Q2 2020 Citrix Systems Inc Earnings Call

Ladies and gentlemen, please standby your conference call will begin momentarily once again, ladies and all the police they are more.

[music].

Quarter 2020 earnings call at this time, all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask the question during the special needs. The press star one on the telephone if your car operator systems Drug program. Please press Star then zero I wouldn't electronic sell throughs prefers called mystery to trigger you may begin.

Thanks, Kevin Good morning, everyone and thank you for joining us for today's second quarter 2020 earnings call participating on the call will be David Henshall, President and Chief Executive Officer, Arlon Shakes exact executive Vice President and Chief Financial Officer.

Please note that we will have posted our second quarter earnings what are your Investor Relations website I'd like to remind you that today's conversation will contain forward looking statements made by the safe Harbor provision of U.S. Securities law.

These statements are based on current expectations and assumptions that are subject to risks and uncertainty.

Actual results could differ materially from those anticipated.

Additional information concerning these and other factors as highlighted in todays earnings water and then the company's filings with the FCC copies are available on the FCC or on our Investor Relations website.

Furthermore, we will discuss various non-GAAP financial measures are defined by FCC regulation G.

A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on todays call. So he found.

And our earnings water sound on the Investor Relations page of our website now I'd like to turn the call over to David Our President and Chief Executive Officer.

Thanks, Tracy and good morning, and thank you everyone for joining us today.

Our second quarter results reflect our position in the market as the leading workspace company empowering employees with a secure and consistent work experience wherever it is the work needs to get done in the office on the road first of all recently experienced at home.

Even one geography is and it sounds to me speaking to reopen this concept of back to the offers is moving beyond the discussion of just one mode versus the other.

I think there's a realization and many companies for the hybrid Workstyle blends together the best attributes physical work environment with the flexibility that individuals need to be productive and do their best work.

Oh this will be dependent upon technologies like that was provided by citrix to ensure a safe secure and productive work experience across all locations.

Really proud of our team the commitment to customer success and I've seen throughout 2012.

So with that like to open it up for questions.

Ladies and gentlemen couple of question or comment at this time, Please press star than the one key on your Touchtone telephone if your question that but that's pretty much worse off from the Q. Please first the property.

First question comes from Phil Winslow with Wells Fargo.

Hi, guys congratulations on a another strong quarter.

David a question for you.

Yeah on penetration, obviously, we've seen I called more people that haven't been able to work remotely start to work field work from home now and it seems like a permanent work in flexible work.

Your point is just you just here to stay how do you think about the ability to drive up because the number of users that have access to the citrix, but as you usage of Citrix also goes up more people using concurrently how do you think about penetration of that called that user base with licenses. So call. It the total user base growing into your license.

Attrition of that Middle just about one follow up for Ireland.

Sure if at all thanks, I think the big take away coming out of this great work from home experiment because that remote work is really in fact, working and so I don't think perceptions of remote work.

You know shifted more quickly than it has right now I mean, you took a step back and as you mentioned you have over 40% of the U.S. workforce now working from home delivering somewhere over 60% of total economic output. So fascinating to watch to see that meters. In general are really realizing the benefits of remote work is bringing to their organizations and so.

It's really becoming clear that hybrid work models are gonna be here to stay and you know you've seen a lot of these statistics and we've talked about some of them.

I suppose you're talking about reduction in everything from real estate portfolios to not a central traveled trade shows itself and so when we take a step back I mean now do we yes actually crossed the chasm for remote work not being seen as a perk or a unique attributes for a select few.

It's because it's going to become much more mainstream and for US that just means you know ability to accelerate penetration across our installed base as well as tapping into that new customers. So from a long term standpoint, I think all the trends that we've seen up at this point should really benefit.

Good idea that work is truly an activity about driving up one that's not a place and the one constant and all that is the need for a digital infrastructure that is flexible that is secure that is providing that level of engagement, regardless of where people choose to work. So I see it is definitely a long term positive for the business.

Got it and then just a follow up obviously the other big announcement. This month with is it the extension of the partnership with a with Microsoft Obviously, that's long standing back to the Leo late Ninetys and Bill Gates talking about network computers, whatever you just comment on just for the evolution of all of that partnership you know from your 90 798 with network computers and better frame.

So now with Windows virtual desktop and then and then sitters cloud and sort of how that symbiotic relationship sort about you're still applies.

Yeah. So it could take a step back and think about you know this is one of the longest partnerships across all of technology that I can certainly remember and the reason that's worked so well for all these years as a citrix is largely about embracing and extending the Microsoft platform for a number of arc technologies and that's one of the reasons why is it works so well throughout the 90 isn't too.

Albums, but where we are right now is is really a announcing more holistic and programmatic approach than anything we've seen it over that we're creating joined skews joint Roadmaps and it really comprehensive approach to give our customers a much clear understanding of Microsoft technologies and Citrix technologies together.

That road map to know, how we're adding value and then the on the infrastructure to really help them simplify the moved to the cloud make it easy to adopt citrix cloud make it easy to adopt Microsoft Azure I think that's gonna be equally powerful combination should go when's. The next couple years.

Great. Thanks.

Thanks, Phil.

Next question comes from had to believe me with Goldman Sachs.

Great. Thank you so much for Ah for taking the question Peter I wanted to ask a little bits to follow up on on the question that go with just asking you know again, you talked about having a higher penetration rate, but when you're when you're one of the questions. We get asked a lot is when companies. What are you hearing from CIO is.

When companies do go back to work there are some people that are afraid that this that it was a big push for for VDI or death.

Actually going to go away and people might migrate back to how they were doing things before if you could share with us some of the conversations you've had with people that maybe thought this work from home what's gonna be a short term situation. It first can now turned into something that's gonna be much longer how was the conversation.

Greg in terms of how they feel about this permanently altering instead of just capital really altering how they're delivering compute to their employees.

Yeah, I think it's a combination both from a CIO standpoint, as well as you know executive leadership and on the executive leadership side, you know, there's a perception pre pandemic that promote working wasn't necessarily working I think it's been that it's probably the single biggest eye opener for a lot of people is.

Recognition that.

Remote workers actually way more productive in some instances and so when you look at the research that our research team has done stand pretty economic Institute a number of different organizations. The conclusion is that most businesses are looking at adopting a much more programmatic approach to flexible work anywhere from one day a week three days.

Thank you see us significantly higher than it has that and again the one constant there is that the need to provide a level of infrastructure. The gets people the resources. The access the securities the visibility et cetera that they need regardless of where they happen to be working and then you kind of take a big step back and you think about what we have been.

In discussion for the last couple of years around a few trophy work and how we as an organization and our workspace can help removed a lot of the noise that comes with.

Automating and simplifying HM simple tasks engagements with your underlying systems of record. So that we can help from everything from unemployment standpoints employee productivity standpoint, and everything in between so I think it's gonna be a material change for quite sometime.

Great. Thank you so much.

Thanks Huh.

Our next question comes from Mark Moerdler with Bernstein Research.

Thank you very much and congrats on the strong quarter, you don't mind them in a couple of related question you assess a ours up nicely Q over Q well you paid subscribers ex the health care organization was up modestly are you seeing an increase in revenue per shipset subscriber.

And then follow up.

Yeah, Mark we really haven't broken out you know revenue by paid subscriber it really depends on the solution that their adoptees longer term what we're obviously looking for it is you know strategically to get people onto the workspace platform that is really the horizontal platform layer that there's a flexible to every single use or in the enterprise regardless of.

Whether they are a power user and they need all the.

The capabilities that come with a full virtual infrastructure or whether they're just using a couple of SaaS applications in office three six though we can provide value and and in an incremental capabilities and then once when that platform. It allows us to you know better segment users to be able to add on incremental capabilities like analytics like.

You know different forms of connectivity and contextual items and so strategically that's really where we're driving much more of a better segmentation of users versus just trying to put everybody on the most expensive skewed.

That makes sense question, we've seen some software companies, having cobot impacting their cash from operations and yet yours is quite strong are you seeing any delay foot with payment terms or payment delays or anything else or given the criticality clients just paying as normal.

[laughter] anymore.

I think you know we haven't seen anything out of the ordinary you certainly we had a very strong cash flow for the quarter and I think thats really reflective.

You know the breadth and scope of our of our customer base, obviously geographically as wells across industries, and we've had you know what I would say a handful of requests round extend the payments, but generally we've had pretty much business as usual in terms of our cash flow correct.

Perfect and apologize one last one leasing in the conversion of the short term term licenses to perpetual or or longer term term or anything yet or is that in the future.

I think thats in the future. That's you know certainly as you know in the first quarter, we had a fair number that up those that obviously tailed off in the second quarter, two an immaterial amount and as we exit the year and approach to beginning of next year will be very focused on converting those customers.

So it's really appreciate and again congrats.

Excellent thanks Mark.

Our next question comes from Raimo Lenschow with Barclays.

Hey, Congrats from me as well David can you talk a bit it little bit about it does that make you pointed out in your letter around people just maybe taking it in between staff Ultra on premise term and then oney Lee take going to like to pure cloud cloud in terms of like you know is that just kind of.

To to sweat the assets on their on premise side, what a driver straight and talk a little bit about the implications.

That's you know you highlighted on the revenue side as well a in your letter.

Sure Raimo I think yes, it's less about sweating the assets and more just a recognition that 90 plus percent of our installed base is still on premises and you know it was the easiest thing for a lot of them to do to just expands as they were making a wash to put people into our remote work environment back in the end of Q1 time frame.

I think it's just that it's an interim step that's the way we're looking at the right now I mean, those customers that have already made the move to cloud we have one large financial institution for example, but yeah. They came to US and said I have no idea when we would've done with our tens of thousands of individuals have not made those investments.

So.

There's a recognition that cloud consumption. Thank you citrix cloud public cloud et cetera, we'll continue to increase in probably accelerate due to this environment and the flexibility that oh affords the for US. It's just a matter of individual steps as we talked about last quarter customers were focused on more of the tree Arash mode.

In Q Q1 in early Q2, and because of that we've seen a number of projects the larger projects like the cloud conversion just gets pushed out a little longer and so no change directionally just a matter of sequencing.

Okay, and one follow up like if I look at the geographic split Lucky It looked like Europe Easter was doing a lot better than than the Americas. Like you said is that kind of like where we are reported or is that kind of more kind of subscription into your asked first of all on premise and the only reason it's like can you talk to that a little.

Thank you.

I think the primary driver there was just the fact that the Americans had a blow out Q1, they're up well over 20% in the first quarter and so you know probably pull business out of Q2 into Q1 was the largest indicator and then there's mix underneath that but you don't like would look at a more from a first half performance across all regions.

Perfect. Thank you congrats.

Our next question comes from Walter Pritchard with Citi.

[noise] Arlon and David wondering how you're thinking about.

The factor a your end of your stopping the perpetual sales on October one what impact I'm kind of on.

Thank you for like a perpetual license, obviously keep for follow up quite a bit easy in the path sort of a pull forward well never some companies a simple personally when they paid US next curate curious on that and then how to follow.

Yes, well so we obviously plan for this for the year and no felt very comfortable announcing this is a you know in October 1st timeline. So our guidance reflects what we expect in terms of activity from our customer bases, we transitioned off of perpetual plus maintenance business model and getting a fourth quarter. Obviously, we can be taking that into account.

Right. So when you think about you know the fact that we're kind of no longer offer perpetual plus maintenance licenses to customers in fourth quarter. It's reflected in our thinking about the business and obviously that creates somewhat of a headwind depending on the mix in how we think about the performance through that quarter.

And then just the action on that on the networking side I'm curious, if you're seeing any uptick in attach around.

Netscaler and related products to a tumor study that's just given given what's been really heavy activity in that area.

Little bit of color there would be helpful.

Walter.

If you guys if stuff I can think about networking I mean, it I think yes, there you're seeing more and more incapsula workspace is part of it was just away.

Architecture, a b the underlying solutions is going as we move much more of a software approach much more minutes of service approach. It just gives us a lot more flexibility to reposition many of these technologies for example, as workspace conductivity workspace performance workspace security and the the story around better together is absolutely.

In the broader networking area you know what you saw in our letter we had 88 really pronounced uptick across some of the amount of subscription versus versus on you know on prem or hardware revenue and that's what the trend that's been in place for a while it is continuing right now and I think that's something that we should expect on the straight line, but directionally up into the right for core.

Sometimes.

Okay. Thank you.

[noise]. Our next question comes from century thing with Morgan Stanley.

Thank you for taking the question I wanted to ask about the VPN replacement opportunities, which seems to be a focus on for the company in Q2, David you anyway, you could sort of size that opportunity for us as on coal that hit and customers of mature enough work posture, how much of that sort of.

No real time demand was it was or customers sort of leaned into that that option for for a note work and what do you see I see opportunity whether it's from a devices are users or the customer perspective to convert those the those VPN connections onto it.

Desktop.

Yes, Indeed, I think it's actually it's a much longer opportunity you know, it's probably still the predominant way that people access their network and even though it's somewhat of an old technology. It's you know it's in place and so VPN replacement with a more modern approach to a digital workspace that provides a different level of not just.

Conductivity, but a different levels of productivity and engagement and kind of a holistic nature of delivering resources to employees is not the broader way to think about this over a period of time and so I think that a lot of companies that have had VPN in place or just extended that easy it's relatively cheap.

But now they're coming back and recognizing the constraints on that whether its performance for we're just some of the other attributes we've talked about that are necessary to give people and everything they need to do their job and then again and then continue to be productive. So I wouldn't look at it as a benefit in the short term, but much more vague I guess, we call the second.

Our change over time.

Understood.

My question is sort of because not too on the conversation on cloud.

You seem to hit that you know right now there is some modernization projects or caught initiatives that are just frankly tough to deal with the current environment. As you look at the Citrix customer base. What are they are key friction points in terms of.

Moving to cloud I Wonder what are some of the considerations.

But they have to deal with it the obstacles that they have to get through two more aggressively move to at two o'clock posture.

Oh, it's just a combination of looking at the other projects in the in the broader economic situation clearly most enterprises have been somewhat distracting over the last three four months and so large digital transformation type projects I've just been pushed out so just a timing activity in my mind I mean, when you look at the things.

We were drilling as an organization both by ourselves and with Great partners like Microsoft. The idea. There is just to make as easy as we can for customers to migrate existing infrastructure and adopt public cloud and Citrix cloud it and so that'll be a combination of individual tools that help these migration as well as you know.

Simple things like you know joint packaging and others just to remove the friction across the entire up you know projects face.

Appreciate it thank you.

Our next question comes from Brett through filled with Jefferies.

Good morning.

The number of paid subs on the cloud declined 3% sequentially in Q2 unique noted that.

The customers trading up to the cloud offerings not progressing at that rate you anticipated coming into the here. What do you think is is.

Holding that back in <unk> is there anything you need to do from your side or is this more just the burst of a perpetual that's that's helping right now.

Brian I think if you think about the decline in paid users. That's clearly the reflection of of customer who is not in addition to make it very sparse transformation of their environment and I think that's also reflected a bit of what you know David It said in the letter around RTT emotion and so while I think we.

Continue to know that business resiliency and continuity are incredibly important our customers. Many of those customers are can continue buying what they've deployed because it works and it's it's utilized and engaging for their cut for their their employee base and ultimately you know they won't get there at the run rate and pace, but it will take them some time, that's which reflected.

Kind of our guidance you know what you're seeing in terms of C.

The conversation about the number of users.

Great. Thanks.

Our next question comes from Matt Hedberg with RBC capital markets.

Hi, guys. Thanks for taking my questions I wanted to go back to the expanded relationship with Microsoft I guess, maybe Arlon for you. When you think about your guide. This year are you guys just assuming more run rate business would that obviously long standing relationship or you know how to I guess I'm, what I'm trying to get it is you know you talk about Microsoft leading sales Citrix cloud.

You know he is there any assumption in that guide that that we might see a bit of a bit more of a tailwind from from Microsoft.

I think that when you think about the relationship for this year, we're really focused and frankly into 21 about making sure that were holistically approach our customers and were part of that conversation as they think about the transition to the cloud and I think a fair amount of this discussion about teach you and about customer landscape transformation is much better addressed with Microsoft and Citrix.

Together at the table in a way that is multifaceted holistic around a relationship in terms of roadmaps in selling motion and things of that nature. So I think that it's clearly part of our long term strategy is to be close to Microsoft and I think it has a long term positive impact on our business, but I wouldn't look at it on this quarter to quarter year to year in terms of.

You know, it's gonna be a separate driver.

That's helpful. And then obviously you talked about this the spoke licensing offerings not really impacting the quarter ending I think in April could you could you talk about though how business progressed through the quarter. Obviously gets are coming off a strong Q1, but just did did things sort of trend normally this quarter from month to month basis.

Yeah actually it was actually better linearity than than I've seen in you know when a while it was relatively straightforward quarter. I mean, it was less back end loaded than you see in a traditional enterprise software model and you know it's just back to the fact that customers are looking at their environments are looking at all this work from home.

We've talked about it and they are focused on high priority projects and it's one of the reasons why some of these big transformational type things or you know pushed out into the second half a year, but business was very stable and.

Probably more so than it's been in the last you know you're you're too.

That's great Super helpful. Thanks, David.

Our next question comes from Jason I live with William Blair [noise].

Thank you and a couple of modeling questions.

As you shift away from a perpetual model should this important services line.

Further deceleration from here in terms of year over year declines.

And then secondly, how does the impact from professional change.

Effect.

For Q1 sort of normal seasonality for Citrix, where we've seen that.

Just a significant.

ER positive impact in Q4 net.

So I would I would think Jason in terms of the modeling you can think of this as a decline I think that's pretty clear and if you look at our our trend on product in license over the past several quarters and were down 8%. This this quarter, but we've been.

I had a larger saw rationing in other quarters I think you definitely should think about that as being down I think that you know the issue on the fourth quarter is as we articulated in terms of our exiting the perpetual plus maintenance business. Obviously, you know the real revenue outcome is highly dependent on the mix that business and the impact of six so six so I think it.

Can you should think of that in terms of how we guided and thought about our corridor and the headwind that will represent for us as we exit the year.

Yeah.

On the seasonality.

Again, it's included in our guidance and I seasonality is essentially obviously fourth quarter tends to be a large quarter for us and then you should keep in mind the impact of that business model change, which is included in <unk> and when you extrapolate how we're talking about the year and then secondarily. Obviously you know I think that just have to look at the jobless claims. This morning this morning's number.

And you can see that there's still economic uncertainty as we go from quarter to quarter and as this environment changes on all of us.

Thank you.

Our next question comes from her patterning with Evercore ISI.

Thanks, very much and congrats on the quarter I guess, just two quick ones I realize you all talked about this one health care a client that wasn't able to serve shift over to the SaaS model, but could you just talked about renewal rates in general on the on the cloud or they basically trending in line with what you would expect better I know you're not can provide anything quantitative but maybe just any color.

I'll tell you give color on that and then secondly, you at you all are obviously in work from home profile as well you just wondering how you're thinking about sort of sales and marketing efficiency longer term you now that you've been in sort of more of a virtual selling model for it for a couple of quarters are there some opportunities for efficiency on that front as you think back towards a more new.

Arm and hopefully in 21 thanks.

Sure Kirk let me take two parts of that so I mean, just to be clear on the on the paid users part I mean, we had probably be our largest workspace customer in the world. You know look for a bespoke transaction, where they had a time bound opportunity to move to the cloud relatively short and based on their own priorities that that period as lapse fill those licenses.

As reverted back to being the traditional on premise perpetual license will work to trade them up and to Citrix cloud when they're ready in the future.

So I think that that was all pretty straight forward when I think about the productivity of the of the sales organization.

You know in maintaining established relationships and expanding those is relatively easy on on a remote basis and we like a lot of other companies and spent a lot of time and effort focused on how to be as engaging as productive has.

As in a physical mode and so I think we're getting pretty good at that we're doing a tremendous number of these remotes executive briefings and the same types of things we would be doing in a in a physical.

No constructs and so we haven't seen a whole lot of change from a sales productivity standpoint, when you look at our renewals of of the underlying subscriptions are gross renewal rates have actually been increasing you know across any type of a recurring robin I think a lot of that is just is probably talked about a last several quarters. It's just a renewed focus.

Yes on the underline programmatic side of things the focus on customer success, driving active use and whatnot. So our underlying renewal rates have been increasing across the board.

Thanks, David.

Our next question comes from Ittai Kidron with Oppenheimer.

Oh, sorry, guys. A couple of questions for me first Orlando thing last quarter, you talked about a thousand new.

Customers into quarter any chance you can give us some sort of a benchmark what what was the performance this quarter and then as a follow up also DSP customers.

Moved to subscription what did you also which is the third one moving as well and if so how do we think about timeline there.

So in other third SSG I think it's a matter of their decision. Obviously, we're actively engaged with them I think it will happen over time, I don't think and give you a quarter for that obviously, we take into account when thinking about how we guide the business and provide a mix of subscription.

But I think we will get there. It just takes some time and we'll continue to work on that on the new customers I think.

Last year. We are you know I think it's consistent I would think of it as you know two in one or 2000, you lose a quarter.

I think last year were in that five to eight I mean, so I think you can think of it as you know.

Similar type business, obviously, a 400000 customers so in terms of adding new logos ancillary broad and diverse in global customer base.

Hi, good like us.

Thanks.

Next question comes from Robert Magic with Raymond James.

Thanks, and you start to convert some of the enterprise seats from discounted short term licenses to longer term contract deals can you just help us understand what the uplift could be on a per seat basis.

[noise] I think that would be consistent with what weve articulated in terms of it you know 35% uplift in it and if you'd like to the cloud and I don't think said do anything about that Robert is obviously, we want to convert those customers to be SAS customers tend to get them to have the additional functionality around security and analytic.

And engage with their employees, if they get being our SaaS platform. So I think thats consistent and that will be our selling motion and obviously you know that will start to happen as we come into the beginning of next year and think about those users.

Robert I also think it's important point out that if you remember we excluded a lot of those tens of millions of dollars from our air our calculation and so when those are converted to permanent licenses those will come back in and be a tailwind to two way our.

Thank you.

[noise] and I'm, not showing refurb across with the spot I turn the call back over Davis for closing comments.

Great well, thanks, everybody for joining us I just want to leave you with a few parting thoughts Citrix is workspace company, we're enabling employees with a secure and consistent work experience wherever work needs to get that whether that's at home in the office or really any place in between.

Subscription business model is obviously on track and it's been supported by a great first half of 2020 as we've talked about here today, the peso customers moving the bid large workloads from on premise to cloud is likely impacted by economic conditions and shifting priorities. So our focus along with strong relationships with partners like Mike.

Her shop is going to be on aligning in making this transition as easy and successfully as possible for these customers. So I'll leave it at that and we look forward to speaking with many of you throughout the course of the quarter and on our third quarter earnings call have a great day.

Ladies and gentlemen, does conclude todays presentation. You may now disconnect have a wonderful day.