in the full year. Still expecting full year guidance of about 4% top line growth, margin up to about 32 points and $6 of EPS. And I'd say the only thing that I'm thinking about in terms of the full year is that subscription mix is running hotter towards subscription, so that causes a little bit of a headwind. Specific to Q2, we've never given 2Q guidance before. Q2, if you look back over the last couple of years, tends to be our lowest-margin quarter because it's our highest expense quarter. And the reason that is, is Q2 is a lot of seasonal items like our big Synergy conference, that's when we do merit increases. And correspondingly, that's our highest marketing quarter historically. So it tends to pop, and then come back down in Q3 and Q4. And I would expect that to be the case in this year as well.

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Operator [6]

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Your next question comes from Ittai Kidron with Oppenheimer.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [7]

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Good quarter, guys. I guess I wanted to dig into the SSP business. And I understand the lumpiness of it, but I guess it's been under pressure for 4 quarters in a row now. And considering who the customers are, you would think that they wouldn't hold up on large purchases for such a long time. So help me get my hands around your visibility there. And how do you get a sense that there isn't a bigger issue with those customers? Have they moved elsewhere, developed their own, moved to another vendor? How do you get a sense and confidence that that's not the reason for the weakness?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [8]

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Yes. I [want to] put a couple of things in context as we're talking about, just so you understand. So when we're talking about the SSP business, let me remind everybody. It's about 3% of total revenue. It's not a big number. But it is subject to both cyclical and secular pressures. Cyclically, it's lumpy, and it's always been that way. If you look at last year, there was about $100 million of business in the first half of the year and $50 million in the second half. And the year prior had similar lumpiness. And so as I've stated many times over the years, we have pretty good visibility into the full year, but the quarterization is a little harder. And that's the primary reason why we're going to break it out going forward. And so that everybody can look past it with a lot of clarity to understand their -- when it's hurting and where it's contributing to the quarter. So on the broader secular trend, yes, it's been declining at a rate of about 10% for several years now. And so it's very consistent with the way we've talked about it. And that's just the normal scaling that the 3 big hyperscales are going to have.

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Ittai Kidron, Oppenheimer & Co. Inc., Research Division - MD [9]

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Got it. And then as a follow-up, you've talked about how early you are into your subscription transition in the networking business, and it's predominantly still hardware. Although I was surprised with the new disclosure, and again, thanks, like Heather, this is great to see that already it's 25% of the product revenue within networking -- of bookings, I'm sorry, subscription bookings. Help me think about the pace by which you think you can pivot networking business into subscription. Should we look at the Workspace transition as a good proxy for the pace where which this would move? Or given the hardware -- the high hardware mix here, it should take longer to get to the same levels?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [10]

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Yes. Two things. One, it's definitely going to go slower than Workspace. Workspace is a software product, and it's a much more natural transition there. On networking, I think it's important to take a little bit of a step back and think about strategically what we're driving. I mean we're a software company by nature. That's what we do. And so our approach to networking has been to really disaggregate the functionality from the hardware appliance itself. And that's always been the strategy. But giving customers that flexibility to consume networking hardware in the form factor of a hardware appliance; a virtual appliance as a container; and in some instances, as a service; and shearing capacity, in some instances, across those different types of form factors. That's really our strategy to be able to address a number of, let's call it different secular trends that are going on in networking entirely. So it will continue to move more towards software. I think that should be the expectation, but it'll be more gradual than on the Workspace business.

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Operator [11]

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Your next question comes from the line of Michael Turits with Raymond James.

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Michael Turits, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Infrastructure Software Analyst [12]

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Back at Workspace, David, how much of a boost have you been getting from the Windows 10 transition, which is really getting towards its end? And are you at all concerned about incremental competition, the Desktop-as-a-Service market from either Azure or AWS? And what's your strategy there?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [13]

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Yes. Two things. I mean if you think about Windows 10, I mean, it's one of the drivers. I'd say that the platform drivers are less these days than they would have been 5 years ago, and that's simply because most of the use cases that I talk to customers about tend to be around security or enabling mobility or enabling workforce productivity. It's those types of things. But it also includes platform evolution. So I'd say that, that's one of many. In terms of DaaS, we actually don't compete in DaaS today. We've announced that we are building a DaaS product on top of Azure virtual desktop, which we'll talk about a little bit later in the year. But it's a different category than we've competed in historically. And we do think it's important. That's one of the reasons why we're doing this natively on top of Microsoft. We're actually becoming a cloud service provider so that we can bundle certain capabilities in the infrastructure together with our solution, the idea to really focus on customer simplicity and simplification. And that's going to be our strategy going forward. We've been embracing and extending the Microsoft platform for 30 years now. I think we'll continue to do that, especially in new categories like DaaS that are just new opportunities going forward.

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Operator [14]

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Your next question comes from Raimo Lenschow with Barclays.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [15]

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Thanks again for the extra disclosure from me as well. And David, just more an accounting question. Can you talk a little bit about to the cash flow in Q1? And just talk us through the impact that the subscription transition has on the cash flow seasonality here and going forward?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [16]

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Yes. Cash flow is the area that you're going to have to look at in conjunction with future committed revenue because our billing -- kind of our billing cycles are changing as we go through this. And it's the same as we've talked about for a long, long time. I mean as we go to book SaaS contracts, the typical contract is 3 years of total contract value annualized billings. And that's what's building this unbilled deferred that we're disclosing. [In fact,] unbilled increased by about $300 million year-over-year. In the historical model, we would have billed all that upfront. So it's just a timing conversation more than anything else. Remind everybody the total future committed revenue that was up to about $2.1 billion now, grew 21% year-on-year.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [17]

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And then one follow-up. If you think about the CFO transition, obviously, we wish Drew all the best back on the West Coast. What's the time frame that you are thinking about?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [18]

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He'll be leaving immediately.

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Raimo Lenschow, Barclays Bank PLC, Research Division - MD & Analyst [19]

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I know. And so you'll start the search now already?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [20]

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Oh, yes. We'll start the search shortly. But Jessica has been my colleague for a long time. We're not going to miss a beat here as we go forward.

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Operator [21]

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(Operator Instructions) Your next question comes from the line of Phil Winslow with Wells Fargo.

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Jieli Diao, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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This is Jerry Diao filling in for Phil. Congratulations on the strong first quarter. I just want to build upon Heather's question and your comments on how Workspace has evolved. Could you give some specific color on kind of what's precisely driving this re-acceleration in terms of whether it's sales re-engagement or just customer better understand the new functionality, et cetera?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [23]

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Sure, Jerry. I'd say it's very consistent with the strategy that we've been talking about now for 1.5 years, 2 years. It's about -- we're thinking about the Workspace much more broadly than simply virtualization. And that allows us to address really all customers in a way that we talk about as kind of general purpose. And what that means is it's the opportunity to expand beyond traditional virtualization in the installed base. And think about providing customers with a platform upon which automation, security, analytics can reside that provides value even to the users that have really light application use, including those that don't need any virtualization whatsoever. So all applications, all potential seats inside of an account really anywhere in the world, et cetera. And that overall core message is resonating with customers. And I think that's allowed us to reengage and start accelerating that business over the past couple of years.

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Operator [24]

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

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Brad Robert Reback, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [25]

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Dave, can you give us a sense of what the Americas growth rate look like ex the SSP business?

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [26]

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No. We haven't broken it out ex SSP. We're going to try to keep the level of breakouts at a pretty high level. I mean if you look at the memo, you will see that the international geos both grew double digits. Workspace -- I mean SSP was really the influence, of course, on the Americas. Those are really pretty much all in the Americas. And that's been the case for the last 2 quarters.

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Operator [27]

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There are no further questions at this time. I will now turn the call back over to David Henshall.

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David James Henshall, Citrix Systems, Inc. - CEO, President & Director [28]

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Okay. Well, that was awfully quick. I guess the memo and the new format is doing its job by providing this incremental level of information that we're asking for. So I really just want to thank everyone, again, for joining us today.

Overall, as I said, we're very happy with how the business performed in Q1 and expect to continue driving our subscription transition throughout the year. Hopefully, many of you are joining us at our annual Synergy Conference in May or at least tuning in, in June, to our analyst meeting.

Thank you again. Talk to you soon.

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Operator [29]

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