Q2 2019 Earnings Call
Ladies and gentlemen, please standby your conference call will begin momentarily once again, thank you for your patience and please standby.
Good afternoon, My name is Ashley and I'll be your conference facilitator today at this time I would like to welcome everyone to the Citrix Systems' second quarter 2019 earnings 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 period. If you would like to ask a question during that time. Please press Star then number one on your telephone keypad.
To withdraw your question that anytime piece pass the sounds fine. Thank you I would now like to introduce Ms.
True cheap coaching vice President of Investor Relations you May begin your conference.
Thank you Ashley good afternoon, everyone and thank you for joining us for today's second quarter and fiscal year 2019 earnings call.
Participating on the call will be David Henshall, President and Chief Executive Officer, and Jeff definitely fun interim Chief Financial Officer. Please note that we have posted our second quarter earnings water 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 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 is highlighted in today's earnings letter and in the Companys filings with the SEC.
Copies are available from the FCC or on our Investor Relations website.
Furthermore, we will discuss various non-GAAP financial measures as defined by a SIFI regulation G.
A reconciliation of differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of our earnings what are found on the Investor Relations page of our website.
Now I'd like to turn it over to David Our President and Chief Executive Officer, David.
Thanks, Tracy and good afternoon, and thanks, everybody for joining the call I hope everybody had an opportunity to review the earnings letter that we posted to our IR site, you know similar to last quarter I'm Lucky My opening remarks, we briefly we can jump right into Q enable I thought it would be important to provide a little bit of context on the business. Overall, so let's say you know all in I'm really happy with our performance in the second quarter demand across our products and our Geos was remarkably consistent throughout the quarter. The only real difference was mix you know, we clearly underestimated the demand for subscription licensing in the in the quarter.
The subscription transition for new licensee it is really happening faster than we had forecasted across most of our major businesses, which is strategically where we're driving the company.
We expected this accelerated pace to really continue for the full year.
The obvious consequence here so the faster shift is that revenue margins earnings and cash flow, we're gonna be impact in the short term with the offset represented an unbilled and deferred revenue in particular.
Just to be really clear here. So the mix shift explains the entire difference between our reported second quarter results and our guidance.
We had guided a midpoint mix of about 52%.
On the actual was 62%.
Within this result, we also saw record subscription booking levels in both of our businesses.
The workspace product mix jumped up to 71% from 58, a year ago, well networking moved from 11% last year up to 35% in Q2 and I can talk much more about the demand drivers once we get into Q1 night.
It's important to point out again that for all of our financial statements are going to be impacted by the business transition, including cash flow because we typically bill annually for subscription contracts rather than everything upfront like we typically do in perpetual license deal. So less cash is collected in the current period more cash is going to be collected in future periods.
So in other words, the strength that we're seeing in subscription bookings to serve to improve our predictability and certainly accelerate our growth in future period. That's the primary reason why we've introduced future committed revenue was one of our new metrics. Hopefully you saw that that balance is now up to $2.2 billion, it's up $290 million or 15% from last year, It's really the easiest way to think about the transition.
But to make the full year transition math really simple for everybody. We just give you a quick rule of thumb.
That is for every one percentage point change in mix, it's equal to roughly $10 million to $12 million and recognize revenue for a full year basis.
This offset to the decrease in recognized revenue in the period is generally the corresponding increase the unbilled deferred revenue.
So that when you look at our full year guidance, we now expect the subscription mix of new product bookings of at least 60% to 65%.
As compared to 50 55 earlier.
This is a change from our prior guidance for our current guidance.
Finally, this quarter, we are introducing a R or annualized recurring revenue as you know probably the most important KPI for our business. The way was calculated this is a bottoms up contract base metrics, which we believe is really the most important way to measure the performance of this transition.
You will see a five quarter history in our earnings letter I'll point out for Q2 total subscription ARR was 614 million.
And that's up 33% year on year.
Well the SaaS only a R.R. was 418 million, that's up nearly 50% year over year.
As we continue to move through the business model transformation, we expect to see very strong continued growth in both of these metrics.
So let me stop there and with that ill turn it back over to the operator, so that we can open it up and take your questions.
Thank you.
Thank you, ladies and gentlemen at this time I would like to remind you. If you would like to ask a question. Please press Star then the number one key touchtone telephone, we'll pause for just a moment to compile the queue any roster.
And our first question comes from the line of Rommel Lenschow with Barclays. Your line is now open.
He is he thanks for taking my question.
I know, there's a lot of stuff to go from Dave It's like.
Can you help us a little bit understand like what are you seeing in terms of customers in terms of and Citrix service provider versus like doing this as a SaaS offering in terms of like what do you see there because if I look at the numbers on my side. It seems more she is P.M. term, what's driving it but I'm just trying to understand the dynamic there.
Yeah, I'd say all in two things right now I mean, we're seeing strong growth across all three of those areas you saw that SAS only pay our our is the one that really picked up its growing nearly 50% right now at a scale north of $400 million. So that is the public cleanness representation of thinking about Citrix cloud. The other two businesses show up in the other subscription you pointed out CSP, which for everybody is the consumption based subscription that we have mostly through our partners that business is north of a 100 million run right now continues to grow nicely and then on premise term and I'd say on premise term is a bridge for a lot of customers as they are moving from a perpetual license to a true subscription a lot of those tend to be hybrid licenses were there.
Working through the transition of their own infrastructure long term, we actually want to highlight much more SaaS driven and so on Prem term as I look at that as a bit of a bridge in between the two but the fastest growing part of the business is pure SaaS.
Perfect. Thank you well done.
Thank you and our next question comes from the line of Phil Winslow with Wells Fargo. Your line is now open.
Yes, Thanks, guys for taking my question I actually just had two of them first David.
Workspace services, obviously, you highlighted the continued shift to subscription there, but you've had reported basis, you're still up 7% year over year. What did you just walk us through some of the demand drivers that you've been seeing.
The first half because obviously the super saturated.
Regional or apples to apples growth and then just one follow up to that.
Sure Phil that actually really excited about the workspace right now like you said, we've seen really solid growth in this business on a recognized basis, even though 71% of the mix last quarter came the.
Via subscription and that's like like quote those numbers those are new product mix and so there's two things going on I mean, we have been leading the market for years around desktop and efforts realization just pure virtualization I think that part of the overall business has seen a nice resurgence in the last couple of years because customers are really focused on mobility and security and those types of opportunities, but really what's most important for us and probably most exciting is the message that we're driving with customers right now about the intelligent workspace and how we can move those capabilities not just for those users that are focused on virtualization, but really add value to everybody inside the enterprise and we introduced a number of those capabilities and at our synergy conference a couple of months ago, we'll be shipping those in the back half of the year. So I think our message is resonating and it'll allow us over a long period of time to really expand our available Tam drive incremental penetration within.
Our installed base and also look for new customers that really are not using any form of virtualization. So that's where that's where we're taking the product line and that one is clearly leading the subscription transition and I would expect it to be.
Close to 80% by the end of the year.
Got it thanks, and then just a follow up as you mentioned synergy obviously, there are some significant announcements with Microsoft.
Synergies, including Brad Anderson kind of unofficially announcing the renewal that that partnership can you just give us an update on just the partnership with Microsoft, particularly the new products that are coming up.
Yes, they all in the partnerships as strong as it's been in 20 years and Thats for a couple of reasons. One were have really good alignment in the field. When we're working with customers a lot of customers are going through major projects like 0365.
Azure transformation.
Lots of.
Bigger projects and we've we can join shell with Microsoft and really help support a lot of those capabilities and so that's been very positive in the longer term, that's a huge opportunity for customers to continue to move their citrix workloads onto azure or one of the other major cloud properties and that's why we work well with them specific to your question about individual products, Yes, Brad was with us at synergy and we announced a number of new things for example, the support of their new platform, which they call windows virtual desktop and now we've integrated that with Citrix cloud. So that customers can look at that is one more place to run their workloads, giving them and really unprecedented flexibility across citrix cloud.
We also announced the Citrix managed desktops, which is a really a das service sitting on top of that platform and we're doing that with Microsoft and we'll be able to bundle azure capacity and really create a clean turnkey. We also announced a number of other areas I'm sure I'm going to forget all of them, but optimizations for windows.
Excuse me for office 3654, SD Lan, we can do a lot of really cool things to accelerate the performance of of office HTS optimizations for teams.
Ft win more broadly for windows virtual desktop, adding performance and resiliency as well as a number of other areas. So I'd say the partnership is as broad as it certainly been in any time in my 17 years.
Great. Thanks, guys.
You bet.
Thank you. Our next question comes from the line of Karl Keirstead with Deutsche Bank. Your line is now open.
Thank you.
Hey, Dave I, just want to get to the question of.
Call it normalized revenue growth.
So.
You posted 1% growth, but you mentioned that there was a six to 700 basis point headwind from the mix. So call. It normalized seven 8% growth I think when you gave guidance three months ago for roughly 3% to 4% growth in Twoq. You you were calling for a two to 300 basis point hit from the bookings mix, which would equate to normalized growth of like six 7%. So.
My My simple math suggests that you are in line or slightly above your prior guide on a normalized basis I just wanted to check that math and assess whether it's directionally accurate anyway.
Carl I think your math is exactly right.
If you look at the mix shift I mean, it's basically just our prior expectations and the actual it's it's mix, there's really nothing more to that to step back and think about normalized growth rates I mean, what we've been executing on if you normalize this whole push to subscription or if you normalize the growth in Unbilled revenue. So you can really have apples to apples you look at businesses or a company as a whole that is operating in that mid to high single digit rates and thats.
Effectively where we'd be operating on.
Pure a steady state basis, I think as everybody knows of course, we're driving this transition to create much more incremental value long term for customers more stickiness from a product value standpoint, and obviously that translates into a higher higher returns for investors.
Got it okay. Thanks, and then maybe a second question just on three Q.
Your expectation for the subscription bookings mix of 60% to 65% is a pretty well in line with what you did in to Q and yet the revenue guidance is for a 3% decline rather than 1% growth. So your revenue growth de cells in Threeq you, but your subscription bookings mix is quite similar and maybe it's a complicated answer I don't know, but why is that Dave.
Yeah sure version of the answer is there's always some seasonality in Q3, not not a whole lot more besides that and then the mix of 60 to 65, you know not sure exactly where it's going to fall in that range, but I think the rule of thumb that I laid out is a good way for everyone to think about it. If you remember when we went into Q2, we had guided a midpoint of at 52%, 52.5% mix our revenue outlook would be ex pain, and we came in 10 points higher than that and so that influenced revenue and I think as we go forward. If our mix is a little hotter that's when we'll come in closer to the bottom of our range and vice versa.
Okay, and if no one would get too upset if I ask a third and I promise I'll stop there without stealing the Thunder from your September 9th Analyst day, where im guessing youre sort of lay out the the transition the model transition impact on the financials over maybe 2020 2021.
Dave is there any framework you can give us.
Perhaps now on the call about sort of how long these.
Pressures on revenue EPS cash flow will last is it the kind of thing where things should begin to normalize to call. It.
Second half 2020, any any broad framework ahead at the analyst day.
Yeah, Let me talk about at a high level you know you're right. We do need to talk about those things in the context of a longer discussion. So I think as everybody knows each year. We updated long term targets is as we've been moving through this transition and that's based on actual results customer feedback in the outlook and we're going to do that again this year at our analyst meeting in.
And a couple of months, but lets take a bit of a bit of a step back for a minute. So we're two years into this transition I think we've made really good progress all in.
But unlike other model transitions that we've seen across the industry, we've never really seen any material impact on the piano up to this point I think that's been for two reasons.
First is that we've just had better internal execution you know in a really good product stories. So we've sold more we sold more and we've just been trying to balance the impact up to that point and so phase one it's been focused really on net due largely due to capacity in focus.
And so last year, we moved about 42% of net new units to subscription this year as I said, we're looking at 60, 65%. So that's a big increase in the law and the numbers are now large enough that it creating this headwind that you're seen over the course of Q2 and the balance of this year and really into the reported PNM, but again like I mentioned a minute ago, the offsets going to show up in deferred and Unbilled plus these new metrics. So everybody has complete visibility the way I'm thinking about the next couple of years, though is phase two is going to bring much more focus on transitioning our really big installed base. So we've started that this year, we've seen a nice uplift in kind of the annualized dollars that those customers are paying for those we've transitioned so far and so this is a big incremental opportunity in fact hundreds of millions of dollars annually, that's going to start to become a priority in 2020.
And Thats why to help everybody understand this weve delivered these new metrics Unbilled revenue here are in particular, so that everybody can really just see how that impacts beyond the reported PNM. So we'll talk about all that in.
At our next analyst meet and make sure that you have complete perspective, and again that we're providing the metrics for you can measure us along the way look much more like a traditional subscription transition and looking forward to having that in depth conversations.
Okay, great. Thanks very much.
Thank you and our next question comes from the line of Heather Bellini with Goldman Sachs. Your line is now open.
Thank you David just a couple of questions left here, but just on that point.
And didn't turn into phase two of the transition of the of the installed base any comments you could mention about churn thus far as you've been seeing those big customers transition and kind of what the level of uplift is that you're getting on our pricing for those that are staying and you know kind of what the price realization as and then I just wanted to follow up because I know Phil asked a question about Microsoft My questions just more related to Windows 10, Theres been some people are wondering how much of a driver that spend the whole workspace services and how does that.
That going.
The migration from Windows seven to Windows, 10, which has to be done by.
January does that become a headwind when you start to think about calendar 20 top line. Thank you.
Yeah, we talked about the second question first.
You know I don't hear that much about win 10 as a standalone driver I think desktop a west isn't the driver than it would have been for a major project like it was a decade ago I'd say, it's one of the many projects that customers are looking at.
And it's one of the things that we can engage and I'd say that more broadly speaking when we're talking to customers today and every customer meeting that I had throughout Q2 was focused I'd say first on security.
How they're looking at managing an increasingly complex infrastructure.
Second on mobility around just finally, enabling devices to you know to be used in the enterprise and secure simple way across what is usually hundreds of applications in most enterprises and then lastly, this idea that a little bit more about our roadmap and our vision about embracing employee productivity and driving engagement and things that will just make them.
Their teams more productive so I'd say, that's probably the bigger driver than any one off like a win 10 migrations.
Back to the other question about the installed base.
Yeah, it's been we've actually seen really good success with those customers and we've updated so far I'd say, it's a limited its a limited set so I wouldn't read too far into it but the average uplift that we saw in Q2 was like 40% from what they had been pain.
On a typical maintenance contract and again, that's because it's not just a like for like but this whole migration opportunity is about moving them from what might have been a virtual app.
Ill to a more broad workspace sale and so we'll get that uplift as we do that but it also provides that platform for us to start expanding more horizontally into untapped sheets inside that customers. So it's really a dual strategy.
I'm really happy with what we've seen so far and we just have to scale that up and it's one of the reasons why we've unified our religious motions globally now.
We have introduced a new flow into the company and existing employees and help focus on really driving this phase two in the next couple of years.
Great. Thank you.
Thanks, Doug.
Thank you and our next question comes from the line of Mark Moerdler with Bernstein Research. Your line is now open.
Thank you very much.
And.
I really appreciate the fact that you guys are giving more color and.
Yeah, our numbers in the breakdown of it it's going to be helpful as well as the additional color in the in the filing.
Two questions for you I apologize there too but.
The first question is while subscription bookings as a percentage of total product bookings were 62% in the quarter can you give us some color on the percentage of the install base that is through the subscription you give a little color.
Is there a better sense of what percentage of the of the piece really is moved or are we really going the point at which.
Subscription.
Citrix cloud is really go from net new and then I have a follow up.
Sure on your first question Mark It's I mean, it's largely that no I mean, we're looking at less than I'd say less than 10% of the installed base has has moved at this point in time and when one important point to point out is that we are still selling perpetual licenses and so the installed base as you define it is still moving it still growing so it's not it's not static necessarily.
But that said I'd say, it's less than 10% at this point and that's been intentional I mean, and we wanted to make sure that we get this fall.
Process, moving around and focus around net new and I think thats important and once we have that go in and you've seen this really driving the business over the last couple of years. This gives us a much better framework to go and drive installed base and I also think it's also given us an opportunity to really mature the product sets across citrix cloud across an intelligent workspace and all these new initiatives. So that it's not just a migrate to cloud story, it's a much broader opportunity to talk about employee productivity and ways that we can help really drive what in marketing terms, we call the future of work but.
A holistic strategy for customers.
Excellent I really appreciate and then as a follow up.
Well Citrix cloud cloud how should we think about the impact on gross margin is this more like a subscription where the margin impact is very low or is this more like a SAS how should we think about it.
Yes, I'd say, it's a good question Mark I mean, it at a high level, our services are not necessarily compute or data intensive and therefore, you know at scale, we can manage with pretty high gross margins.
That said as we you know before we get to scale and we're bringing on more and more customers I think it's a little bit of upfront. There, there's probably a 50 basis point headwind you know in the first half of the year on gross margins not big but what's there and we obviously have teams that are focused on not just cloud cogs and optimizing that but you know that all of the aspects of cloud operations and so there'll be some pressure on gross margins over the years, but we'll manage that our services are built out with full multi tenancy and the things you would imagine and so we'll be optimizing across the board.
Perfect I apologize I never do this but I've got one quick can you give a little more color on.
Subscription and what the drivers are what the lift is like any more data would be appreciated since no one's really focused at this point on that.
No. That's okay. Mark is actually a really interesting dynamic that's happening right now I'd say I think as everybody would it.
I understand there are secular changes going on in networking in general really driven by the adoption of cloud more than anything else and so what we've seen over the last few quarters is a more pronounced move to software versus hardware and that's simply because no customers are looking for more flexibility more choices and the way that they deploy their their capabilities and the good news for Citrix. In particular is that we're a software company and we can deploy our networking hardware on a physical appliance in a virtual container.
Docker container as a service and a number of other things and Thats what gives customers flexibility. So the dynamic we're seeing right now is that customers that maybe in the past would have thought about a hardware refresh cycle now they're looking at it as well into a software resell refresh cycle, where I can buy in our licensing terms a pooled capacity license that can be shared across and on premise infrastructure.
Any form of hybrid cloud in a container et cetera. We've got this great control plane that allows you to help manage that in a reasonably seamless ways, which just gives customers a lot more flexibility and that's something that we've got is pretty unique capabilities and we're pushing that in the market fairly aggressively and customers are responding I think 35% of the mix in one quarter is little higher than I would have expected that's up from just over 10, a year ago, and but that's a trend I expect to continue.
Really appreciate it.
Thanks.
Thank you and our next question comes from the line of Matt Hedberg with RBC capital markets. Your line is now open.
Hey, it's Dan Bergstrom for Matt Hedberg, Thanks for taking the question.
To the acceleration of subscriptions very impressive.
You pointed out some drivers such as hybrid multi cloud citrix cloud in Investor letter in prepared remarks here, but could you pinpoint further the change in pace here versus last quarter.
No it's really dramatic.
Yes. It is that we did Q1, we were at 50% of the mix Q2 were at 62 and I think in the second half of the year, we are going to be.
Pushing 65 or higher to get to that full year of 60 65. So I mean, we're moving at a pretty rapid pace right now and as I pointed out and you can see in our letter 71% of workspace mix is now coming via subscription that was up about 10 points from from Q1 and.
15 points or so year on year that business will continue to move up obviously the gains will start to slow down on an incremental mix basis, because it's so rich and then you know networking as its moved up much more materially from 10, a year ago to 35 now that's that's the biggest change.
We will still continue to sell a fair bit of hardware. So I do not expect that in the next 12 months, let's say to get north of 50%, but I think the rate that we're at right now is probably a pretty good floor and it will move up from here.
And it's a function of two things I think we have tried as a company to balance the transition.
Actively balance that over the last six eight quarters, while giving customers the choice that they want.
Now we're just.
Letting that embracing it and letting that happen in a bit more of a natural pace and so you'll see US continue the way it was in Q2 into the back half of the year.
Thank you.
Thank you and our next question comes from the line of Keith Weiss with Morgan Stanley . Your line is now open.
Hi, This is Dan just saying in for Keith Weiss. Thank you for taking the questions.
Maybe to start off in terms of managing let's say phase two of the transition from an operating margin perspective is the view that you would just sort of let the transition happen as rapidly as possible take the headwinds on margins up front end and kind of move accelerate through the transition to get to a better margin profile down the road or is the view that you will continue to protect margins.
As you execute your phase two.
Well I think as you see the impact on the top line and certainly the overall growth I mean that'll that'll flow all the way through the PNM way, we saw that in Q2 and in our guidance for the second half of the year I think weve move margins up a lot in the last in the last couple of years and so we're not going to do anything artificial we're investing to drive and grow the business and drive the transition.
We're of course always thoughtful in how we manage our expenses and our head count growth in those types of things because we want to make sure. We're investing in the right areas, but we absolutely have a view on how are we going to drive long term sustainable growth and so I wouldn't expect anything artificial from us in that regard.
Got it and then for the follow up in terms of the new metrics that you at least this quarter on paid subscriber count it sounds like were at 5.4 million today, if I understood you correctly, that's mostly net new as we think about the maintenance base transitioning over to cloud where do you think that number goes to what do you think sort of the number of available I'm subscriber count that you have to transition that does that 5.4 million.
Does does that does that increased significantly over the next couple of years and any view on where that number could go.
And could go much much higher where we're certainly not going to guide that one yet because thats predicated on on a few different movements, but if you think about our installed base right now I mean, it is tens and tens of millions of active users and so the opportunity pool is the is very material I think it's premature for us to try and put a number on that right now, but I think where the very.
First can you please give us some concrete examples of how workspace will coexist with windows virtual desktop and any areas of current or potential overlap and my second question is what needs to happen from a product pricing or go to market perspective for the installed base to begin to move to the cloud.
Sure just couple of questions in there I mean, if you're coming back to the Microsoft specific question.
Think about windows virtual desktop as a as a platform very similar to the way people have thought about remote desktop services over the years, which was part of Windows server I think thats, the easiest way to conceptualize it and so as a platform you know its a little.
Multi user version of Windows 10.
And so for a lot of our customers. They will look at that as maybe a use case that makes sense and part of their business alongside everything else, they're trying to accomplish our average customer is delivering.
Over 500 applications across all different types and so for us to be able to open up windows virtual desktop is another resource own or another type of capability that could be managed inside of Citrix cloud very similar to the way you would be managing for example, an on premise application or maybe a published SaaS application. So for a lot of customers. It just provides more flexibility from a platform standpoint.
Citrix building a data service on top of that really just embraces and extends a lot of the capabilities to be much more feature rich on the enterprise side. So those are that's probably the easiest way to think about that it's a component of a broader broader infrastructure from a typical citrix customer standpoint, and can you repeat the question about go to market.
Yeah, just curious on what needs to happen from a product or pricing on go to market perspective, what installed base to begin to move to the cloud.
Well I'd say for the most part of the products. There. It's just in the pricing is there and its just a matter of focus from our point of view, we have disincentive that really from a compensation standpoint, we did that intentionally I've talked about that each quarter because.
Teams only have so much bandwidth and we want to have to focus on net new in order to really start building the base, there's a big opportunity around the installed base and so we'll start expanding that and really leveraging the success. We've had in some of the early some of the early areas. So I think it's just about making sure we have enough capacity to serve customers and thats why weve been investing in quota carrying folks for the last couple of years as well as customer success and then we'll we'll tweak compensation along the way to make sure. We're incenting the right outcomes as we go into 2020 and beyond.
Got it thank you.
Thank you. Our next question comes from the line of John Difucci with Jefferies. Your line is now open.
Thank you David I have seven questions.
Actually timeline kit.
I only have one valuable and.
Listen we understand the mix change and its effect on the financials that all make sense, but deferred revenue was also lower than expected and I would have expected that that would have been much better given the outsize to ratable bookings. So can you explain that.
Yes, two things on deferred.
Yes, one you have a you had a really big if you look back really big seasonal comp because we did a mega deal in Q2, a year ago and that that was a a large mid eight figure deal. That's one thing.
So that's the seasonal point the other is most of your growth is coming in Unbilled right now instead of deferred because the contracts are moving to SaaS and Hsas are three year deals on average one year build upfront and Thats why we didnt have unbilled a year ago and now it's.
$380 million I think Jessica.
And so that's the primary.
But I would I would think the one year that you do bill upfront would be more than.
Well I guess it would be more than the maintenance that youd bill and that would go into deferred attaches it still.
Okay I'm sorry, you said there are two things.
Did you say both of them.
No I'd point, you back to air are as well and the reason we did that on a contractual basis, a its duration adjusted and be it just gives you the best end of quarter visibility into what's really going on and we're going to continue to deliver that on both a total subscription basis and OSAT space.
Got you back there, but all in deferred and Unbilled are up 15% year on year and.
I'm happy with that I think it will continue to grow in the future.
Okay.
Okay. Thanks, David.
Thank you.
Thank you. Our next question comes from the line of Brad Reback with Stifel. Your line is now open.
Great. Thanks very much.
David with the headwinds from the subscription going forward here does that impact your ability to return capital to shareholders and if it does to what effect. Thanks.
No not not not materially I think that when we look at how we have thought about capital return over the years, we've been really consistent I mean, we're always focused first and foremost on things that will grow the company.
Great M&A at the right price and that's a priority and when we find those we execute on that we also returned excess capital via dividends via share repurchase and that's I'm not sure that that's going to change in the future.
Great. Thanks very much.
You bet.
Thank you. Our next question comes from the line of Kirk Materne with Evercore. Your line is now open.
Great. Thanks, Peter Levine in for Kirk just two quick one sorry, if I missed earlier, but I'll give you an update on the CFO search and then second just to piggyback off of the.
Mix shifts in the quarter.
You talked about it but just anything you would call out on the sales are made with the partner side the accelerated this quarter.
Kind of major change your guidance there. Thanks.
The only thing the second part first I'd say that.
With the benefit of hindsight, we probably been holding it back a little bit and in prior quarters, what was the normal customer motion and so we're just letting it happen much more naturally and I think that that that's representative of what you're seeing right now and given the scale of the business, it's time to really lean in and embrace the transition it and drive it more aggressively than we have been so I'd say that that you know thats the easiest way to think about that and why we want to drive this expectation over the balance of the year start looking a little bit more like a typical subscription transition that people are used to seeing across companies.
On the CFO search, it's going well we've.
We've met with a number of external candidates, we have some great internal candidates as well and then we're just going through the process very methodically, we've got such a solid team right now that I feel comfortable where we are but I'm more.
More focused on making the right decision than making a quick decision that said hopefully we get we get this wrapped up fairly quickly.
Great. Thank you.
Thank you and it looks like our next question is a follow up from the line of Phil Winslow with Wells Fargo. Your line is now open.
Hey, Thanks, guys for taking my my follow up actually just two follow ups. David Obviously, you mentioned some of the changes and just the market when it comes to the to the networking business.
With its a subscription some of those changes and just sort of how are you.
Netscaler ages being being delivered how should we think about the revenue breakeven from the old called product Slash license model plus maintenance to subscription and then also how should we think about sort of just the gross margin.
Differential.
Yes, Phil gross margins going to be higher because we're selling software that looks more like a typical software gross margin that often at a hardware gross margins. So you know the changes probably got higher gross margin dollars from a revenue standpoint, you're not selling the the box along with it. So you may have you may have a little bit of the revenue headwind in the short term, but getting customers to build this out from a software standpoint as part of their infrastructure I think its going to drive really good stickiness. So.
I'd have to go back and look at it on a it's probably a little bit more case by case that in the aggregate, but I'd say that the breakeven from gross margin and really the extension of gross margin dollars is relatively short term.
Great. Thanks, David.
Thank you ladies and gentlemen, we have reached the end of the allotted time for questions and answers I will now turn the call back over to David for any closing remarks.
So thank everybody again I appreciate all the multi part questions along the way I just want to reiterate a couple of things as we go through this we're driving the business towards a subscription model probably faster than we would have anticipated over over the course of the last several quarters. I think Q2 is a great example of that performance shift relative to guidance and that's why we updated the back half of the year, we're delivering all these incremental metrics to make sure that you can look at the business Holistically, whether that's a RR with subscription air are up 33% and SaaS they are up nearly 50%.
So those will be the most important ways to view the business on a go forward basis, hopefully everybody can join us at our upcoming analyst meeting in the next couple of months look forward to seeing you there and if not talk to you again in three months. Thank you.
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