思杰系統 (CTXS) 2017 Q1 法說會逐字稿

On behalf of Citrix, hello, and welcome to today's webcast entitled 1Q '17 Financial Results and Business Outlook. My name is Ian, and I will be your web event specialist today. (Operator Instructions)

It is now my pleasure to turn the webcast over to Eduardo Fleites. Eduardo, the floor is yours.

Thank you, Ian. Good afternoon, everyone, and thank you for joining us for today's first quarter 2017 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 replay 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'd like to remind you that today's conversation will contain forward-looking statements made under the safe harbor provision of the U.S. securities law. These statements are based on current expectation and assumption 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 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'd like to turn it over to David Henshall, our Chief Operating Officer and CFO. David?

Thanks, Eduardo, and welcome to everyone joining us today. We continue to show good results and execution from the operational initiatives driving leverage to the strength in product portfolio that's fueling growth and increased win rates. We're focused on our core strategy of securely delivering apps and data, both on-premises and in the cloud, setting the company up for success in 2017 and over the long term.

As a note, throughout the call today, we'll only be discussing results from continuing operations, excluding the 1-month impact from the former GoTo products.

As you can see from the release, Q1 results were as forecasted: revenue was up 1%, adjusted op margin was 28% and adjusted EPS was $0.97 a share. However, the mix of sales in the period saw a large increase in subscription-based items like CSP, annual-term license and Citrix cloud sales. This contributed to billings growth of over 5% year-on-year as well as total deferred revenue, which was up 11%. I'll talk more about these trends here in a couple minutes.

In Q1, we closed 47 $1 million-plus transactions with strength in technology, fin services and health care. There was good balance across the portfolio, with approximately 2/3 of these deals coming from the Workspace Services area, including the full suite, and the balance from networking and cloud.

So next, let's look at the Q1 results within our primary product areas. Workspace Services, which includes virtualization and mobility, was flat year-on-year at $400 million. As we've discussed before, there are several specific initiatives we're driving to accelerate growth in this area, including faster innovation, integration of our unique assets, greater competitive positioning and the reinvigoration of our channel partnerships, especially with Microsoft. These efforts have steadily increased our win rate and competitive opportunities.

There are, however, a few dynamics that are worth noting from Q1. First, the sales mix in this business is where we're seeing the most pronounced shift to subscription-based offerings. In total, the contribution from contracts of this type was over 20% of product license sales, up from just 11% a year ago.

Next, on a recognized basis, license revenue growth in the Americas was up over 5% in the quarter, continuing the above-market growth seen in this region over many, many quarters. And we're also seeing good traction from our APJ restructuring, where Workspace Service license was up 9% in Q1.

Third, we had strong growth in monthly CSP subscriptions, where our partners primarily utilize XenApp to deliver cloud-based offerings to their customers. Total recognized revenue in this area grew 36% and now has an annualized run rate of $90 million.

And finally, we've had a really good response from the newly launched Customer Success Services, the redefined software maintenance programs we announced at beginning of last quarter, really helping to drive the growth in deferred revenue as well.

Turning to the networking business. Total revenue decreased 1% year-on-year in the quarter to $193 million, with license revenue down 9% year-on-year. This result is in line with our forecast as we expected decline in the cloud infrastructure segment due to the difficult comps from a year ago.

I will remind everybody that the NetScaler business is essentially made up of 2 main segments: cloud infrastructure and e-comm, also known as our SSP business; and enterprise ADC, which includes solution sales made alongside the Xen family products. Within the quarter, SSP license sales were down about 20% year-on-year but up nearly 100% sequentially from Q4. We continue to expect growth rates to increase in the second half of the year due to easier comps as well as our focus on expanding the base of customers.

In the enterprise ADC segment, license increased nicely in Q1 due to the capacity and management investments we made in the second half last year. All in, we sold to about 1,900 networking customers in the period, with 30% of them being new, which reflects our strong competitive position as well as providing expansion opportunities into the future.

And finally, our total SaaS revenue was up 24% to $39 million in the quarter. The largest component of this is ShareFile, our secure data platform, with the new Citrix cloud services now addressing Workspace-as-a-Service and the networking needs of our customers.

As I mentioned earlier a couple times, we are seeing an increased shift in the way that our products are being delivered, evolving towards a more subscription-based model, where unit growth, sales and cash flow are going to exceed revenue in the short term. When we account for all of the ratable product subscription items, including revenue that's coming from CSPs, our cloud-based services and annual-term license, the aggregate ARR was over $275 million in Q1, which is up 22% from last year. We do expect this trend to continue throughout the year as more of our portfolio is available as a service in Citrix Cloud.

Given the increased pace of this transformation, right now, we're planning to provide more insight into the longer-term economic model as well as our plan for the revenue model at our analyst meeting at the end of May.

So turning to operations. We've driven a lot of efficiencies in the company over the past couple of years. The actions across the business were designed to generate permanent expense reductions while reallocating investment to those areas that will drive profitable growth in the future. In Q1, adjusted op margin was 28%. It was down a couple of points from last year but in line with our plan for 2017. The difference from last year represents those capacity investments in sales and services to drive enterprise networking, tech support investments to support this upgrade to Customer Success Services and in professional services to assist customers with cloud and security projects. We're still comfortable with our full year target of 32% to 33% even as more revenue is being recognized ratably.

Turning to the balance sheet. Deferred revenue increased to $1.66 billion, up 11% from last year due to the strength of Customer Success Services and the subscription-based sales that I've been talking about. As in Q1, we had nearly $2.4 billion in cash and investments, aided by cash flow from ops of $292 million from continuing operations in Q1. In total, cash was down from the end of Q4 as we restarted and accelerated our share repurchase program. In the quarter, we purchased over 7 million shares for a total of $550 million, which leaves about $400 million in our additional authorization.

So our growth strategy and operational programs have been working. We're pleased with the results and confident in our plans as we consider this coming year.

Before I discuss our guidance moving forward, I'd like to provide a little color around our plan. Overall, our view of the Workspace Services opportunity continues to strengthen, and we expect cloud adoption and the mix of subscription-based sales to begin to accelerate as we move through the year. In networking, we remain our conservative view due to the cyclical nature of the NetScaler SSP segment, which we continue to expect is going to return to growth in the second half of the year. And on margins, we'll manage OpEx to drive leverage in the areas that we've outlined previously.

So for the full year 2017, we are leaving our guidance unchanged and continue to expect revenue between $2.81 billion and $2.84 billion, which is an increase of 3% to 4% over last year; and adjusted EPS of $4.60 to $4.65 per share. For Q2, with an increasing mix of ratable sales, we expect revenue between $685 million and $695 million and adjusted EPS of $0.97 to $1.

We're proud of the continued improvement in results, our new product innovations and the early returns from Citrix Cloud. We're also continuing to make those go-to-market capacity investments that should drive additional growth as we move through this year.

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

Thank you, David. Hello, and welcome, everyone. This was indeed a significant quarter in our transformation. So let me add a few qualitative highlights. Our global field teams exceeded their bookings plans in all geos. The new leadership in both APJ and EMEA are demonstrating much improved execution, growing bookings in the double digits. And as in previous quarters, the Americas team continued growth momentum in the first quarter.

For the first time in more than 4 years, our Workspace Services product bookings grew double digits. One could say that we have turned the tide here. We've added over 1 million new users, which is about 50% faster user base growth year-on-year, with mix strongly shifting towards subscription, as David mentioned. 139 customers chose Citrix Cloud in Q1 to run their workspaces, with most of them being existing Citrix customers transitioning to the cloud, with several of them were 7-figure cloud deals. Both CSP and ShareFile did very well, adding to the overall subscription ARR, which exceeded $275 million, as David mentioned.

In addition, our innovation and increased competitive positioning are paying off with over 1,000 competitive wins in Workspace Services and in networking in Q1, with overall win rate continues to accelerate. Our momentum is building, making it clear that our strategy and execution are focused in the right direction.

Now let me add a few extra comments in our solution areas. We continue with an accelerated quarterly update cadence for our core XenApp, XenDesktop products, delivering the 7.13 release in Q1. We've also fully integrated recently acquired Unidesk technology into our solution set, adding to the overall momentum. Among many Q1 wins against the competition, 2 major global financial institutions chose Citrix for application delivery, driven primarily by our unique capability with Skype for Business.

As we moved into 2017, we set the priority for our sellers and partners to lead with Citrix Workspace Suite. And this quarter, we're already seeing results. Among many large wins [Saab] chose CWS to enable the company's digital transformation and desktop delivery. Our unified product organization is now much more focused on integrated innovation, making CWS even more appealing in the future.

Moving on to networking products. We've continued to innovate rapidly here, stressing our unique pure software-defined and application-first approaches. In Q1, we introduced NetScaler SD-WAN as a service in Azure with 0-touch deployment. And we released NetScaler Gateway for Microsoft EMS and also NetScaler SD-WAN 9.2 with improved scalability and throughput. This rapid innovation makes us very enthusiastic about our future prospects with NetScaler, particularly in SD-WAN, where our years of experience in application-aware networking and scalability make a huge difference and paying off already. For example, a major European home furnishings company chose SD-WAN for branch reliability driven by the performance in app-aware capabilities of our solution.

While, as David mentioned, NetScaler SSP results remained muted in Q1 due to the cyclical nature of this business, we saw growth for NetScaler ADC in the enterprise. For example, a major Asian electronics company and a major North American insurance company both chose NetScaler ADC for the reliability and security that it offers.

We also saw many switching opportunities with NetScaler, driven by combination of scalability, performance and security that only Citrix can offer. For example, the Nemours Foundation chose NetScaler to replace a competitor to support their needs for hosting the #1 most visited children's health website in the world, KidsHealth.org, very exciting undertaking by the Citrix team.

On to the secure data delivery. ShareFile had a very strong quarter in the enterprise, demonstrating the proven value that ShareFile brings to companies of all sizes. We're seeing particularly strong traction with ShareFile in EMEA, where data residency is a particular concern. For example, a major global auditing firm chose ShareFile for better sharing and mobility for their data delivery in Europe. We'll continue to drive rapid innovation with ShareFile, a true born-in-the-cloud service.

Speaking of cloud, as we mentioned, our cloud transformation is clearly picking up momentum. We're seeing strong demand from both existing and new customers. As an example, Health Choice Network, a leading U.S. health information technology firm, chose Citrix Cloud to deliver on the company's new cloud-first strategy. HCN has been a Citrix customer for more than 2 decades, and now they felt that Citrix Cloud was the perfect fit for their digital transformation.

Another large cloud win was Capita Customer Management, a major European customer management outsourcing firm. Capita cited Citrix Cloud as the only solution that offered the agility, features and scale to deliver on their cloud-first strategy.

As we saw in the past quarters, cybersecurity concern continue to be a growth catalyst for Citrix. We have been doing more to both drive the product innovation in the security space and appropriately adjust our positioning. Customers are increasingly viewing Citrix solution as a crucial piece of their security efforts.

For example, Hitachi, a long-time Citrix customer, now chose XenDesktop to deploy 80,000 Hitachi-made notebooks, thin clients for their current time and location-free workforce initiative, driven by a need for increased security and also data protection.

A few notes on our partnerships, starting with Microsoft. I'm extremely excited to report that we released the cloud-native, multitenant app and desktop delivery services in Azure Marketplace the last week of March. In fact, we are trending in Azure Marketplace this week and already have 175 customers who have signed up to use these services. Beyond that, we saw continued joint wins with Microsoft. And one such win against a major competitor, the Queensland Investment Corporation, chose Citrix Cloud to Microsoft Azure in a large deal, driven by strengths and trust of this partnership for their Windows 10 migration.

We've also launched our partnership with Samsung, enabling a true Windows desktop experience from the new Galaxy S8, truly executing on our strategy to secure delivery, apps and data, on any device.

And of course, we continue to see good execution and traction from our broad distributors and [broad] partner channel, and we'll continue to make it a big priority for Citrix as we continue into 2017.

Next month, we head to Orlando for Citrix Synergy 2017, our major user conference of the year. We will be making several major product and partnership announcements. We will also be hosting our annual financial analyst meeting at the event, and I hope to see many of you in person there. Thank you. And as always, we look forward to your questions.

Your first question comes from the line of Raimo Lenschow.

I have 2 quick questions. First of all, the speed of the transition towards more subscription seems to be picking up here. Can you think about how you kind of continue to plan the business then? Because if you can't really plan what's coming on-premise, what's coming as subscription, I mean, how do you -- can you help us understand a little bit about the speed that you can see here? Is that like a steady speed? Is it increasing, et cetera? And then, David, can you talk a little bit about -- if I look at your investments at the moment and it looks more loaded into -- it looks more focused on the first half. Can you talk a little bit about the linearity for the year? Because I try -- I still try to get to the full year EPS number.

Sure, Raimo. Let me start with the second question about investments. We did front load a fair bit of investment this year. And so when you look at it in the aggregate, it will be fair to expect it to actually trend down as we go through the year. And let me point out a couple of things. First, there are incremental costs in-period in the first half. For example, our big Synergy event, our Summit event, our partner event, et cetera. Those are all first half initiatives. Also, there's a fair bit of our ongoing efficiency programs that had been held up a little bit just based on the GoTo spin that's done now. So those will flow through in the back half of the year. Front-loaded marketing and demand spend, things like that, so that's how you get to it on a modeling basis. When you step back and you think about the overall economic model, it is a shift going on. I think it's fair to say that we are managing that. We're actually holding it back a little bit. Customer demand and customer conversations are very strongly focused on cloud these days. It's aligned with where they're going. And fortunately, it's very much aligned with our strategic focus as well. We are focused and, in 2017 much more on new customers. Of the cloud, in this period, 75% were new, 25% were installed base customers migrating. So that's a good dynamic. And we're going to keep that focus on net new for now and, frankly, keep a governor on it. Because as we've talked about a few times, this is our year to slowly ramp and make sure that we're hardened in the infrastructure areas that we need to be, et cetera. And so we'll be building out our processes. And because of that, we'll have a better ability to manage the financial model. Our plan right now in May is to -- at our analyst meeting to talk more about the longer-term economics and how it impacts the model. Obviously, this shift to subscription is a big upside from a customer lifetime value point of view. So the economics look great for us, and we just have to make sure that it's managed effectively and appropriately within the financial model.

Your next question comes from the line of Philip Winslow from Wells Fargo.

A question to David and also just to Kirill. On the shift to the cloud, that's obviously in -- the recognized revenue upfront for the Workspace Services business, David, just in terms of the guidance that you guys have obviously reiterated for the full year, it seems to be progressing a little faster than you thought. How should we think about what you've baked in, in terms of that shift kind of directionally maybe versus your original expectations and how -- Kirill, too, sort of what is driving this, in your opinion?

Yes. In terms of what we'd bake in, I mean, you think about the mix that I referred to a couple of times in Q1 with about 20% of bookings coming out of the ratable-type license. There's a combination of term-based license, cloud, CSP, et cetera. CSP is -- let me take those kind of one by one. So CSP has been accelerating because we put more investment in that area. We've been investing in the capacity to recruit, onboard and manage those partners. And so that business has accelerated. Term and cloud are really just a function of how customers are looking to purchase software these days. I mean, you're seeing this increasing trend towards that, most likely driven by cloud and what a lot of other software vendors are doing from a solution point of view. So it's becoming much more common now. We will manage that balance between term and cloud, obviously, pushing towards cloud as customers are willing to accept that. But as I was telling Raimo, I think we'll manage that this year, keep the focus on new license, a little bit less so on the installed base. And we'll save that for the real acceleration of the transformation over the next few years.

Yes. I think it's absolutely correct. Just build on what David just said, the balance is the keyword. Building out of our cloud capabilities is the keyword, as we'll continue in 2017. And it's also worth noting the new services that we just launched on Microsoft Azure in their marketplace, an opportunity that it creates and the fact the SMB segment that historically we've not been able to reach. We saw some early successes that's really positively surprising to many technical analysts who've been following us, like, for example, a customer who is able to get XenApp going in under 4 hours. And historically, in virtual client computing, as you've been following it on the technical side, it was just not possible. And now we have a solution that enables that to happen. So we view that as a sort of balanced approach where, as David mentioned, we will be regulating it and building out our capacity in enterprise. At the same time, it opens up new opportunities for us in the lower end.

Your next question comes from the line of Heather Bellini from Goldman Sachs.

David, I was wondering -- or Kirill, you mentioned reinvigorating the channel community. I'm wondering if you could share with us just a little bit more detail on what specific steps there you've made to kind of reinvigorate the channel and how would you gauge your success thus far. And then I just had a follow-up for David.

Well, I think -- so obviously, we've been engaged with partners since the beginning of time at Citrix here. And last year, we took a very deep view on what else we need to do to enable our partners. And it starts with enablement. It starts with education. It starts with sort of building out for -- to enable their success. Our Summit event in early part of Q1 was a center point of this reinvigoration with also new leadership that we brought into the program, some new adjustments to the program that we implemented in 2016 that are now starting to work and starting to pay dividends, like partner-sourced opportunities and shifting of our partner compensation to come to -- to essentially encourage that behavior. All the things are in place and we -- are starting to work. But as I'm sure you're aware, to manage large partner channel, and we have over 4,000 transacting partners in Q1, is a process of continuous tweaking and it's a process of continuous enablement and optimization. That's precisely what we plan to do for the remainder of the year.

Okay. And then the follow-up for David, if I could, is just if I go back over the last, I don't know, probably 3 or 4 years, I always feel like Q1, people are usually on point with when you guide Q4. But it seems like we all seem to get Q2 seasonality wrong. And I guess, I'm just wondering how much of this is the business model shift versus -- just for your Q2 revenue guidance being a little bit below where people were looking -- versus kind of the shifting business dynamics that you mentioned.

Yes. I hate to say it, but it's largely just a modeling exercise. Every year, it seems to be the same drill. Because we haven't provided Q2 guidance at this point, there's a pretty wide range out there. So usually, once we get past Q1, it starts to settle out for the balance of the year.

Your next question comes from the line of Walter Pritchard from Citi.

This is Tyler Radke on for Walter. David, I was hoping you could talk to us about -- the maintenance revenue, I thought, declined sequentially. Could you just kind of walk us through the reason for that?

Yes. Maintenance revenue has got a lot of moving parts in it right now. As licenses are moving towards a cloud or subscription, that's things that are coming out of the base and now show up in different parts of the P&L. But I think the more important thing around maintenance right now is you look at the shift that's ongoing towards CSS, that's what's going to play out over the course, starting in Q -- starting right now but really over the back half of the year and then to the next couple of years. We've talked about this a couple of times is that we've migrated to this new program, it's going to provide an incremental revenue stream that we've been estimating north of a couple of hundred million dollars layered in over a few years. The reason is that we are metering the increase to customers to not exceed a certain level year by year. I will say though, however, in Q1, the facts are better than what we have been modeling. We've had a faster level of adoption for customers doing a voluntary. In fact, the average ASP from a booking is up about 24% for those customers that are migrating, which is ahead of our original 15% planning estimate. So just one data point -- a couple of data points that give us confidence in hitting that transition with probably a more positive outcome than we had originally anticipated. And we're just trying really hard to make sure we're touching every customer, selling that value. You'll see that start to flow through the recognized license piece as we go into the next few quarters. On a billings basis, obviously, that's one of the things that contributed to the big growth in deferred revenue year-on-year and one of the reasons why billings is outpacing revenue by several percentage points in Q1.

Great. And then just a follow-up on the cloud side and NetScaler. We've seen some hardware vendors talk about some impact from cloud spending or possibly the competitive environment. I was just hoping you could kind of touch on what you've seen there. Has the cloud spending patterns or competitive situation changed at all?

Sure. Nothing unexpected. I mean, we've -- for the last 6 months, we've been talking about the cyclical patterns that we expect. Given that the first 3 quarters of last year were extremely strong, we expected 2 or 3 quarters of not-as-strong business as compared year-on-year. One of the stats I called out in my prepared remarks was that on a sequential basis, from Q4 to Q1, that cloud infrastructure spending on NetScaler was up over 100%. And so it's starting to come back but it's, compared year-on-year, against a monster quarter in Q1 a year ago. So we do expect the growth rates to be higher and stronger and positive in the second half of the year, just the same thing we've been saying for the last couple of these calls. No real change in the overall competitive environment, continues to be competitive but nothing unexpected.

Yes. And I'll just add that this is really the case where we continue to benefit from our software-first approach that enables us to deploy NetScaler in broad range of form factors, including NetScaler as a service in both AWS and Azure, NetScaler [dock] container and really benefit from this rapid shift to software-defined perimeter where we're now increasingly playing a role.

Your next question comes from the line of Abhey Lamba from Mizuho Securities.

Two questions, David. One, what was the impact of greater-than-expected adoption of subscription in this quarter in terms of revenues and earnings? Can you quantify it for the quarter and for the guidance for the year? And secondly, how should we think about cash flow margin for the year? Should there be upside effect from the shift in the model? And was there any onetime impact on cash flows this quarter?

Okay, Abhey, let me parse out all those questions. I'd take the last one. In terms of onetime impact, there was a big onetime impact to cash flow related to the discontinued operations, really the GetGo spin. That was a negative impact of over $42 million, and so that's the largest of the one-offs. Cash flow is a little bit messy this quarter just because of that spin. We'll be reporting that on a very clean basis going forward and then calling out the GetGo business as discontinued operations in every prior period. In terms of the actual impact on the quarter, we're not prepared to talk about a perpetual equivalent right now or try to normalize that. I think it's a little too early for that given where the financial model is. But I'd say the best way to look at that in the short term is just the difference between billings and revenue and deferred -- and deferred expectation. Those are probably the places I would point you to. If I was looking at it, it would be in probably the ACV terms. And we are starting to measure the business this way, and we'll provide that level of incremental metric as we go through our financial analyst meeting and talk about the multiyear transformation. At this point, I'd rather just keep it very focused on the reported financials.

Got it. And what about the cash flow margin for the year? And that's it for me.

Yes, I think cash flows are actually going to benefit as we go through this. I mean, we've got a couple of dynamics going on. We've talked about them a few times. A lot more in the case of multiyear transactions, we are still billing a large portion of those upfront. We are starting to build a balance of what we can call unbilled backlog or off-balance sheet backlog. We're not planning on reporting that at this point. It is measured in the several million dollars this quarter, but it's not material at this time. So fortunately, we'll be collecting a lot of cash from these multiyear transactions. And as we go into cloud, it will start to outpace revenue in the short term.

Your next question comes from the line of Kash Rangan from Merrill Lynch.

This is actually Nikolay Beliov sitting in for Kash. You guys mentioned that APJ and EMEA bookings grew double digits and overall billings were up 5%. Can you please speak to the Americas business? That implies that maybe Americas was weaker in Q1. What happened there? Any puts and takes?

This is the danger of talking about bookings because you're combining recognized plus the change in deferred, of course. But if I look at it on a recognized basis, Americas was up 1 point, APJ was up 10 points and EMEA was down a couple points. On a bookings basis, all -- I think the important takeaway is that all 3 geos exceeded plan. It's first time in a long time we've had all 3 geos north of 100%. They all had nice, positive growth there. So I'd probably want to just stay at that level and not try to go down too far. Because the real takeaway is the work that we've been doing in rebuilding the teams, the capacity and some of these execution challenges that we've talked about in the last year or so really showing great progress. The Americas team has been the growth engine of this business for a long time. They continue to do extremely well. And the improving results you've seen in the international geos are just going to help as we go through the balance of year.

Got it. And as a follow-up, you mentioned that the win rate in Workspaces has been increasing in the marketplace despite the pressure from the shift to subscription. Can you please talk about why you guys winning at an increasing rate and how you are differentiated versus VMware? And are you seeing Amazon WorkSpaces in the marketplace?

Yes. It's a great question, and we have seen increased win rate and we have seen the record number of wins this quarter. Obviously, the product is the #1 driver. We continue to innovate rapidly with our Xen family of 4 releases in 2016, another very significant release in the first quarter of '17, full integration of Unidesk that adds to overall win momentum. And we've seen that it's really starting to make a difference, and it's very exciting to see. I think our partnership with Microsoft, which essentially now has come to a point of sort of well-run operating machine, we spoke about at least one win we can name and report. There were many more. And that continues to help. We still have unique capability for virtualizing of Skype for Business. We play a very unique role in Windows 10 migrations. And all of that combined has certainly been driving the overall win rate. It's also fair to say that our field and our partner channel demonstrate a lot more energy and enthusiasm, even compared to what we saw a year ago. And this is all the result of the continuous focus, continuous education and continuous cultural transformation of the company to be more courageous as we take on competitive situations.

Your next question comes from the line of Gregg Moskowitz from Cowen.

Kirill, how would you characterize sales cycle this quarter? And going forward, is there some risk of sales cycle elongation among your installed base as customers perhaps liberate the architecture that makes the most sense for them? How do you see that playing out? And I just have a follow-up for David.

Yes. I think -- I don't believe we've seen any material change in the sales cycle in Q1 in our core businesses. I think if we sort of look across the portfolio, I think we've seen probably a slightly accelerated velocity in XenApp and Desktop, primarily driven yet again by increased innovation and just by much more focus of being clear on what we deliver and articulating our value proposition with a whole lot more clarity than in the past. I think it's also the case where the entire company being more focused and our strategy being much more aligned with our core product value proposition continued with slightly accelerated deal velocity. In the networking space, in SD-WAN in particular, I would say that this is a new market and I would say it's driven by large transactions. And I think this is the place where proof of concepts are taking time and people are really trying to assess what's going on. We continue to stay very focused on that. We're very bullish on SD-WAN going forward, and we certainly participate on those proof of concepts with our partners and also educating the channel. So I would say no material change, slight acceleration in our core business on the deal velocity.

Great. And then just for David. I wanted to confirm because there's a little confusion among investors since I don't believe we have all the historicals ex GoTo from a balance sheet perspective. Did you say earlier that your total billings growth this quarter was 5% on an apples-to-apples basis?

Yes, I did.

Your next question comes from the line of Mark Moerdler from Bernstein Research.

I've got a question for both, one for Kirill, one for David. As you discussed the Microsoft partnership is helping, but is the partnership, yet firing on all the cylinders, would you believe the ability, especially relating to Azure, to drive acceleration adoption is still ahead of you? And then a follow-up.

Yes, it's a great question. I think Microsoft partnership, which has been in place for about a year now, has sort of reached a point of operational maturity in most part of the world, and we continue to make a truly global phenomenon. So I think while it's working in major geographies, I think there's opportunity for us to see more upside from that as we expand globally. And as you know, for that partnership, the most important thing is to get the sort of people on the ground in the countries to work very closely together. And we'll continue to ensure -- we continue to make sure it does happen as we made it happen in the center and have very good cadence of engagement. I think there's an upside. Clearly, there's an upside in XenApp and Desktop Essentials services that were just made available at the end of March on Azure Marketplace. And we view that as a great new opportunity. You can kind of characterize it as a second-party service. It's not first party by Microsoft, it's branded Citrix, yet it is sold in Azure Marketplace by Microsoft. And early traction has been significant. And on top of that, at the end of Q2, we plan to make available similar service for XenMobile, which is XenMobile Essentials, which is yet again multi-tenant, cloud-native service released in Azure Marketplace. It's essentially a wrapper or add-on to Intune and Microsoft EMS. And sort of early signals from customers who previewed this solution has been incredibly positive, and we're expecting good uplift for that -- from that solution as well. So great traction so far. And yes, we'll absolutely continue to see upside. And obviously, with our major customer event coming up next month, we're certainly going to be unveiling some other interesting tricks that we're going to do together with Microsoft.

Perfect. David, how should we think about the gross margin impact of the cloud shift both on this year and the longer term?

Sure, Mark. I mean, longer term, we'll talk about that later in the year. We'll preview some of that at our analyst meeting. But no impact this year. I think gross margins for '17 are still going to be in that range of 86%, 87%, where we've been forecasting all year.

Your next question comes from the line of Kirk Materne from Evercore.

This is Tom Mao on for Kirk. For Kirill, in terms of the bookings strength for Workspace Services, do you feel like this is due to better execution on your end or kind of taking share versus competition? Or has there been a broader pickup in spending on desktop delivery technologies? And if it's a bit of both, can you just provide some context on how we should think about these macro and micro factors?

I think there's a broad set of factors. And first and foremost, we're a technology company, and innovation is the #1 driver for any uplift. And this is the case where focus on the core and investing in core product in the last 18 months is clearly paying off. So this is one. A few secular trends, cybersecurity, the fact that more and more customers are viewing virtual client computing as core part of laying down secure and reliable architecture for their IT is certainly taking place. And we're seeing customers choosing XenApp and Desktop for securing of their enterprise. And this is across industries: financial services, health care, essentially across the board. Win 10 is serving -- Win 10 migration is certainly serving as a very important pivotal point in IT rearchitecture. And through that IT rearchitecture and move to Windows 10, we see customers shifting towards thin clients, whether it's a thin client "laptop" with Chromebooks, where Citrix has unique capability to offer to essentially legitimizing Chromebooks in the enterprise, whether it's something like Raspberry Pi for larger screen-type deployment. Yet again, we have unique capabilities there through Citrix receiver baked on the chip. So that's taking place. And last but not least, we're seeing shifts to Citrix Cloud, and I think that shift is certainly also serving as a catalyst. Historically, we all know that one of the blockers for VDI adoption and for virtual client computing adoption in the enterprise has been complexity of the overall solution. It's not the easiest part of IT infrastructure. We also know that in the last 5 to 7 years, we've seen continuous shortage and increased shortage of IT talent. And so now, we essentially with Citrix Cloud remove that complexity and all of a sudden made it easier for organizations of all sizes to adopt virtual client computing and VDI. And that also serves as a driver here. So broad range of factors. I think it's -- last quarter, we said that 2016 was the year when we'll lay down the foundation for future growth in the core. And now we're seeing the results of that foundation being laid out. And all of that, coupled with strong execution in the field -- David spoke about much improved leadership and execution globally. We're seeing that taking place, and yet again, our global field organization being much more courageous as they took on the competition and win against them with stronger product.

And just a follow-up to that. How are you thinking about M&A in terms of helping you continue this transition of the cloud?

Well, as we've demonstrated in the last 12 months, we favor tuck-in acquisitions that will clearly immediately benefit our customers and easy for us to integrate. And we always look for more and we look for more opportunities. As it relates to sort of cloud foundation, this is really something that a company like Citrix needs to build and needs to own. And we've made huge progress building out Citrix Cloud and really laying down all of the operating tools that enable us to deliver that scale with high velocity. And obviously, we always look for ways to augment it with both parts of infrastructure that can help us and potential future M&A activities that would help us accelerate and add capabilities.

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

This is Austin Dietz calling in for Michael. How much deployment both on-prem and the cloud are you seeing with NetScaler VPX?

Yes. NetScaler VPX is still a minority product. I mean, it's -- from a volume standpoint, it would obviously be much, much higher than revenue. But on a revenue basis, it's generally 10% or 15% of the mix; units, of course, being much, much higher. I don't think we have great visibility in terms of whether they're -- it depends on where the customer purchases them, if they purchase them through a marketplace on one of the mega clouds. And of course, the assumption is it's being deployed in the cloud. If they purchase it through a typical license agreement, we're not sure exactly where they ultimately deploy that. But I think the bigger takeaway is that it is a software solution that gives you that flexibility, whether that cloud is a hybrid cloud that you own some of the infrastructure or it's a public cloud. And you can move those capabilities around very, very easily. And because we're a software-first solution, NetScaler allows you to do that. And whether that's VPX in a container focused on DevOps or in a traditional appliance form factor. And so that's our strategy from a product point of view.

Your next question comes from the line of Keith Weiss from Morgan Stanley.

This is Sanjit Singh for Keith Weiss. David, I had a quick clarifying question on the ARR of $275 million. On the 22% growth that you cited, is that an impact of the GoTo business, the GoTo portion of ARR?

No, that's totally excluding all GoTo impact.

Okay, great. And then, I guess, moving to the cloud transition, I think just from a philosophical point of view, is the operating principle in terms of how you're going to manage this transition, if the transition happen faster than you expected, is that something that you guys would be happy with? Or do you guys feel you need to manage the transition into the cloud to sort of maintain the near-term, intermediate-term financial profile?

Well, I'd put the financial profile second, and I'll explain that in a minute. And it's more a practical answer when it comes to just making sure that everything necessary to transform a company to a different model is in place. And that's true from a technical standpoint, from an infrastructure point of view, from systems and processes and people. And all those things take time. You want to make sure that you get it right so the customer has an amazing experience. That's the primary reason why we meter. If I look at it from a financial point of view, I mean, financially, it provides a tremendous amount of upside long term from a customer lifetime value. Assuming you get part A of that answer correct. And so that's why you got to start there, get the foundation in place, get the processes in place and then help customers. And we'll add a tremendous amount of value when we do that, but that's the primary reason why we're throttling the growth rates.

Yes. Listen, I would just add that in the last 2 quarters, we spoke about our approach to cloud transition being crawl, walk, run. And we certainly in Q1 entered our walk year. And this is a bit of a speed walking, and we will continue to moderate our pace as we go through the year. We'll also see balanced demand from our customers, and I think the sort of operative work for our cloud transformation in 2017 will be "balanced."

Understood. That's helpful context. And then just a last follow-up. And I know we'll probably get into this more on the Analyst Day. But just as a starting point of discussion, in terms of the gross margins on your cloud/ratable business, approximately where do they stand today and where do we see that going once they sort of really start to accelerate in terms of scale?

Yes, I'd rather just hold off until we can talk about it in scale. It's not appropriate at this point. Let's stay focused on the 86%, 87% that's embedded in our guidance for the full year.

Your next question comes from the line of Matt Hedberg from Wells Fargo (sic) [RBC].

This is Matt Swanson on for Matt Hedberg from RBC. Kind of circling back to your comments during the call about cybersecurity becoming increasingly a catalyst. I know you had an article come out earlier in the month talking about GDPR. We hear that a lot from security companies, maybe a little less from infrastructure. So can you talk a little bit about how GDPR could affect your European business and what products specifically feel like it will be benefiting?

Yes, it's a great question. And having spent a bit of time in EMEA during the quarter, I can certainly attest that GDPR is a big topic of conversation for CIOs and for our people and our partner channel as well. It comes into effect in 2018. We're absolutely going to be ready with all of our products in full compliance and absolutely ready for the new regulation. In our secured file sync and share solution, ShareFile, we have a unique capability. We have unique capability compared to all of the other cloud, cloud-based file sync and share solution, and that is we have an option to deploy in customer-managed zones, whether it's in the local cloud or whether it's -- and whether it's on-prem. And I think this is certainly the case where ShareFile is likely going to be beneficiary of this new regulation on an ongoing basis.

That's great. And if I could just have one follow-up. We talked a lot obviously about the shift towards more subscription and also a lot about the Microsoft partnership. But with so many of their products now going cloud or subscription based, do you feel like that partnership is at all accelerating this transition for you?

I think this is certainly the case where Microsoft, along with other cloud infrastructure providers, has played a pivotal role in effectively convincing enterprises that cloud is something that they need to embrace. I think this is also the case where continuous improvement on performance, scalability and security of cloud offerings, whether it's driven by Microsoft or other cloud providers, is also serving as a catalyst of the broader partner -- of the broader cloud adoption in customers of all sizes. So we have certainly seen this. We have certainly absolutely seen this. Also, Microsoft has been incredibly focused on Azure as a company, and that has certainly been a driver and been a catalyst for the overall broad cloud transformation in Microsoft customer base, where effectively, we have very, very strong presence. So yes, indirectly, it has been a driver and continues to be a driver.

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

David, in the cash flow statement in the first quarter, there is a deferred tax item that added about $67.5 million. What's that related to? And will it reverse over the course of the year?

Yes. I'd have to follow up with you on the detail of that. It's related to the GetGo spin. But in terms of how much of that is embedded, we'll just -- we'll follow up on that. But it's -- if you look down the financial statement, it should be netted out by the impact of discontinuing operations.

Okay. But below the line on -- or is that in cash flow from ops?

Yes, cash flow from ops. We'll follow up with you on much more granularity, though.

There are no further questions at this time. I turn the call back over to the presenters.

Well, thank you, everybody, for joining us today, and thank you for following Citrix as we continue in our journey to transform the company. The new Citrix has clearly taken shape in the last few quarters, and we look into the future with high degree of confidence, excitement and enthusiasm. Our vision is clear, our strategy is focused, and our execution and innovation engines are working well. We look forward to seeing you in the next month in Orlando for a deeper discussion on our cloud transformation and future prospects. Thank you all very much.

Thanks to all participants for joining us today. We hope you find this webcast presentation informative. This concludes our webcast. You may now disconnect. Have a good day.