思杰系統 (CTXS) 2016 Q1 法說會逐字稿

Good afternoon. My name is Skinner, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems first-quarter 2016 earnings conference call.

(Operator Instructions)

Thank you. I would now like to introduce Mr. Eduardo Fleites, Vice President of Investor Relations. Mr. Fleites, you may begin your conference.

Thank you, Skinner. Good afternoon, everyone, and thank you for joining us for today's first quarter 2016 earnings presentation. Participating on the call will be Kirill Tatarinov, President and Chief Executive Officer; and David Henshall, Chief Operating Officer and Chief Financial Officer. This call is being webcast on Citrix Systems Investor Relations website. The webcast will be posted immediately following the call.

Before we begin, I want to state that we have posted product specification and historical revenue trends related to our product groupings to our Investor Relations website. I would like to remind you that today's conversation will contain forward-looking statements made under the Safe Harbor provision of the US securities law. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated.

Additional information concerning these and other factors is highlighted in today's press release, and in the Company's filings with the SEC. Copies are available from the SEC, or on the Company's Investor Relations website. Furthermore, we will discuss various non-GAAP financial measures as defined by SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release, and on the Investor Relations page of our website.

Now I would like to turn it over to David Henshall, our Chief Operating Officer and Chief Financial Officer. David?

Thanks, Eduardo, and welcome to everyone joining us today.

As you can see, we continue to show great progress with the operational initiatives we introduced last year. We're focusing our energy towards our core strategy, the secure delivery of apps and data, really setting the Company up for even better results, efficiency, and growth as we look forward.

As you can see from the release, total revenue was up 9% year on year in Q1, with perpetual product license up 10%, and SaaS up 17%. Adjusted operating margin jumped to 29%. Adjusted EPS was $1.18 per share, up 80% from Q1 a year ago, and we generated a record $340 million in cash flow from operations.

In total, we closed 51 $1 million-plus transactions across product and services, an increase of 30%. The Americas region booked the majority, with 42 of these, while EMEA had 5, and APJ had 4. A couple of points worth noting, was that the average value of these large deals increased significantly from last year. And at a product level, there's good balance across the portfolio, with roughly half coming from Workspace services solutions, and half from delivery networking. From a geo perspective, when you exclude SaaS, the Americas was really the big driver in the quarter with revenue up 13%. EMEA finished up 1%, while results in APJ declined by 8% year on year. Since our restructuring last year occurred earlier in the US, versus the other geos, the Americas teams have really had the most time to stabilize and adapt to this new structure, a key contributor to this performance.

Next, let's take a look at the Q1 results within our three primary groups. Our Workspace services business grew 3% to about $400 million, including flat license revenue. Really more than any other, Workspace services should benefit from the work we're doing to simplify our focus and strategy. And as we've reviewed before, there's a number of really specific initiatives we're driving to accelerate growth in this area, through faster innovation, a more verticalized focus, and aggravation of our unique assets.

Within this business, there's a few dynamics I'd like to point out. First, growth in the Workspace Suite, which is our comprehensive solution for secure app and data delivery was up more than 100%, contributing 8% of license revenue, as compared to just 3% a year ago. Second, we continue to grow our CSP subscriptions, where partners primarily utilize XenApp to deliver cloud-based offerings to their customers. Overall, CSP revenue grew over 30% in the quarter.

Third, customer interest was more focused on application delivery versus VDI in Q1, lifting XenApp standalone license sales by more than 10% from Q1 a year ago. And finally, we saw really good results in the Americas geo for overall Workspace service license. In total, it grew 7%, and reflected the success from the restructuring within this business. This compares to flat year-on-year license growth in EMEA, and a decline of 24% in the APAC region.

Next let's look at the delivery networking business, where total revenue increased 20% in the quarter to $195 million. This includes license revenue growth of 25%. Focusing on NetScaler, I'll remind everybody that the business is essentially made up of three segments: cloud service providers, Citrix Solution sales, and enterprise ADC.

Demand from the cloud providers continues to be really strong, contributing more than 60% of sales in the period due to growth in public cloud and cloud services, plus the addition of more than 100 new customers in this segment as we expand the opportunity base. Solution attach sales represented over 10% of the mix in Q1, with the number of app and mobile opportunities that included networking as part of the overall Citrix solution up about 30% from a year ago.

Core enterprise ADC was about 25% of the mix in Q1, and we're beginning to see early traction from the new NetScaler SD-WAN products, which are addressing the nascent market that's expected to grow significantly over the next few years. All-in, we sold over 2,100 networking customers in the period, with about one-third of them being new.

Finally, within our SaaS services, revenue in the quarter approached $200 million, growing in the mid-teens. About 85% of the SaaS revenue is being generated by the GoTo solutions that we'll be spinning off later this year. The spin project overall remains on track for the second half, and we expect to provide more detail, and the performance of this unit within the Q2 time frame.

The majority of the other SaaS revenue is coming from ShareFile, our secure data platform. In Q1, this business grew 40%, and is being driven by integrations with our enterprise solutions and enterprise sales motion.

Turning to operations, we've obviously shown rapid increase in margins over the past few quarters, despite funding incremental investments in our growth businesses, and certain go-to-market areas. As we have repeatedly discussed, our restructuring plans across the Company are intended to generate permanent expense reductions, that allow the Company to execute more efficiently, while at the same time driving greater scalability into the future. In Q1, we posted 29% adjusted operating margin, up over 900 basis points from last year, and the highest Q1 in over a decade. We're obviously well on our way to achieving the 30%-plus goal for fiscal 2017.

The focus on leverage has also helped to increase cash flow from operations, which was a record $340 million in Q1, and $1.1 billion for the trailing 12 months. This translates into approximately $2.18 per share in the quarter, and over $6.83 per share for the past four quarters. And finally, we remained active in our share repurchase program, buying back about 850,000 shares last quarter.

Before I wrap up, let me talk about the current outlook and expectations for Q2, and for the full year. Our operational programs are clearly working. We're happy with the results so far, and confident in our plans for the year. At the same time, we want to remain mindful of the potential disruptions that can occur with any restructuring, the GoTo spin project, and the significant revenue upside we delivered in Q1.

With that, we intend to remain conservative with all of our assumptions for Q2, while at the same time still increasing current expectations. So for Q2 2016, we expect revenue in a range of $810 million to $820 million, and adjusted EPS of between $1.12 and $1.15 per share. For the full year of 2016, we're increasing our expectations to include revenue between $3.34 billion and $3.36 billion, and adjusted EPS of $4.90 to $5.00 per share. I want to remind everybody that this guidance represents all the businesses, including those that are part of the planned GoTo spin.

So now, I'd like to turn it over to Kirill to provide further color on the quarter, and our focus areas going forward. Kirill?

Thank you, David. Hello, and welcome everybody.

Obviously, I'm very pleased with our performance this quarter, on both the top line and the bottom line. It's clear that our efforts to refocus the Company are starting to work. As we simplified our portfolio and sharpened our message, it made it easier for our sellers and channel partners to execute and deliver.

This is really the case, where refocus and restructuring is producing not only bottom line results, but also driving the revenue growth. In particular, I'm really excited about double-digit growth in the license revenue. All in all, this was another quarter of great execution by our worldwide sales team. It also gives us confidence that the new commercial leadership, together with the revitalized channel program sets us up on a path for continued healthy execution.

With a large number of significant customer adds, we continued to demonstrate growth in our targeted industry verticals, especially in the public sector, financial services, and healthcare, where customers are transitioning from other virtualization, networking and mobility providers to Citrix. Specifically, John Hopkins has chosen Citrix XenDesktop for VGI deployment, expanding our long-standing application and virtualization partnership. The decision to replace the competitive offering was driven by the need to unify their client virtualization solution and improve performance.

On the network delivery side, [Salem] Health moved from another vendor to Citrix NetScaler because of the seamless integration with the rest of our portfolio, richness of the experience, and reduced TCL. In enterprise and mobility, we were selected multiple times over competition due to our unique capabilities such as microVPN for application security, and our integrated cross device platform.

Customers choosing XenMobile included the country's leading commercial real estate development firm, and a major energy provider. These were all great wins, and they're just few of many examples where Citrix was chosen over the competition.

Our engineering teams performed very well in Q1, and product delivery was strong. Specifically, we announced and delivered capabilities to accelerate and simplify the deployment of Microsoft Skype for Business in the enterprise. We see very strong interest amongst largest customers deploying Skype for Business to roll it out on Citrix virtualization infrastructure. Overall, we see our Workspace services business trending very positively. In addition to introducing new releases for the entire Xen family of products this quarter, we also launched our new secure browser service which expands secure Internet access to web and SaaS applications.

Q1 was also a big quarter for networking innovations, and we see growing interest in our advanced SD-WAN capabilities that we announced in the quarter. We also hit a new performance milestone for the industry, releasing virtualized NetScaler VPX, with delivery speeds topping 100 gigabytes per second. In Q1, we also released NetScaler CPX, basically NetScaler in a docker container, giving dev ops teams the production grade tool they can use to speed development of new apps. We also expect NetScaler CPX to help accelerate IoT strategies.

Finally, we have further extended the enterprise cloud security and usability of our ShareFile portfolio, allowing customers to securely share data and files from any source or location on-premise, in the cloud, or across other file sharing services. Overall, I feel great about product deliverables in Q1. I feel they set us really well for the future, and I'm super excited about the product road map.

I'd also like to give you a bit of context on how we are evolving the Citrix strategy. Organizations of all sizes are experiencing dramatic changes in the way businesses operate, and the way people work, moving more workloads to mobile devices, into the cloud, and across an array of networks. The growing number of new connected things or endpoints are creating huge volumes of data that need to be accessed, secured, transported, and managed. And as I approach this mythical 90 day milestone as CEO of Citrix, there are two recurring themes that I'm hearing in my dialogues with customers, partners, and key industry analysts.

First, CIOs, IT, and networking professionals feel overwhelmed by the heterogeneous environments they're being asked to manage today. They're even more concerned about all the new cloud apps, mobile devices, and other connected things they're being asked to control. Cybersecurity is the top concern for all of them, and therefore their ability to securely deliver apps and data to their people is top of mind.

The second thing I learned from several surveys and direct dialogue with customers and the industry is that the Citrix brand is very well-trusted, and that our customers really love working with us. They love our products, and the value they deliver. However, in many cases, they don't yet see our end-to-end strategy, the breadth of our portfolio, and how the whole is more than the sum of the parts. And this is precisely where I feel Citrix has a huge opportunity.

It all starts with our vision. We aim to power a world where people, organizations, and things are securely connected and accessible to make the extraordinary possible. And our strategy is to build the world's best integrated technology services for secure delivery of apps and data anytime, anywhere, on any device, from any cloud. We enable people to work and live better, by giving them secure, reliable and performance enterprise storefront, to get access to all the apps and data they need to excel at their jobs.

Security is the core underlying feature, and the most important outcome of deploying Citrix technology, with our network delivery through NetScaler, Workspace services through the Xen family, and secure file and sync sharing through share cloud, all integrated and working together to deliver on this singular mission. We will provide more details on our strategy in the upcoming Analyst Day at Synergy event next month.

But even today's results clearly demonstrate that the market is beginning to validate our vision and our strategy. When we examine the primary reasons why we're winning in the markets, it's because of our reliable product performance and scalability, the openness and flexibility of our solutions, low TCL, and our ability to provide it all as integrated solutions working together.

Thank you, and now we look forward to your questions.

(Operator Instructions)

Raimo Lenschow, Barclays.

Hi, congratulations to a great start, guys. And Kirill, welcome onboard. First question for you Kirill, can you talk a little bit about the -- you came from Microsoft. Microsoft has their own mobile solution. How do you envision that relationship with Microsoft to evolve for Citrix going forward, with you onboard now?

Yes, thank you very much, and thanks for the welcome. Obviously, Citrix and Microsoft have a long-standing history of partnership and terrific relationship, and that partnership certainly continues and expands to many areas. I think the work that we've done together on Skype for Business is one example of that terrific partnership, the work that we're doing with Microsoft on Windows 10, and helping Microsoft customers roll out Windows 10 quickly is another example of that partnership. And we're looking for many other ways to collaborate, and we continue to work very closely together in many other areas including enterprise and mobility.

Okay, perfect. Thank you. And David, one question. Like you've obviously had a very strong start to the year on the operating margins, how much of that was just coming, stuff coming through quicker than expected, versus actually you were identifying new areas? Thank you

Raimo, if you're asking in terms of -- from the expense point of view, obviously margins were a function of the [fuel] plus expense. But our restructuring is a little bit ahead of plan. I mean, we've been executing across the Company very effectively. I think, we're -- we have taken a bottoms-up approach as we discussed over the last couple of quarters, and this just allows the teams to really own the business, and own their restructuring items. I think we're just doing a great job across the Company. So obviously, we're taking up our full-year margin expectation by about 100 basis points already here in Q1, so feeling really good about that as well.

Lovely. Thank you, well done.

Kash Rangan, Bank of America/Merrill Lynch

Hi, guys. Thank you very much. I'll echo my congratulations as well. So when I look at the way in which you beat the operating income, more than two-thirds of that came from gross profits beats. So it doesn't look like it's purely an expense reduction story. So can you talk to the drivers of upside performance on the Xen side? And I think clearly, for years, we've been hearing Xen license flat to down. So this time it's flat, which is obviously a nice positive reversal. And also, I don't believe that we've seen a strong double-digit growth on the networking side. Can you just talk to industry fundamentals, versus how much of this is fundamentals in your end industry, versus your execution? And color on why Asia-Pacific was down so much as well; notwithstanding, otherwise a great result. Thanks so much.

Thanks, Kash. A few questions in there, so let me parse that out a bit. I mean, overall, talking about the industry and the demand environment, I'd say the big stories in the quarter were the Americas performance; really did a great job, drove a lot of the revenue, drove a lot of the revenue upside as well. So those teams have been working through the restructuring from really the beginning of 2015. So they're just-- they're just humming along. We're a little bit further behind when it comes to the other two regions, in the terms of the work that we've been operating against.

From a products standpoint, yes, NetScaler had a terrific quarter again, similar to the last, really the last nine months have been very strong. It's a combination of strength across the big trends around cloud build-out, cloud services, et cetera. We're also continuing to expand the customer opportunity size. I called out more than 20% growth in customers within that segment. Interestingly enough, we're also seeing a pretty rapid growth of NetScaler being consumed as a cloud service. And so, while still only a mid single-digits of the mix, that business is growing well over 100% as well.

Shifting gears, and talking about Workspace services, a couple of things to point out. Clearly, we've been making good progress over the last several quarters. Some of the stats that we referenced in the prepared remarks, the suite being the complete solution for talking with customers about app and data delivery, that was up about 100%. The overall CSP business, which remind you, is full subscription, was up about 30%.

And one data point that I didn't put in the prepared remarks, but it's also interesting, is that when I look at units, units are actually growing year on year in the mid-single digit range. And that's just a function of the mix of license type. So overall for the Workspace services business, about 18% of license this quarter was coming via subscription. That compares to 14% a year ago. So I've got a couple of different dynamics in play, but the overall message is that, we're up and to the right across all of our major product areas. We're seeing terrific execution out of the Americas. We were happy, and above our internal expectation at multiple product areas, and we still see further upside, because there's more work to do.

(multiple speakers) Thank you.

Perhaps just a couple of things, on the secular trends that we're seeing that are clearly playing the role, and driving results for the business. On the networking side, we all see the tremendous build out of the data centers that continues, and NetScaler offering unique capabilities in a software-defined fashion truly participates in that build-out. And that's what we see in the growth, in the cloud provider segment.

At the same time, the growth in e-commerce, and the fact that even those companies that historically weren't participating in delivery of online goods and services, now, right in there and they need to increase their networking throughput and capacity. That plays a significant role. And, of course, may have used NetScaler as essentially security product, or part of their cyber security strategy. And that's another trend that plays to that.

On the app virtualization, and on the overall Workspace and Workspaces services. XenApp is, we're seeing significant interest in XenApp, and we see a significant interest in large customers going to virtualized application, and we see good growth in that particular product.

From the trends point of view, I would say the introduction of Windows 10 in the enterprise is starting to be a driver that we're seeing. And many large customers that I had a chance to have dialogue with in the last few weeks, certainly looking at XenApp and XenDesktop as the very significant important infrastructure for them to roll out Windows 10 in the enterprise. And we obviously expect that to grow and accelerate and continue. And new product introductions that happen in Q1 will only help with that, also through the Skype for Business and secure web browser.

Kirill, thanks so much, and nice to hear from a person whose name also starts with a K.

Thanks, Kash (laughter).

Walter Pritchard, Citi.

Hi, thanks. Just following on the last question, this XenApp resurgence, I think many of us are trying to understand -- you saw a good business there last quarter. And you've had like the 7.6 release, which I think may have released pent-up demand. Kirill, can you help us understand just how sustainable you think growth, I guess, in XenApp license is? And maybe as part of that, could you highlight some of the use cases or value propositions beyond sort of generic app virtualization that are driving demand there? Because that product has gone through sort of phases of growth and maturity, and it's surprising to see how well it's doing.

Well, I think it's worth remembering, that about two or three years, the Company went through a very significant engineering effort to lay out VDI and XenDesktop and XenApp on the same infrastructure. And that, as we've seen in some examples, and Johns Hopkins in particular that we mentioned, we see customers who want to run both virtualized desktop and virtualized app off both the same infrastructure. And that's becoming more and more prominent, and we see more and more of that.

We also see customers who want to essentially create one single storefront for all of their employees to access their Workspaces. Whether it's virtualized desktop they access, virtualized app, or files. They basically want to create the enterprise portal, enterprise store for them to use. And that's precisely where, so the unification plays an important role, and where all of that working on the same infrastructure is quite significant. These are just a couple of things that we're seeing, and that going through many customer discussions to me, create both excitement on what happened in the last couple of quarters, but at the same time confidence that we see some bright future for XenApp in particular.

And then, David, on the cost side, the one area that stuck out to us was the R&D spend, which was down -- because we calculate somewhere in the mid-teens year over year. That strikes me as maybe down more than it should be, or more than it can be for some sustained period of time. Could you help us understand what's driving that, and how we should think about your level of R&D spend going forward?

Yes, I wouldn't focus too much on the individual line items quarter to quarter. Let's get a couple more quarters into the year. There's really two things. The first, the reason I say that, is that there is always individual projects going on that may or may not have large consulting expense. There are events, other things that flow through there.

The second one is, a large part of our focus and streamlining was around the portfolio. And so, as we have removed or sold or shutdown product initiatives, that comes with the expense, that was everything from engineering through support, through sales, et cetera. So that's really what you are seeing there.

Overall, we've talked about freeing up capital, so that we can reinvest in the areas that are strategic, and they're going to drive growth long-term. And that's been a core part of the strategy, and we're executing on that. So overall, overall R&D somewhere running in that 12% to 16% of revenue is pretty typical, and I think that's where we're going to be as well.

Okay. Thank you.

Heather Bellini, Goldman Sachs.

Great, thank you. I guess, David, I had a question, two questions. The cloud providers, I believe you said they were 60% of sales in the period, and obviously the NetScaler business looked really good. I'm just wondering, that does seem higher than normal. I thought in the past, you've talked about it being more like 25% to 30%. And I'm just wondering, are these guys kind of buying in bigger bursts less frequently than they had in the past? Are you seeing any change, I guess, in their buying behavior? And then, the other would be -- the question on top of that would be, how do we think about the dip down sequentially off what's a huge number in Q1? And then, I just had a follow-up on long-term deferred.

Sure. On the middle part of your question, about the sequential change from Q1 to Q2, it's just a function of, as you said, the really strong out performance in Q1. We want to be conservative going into Q2, nothing more than that. In terms of the cloud service providers, it represented about 60% of the mix in Q1. It's all of the above, from your earlier question. They're continuing to build out just core infrastructure, as the meta trend of cloud continues. There are new services being delivered all the time, that require incremental capacity. And as I mentioned a little earlier, we've been expanding that base. So trying to keep the size of the opportunity expanding at the same time.

So we added a couple hundred customers to that segment, and it's really a combination of all three of those, that are driving the growth. Over the past few quarters, Q4 for example, it represented about 45% of the mix, it was 60% in Q1. And so, it does have the potential to be a little volatile, and that's one of the reasons why we're being conservative for Q2, but nothing beyond on that.

Okay. And then (multiple speakers). Sorry, go ahead.

I was just going to add that the base is expanding, and there are more customers that's being added to that pool.

And the question on long-term deferred was really, the -- it looks like your contract durations, people are willing to pay you more up front. Your long-term deferred trends over the last three quarters have been way stronger than what seasonality would suggest in the past. Can you just talk a little bit about what's driving that?

Yes, customers are driving that actually. I mean, we're not incenting the teams to drive multi-year arrangements, more so than customers are simply asking for that. And it's just a function of becoming more and more strategic in their infrastructure.

I can think of, the largest transaction in the quarter, which was with a US federal entity that included four years of underlying maintenance, and that was part of the overall contract. It mapped to the outsourcing that they were doing with an additional provider. And so, it's instances like that, that they're really driving the long-term deferred. But overall, it's just a function of -- it's a critical part of their infrastructure, and we're becoming more strategic. And I think that trend, as it's continued over the last couple of years should continue going forward.

Okay, great. Thank you.

John DiFucci, Jefferies.

Thank you. I had two questions, the first one it's being asked quite a bit. And David, I think I asked you -- might have asked you this question last quarter. I mean, I think when you first got into this business with NetScaler, there was some criticism, not criticism, some concern, that there was a high concentration that NetScaler sold to cloud providers. And but now this turns out to be -- looks to be anyway a good thing. You've typically said, that this is going to be really lumpy going forward. But as you just pointed out, you've see nine months of pretty strong results here. And I'm just curious if now your view on that has changed, and is now -- this looks more to be a trend versus just a pretty lumpy business?

Yes, I would call it slightly volatile, more than lumpy. But it's -- it is still concentrated into a couple of hundred cloud providers, with the top 50 being very, very large household names, of course. I think that it's just a reflection of the meta trend that's going on, across our industry around cloud, and cloud build-out. And so, there's -- I wouldn't call it an insatiable appetite for capacity, but it's been extreme. And so, there will continue to be some quarter to quarter volatility. I think that that should be the expectation. But overall, it's a really important segment for us, and one that we expect to see solid growth in for the full-year.

Okay. And if I might, the follow-up to Walter's question, because I noticed on the cash flow statement, cash paid for licensing agreements and technology, which I'm not sure what -- it's usually a small number. This quarter it was $24.3 million which is I think more than 2 times it was all of last year. There's usually a little bit in there every quarter. And I'm just curious, if that had any impact as to why R&D was lower? And maybe you can explain that a little bit, just like what is in there, especially the big jump this quarter?

Yes, not a lot to explain. I mean, there's always different things we're doing from an inbound licensing point of view, asset purchases, technology purchases, and other M&A. And those are generally, the four buckets of one-off items that show into R&D. Not a reflection on why OpEx was higher or lower, really an unrelated item.

But why did it jump this quarter though? What is in -- like what was special this quarter, that it would jump to 2 times to what it was last year, and it's usually pretty steady at low single-digit millions?

Yes, we did a one-time licensing agreement for a technology that will become an entitlement for our customers on subscription and maintenance.

So we shouldn't expect that going forward? It should go back to sort of low single-digits of millions, or I mean, there might be something like that happening, but generally?

Yes, generally back to where it has been.

Okay, great. Okay, thanks a lot guys.

Scott Zeller, Needham & Company.

Hi, thank you. Another question on XenApp, there have been several. But I believe -- we'd heard over the past year or so, of the development, and that was mentioned in the prepared remarks, the two to three years of development. And wondered if this is really a refresh cycle more than anything else? Could you add some color around that, because it seemed that -- I think before the investment and the rewrite, we'd heard that it had not been touched for, I believe five or eight years. So is this actually a refresh cycle?

Well, I think it's a refresh cycle from two vectors. It's absolutely a technology refresh cycle from Citrix's point of view. There was a massive engineering effort conducted over the last few years as we mentioned earlier, that resulted in this highly scalable, highly performing solution that is built on single platform, with highly performing patented protocol. That's one angle, and that's certainly drives adoption.

The other angle there is Windows 10 phenomenon in the enterprise, that essentially drives reinvigoration of a desire to put traditional apps, legacy apps for lack of a better word, into the modern desktops. Or deliver modern desktops through XenDesktop to the legacy hardware. Both trends would be playing here in the future without a doubt.

Okay. And then, just to follow up, any comments about your initial thoughts you've given on fiscal 2017, previously of the 30% operating margin, and 4% to 5% top line?

Now we haven't updated the 2017 numbers, and we really aren't planning to, until we get further in the year. Just the one comment that I made earlier. Obviously, we're tracking ahead of our prior guidance when it comes to operating leverage. We feel good about all the progress we're making there.

Thank you.

Michael Turits, Raymond James.

Hi, guys. Good afternoon. It's James Wesman sitting in for Michael. First question for Kirill or David, can you just talk about the competitive environment in desktop versus VMware this quarter, and your other competitors? And I have a follow-up for David on NetScaler.

Well, obviously competition continues, and competition is very strong, and it is a highly competitive environment. As we shared, we have seen some good strong wins, and we're quite excited about those. And we see customers who really want to work with us, customers who love our unified story, customers who love our capability. There was one particular one that I would mention, that I had a chance to sit down, talk -- Friday actually in Paris. It's a large financial institution.

They've just selected XenDesktop over VMware VDI for two main reasons. One was overall cost of ownership and implementation, and two was capabilities, and a set of scenarios that only Citrix could support. And in particular, they discovered in their proof-of-concept that only Citrix solution could support all broad range of peer referrals they wanted to run for a virtualized desktop, and that drove them to us. And again, that's just one example of many that we are seeing. But at the same time, it's a competitive environment. We see our competitors discounting their solutions heavily. And in many cases, it's a combat, but we're here to win.

Great. Thanks, Kirill. And David, a follow-up on NetScaler. I know several people have been asking this, but just given the recent success of it, and within the cloud providers and the business overall you've grown the top line and license double-digits plus for the last nine months or so, do you feel like this is a sustainable growth rate into 2016? Should we be thinking that this is a double-digit grower going forward?

Yes, we're obviously being conservative and cautious, when we provide forward outlook. We're incredibly happy with the business over the last -- well, really over the last 10 years. But like, as you pointed out, the last nine months have been particularly strong. And so, we're clearly taking share. Share is not broken out in terms of individual segments, but we took several points of share last year, and I think we've got the capabilities to do that going forward.

If you look across our product portfolio, we got a unique technology approach, where we are a software company, and that gives us the capability to deliver these types of technologies in a form factor of an appliance, in a highly virtualized appliance, in a software package, or via cloud consumption. I think that gives us the ability to do some really unique things with customers that are going to play very well, with all the meta-trends that are going on around us.

Great. Thank you, guys.

Philip Winslow, Credit Suisse.

Hi, thanks, guys, and congrats on a great quarter. Just going back to the XenApp and XenDesktop and Workspace Suite side. I mean, you talked about obviously the backend infrastructure, the upgrade that you had, but also there was the releases where you are adding back end, call it front end capabilities as well. And then, obviously with Workspace Suite, bundling in the XenMobile capabilities. Then you guys also talked about the messaging through the channel, and how it was back on track, beginning last year and is building.

So I guess, as you balance these -- all these together, are we past the point where there are no product issues, and people are ready to go in terms of upgrading the back end? And similarly, where if like if there had been confusion in the past in the channel, are we kind of complete there too, and is this the run rate to expect, or is there another leg that still needs to build here, in terms of the turnaround?

Well, I think our refocusing and restructuring efforts are clearly paying off, and the feedback that we're getting from the channel from customers, and even from our own sellers have been resoundingly positive. I would say our Suite message resonates incredibly well, because this is precisely what customers want to implement. Our latest releases are very strong, XenApp and Desktop 7.8 has regions of functionality, and lots of features that our competitors are simply missing. At the same time, they're clearly providing this integrated environment.

XenMobile, 10.3, our latest release in that area is very competitive, and we saw some very interesting takeouts with application management, mobile application management being the core strength area of ours. And that's again, the case where's XenMobile, working together with NetScaler, working together with ShareFile provides this unique, better together scenario. And those are simply unmatched by competitors. So I think this is the case where we have something unique in our hands.

Of course, there's always more things we need to do. Of course, we'll continue to evolve our solution, and we continue to invest, and continuous research and development to add those new unique scenarios, and embrace the needs of the new modern infrastructures, and the help enterprise move with the trends of digital transformation. But we feel very good with where we are, and very energized about the future.

Got it. That's great. And then, David, just a follow-up for you. In terms of just the cost savings from the realignment that you have done, obviously, you talked about in the past, a certain percentage actually bleeding into next year, sort of just a quarter into 2016 here, any change on that split, of when these cost savings start showing up, 2016 versus 2017?

No, I think it's -- a lot of the short-term actions are things that we executed at the end of Q4 and into Q1, those are around people-related items. The longer term items, the big structural things like bringing down, facilities capacity, and optimizing there, which up to date, we've touched about 27 facilities, which is over 20% of the overall portfolio. Those things have long-term tails on them, but they're also permanent benefits, changes to our procurement and sourcing organizations, things like that, that will be layering in gradually over time, plus just the elimination of other types of events and programs and projects, et cetera.

These things will layer in. I think the teams are running full out now right now, in terms of execution capacity. And as I've said a couple of times, we're a little ahead of our internal plan on the time line there. I think we will just keep focused on that. More to do.

Great. Thanks, guys, and congrats again.

Thanks.

Kirk Materne, Evercore ISI.

Hi, it's actually Patrick Falzon on for Kirk. David, you touched on this before, but on the strength in the US, was there anything from a macro competitive backdrop any different versus prior quarter? Or is it, do you think it's just about using your channel partners, executing better?

Well, I think that, from a macro standpoint, I mean, Q1 always tends to be a little different than Q4. I mean, most organizations are still finalizing and locking down budgets. They're absorbing the uplift of purchases that they incurred in Q4. And so, it tends to start out a little bit slower, and that's just very, very typical across IT buying patterns. So I would say Q1 was as expected.

US, we are executing well, the teams are doing well, as I pointed out a couple of times. Competition, as Kirill said, is very strong in all regions. I think we've seen a high level of discounting from a lot of vendors. We've seen a high level of bundling, which is a different type of discounting and that's persistent. So very competitive. Customers are very focused on the big -- same themes cloud, mobility, security, et cetera, ways to simplify their own infrastructure. And so, at this point, I would just call it execution.

Absolutely.

Thank you.

Steve Ashley, Robert Baird.

Terrific. My congrats as well. I'd like to ask about the channel. I think a lot of the discussion so far has been on the products, but I know that making changes in the channel was an important part of the recent quarter. Just like to ask you to maybe call out, what you are or think are some of the bigger and more important things that might have changed here in the first quarter?

Well, obviously, channel plays a hugely important role in our future success, and has been part of our go-to-market strategy for many years. I think every time you have a large and vibrant channel like we have, adding elements that help reinvigorate it and encourage growth is something that you need to continuously do. And that's precisely what we've done and communicated in the last quarter. It's basically a program that encourages acceleration of customer adds and growth in the business, and essentially rewarding our channel partners for doing more of that.

And Steve, we're still working our way through that. There's more work to do from a channel standpoint, getting the message out, and aligning training and certifications and everything else. But in terms of an early data point that's positive, I mean, aggregate contribution from our reseller, the reseller part of our channel was up, north of 10% Q1 to Q1. So I mean, we're seeing good vibrancy in that respect. And then, contribution from the really large named partners was up substantially higher than that. So a strong quarter from an SI point of view.

Terrific. And then, another thing that you talked about, on terms of go-to-market was maybe doing some more targeting of the mid market, and really trying to make an extended effort to reach out. Any update there, is that something that has begun here in the first quarter?

Yes, early days, but we -- that's going to be a combination of both go-to-market and product. And so, some of the product areas that we have talked about releasing in Q1 like the browser server, which gives really businesses of all size, but targeted towards mid market in many dimensions, the ability to deliver browser-based apps, while managing performance, security, browser compatibility, et cetera, in a more simplified fashion.

Consumption across areas like CSP that's been growing so quickly, targeted towards that smaller and mid-sized customer, where they can consume cloud services and not have to manage the infrastructure. I mean, those are all trends moving in that direction. But in terms of the go-to-market efforts, we're just getting going on that front, and you should expect more through the balance of the year.

And I would add one very important element of our strategy and execution, as it relates to ShareFile, which has been a fantastic solution for mid-market and essentially optimized for mid-market, with an SMB essentially, with its cloud-based self-serve delivery model. And now, as ShareFile becomes very integral, integrated part of the portfolio, those ingredients from the product side and those characteristics on self-service, easy to deploy type of methodology is starting to resonate across Citrix. And we certainly expect to see more of that happening through the rest of the portfolio, which from the product side would position us much better in the SMB segment with a cloud delivery model.

Perfect. Thank you.

Gregg Moskowitz, Cowen and Company.

Thank you, and I'll add my congratulations. Getting back to the strength of the delivery networking business this quarter, you noted David, that there were more than 100 new customers in this segment. Actually, it sounded more like a couple of hundred, just in answer -- in your answers to Heather's question. Can you give us a sense of how those net adds compare to a typical quarter, excluding of course, seasonally strong Q4s?

Yes, when I called that out, it was just specifically in a quarter one to quarter one comparison not -- because there is some seasonality that moves around it. And so, as compared to last quarter. So overall, it's up, and I think just a function of NetScaler becoming more and more visible, and it's just a solid solution. So not much more I'd add beyond that.

Okay. And then on the NetScaler market share, I believe what you said in the past is that you expect your NetScaler business to grow in line with or faster than the market in 2016. Based on how you've started the year from an execution standpoint, has your level of optimism increased as it relates to market share gains going forward?

We're certainly happy with the performance of Q1, and optimistic about our ability to execute for the balance of the year. So I'm optimistic about this business for sure.

And there are additional elements to this business that are also quite interesting, in particular in SD-WAN, which is a new and unique capability that we have added in pure software delivered fashion. IDC just came out with their assessment of SD-WAN market, and it's going to grow quite phenomenally, and we will have an opportunity to participate in it.

Very helpful. Thank you.

Brad Reback, Stifel.

Thanks very much. David, could you give us a sense of what the core Citrix operating margin was in the quarter?

Yes, Brad, we haven't broken it out yet. I think the expectation should be when we file the Form 10, which will happen later this quarter, we'll give clarity into the two operating segments. But consistent with what we've talked about in the past, core Citrix is higher than what we call, spinco at this point in time. So it operated north of the 29% margin that we posted for Q1.

Great. And then, just one quick follow-up. APJ, is that a macro issue or an execution issue?

Well, it's a little of both. I mean, the teams are working hard to evolve the go-to-market model there, to be a little bit more indirect, and that's more on the execution side. There's clearly macro issues and political issues that we've been dealing with, in some of the larger geos over the last year plus.

Great. Thanks very much.

Keith Weiss, Morgan Stanley.

Hi, this is Sanjit Singh in for Keith. Thank you for taking the question. Wanted to toggle back to the Workspace services division. When you talk about overall license growth being flat, I guess my question is here, how much does -- to what percentage does, do we need to get to in terms of the CSP business and the Workspace services business as a percentage to get that license growth to start to accelerate into the low to positive, low to mid single-digit license growth?

Well, it's not just a function of what percentage that has to get to, because that's a two variable equation. But I'd say that overall, we're working on growing all elements of that business. I called out a few statistics earlier. But the fact that in the aggregate, we are approaching 20% coming from subscriptions, which was 14% a year ago. That's the direction this business will continue to move over time, plus all the work that Kirill and I have talked about around the product area, just addressing some broader trends in the industry, making the products feel more integrated, and everything that we're doing to drive on the fully baked Suite approach on the tops down. So I think it's a combination of all of those. Clearly, we see this as a business that needs to grow, and we're working really hard to make it into a sustainable growth business on the license line.

And a quick follow-up, with a couple quarters of really strong performance on the top line, is there anything that makes you think about accelerating the investment profile, given some of the strong top line results that you have seen in the past couple of quarters? And also from a strategic point of view, is there anything that needs to be refined strategically, given the healthier state of the business as we look at it today?

Well, I'd say strategically, I mean, we're starting to talk a little bit more about that, and come -- we invite you to come join us at our Analyst Day at Synergy at the end of May. We'll be talking much more about overall Citrix strategy, and how to think about that going forward. In terms of revenue outperformance, clearly, that's been driving an acceleration of our margin goals. We are fully on target for delivering that 30%-plus here, before too long. And that's not going to change.

We're always investing in things we believe are going to drive long-term growth. And I think that's our responsibility to make sure we're investing in just those things that are aligned tightly to the strategy, very focused, and have the highest probability of return. As we see those, we'll be investing in those. The reason why we've gone through so much hard work on the restructuring is that it frees up the capital to be able to do that, and deliver the upside to margins on an ongoing basis. So, I mean, that's the goal.

Thank you.

Ed Maguire, CLSA.

Hi, thanks for taking my question. I had a question about Windows 10, and the potential upgrade cycle in the enterprise, how you look at that as really an opportunity to reintroduce some of your newer products, and new offerings and whether you see that impacting the demand profile in your core customer base?

Yes, thanks. That's a great question. And obviously, we see Windows 10 as a huge opportunity. It's a reality in the enterprise, and we see the enterprise upgrade accelerating to Windows 10, and Citrix has a very important role to play in that. A very important role on delivering apps to Windows 10, delivering apps to Windows 10 desktops, that people and their organizations just bring an upgrade by themselves. But at the same time, giving IT professionals and infrastructure managers, the ability to deliver managed and controlled Windows 10 desktops to -- and so, they're more controlled regulated environments. And I think both of that, both of those are very important trends, and our customers are telling us that this is really, I would say very significant to the beginning of the upgrade cycle that we certainly look forward to participating.

Great. Thank you.

Mark Moerdler, Bernstein.

Hi, this is [Zane Creain] for Mark. Thanks for taking my question, and congrats on a great quarter. I was just wondering if you can give an update on some of the retention rates across Workspace services and NetScaler, especially with Windows 10 coming out? Any potential positive impacts on retention rates in Workspace? Thank you.

Sure. If you're referring to subscription and maintenance retention rates, they've been basically unchanged. We run in the mid-to high 80%s, continued to do that in Q1.

Great. Thank you.

Abhey Lamba, Mizuho Securities.

Hi, this is [Patov] sitting in for Abhey. Thanks for taking the question. On the capital allocation front, what are your thoughts on paying a dividend? Is it something that's on the table post spin-off?

Well, we haven't discussed it publicly, of course. But I think right now, the message we have talked about over the last couple of quarters, that the capital strategy is something we'll be addressing post-spin. And we'll address it with clarity, in terms of how we're thinking about the balance sheet, how we're thinking about capital use going forward, et cetera. So I'd say, let's just hang tight until we get through the spin, and we can have a more focused conversation on capital structure.

Great. Thanks.

John Rizzuto, SunTrust.

Yes, hi. Just a point of clarification David or Kirill, when you were talking earlier about XenDesktop, or XenDesktop as it's used at John Hopkins I believe as an example, something driving XenApp sales, that unified infrastructure. I was under the impression that if you are getting XenDesktop, you are still getting XenApp as part of that XenApp virtualization. I'm wondering how you -- is that true? And well, is that true?

Well, if you're getting a suite, you're getting both. But if you bought a standalone product, and now you want to expand, you would want to expand either by adding another product, or expanding into a suite. And that's the dynamic that we're seeing. And it gets to be -- it's very easy to do now, because the two are under the same infrastructure, and that expansion becomes natural for customers, unlike our competitors.

Okay. So XenDesktop does not come with application virtualization then, correct? Is that what you are saying, because that is what I am asking?

John, the underlying example that we talked about was, where a customer is using a VDI solution from a different vendor, and still using XenApp to deliver applications.

Okay. Oh, it wasn't your VDI solution? Okay, got you.

Correct, and this is about unifying the two together.

Okay. Because, I guess, what I was after is, if you have -- if there's a lot of XenDesktop out there historically, is there a potential for XenApp upsell, and is that one of the things that might be driving the adoption there? Or that wouldn't make sense, because the XenDesktop does come with the XenApp inclusion?

No, John there's an upsell opportunity to Workspace Suite. That's an important part for existing XenApp customers. But more broadly, it's just about expanding the applicability of the solution to drive greater penetration.

Okay. And then, in that being said, when did the new -- because for a while there, you didn't have the SKU for XenApp, and then you reintroduced the SKU, is that correct?

We reintroduced the product over a year ago, and we effectively end-of-lifed the product, and we reintroduced it, at that point of time, and we've been just moving it forward since then.

Okay. Okay. Thank you.

And we have no further questions at this time. I will now turn the call back over to management for closing comments.

Well, thank you very much for joining us today, and thank you for following Citrix as we move our business forward. After almost 90 days with the Company, following many discussions with our customers, analysts, and many of you actually, I'm convinced that Citrix today has the right focus, an exciting product road map, and the right strategy for the future. I look forward to seeing many of you at the end of May for our Analyst Day, where we will be sharing details of our strategy for growing the business farther. Thank you all very much, and have a great day.

Thank you for participating in today's Citrix conference call. You may now disconnect.