思杰系統 (CTXS) 2017 Q3 法說會逐字稿

Good afternoon. My name is Christa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems Third Quarter 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. Good afternoon, everyone, and thank you for joining us for today's third quarter 2017 earnings presentation. Participating on the call will be David Henshall, President and Chief Executive Officer; and Mark Coyle, Interim 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 specifications 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 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 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, our President and Chief Executive Officer. David?

Thank you, Eduardo, and welcome to everyone joining us today. I want to spend most of the time on today's call talking about our business transformation and multiyear financial goals. As you know, our transition to a subscription model is starting to accelerate, and we're seeing the early impacts in our financial results. Today, we want to walk you through how we plan to drive this move over the next several years, the financial outcomes and the metrics to measure our progress along this journey.

Before we dig into that, however, let me take a few minutes to provide some brief color on our Q3 results and expectations for Q4. Our standard deck, including quantitative metrics, has been posted to our Investor Relations website. Mark Coyle, our Interim CFO, is also here with me for the Q&A session.

Overall, I'm pleased with our results for the third quarter. Our team has shown great focus executing despite all the changes we are driving within the company to set us up for the next few years. I'd sum up my view on Q3 simply as total revenue in line with expectations, accelerating subscription revenue as the new model begins to impact the P&L and expenses that are back on track, driving higher profitability. All in, total revenue was up 3% year-on-year. This included subscription revenue, which, as I mentioned, continued to accelerate, growing 30% to $81 million in the quarter. The mix of annual subscriptions bookings to total product bookings was 19% in the quarter, up from 12% a year ago. And as we've discussed last quarter, the growth in the underlying business has been several percentage points higher than the reported revenue this year due to this increase in the subscription mix.

Just a couple of things worth noting within product revenue. First, Workspace Services is starting to accelerate. Overall revenue in this business was up 5%, with perpetual license increasing 3%. However, the real driver is coming from SaaS as the contribution of Citrix Cloud bookings are beginning to be material enough to increase the overall growth rate.

However, networking continues to be a mixed bag. The hyperscale cloud segment of our business, which we refer to as SSP, remains pretty volatile quarter-to-quarter. In Q3, product bookings for SSP has declined more than 40% from last year. While our non-SSP business, the one that we refer to as the Enterprise segment, saw product bookings increase by over 10% in Q3. This is due to increased go-to-market coverage and competitive takeouts.

Operationally, Q3 was strong. Adjusted op margin rose to 32%, an increase of nearly 550 basis points sequentially, and cash flow from operations was up 7% from Q3 last year. We've started the process of rebalancing resources and freeing up capital to invest in those areas necessary to accelerate our business transformation and our multiyear financial plan.

And finally, in Q3, we introduced Mark Ferrer as our new Chief Revenue Officer joining us from SAP, where he spent the last 6 years helping drive their transition towards subscriptions and cloud services.

Looking at Q4, we feel good about the outlook and the opportunity pipeline. And consistent with the last couple of quarters, we expect that customers will continue adopting subscription services for Citrix Cloud, both in hybrid and SaaS models. With this and the strength of Q3, we're increasing our full year guidance to include revenue between $2.82 billion and $2.83 billion and adjusted EPS of $4.79 to $4.81 per share.

Now let's talk about our business transformation and our multiyear financial plan. Citrix is transitioning to a new model because it makes business sense for the company. It's being driven by our customers and it'll create a stronger operating model. It's important to understand the complete context for this move. So today, I'd like to provide you with an overview of our strategic opportunity, the benefits to Citrix and our customers, improved financial reporting to really help you understand our business and our financial targets as we exit 2020.

In addition to the materials we'll walk through today on this call, a more detailed slide deck will be posted to our Investor Relations website. So to understand the context behind our strategy, you need to step back and look at the infrastructure from a customer's point of view. They're adopting cloud services and SaaS applications on a broad basis. Many of our customers are juggling multiple cloud providers and dozens of new SaaS apps, yet over 90% of organizations expect that they'll still have the majority of workloads running on-prem for 5 years. When you combine this increased complexity with mobility and the new work styles, it's a fragmented user experience, provides an increase in security risks, and most IT teams are just struggling to keep up. For these reasons, customers have been driving our evolution. They're looking to operate in a multi-cloud, hybrid cloud world. These challenges require a new approach and create this opportunity for Citrix to provide simple, secure and unified solutions, helping our customers address these challenges and simplify the road map.

Keeping this in mind, we see 3 strategic motions driving our opportunity for revenue growth. First, we're building cloud services across our entire portfolio to address the fastest-growing part of our TAM, accelerating the delivery of our own innovation and simplifying customer adoption. Next, unifying our point product technologies into a secure digital workspace, both on-premise and in the cloud, for an integrated end-user experience and simplified control for IT. And third, we're unpacking many of our networking capabilities into a secure digital perimeter to be delivered as a cloud service for reliable and secure app delivery across an extended surface area. With this strategy, we expect to expand our total addressable market by more than 35% over time.

We feel confident in our strategy for several reasons, most importantly of which is that this is what we're hearing from our customers. In fact, a recent ESG study of nearly 1,000 Citrix customers found that 2/3 view us as a cornerstone of their security initiatives, providing secure access and control.

We also have an added advantage over point product providers because of our installed base of hundreds of thousands of customers, 100 million endpoint clients, our layer of 4 through 7 networking and nearly 2 billion documents shared per year. All in, this puts us in a direct path of user, device, networking and content traffic to help optimize, secure, detect and correct issues before they become a problem in customer environments.

And the Citrix Cloud makes the delivery of these benefits much, much easier. What we're doing is providing an integrated approach for administration, identity, authentication, provisioning and management. Citrix is hosting the management layer while the customer gets the choice of where to run the workload, from any cloud or from any on-premise data center. We integrate the administration and control across all of these environments, allowing them to embrace a hybrid cloud architecture while reducing their need for specialized IT skills. Inevitably, this leads to faster innovation, greater control and a lower cost of ownership.

So now let's look at the economics of the subscriptions and why this ultimately drives customer value. Moving to a subscription model provides significant economic benefits for Citrix. The model increases customer lifetime value, while the new cloud services expand our use case opportunity, extending the use of Citrix to secure and deliver a broader range of applications, including SaaS and web apps. This should increase the number of seats and usage of our products over time.

In addition to that, as an integrated suite, the Citrix Workspace Service automatically attaches to our networking and content collaboration products. For customers, the goal is to reduce TCO, easy access and new innovation and simplify their infrastructure while increasing security and, of course, the flexibility and confidence to pursue hybrid multi-cloud strategies.

If you step back and look at the impact of this model on our financial statements, the shift should really only have moderate financial headwinds. Currently, our business is about 70% coming from recurring sources. Our nonratable revenue, the remaining 30%, is made up of perpetual licenses of Workspace Services and networking. We expect that most of the nonratable revenue will move to recurring over time as licenses are sold under the new model.

Financially, subscription transition provides an opportunity for us to increase revenue from both new and installed base sources. The financial opportunity is pretty straightforward when you look at it from a unit economics point of view of a new cloud customer as well as a current installed base customer adopting Citrix Cloud subscriptions. In each case, the customer can consume Citrix Cloud as either SaaS or a hybrid cloud offering, the latter giving them the choice between the 2.

First, for new licenses, current pricing shows an average 2.5-year breakeven point as compared to the cost of purchasing perpetual license and maintenance, creating an increase in lifetime value by year 3 and beyond. Next, you can see an example of the shift for an existing installed base customer moving from maintenance to cloud. While still only a small sample size, we've seen an average 42% price uplift as customers have converted so far. For the purpose of our planning, we've used a more conservative assumption in our modeling and assumed only a 33% price increase over time on conversions from our CSS offering. We understand that customers are moving to cloud really at their own pace and the transition allows for hybrid rights, which affords optionality to migrate to the Citrix Cloud platform over the term of the contract.

We're hearing good feedback from early adopters. For example, from customers that have been running older versions of our product, the move to Citrix Cloud has provided the opportunity to benefit from all the new versions and updates without the cost and complexity of a normal upgrade cycle. Additionally, we have customers reporting consecutive quarters of reduced operating costs post transition.

Specifically looking at our large installed base, there's really 2 opportunities in process that should increase annual recurring revenue. In addition to the Citrix Cloud move that we just discussed, we're also still migrating existing Workspace Services maintenance customers to our upgraded support offering, Customer Success Services, or as we refer to it as CSS. This will be completed during fiscal year '19.

CSS is really important as it provides a significant increase in customer value, including proactive monitoring, analytics, expert guidance, cloud migration tools, unlimited support and access to product updates. As a reminder for everyone, CSS is priced at 25% of original product license cost for an annual subscription versus just 15% to 18% for our older license update programs.

As we previewed at our last analyst meeting, we'll be introducing adjustments to our revenue reporting as well as new metrics so you can better understand the business as we move through this shift, including subscription revenue ARR, annualized subscription mix as a percent of product bookings and deferred and unbilled revenue. We've already posted historical financials in this format to our Investor Relations website so you can build the bridge.

While we're introducing these new metrics, the transition of our Workspace Service and networking business has actually been in process for several quarters. We're now starting to see the impact in the P&L, with subscription revenue accelerating since Q1. In fact, subscription ARR in Q3 was north of $320 million, up 30% from the prior year. Driving this is the increased mix of annualized subscription bookings in the Workspace Service and networking business as a percent of total product, steadily climbing to almost 20% last quarter.

As we look forward, we're approaching the transition holistically and have identified 4 business initiatives that we expect to drive customer and shareholder value, and we have set goals for each one to better understand how we're thinking about the shape of the business in a few years.

First is the move to a subscription model, driving value through more predictable recurring revenue while increasing customer lifetime value. We're targeting to exit 2020 with at least 40% of total revenue coming from subscription.

Next is the delivery of Citrix Cloud. Not only does this increase our addressable market opportunity and accelerate the pace of our innovation delivery, but these services drive real customer value by reducing complexity, TCO and providing a platform to ease the adoption of new Citrix services. We're targeting more than 60% of new bookings coming from Citrix Cloud subscriptions in 3 years.

Third item is our commitment to a balanced and efficient financial model. Exiting 2020, we're targeting revenue growth of greater than 4%, trending upwards while adjusted operating margins of at least 33%.

And finally, as we move through the transition, we plan to continue to return significant capital to our shareholders. Our current plan is to return $2 billion of capital between now and the end of 2018.

So let's take a closer look for a moment at the pace of our transition and how it will impact revenue growth rate. As I mentioned, we're targeting an overall growth rate of more than 4% exiting 2020. And as expected, as we move to a subscription model and we recognize more revenue on a ratable basis, we'll see a temporary decline in revenue growth rate and profitability as we have this year. However, as -- revenue growth should reaccelerate in 2019 and beyond due to the compounding of prior ratable bookings, growth of new customers and the CSS maintenance price increase. Ultimately, the ultimate pace of adoption will drive how quickly we reach these levels.

As the model changes, you're going to see a rapid growth in subscription revenue where our estimates show a compounded growth rate of more than 50% during this timeframe. Partially offsetting this, though, will be the decline in the traditional license and maintenance model.

On the operational side, we'll maintain spending discipline while investing in innovation, customer success and the go-to-market capacity needed for long-term growth. As I've said, as our revenue growth rate slows a little next year, we'll expect a temporary impact in adjusted operating margin. As mentioned, we're targeting to exit fiscal year '20 with adjusted op margin of at least 33%.

Finally, let's address free cash flow. The 2020 exit rate for free cash flow will be influenced by 2 factors: the pace of subscription adoption and the billing terms of these contracts. In order to provide further visibility into the impact of the billing terms, we'll begin disclosing the change in unbilled revenue starting in Q1 earnings. Through the transition and the capital return programs, we're driving the business to deliver more than $7 a share of free cash flow. We expect to achieve this in the 2020, '21 time frame, dependent upon the rate and pace of subscription bookings, the final billing terms and the capital return programs. The mix of free cash flow and unbilled revenue will depend on the average length of these customer contracts and, of course, the frequency of billing cycles.

Transitions like ours typically take 4 to 5 years until the model normalizes. And after that point, you would expect to see an acceleration in free cash flow growth. So when we bring it all together, looking at where we expect to finish 2017 and the impact on the P&L from accelerating this move to subscriptions, our preliminary view on 2018 would include revenue growth in the range of 1% to 2% over this year and adjusted operating margin of 29% to 30%. Ultimately, the pace of the transition is really important. If slower than expected, results could be higher than this outlook. Conversely, if the pace is faster than we expect, then revenue growth and operational profitability could be a little lower in 2018.

So really to sum it up, we're happy with this plan and really happy with how it's all come together in the last 3 months. Our goal is to drive customer success and long-term value for shareholders, partners and employees. The new business model will provide visibility and drive leverage over the next several years, and our innovation around Citrix Cloud will give customers the path that they need to a secure, flexible, multi-cloud, hybrid cloud environment that they've been asking for. We feel good about our direction and the future of Citrix. We've set solid goals for 2020, and we have a clear path to execute. This is an exciting time for the company. And while any transition is challenging, I'm confident that we're positioned for long-term success well into the future.

Thank you, and as always, we look forward to your questions.

(Operator Instructions) Your first question comes from the line of Phil Winslow from Wells Fargo.

A question for you, David. You mentioned obviously rate and pace of transition is going to be important here, not just next year but over the next several years. How are you thinking about going to market with this and just how that rate and pace plays out, considering that it's sort of up to the customer? How are you kind of thinking '18 and beyond? And what sort of incentives, et cetera, do you have in place, whether it be for the customer, for the sales force, et cetera? And then just one quick follow-up to that.

Sure, Phil. I mean, overall, as you imagine, we're working pretty quickly to make sure that we've got a holistic approach to the transition, not just on the go-to-market side but everything inside the organization as well. So we're 100% lined up against what this instate vision is going to look like. In terms of how we're going to market, we're planning on just normalizing it from a sales standpoint so that compensation programs are clean between perpetual and subscription-type revenue sources. We will tweak some of the incentives along the way to incent this more aggressively. And frankly, we've been holding it back at this point, given the impact on the P&L. We've already moved up to nearly 20% of the mix, as I've talked about before. And if we look to accelerate that transition, some of it is just taking our foot off the brake, and some of it is, frankly, just normalizing it from a sales standpoint. So we'll do both.

Got it. And then just a follow-up on CSS. Obviously, last quarter, you gave us some metrics of uptake on that, obviously, the terms of CSS, which have changed now. Just curious if you can just give us an update in terms of what you saw this quarter with CSS, whether it be anything from clients, any sort of change in term versus expectations, et cetera.

Phil, CSS continues to move pretty quickly. As you know, we had a lot of success in Q2. We pulled in probably some business out of Q3 as well, just renewals business. We've migrated, I'd say, roughly half the base so far, but remember that some of these customers are on multiyear step-up from an ASP standpoint. So the financial impact will flow in over time. We expect to be done with the complete migration by fiscal year '19.

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

At the Analyst Day, you had also talked about $500 million for incremental revenue from cloud migration. Are we still on track to that? Or do you think that we should expect more given that -- the accelerated pace of adoption there?

That's a good question, [Bai]. If -- I would encourage everybody to go back and look at the charts, if you haven't seen them, that were part of the webcast and that we posted on the websites. We provided a lot more detail into this transition. But looking specifically at installed base, my prepared remarks talked a little bit about the double hop between migrating customers to CSS, which is still in flight. And then what we've seen so far is a -- actually, about a 42% uplift off of CSS to -- for customers that are migrating to Citrix Cloud subscriptions. And to remind you, that just gives installed base customers the optionality to adopt the Citrix Cloud platform, our host work plane and the capabilities that come along with that. So our model that we've laid out has a lower step-up. We want to be conservative on that and model about 1/3. So I think the opportunity is absolutely there. We'll be migrating those customers at a little bit slower pace, probably the net new. Net new is where we'll be more aggressive, but we have a plan that we're putting in place right now to give them good incentives, but it is a financial step-up.

Got it. And the $2 billion of capital return that you have laid out to the end of next year, is it going to be primarily buybacks? And are you thinking of ASR or some sort of program type of (inaudible) purchases?

We can't give a lot of detail at this point, but we -- I would say that it's fair to assume it'll be largely buyback.

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

This is Tom Mao dialing in for Kirk. David, I realize this is a preliminary guide, but does ASC 606 change? Or does it have any impact on operating margins next year? And just given expenses were kind of higher than expected in the first half of this year, we're a bit surprised you wouldn't see a bit more leverage next year. Would you mind just walking us through some of the pieces as it relates to operating margins going forward?

Sure. The simplest way to think about op margins in '18 and beyond is that we're just being conservative looking at accelerating this transition. As everyone knows, when we push hard and we start driving a much greater incremental amount towards subscriptions, there's a little bit of a dip in the P&L as we spread out that revenue over an extended period of time before the base catches up and we get that acceleration. And so that's the way we're approaching it. We've taken the last 2.5, 3 years to get to 20% of the mix. If we can double that in a year, I think that would be probably as fast as we could go, but that incremental piece is what impacts the top line and then conversely impacts the operating margin. When we step back and we look at where we are, we want to make sure that we've got plenty of capital to invest in increased sales capacity, cloud ops, customer success. Those things are going to really drive success over the next 3 or 4 or 5 years. So that's probably the best way to think about it right now.

Got it. And just a quick follow-up. I know you talked about the CSS offering. What kind of revenue uplift should we expect to see in your customer base? And to what extent is that already embedded in your guidance?

Well, I think it depends on how you're thinking about the installed base because there's really 2 things. Just on a pure ASP uplift, that was back to a biased question, that's hundreds of millions of dollars of annualized recurring revenue that is an uplift from where we are today. I think more importantly, though, is when you think about what we're driving right now and the types of complexity we're trying to abstract away from a customer environment, the secondary impact should really drive a broader set of use cases, should allow us to increase seats under management and really just expand our overall served addressable market. The latter statement, though, none of that is included in our current outlook. We're being very conservative on that piece.

Your next question comes from the line of Rob Owens from KeyBanc Capital Markets.

This is Mike Casado on for Rob Owens. Given the broader hacking activity we've seen over the past few months, how have you seen changes in the way customers engage with you? Is security resonating more with them? And is any of that traction coming from new logos or replacements?

It's a fairly broad question. I'd say that security is absolutely resonating obviously with all of our customer base. It's a huge priority. One of the things that I mentioned in prepared remarks was a recent study that we did with 1,000 Citrix customers, and the vast majority of those highlighted Citrix as a critical part of their overall security framework. And so that, in and of itself, is obviously a real testament. We are spending more time with customers thinking about security holistically because if you think about a lot of what the Workspace Services products do and more broadly, the whole digital workspace, it allows them to really rethink the way that they're approaching everything, from endpoint security, identity, contextual access and contextual performance. So there's definitely a big security wrap around it. When I look forward into really what is the evolution of a lot of networking capabilities as we embrace a perimeter approach and start bringing networking capabilities to the edge, that allows us to much more directly start addressing things that people would consider to be security-specific activities. We have many of these services already embedded inside of the NetScaler ADC platform, but we can expose those and start delivering those as stand-alone services, everything from DDOS to web app firewalls, to secure gateways, to many others. And those will be more directly related. So I'd say the short answer is yes, absolutely security and compliance are key drivers, becoming more so, and I think we've got a pretty exciting road map as I look into the future as well.

On the sales side, with Mark's new appointment to CRO, what are his initial areas of focus relative to the cloud transition effort? And that's it for me.

You bet. It's great to have Mark on board. As I said earlier, this is -- he brings to the company a tremendous amount of deep experience, both across true go-to-market and general management. And he spent the last 6 years really driving a lot of this type of transformation at SAP. So it's going to be awesome having him on board. And one of the first things, of course, he's doing is working customer back, making sure that we've got everything from our engagement model, our channel programs, our quota setting and our overall messaging and engagement, really aligned in a way that resonates with customers. And so as you'd imagine, he hits the ground running, and it'll be very exciting to have him on board.

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

Your next question comes from the line of Raimo Lenschow from Barclays.

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

So David, as you noted, your networking business did struggle again, and it was versus a fairly easy comp. Do you have any visibility into SSP spending on NetScaler over the next couple of quarters or so?

Yes. I mean, it's interesting. I mean, if you kind of look at that business, it's pretty concentrated. And I'd say, overall spending in hyperscale is pretty volatile just by nature. So the -- looking into Q4, I think it grows year-on-year because Q4 was not a huge quarter. More specifically, though, the places that we're investing in, in that business that will drive long term is around the enterprise, the things that are most important to not only our overall strategy but how we're going to drive incremental revenue growth. And that's where the bulk of the market is. As I mentioned earlier, we're seeing double-digit growth in Q3. The reason of that is it's a really good story. We've got a software-first approach. We've got visibility to embrace hybrid cloud motion a lot of customers are asking about and then, ultimately, the delivery of cloud services. So I think, overall, SSPs will be a smaller and smaller part of the total over time because the other is growing much faster. And then specific to them, we're working on expanding the base to include, what, I guess you would call Tier 2 clouds, MSPs and telcos, and then just innovating really quickly to stay ahead of the ongoing white boxing that happens across normal hyperscale.

Okay. And then just as a follow-up, so heading into today, The Street was forecasting approximately 4% revenue growth and 31% to 32% margins for 2018, but that was, of course, prior to embedding any expectation of a cloud acceleration into the model. Is there any way to sort of tell us or give us a sense of what the estimated impact today is of that accelerated transition, David, on total revenue growth and margins in '18?

I guess we'd have to normalize it. But I mean, the business trends have been moving up and to the right. If you think about Q3, I mean, Q3, we just posted the highest revenue growth, EPS growth and op margin of all 3 quarters this year. And Q4 will be the exact same, the highest -- not only the highest percentage mix of subscriptions likely, but accelerating total revenue growth, very quickly accelerating subscription growth, EPS and op margin. So the fundamental trends of the business are actually really good. I mentioned earlier that probably the best way to normalize that is that if you step back and I look at the underlying bookings on a normalized ACV basis, the shift to subscription has, I guess, underrepresented the overall growth rate of product by several percentage points this year.

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

I -- most of mine have been answered, but was just wondering if you could share with us what you've seen in regards to churn rates as the year has progressed and as you've seen some of these programs put into place. And just what's the feedback from customers? I saw the examples that you gave in the slide deck. But overall, where is there pushback if you are getting any? And again, what's the risk that maybe the churn rates could actually accelerate? How do we think about modeling those?

Yes. Heather, if I look at churn rates overall for all types of subscription renewals, they're unchanged. In fact, we anticipated there being a decline when we introduced CSS as a mandatory upgrade. That just hasn't been the case. So we've seen a higher ASP uptake. And I think the reason behind that is that we've just been really successful in articulating the value because not only were we moving up to a price point that, frankly, is right in line with the industry, but we're just adding a lot more value as well as certain services to help customers proactively manage their own environments, migrate to the cloud, et cetera. As we go into true Citrix Cloud, I think the only pushback that I've heard directly is around making sure it's not an either/or, that we're not forcing customers to move to SaaS. And that's why we've mentioned a few times that this is really more of a subscription transition in the first phase and allowing customers to adopt more of a true SaaS version over time because they're all going to have a different pace, may not be their entire infrastructure but that level of flexibility. So we are taking a hybrid cloud approach. This will give them optionality and really align with their own, I guess, call them to-the-cloud road maps.

Yes. I just had one follow-up in just relation to what you just said about giving people the choice. If you are migrating with CSS right to the higher-value program, is it going to be -- is it such where if they decide 2 years from now or 5 years from now that they want to start migrating more aggressively to the cloud that they'll be able to just convert with that existing agreement?

Yes.

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

In thinking about sort of those 2020 targets, particularly like if you think about the $7 in free cash flow per share, how should we think about OpEx growth underneath that? You guys did some initiatives to rebalance and sort of cut some head this year. How should we think about the pace of OpEx growth between now and sort of 2020 that would get us to that $7 in free cash flow?

Yes, Keith. Our -- I'd say the way to think about our overall OpEx growth is we've got good discipline and focus back in the business model. And you saw that show up in Q3 and Q4 guide as well. We will continue to invest in the business. Of course, we're going to be investing in innovation. We're going to be investing in capacity, but we're going to do it on a pretty methodical thoughtful basis. The good news about the overall cost structure, if you think about the migrations that we've been talking about, our cloud service is not data- or compute-intensive. I mean, most of our components are already fully multi-tenants. We're going to have a lot of leverage as we go into this. And customers, as I said, are not going to be adopting the hosted versions day 1. So you get a little bit of a lag effect even on top of that. So I'm pretty confident we can maintain gross margin into the future as well. And then we'll be growing revenue faster than we grow expenses over the period of the term. Got a lot of areas that we're still looking to drive increased productivity, increased focus and alignment, and we've taken some proactive steps already. We actually executed a restructuring at the early part of this quarter. We did that to free up a lot of capital to reinvest in some of those things that we want to drive going forward. Of course, there was a profit element to it as well, but I think we're already well underway. We've been moving very quickly in the last 3 months.

Got it. And then in terms of -- there's a lot of functionality that you guys could add into the service on a going-forward basis, and you were talking about sort of all the security functionality you could add. Will that come primarily from organic development? Or do you see more inorganic sort of technology tuck-ins coming into the equation? You guys have been pretty quiet on the M&A front for the past couple of years as you've been sort of changing around the focus. Will M&A pick up as you kind of roll out these cloud services?

I think it's fair to assume both. Our pace of innovation has changed a lot over the last year or so. What we've been doing behind the scenes is really reorganizing our whole innovation engine. We've broken down all these silos of business units and aligned things against a -- think of Citrix Cloud as a common platform and bring innovation to market on a weekly basis versus once or twice a year in big releases. So I feel really good about that. We've got a lot of these capabilities we can do ourselves. We will have to augment that, of course, with M&A. I think that's going to be an important part of going forward as well, and just make sure that we're not just innovating for the future but also really bringing big chunks as needed and as appropriate for our portfolio.

Got it. And then just one last one. In terms of CSS, you migrated half the base thus far, is there any sense you can give us of what sort of the in-quarter revenue of that was from the CSS migration?

No, Keith, I actually can't. I'm not sure if we really calculated it quite that way. I will say that overall, we've got an uptick in ASPs, but I tend to look at it on more of a bookings basis. And since these are all subscriptions-type contracts, we'd have to go back and see what impacted that in the period.

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

David, I'm not sure if I missed it or not, but can you give us any commentary on what you think cash flow from ops or free cash flow looks like in '18? Is it a step-down given the model transition?

Yes, Brad, we didn't comment on '18. We were just thinking more about what the model is going to look like in 2020 and 2021. Those were the stats that we gave. And we're targeting north of $7 a share on a free cash flow basis. And obviously, that's dependent upon your billing terms and whatnot. But just to help give really good visibility into that element, what we're going to do is start disclosing unbilled revenue on a quarterly basis. It's a new phenomenon for us. We have typically billed everything upfront. We've started accumulating unbilled revenue just in the last 3 quarters. It's already north of $50 million this year, and it's been unreported. So we'll start disclosing that because I think it provides a much more accurate picture for everybody to understand the true strength of the business as well as the impact of billing terms on cash flow.

Great. Great. And then just one quick follow-up. On the $2 billion, if we assume most of that is for repurchase, it would assume that you exit '18 at sort of the 130 million to 135 million share count. 7x that gets you to about $900 million. Is that the right way to think about that?

We would be exiting 2020 then, yes, I think that's right.

Your next question comes from the line of Raimo Lenschow. And he's from Barclays.

David, quick question on the restructuring program that you announced. Can you talk a little bit about how that fits into the overall scheme? Because part of that, if look through the news flow, there was a lot of -- it seems, at least from the news flow, a lot have happened around ShareFile. So I'm a little bit surprised. Can you, I mean, give us a little bit more detail what you did, how it fitted in and how it helps you in the overall margin story going forward?

Sure, Raimo. Yes, I'd caution you to never look too closely to any external news flow because we didn't provide any details around this. And frankly, it was just a bunch of nonsense that was out there. So I tell you what we did do quickly. We started with looking at the overall portfolio, make sure that we have the right focus across our assets. And we trimmed a couple of pieces that weren't just deemed to be critical to the overall strategy. And then we realigned a couple of things to really make sure that what we're doing is truly aligned with the go-forward enterprise-type motion. So the only thing that we have done in the ShareFile business is just start to recast the focus more towards the enterprise versus SMB. It's historically been largely an SMB-type solution. And the things that we're really driving, including deep integration with Citrix Cloud and some of the other more complete workspace portfolio delivery pieces, has been the only thing that we're doing there. So it's full speed ahead with ShareFile but a little bit of a shift in focus. In terms of overall, as I mentioned just a minute earlier, what we're doing is making sure that we've got assets in the right places, we've got efficiency in the way our development organization is laid out from a geographic standpoint. We've got the right skill sets as we look forward. So part of it was really about freeing up capital to reinvest in those things that I think are really needed for the next few years. So we'll exit this whole restructuring process with more quota-carrying resources, a greater mix of cloud-first skills and that type of thing as well as simplified infrastructure in a few places. So it wasn't simply a cost exercise. Of course, there is a cost element, but it's much more forward-looking in terms of where we're going.

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

Maybe I'll make it this time. So I was wondering -- and I'm jumping back and forth, so sorry if I missed things, but it looks in your slides as if we should see increased revenue over the next couple of years during the transition. But cash flow looks like it dips because my assumption is it's because of more unbilled. I don't know if you walked through this, but I want to make sure given the importance of cash flow during the transition that we know what the right metrics are that you really want us to focus on if we are going to see cash flow down for a couple of years.

Yes, Raimo -- I'm sorry, Michael. I would encourage you to go back and look at the transcript and then look at all the underlying metrics because we did cover this. But just to be clear, I mean, we should expect revenue growth each year through the transition, just a very small dip in the overall growth rate of revenue into '18 before we get the compounding effect and some of the underlying drivers that you're seeing already and then it's an acceleration up and to the right. Cash flow, we're taking a conservative approach on cash flow right now because the billing terms of contracts, we're still waiting to see where that lands. If we land on annual billings versus something a little bit longer than that, that puts a bit of a temporary influence on cash flow. So what we would do to give you the appropriate visibility is we'll also be disclosing unbilled revenue each quarter. So if you want to add that to your cash flow, you get a little bit more normalized view of kind of what's going on inside the business. Obviously, that's going to be overall impacted by the length of customer contracts and the frequency of billing. And so I would just -- we'll disclose enough details so everybody could see how that's moving. But the underlying trends are really unchanged. I think we're seeing a very modest impact in the short term, and then we expect to see a nice acceleration as we go into '19, '20 and beyond.

Great. And if I get one follow-up and if it has been covered, my apologies, but anything else you can tell us -- I know you talked a little bit on the security opportunity. But I think you can -- I know you can add to anything you've already said on that because -- in terms of how long we should see that transition taking around NetScaler.

Well, it's a continuum. I mean, we already have a number of services that are being delivered via Citrix Cloud now. They're very early. I mean, the first of which, think about around our -- we used to call NetScaler MAS, which is management and analytics. And it's providing really a key differentiator, frankly, in that space and one of the reasons why we're continuing to take share across ADC. The expansion of that is a first step when it becomes more general analytics than security analytics. So over the course of the next 6 months, you'll see all of our elements be providing data into that base where we can apply the right level of algorithms on top of it to give our customers really unique insight, all the way back from user behaviors, the device behaviors, how applications are performing, anomalies along the way. Those can be acted on in a security context. I also talked briefly about the way a lot of these current networking services are going to be exposed as independent cloud services deployable across multiple instances. And you start thinking about what we can do in that area across gateways and DDOS and firewalls and others. And that's just a normal progression of this market as customers continue to move more and more workloads to the cloud. So stay tuned. We'll talk more about it each and every quarter.

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

This is Tyler Radke or Radke, Tyler for Walter Pritchard. David, I was just hoping you could walk us through your expectations in 2018 for the maintenance uplift from the CSS program. Would you expect maintenance revenue growth to accelerate from kind of the level it is today? And has the increased move toward subscriptions changed any of your assumptions there?

No, I'd say -- I mean, the way we're thinking about '18 is pretty high level at this point in time. We haven't broken it down and guided to the individual line items. Overall, I'd say we feel good about the pipeline. We expect customers to continue to adopt these subscription services for hybrid and SaaS as well as the CSS uplift. So it's all moving in the right direction. We'll provide quarterly updates. But at this point, it's just -- it's a little premature to start guiding to the individual line items.

Okay. And just in terms of the subscription impact, does that change anything just given the higher uptake that you've seen from customers?

I think the subscription impact, and I mentioned this a little earlier, Tyler, is that we've got a little under 20% of the base that is consuming right now on new licenses, net new licenses, as a subscription service. And that's up from somewhere in that 10% to 15% last year. So think about the incremental jump and the impact that that's had on revenue this year. Going into '18, we want to look at probably a doubling of that incremental amount from year-to-year. That's what's causing the slow pause. As we get into that, I mean, there's a few moving parts just in terms of how many customers on the installed base that are going to want to migrate versus net new. And so as we get each and every quarter, we'll give a little bit more detail there.

Got you. And then on the new subscription kind of line item that you guys broke out, that includes term licenses. Is it your expectation once you adopt ASC 606 that you're going to have to kind of separate the term licenses from that bucket given the potential that those get recognized when the deal is booked?

Yes. Term is not a big part of what we do. And we've been dialing term back for a while just in anticipation of 606. But for completeness, we wanted to put all that together. So I wouldn't anticipate it being a very large amount. But yes, obviously, the revenue treatment does change under 606, but it's a small rounding error for us.

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

I just had one more follow-up. David, to your question you're asked earlier about the 2020 free cash flow, if I scroll down to the bottom of your slides, obviously, you've got that unbilled component there. And if you kind of correlate that back to the revenue slide a few earlier, obviously, you're calling for a sort of acceleration in the transition in '19 and '20 sort of away from licenses, so therefore, a buildup of that unearned. So should we think about what I would call like the underlying cash flow power, not necessarily being 7 but kind of adding back, so to speak, that green box there on top of what's called the underlying cash flow power that we've actually start to see but kind of in the outer years as you guys talk about '21 and beyond sort of, call it, what you've got in backlog there.

Yes, Phil, I think that's a great way to look at it. And one of the reasons why we're going to be disclosing both because they can be influenced by billing terms and other things. So it's appropriate, for sure.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. I will now turn the call back over to management for closing remarks.

Just want to say thanks again for everybody for joining us. This new business model is really going to improve our visibility and drive leverage over the next several years. It will help our innovation around Citrix Cloud in a security-defined perimeter, giving our customers a path that they've really been asking for around a secure, flexible, hybrid cloud infrastructure. We feel very, very good about our direction, and I think we've got a clear path to execute. I think it's a very exciting time for the company, and I look forward to giving you an update in 3 months. Thanks again.

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