Q4 2019 Earnings Call
Ladies gentlemen, this is the operator todays conference is scheduled to begin momentarily until that time Airlines will remain on music old. Thank you for your patience.
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Good afternoon, My name is Erica and I'll be your conference operator today I can sign I would like to welcome everyone to the Citrix systems fourth quarter earnings Conference call. All lines have been placed on mute to prevent any background noise.
The speakers remarks, there will be a question and answer period, if he would like to ask a question. During this time. Please press Star then the number one on your telephone keypad to withdraw your question press. The pound key. Thank you I would now like to introduce Tracy pushes a cheap you may begin your conference.
Good afternoon, everyone and thank you for joining us for today's fourth quarter in fiscal year 2019 earnings call participating on the call will be David Henshall, President and Chief Executive Officer in Arlington, Executive Vice President and Chief Financial Officer.
Please note that we have posted our fourth quarter earnings letter tore Investor Relations website.
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 actual results could differ materially from those anticipated.
Additional information concerning these and other factors as highlighted in today's earnings water and the company's filings with the FTC copies are available from the FTC or on our Investor Relations website.
Furthermore, we will discuss various non-GAAP financial measures as defined by <unk> regulation G.
A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on todays call can be found at the end of our earnings water found on our Investor Relations page of our website now I'd like to turn it over to David Our President and Chief Executive Officer.
Introductory remarks. Thanks appreciate it good afternoon, everyone. Thanks for joining the call hope everybody has had a chance to read you don't really it's one of them, we posted a while ago for Investor Relations.
Similar to last quarter, let me provide a just a quick summary here in the will jump right in the queue and I'd I'd say overall really happy with our performance for the fourth quarter as highlighted by 41% year over year growth and subscription they are 49% growth in SAS. They are not a 15% increase in deferred unbilled revenue.
But they are our model transition continues to progress really well across both workspace and our networking businesses coming ahead of the accelerated plan that we outlined just last year.
The quarter, 69% total product bookings came via subscription and this is up from just 51% a year ago.
In this quarter, we signed a couple of the largest networking contracts in our history and we signed those is multiyear subscriptions really reflecting the customer confidence our strategy roadmap and our ability to execute on where that market is going.
Also our new workspace one intelligence platform is made generally available in December personally I think this is the most significant feature functionality release that we brought to market since the introduction of the workspace good platform number be driving in scaling over the coming years. So all in really good quarter solid progress against our multiyear.
So with that let me open it up for questions.
Ladies and gentlemen at this time I would like to remind you if he would like to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment in about the human day roster.
Your first question comes at a line of Phil Winslow with Wells Fargo.
Yeah. Thanks for taking my question Congrats on great ended a year.
Just wondering if you're focusing in on the networking business, obviously, David you called out pretty significant transactions, there as well, it's a pretty big shift it to be up the port capacity licensing wondering if you could just walk us walk us through doesn't always wonder if you could help us just think through through the net impact to that because obviously was a big step up in terms of the subscription bookings this work.
Sure Phil Yeah, we took first part so from a threat of he standpoint, I think as everyone knows we've been trying to do is really leverage. The fact that were a software company and we can deploy or networking services across just a myriad of different form factors appliances software virtual appliance as a service in the container et cetera, we just have a lot of flow.
Its ability to do that and we've got a unique control plane that we called E. B M. Effectively allows customers to manage across all of those different deployment models and that ties really nicely with the you know the hybrid multi cloud in nature of most customers infrastructure with the transition that's going on in terms of application architectures.
That's just really really nice bridge for for a lot of customers. So we're pushing that as our primary model and that is what's driving capacity. It's just a strategic thing, but it's also a longer term business model shift as you saw yeah. We had a really big pop in terms of the overall mix in the quarter going up to 63%.
From a team that was influenced as I mentioned a minute ago by a couple of really large transactions I wouldn't expect that to be the run right that the percentage will come back down but generally it is it continues to be it up into the right Moshe Yeah, I mean, I didn't know what it adds that selling as David said I mean look if you look at the full year.
Full year for networking business, we basically ended at 44% mix and that's compared to 13% come out of of 18 I.
I don't think worried on a whole bad, but I think we do see our customers buying into our strategy. They do like our pool licensing arrangement and I think honestly, what I'd tell you. It I think you'll see that start to show itself in aerostar and that's probably the best place to focus as we go through that.
Got it thanks.
Thanks, Phil.
Your next question comes from Heather Bellini with Goldman Sachs.
Great. Thank you so much David a couple of questions. If you don't mind <unk> I guess in no particular order you guys sign I think it with a million citrix cloud seats in the quarter. It if I'm reading your press release correctly, which is a pretty big uptick.
Just wondering if you could walk people through what's driving that and you know there's always a lot of debate in the market. How much of this is being driven from you know window set an end of life and then I've got a two quick follow ups. If you don't mind. Thank you.
Sure.
Right as far as paid subscriber count we ended Q4 with seven Dot 1 million, that's up more than 60% year over year from just over 4 million.
What's really driving that assist continuation of the overall strategy that we've been talking about now for for a couple of years from a current customer standpoint migrating to Citrix cloud does a few things one it really simplifies their ability to maintain a their infrastructure to have lots of tools and services to optimize.
And drive that Ford and allow us to do the heavy lifting that we can scale across just really all of our customers and so it was a huge benefit on just the pure like for like the probably much more importantly that was it unlocks a lot of new capabilities that are really only available as a service and whether that is you know something as simple as.
Endpoint management and on a unified basis across you know all of their infrastructure to some of our net new capabilities like workspace with intelligence, which will only be available as a service. So it's a combination of really optimizing what they have today you know for those set of customers. When it provides that foundation for them to grow going forward.
We're just you know I think we're doing a better and better job every quarter of articulating the value. Our sales teams are having conversations you know higher up in.
In the executive ranks and we're talking about things that are I would describe is really transformation type initiatives much more so than a traditional p. delivery initiative. So it's a combination of all of those different factors.
Okay, Great and then that the two quick follow ups could be you know if you can just remind us obviously, you've been going through the subscription transition and and as a result of that there was a headwind to revenue growth could you remind us on based on your current expectations about mix, whether you want to take the midpoint or not what type of headwind to revenue growth is that.
2020, and then the <unk>. The other question would be just subscription air our growth for 2020, I mean, obviously I I heard your comments about being up 41% in Q4 any commentary on the type of growth people might be able to expect out of that subscription there are four up for it for this year.
Thank you.
Sure you don't have they weren't we're not going to guide from a subscription. They are standpoint, you know at least in in 2020, not simply a function of its relatively new metric we want to make sure that you know it is.
One that we can have forecasting with really really good accuracy, but more importantly, I'd take a step back and you look at it just for the last few quarters, that's where all of this business.
Business model transition is starting to unwind I think if I remember correctly was 33% growth in Q2 40 in Q3 41 in Q4, so we're actually seeing an acceleration of that as the numbers gets bigger and that's just a reflection of both net new which is still the majority as well as migrating more of of the answer.
All base.
Going forward.
I'm, sorry could you repeat the first yes people watch and was on the headwind to 2020 revenue growth from the transition if you kind of take the midpoint of your expectations on where you will be on subscription mix, how should we people be thinking about that the headwind that you're experiencing to topline this year.
Yeah, I mean, we didn't we didn't break it out in terms of guidance for 2020, but you know back when we started this transition we weren't that we were posting a the headwind than it was in that seven 800 basis point range.
No we stopped doing that just because we've got a or are out there and I think everybody is well aware of the trends isn't metrics, but it was up seven or eight percentage points. Yeah. The last time, we reported it.
Okay, great. Thank you.
Your next question comes from Karl Keirstead with Deutsche Bank.
Thank you maybe I'll start with a arlon in the earnings letter you gave the 2020 guidance, but I didn't see a reiteration of the seven to $8 per share in free cash flow. So maybe a two parter for you.
Still feel comfortable with that and then secondly, I know that as the installed base converged to ratable. There is the potential for billing or invoicing durations to compress a little bit which would take a little bit as zip out of free cash flow have you seen any of that kind of duration compression over.
Over the last couple of months. Thank you.
Yeah, So call I'd start with Yeah look we remain comfortable with the $70. That's obviously include in our guidance in terms of we delivered at Investor Day, and there's there's no change in that and as you point out rightfully. There. Obviously there are some complexities in terms of how the duration affects the cash we get in the door when that gets in the door.
That's the range as well as how we think about the business.
Turning to your question about compression I haven't really seen compression I think anything if you look at the less.
It's a bit longer actually in terms of Grayson get 1.7 years, obviously were Bert generally entering into 36, most contracts. So we'd expect that the race to continue.
But obviously in terms of how we think about cash flowing in the biggest impact for us as the mix over the course of year and how that results in itself for reflects itself in the business that's going to anything to that David Yeah. Karl I think you're not asking about the duration on the contract which has been going out I think it's more about prepayment and that that's rightly has not absolutely has been.
Headwind, because you know a year or two ago. When we talk about the majority of our customers not only were buying perpetual license, but also by multi years of maintenance and and paying for that upfront as we've been unwinding that model to get to a much more pure.
Yes, it's just a few a pure run rate.
That's been a tremendous had headwind to cash flow and that's pretty much run. Its course, I mean, yeah, we haven't broken it out in a couple of quarters, but it is it's a very low percentage now versus where it was so I think that headwind is pretty much gone at this point.
Okay, Great and then maybe my second question for you David It's just a this earnings call. This is a really in the earnings letter in in your words really putting a little bit more focus on the the Fourq you launch of these intelligence analytics features that you described as the most significant functionality at work space in your history, So I wouldn't mind, given that pressing a little bit.
So I know that they just went GA, probably a little over a month ago, but David any any early anecdotes or numbers you can share that for instance, when installed based contracts are up for renewal in December or so far in January those that have.
Acquired the new features you tend to see revenue accretion of X. anything interesting you can share that would kind of support the view that this could be a needle mover for citrix.
Yeah correlate traded at a high level, it's different than the old days of perpetual license when a new release was a giant event. This is much more about involving the platform and so the way we've positioned this with customers really over the last year, we've been pretty pretty transparent about this is that this is the direction that the workspace is really movie.
Being towards a platform approach that allows us to really provide a solution that is applicable to users of all type whether those users have very simple needs like office 306, five and it calls for a couple of Msas applications for whether that is the group of users that need all the power of virtualization, VDI et cetera, and so the.
A lot from allows us to really cover all of those on a wall to wall basis, and then provide that level of segmentation from an end user standpoint, the right tool to the right solution, but also a platform that we can continue to drive upsell opportunities. So that we can have a an ongoing customer account conversation about new things that we're bringing to market for example.
Security analytics performance analytics and others.
We haven't announced at this point in time and so the big shift is just how we engage and think about the workspace and it's going to be moving much more from a organizing I.P. focus I think we were over the course of the last couple of years too much more about you know modernizing applications guiding in helping to predict work and so that's it.
Big shift and that's an exciting conversation that we're having now with that's a CIO this but I mean more and more frequently people that carry titles like chief digital transformational Chief marketing officer and others. So we're excited about it but I think it's gonna be just a gradual thing that we continue to you know to ramp throughout the year.
Got it okay. Thank you both.
Your next question is from Mark Moerdler with Bernstein research.
Thank you and congratulations on the quarter.
Nice cleaning the results got a couple of questions few what I'll keep it simple can you give us an update on where you are on the process of no longer selling citrix bursting workspace licenses and how do you think of any had made an impact on Q4 license sales.
The to create a lot larger than normal licensed film a quarter and then I've a follow up.
So mark let me describe that look we talked at Investor day about and delighting perpetual plus maintenance. We're in the process of working that through our system you see no impact to that in the fourth quarter. We have not implemented that you'll continue to hear us talk about through the course of year, but we have not taken any action and there's no reflection of that in our current year end result.
And we know the bookings mix was already three quarters subscription in the workspace. So you know the impact will be relatively muted on a go forward basis.
Okay, and then can you give us any sort of an update on where you are on the on the what was existing installed base absurd Citrix workspace you know in terms of how much is moving or are you seeing any bigger opportunity any color on where that I'm on the install base starting to move up to subscription cloud.
Yeah.
Yeah, Let me take that one I'd you know we're early on Phil I'd say that number is is right around less well less than 10% of the installed base. The installed base continues to move even you know because we are still selling perpetual licenses. The installed base is growing while we transition the amount of transition has moved up pretty materially.
Over the last couple of quarters, probably most importantly, as it were still yielding the level of uplift that we talked about at our Rob at our financial analyst meeting well the numbers get bigger. So I think the opportunity is is pretty significant and we'll be doing much more that throughout a throughout 2020.
Excellent really appreciate thanks.
Yes.
Your next question is from Brent Thill with Jefferies.
Yes. Thanks. This is part of on for Brent in terms of the outlook I think the letter indicates that guidance with 2020 assumes.
Hey, subscription bookings mix of 60% to 75% if I'm looking at this rate you were expecting up to 80% of beyond the say so I guess the question is are your assumptions in the business changing at the margins here or are.
Are they still within the band that you had expected back to be on the sale.
Yeah, I don't think anything's changed here I mean, if you see there's obviously some seasonality we talked about the first quarter being much closer to a to the 55% to 60% range you see as for the full year looking at 65 to 75, and that's consistent with what we talked about Investor day, obviously overtime, we will go beyond that 75%, but we think about.
2020, we think that's the right way to approach it and it's very consistent with what we went over in terms of our roadmap in <unk> in our plants the business. Okay got it and then.
Well the CSP business I think the left at a point that we got was in the second quarter of 19, I think you talked about a 100 million the run rate, maybe any update on that and in terms of run rate or growth rates and maybe talk about the mix between you know on Prem CSP versus the cloud.
Yeah parts of it it's not something that we really breakout much anymore. I think now that we're into the complete subscription transition. All of these things are just included in in the overall number it would just confused people to try and breakout individual piece for.
Overall, though she appears a channel program that allows our channel partners to leverage our infrastructure to create as a service offerings for their end customer. It has been a great business like you like you highlight it continues to be so you know and and it isn't the neo nine figures in growing I don't really know where those customers are in terms of.
You know on Prem or cloud infrastructure, obviously over the long term they they have a lot more flexibility as they move to citrix cloud, but it just depends on the size of the partner.
Okay Fair enough that's helpful. Thank you.
Your next question is from Walter Pritchard with Citi.
[laughter] deep into product question for you just as it relates to a windows virtual desktops I think Microsoft launched in a in Q4 have you found that that offering from Microsoft being out there are impacting your business as a creating awareness is causing some confusion on helping the transition subscription just curious what if any impact your.
And at this point.
Well I think W.P.D. at a high level really opens up.
Awareness for for virtualization platform, and we look at it as a platform or in our language you know resource own where we can you know allow customers to run parts of their infrastructure along with like on Prem more you know at another cloud of public cloud et cetera. So much a resource on from that respect when it was first announced that created some mark.
Confusion and so between Citrix and Microsoft we've been spending a lot of time educating our field. We just said our sales kick off you know a week ago, we had a Microsoft and Citrix onstage really talking to all of our partners and our sellers about you know what the what the real snow separation is how to position that out how we work together because.
This is really the story about better together with Microsoft and we spent a lot of time highlighting everything we're doing from a joint customer standpoint, and joint field standpoint, all the product integrations and and we're going to continue to do that so no change on that front.
Great and then Arland for you just on that I want to make sure was clear on the networking piece. The subscription mix went up substantially there is that is that a trend that you think of sustainable as we move forward or was there some element with a flexible licensing in Q4, the trip customers choose that offering that may not be sustainable here in the first half of 2020.
So I think what you'll continue to see as growth I think at the magnitude I think the data point I've tried to utilize that 13% to 44% for the year I think that magnitude is driven by some of the larger deals. We did so I'm very confident they will continue to see customers move in that direction. I believe we're very confident in the fact that you'll continue.
She an increase I just works one we're just not confident that that magnitude in terms of the moving parts in the business number customers, who would be that consistent in terms of driving that.
Okay, great. Thank you.
Your next question is from Keith Weiss with Morgan Stanley .
Hi, Marc Benioff for Keith Weiss. Thanks, Thanks for taking my question, maybe two quick ones on converting that existing maintenance base that we've been talking about one I guess, just how big is that maintenance base in terms of like licenses that could be transition and then two units still less than like 10% of the way through like at analyst day on October .
I guess looking into the next few years when you continue focusing on transitioning that base, maybe just like level set expectations out like how much should we be thinking about per year, maybe it's like 10% or is that too high or too low I'm kind of some way to think about that would be helpful and modeling.
Yeah, I mean, we're not gonna guide to a specific percentage basis. We're obviously looking to build the right programs to go as fast as customers want to go and do you know we're not planning on any type of forced migration is simply going to be.
At the right programs in front of them give them you know the sense of value and allow customers to adopt this that part has been growing from a internally we call. It trade up in transition is growing very rapidly right. Now it is still the minority focus so I want to be clear about though we are still more focused on selling net new licenses to both new and existing customers and then.
You know trade up becomes a secondary motion.
But in terms of the overall magnitude I mean, you just look at look at the at at the piano Alan you see the support and services line you know the bulk of that is where it is related to ongoing maintenance contracts, although both hardware and software. So it's you know it's well over 1 billion dollar opportunity. There you know from a from an ongoing maintenance standpoint, and we just want to make.
Sure that we're converting that at the uplift that that we've been seen up to this point and we're doing it methodically sort of customers really drives the value that they see in the solutions. We're also starting to Incent channel partners on things like active used to make sure that not only are we migrating customers, but we're driving the right level of use and providing that platform so that as we.
Get onto.
For the intelligence in some of these new capabilities, we have that pathway to sell new things new updates you add ons new capabilities. So that funeral motion, we're driving right now.
Great. Thanks, so much.
Your next question comes from Raimo Lenschow with Barclays.
Hey, guys could some more to go beyond four I'm on thanks for taking my question not all fall for my congrats on the quarter next fourth quarter.
Two questions one David I was wondering if we can drill into just the FSP business performance. So obviously, we saw another nice rebound this quarter just based on di di easier much easier comps from last year, but looking into 2020 like should we expect to see volatility just based on the seasonality into comps for next year, there's one or is there anything.
Should be rental and then I've a question Paul.
Sure I mean, it just at a high level I mean, SSP and we'll continue to break it out for a while because it is volatile it's a small handful its now down to three 4% of total revenue. So it's not material, but it does move around a little bit it's going to continue to be volatile, although I will say that part of the strategy. We're driving right now is to.
You know work with these customers on the multiyear types of arrangements. So that you know well there will always be a hardware hardware element focus much more of the engagement on the long term software.
Containers and those types of things that support where their businesses are going so I'd say that the volatility will become less and less pronounced overtime.
It will be there for awhile, but you know just keep it in the context of its you know, it's three or 4% of total revenues. So it's not that big deal.
Understood that's helpful and Arlon just one question just for modeling question on deferred so I'm in based on the commentary that you have heard our own but do you guys are phasing of we had the must be on maintenance contracts being built a funny, we would've thought that there will be somewhat more of a headwind on before this quarter obviously before.
On my seasonal uptick the sequential uptick, but if we're going to give us more color as to how that sort of like peeling away from my deal maintenance will show up in deferred maybe it hasn't been rolled out good but just some more color on deferred from wondering would be helpful.
Yeah, I mean, I think look I would go back if we take a step back and we talked a lot about this in Investor day, but when you think about the business.
I would say the first way to kind of think about the normalization is look at error as after you move away from a our you're going to start to get an idea of where we're headed in terms of our future committed revenues and you'll see more and more of that build up obviously in unbilled in terms of how that will react as a business and then and one of the reasons I started with a ours because one of them.
You'll have to deal with them that we'll deal with in terms of how we model and think about our business is the fact that takes us six and as we do on Prem term licenses and how that's kind of pull in how that have an effect on the business and so even though we'll continue to move away from prepaid maintenance, you're going to continue to see movement around that deferred line that he said, we had an up tick in seasonality.
We feel good is picking up in a quarter by quarter basis. When you look at that where we're headed but obviously, there's going to continued volatility depending on mix and some of that mix is not only the mix in terms of fast, but it's funny, Sean Penn term license as well is the pool licenses, we have for the networking business, which is all going to have an impact and it's going to move across our short.
Terminal long term deferred.
Sounds good thanks.
Your next question is from Robert Magic with Raymond James.
Great. Thanks, a lot can can you give us an update on Citrix managed desktops and how the sell through its been so far with your partners and customers and then Additionally is this an offering we'll see you put more emphasis on going forward.
Yes, Jim TMT just for everybody that is our fully packaged as offering that we're building with Microsoft on top of Windows virtual desktops really a complete well a complete way to give customers a turnkey service.
So things are are just now you know just now going lives. So there's not a whole lot of history, yet, but we'll look at it and talk about it much more going forward. It's similar to the way I described platform earlier, where.
The important part of the strategy is.
Lay the foundation said, we've got a platform approach that are that covers all users regardless of their there and kind of their their end user requirements and then have those those individual solutions that allow us to continue to segment users much more specifically based on their usage. So that could be a full VDI solutions that can be a citrix met its desktop it could be.
You know just simply analytics I mean, it's that level of flexibility I think as most critical going forward. So stay tuned you know when a couple of quarters. We'll we'll provide an update just in terms of overall uptake but.
I think the this story that we talk about is going to be much more platform oriented.
Thanks, a lot.
Your final question comes from Kirkman turn with Evercore ISI.
Hi, Thanks, Thanks, very much and.
Congrats on the quarter I guess, David such that for you is coming <unk> sales kicked off and as you go through this transition to be work spaces be more of a platform to talk about how you're thinking about sort of the evolution of the partner ecosystem. As you guys are now starting to talk to decision makers outside just the I.T. universe you traditionally that's been an error.
Where you know the tradition in the other global system integrators will come in and.
Oftentimes help help sort grease the skids in terms of helping software companies along in terms their platform strategy I'm, just trying to get a sense on where you guys stand on that and maybe if there's any points of validation. We can take away from potential partnerships that help I think speak to the direction you guys are heading out thanks.
Yeah, I can't talk about specific partnerships that the that aren't really announced publicly but I can tell you that you're right. It was a big focus of last week talking about you know the overall message selling into a different set of buyers and it's a jury that we've been on for a few years. So it hasn't been totally that new however, the conversation that I had sitting down with.
Large group of our GI side partners was much more focused on you know this as a platform. This is one that a lot of them up and engaged in in terms of.
Helping build out micro apps and things as you know as beta customers and whatnot because the a the long term engaging with them you know comes from how they build unique and differentiated businesses around some of these capabilities not just using them as a tool as part of a larger engagements, but actually as a foundation to build the practice around and that's the direction that we would be working.
With them on to to help you know become real so.
Good engagement with GE aside continue to work with our traditional set of partners moved on new went in and installed base customers. So the message was was pretty holistic last week. So I think we've got good alignment across our sellers lot of transition as you would imagine we're moving to much more they continue with engagement model, which is typical for a cloud company versus.
One that sells individual point products, but that's a journey we've been on for a while and so I think each and every quarter, we're getting a little bit better at it and I've got a pretty good pretty good view of where we need to be over the course, the next couple of years.
That's helpful. Thanks very much.
All right. It sounds like that was the last question. So again I just want to wrap up and thank everybody for joining US again. This afternoon really nice way for us and the year coming off a strong fourth quarter, obviously optimistic about 2020 with everything we're doing across let's go to market in a product area. The Florida speaking with many of you throughout the quarter and reporting back.
With our first quarter results in April so thank you very much and have a good night.
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