思杰系統 (CTXS) 2018 Q2 法說會逐字稿

Good afternoon. My name is Ian, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Citrix Systems 2Q '18 Financial Results and Business Outlook Conference Call. (Operator Instructions)

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

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The Citrix Systems Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

Thank you. I would now like to introduce Mr. Eduardo Fleites. Mr. Fleites, you may begin your conference.

Thank you. Good afternoon, everyone, and thank you for joining us for today's Second Quarter and Fiscal Year 2018 Earnings Presentation. Participating on the call will be David Henshall, President and CEO; and Drew Del Matto, Executive Vice President and CFO. 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 expectations and assumptions that are subject to risks and uncertainties. Obviously, these risks could cause actual results to differ from those anticipated. Additional information concerning these and other factors is highlighted in today's press release and in the company's filings with the SEC. Copies are available from the SEC or on the company's Investor Relations website.

Furthermore, we will discuss various non-GAAP financial measures as defined by SEC's Reg G. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today's call can be found at the end of today's press release and on the Investor Relations page of our website.

Now I'd like to turn it over to Drew, our Executive Vice President and Chief Financial Officer. Drew?

Thank you, Eduardo, and welcome to everyone joining us today. We experienced excellent results across Citrix in Q2. Our transition to the cloud continues to gain momentum with our Synergy announcements resonating in our markets.

In summary, total revenue grew 7% year-on-year. Subscription revenue grew 49% year-on-year. Subscription bookings grew to 42% of total product bookings. Adjusted operating margin was 30%, up more than 400 basis points versus last year. Adjusted EPS was $1.28 per share, up 24% versus last year. And combined deferred and unbilled revenue grew to $1.94 billion, up 10% over Q1 of FY '18.

Our subscription metrics, along with our deferred revenue and unbilled metrics, highlight our success in our cloud transition. We are well on our way to achieving the 2022 metrics we communicated at Synergy in May.

As stated last quarter, we adopted the new accounting standard ASC 606, using the modified retrospective method beginning in January of 2018. The effects of which were immaterial to revenue in Q2. You can find more details posted to our Investor Relations website.

Now looking back at Q2. Our enterprise business continued to be strong. We closed 83 $1 million-plus transactions compared to 79 in the prior year, with strength in health care, technology, financial services and government. There was a good balance across the portfolio, with strength in both cloud and on-premise Workspace Services and networking.

Our focus on cloud and hybrid cloud, along with our Synergy messaging, provided a tailwind to our enterprise business. We saw consistent 7% to 8% growth in each of the geographies. Customers are realizing the value of reduced infrastructure complexity, strengthened security and flexibility to align with their business initiatives. Citrix Cloud simplifies hybrid cloud adoption, providing the same infrastructure on-premise or in the cloud.

Next, let's take a closer look at Q2 results within our primary businesses. Workspace Services had a great quarter, with revenue up 7% year-on-year to $455 million. This is the fastest growth in this business in several years. More importantly, Workspace Services product and subscription revenue grew by over 20% year-over-year. This was driven by a continuation of recent trends toward hybrid cloud subscriptions for our unified workspace and CSP offerings. Within Workspace Services, Q2 subscriptions reached 50% of the product bookings mix for the first time.

Results were steady within the networking business. Q2 '18 networking revenue increased 5% year-on-year to $207 million, with subscription revenue more than doubling over last year.

Finally, our content collaboration revenue grew about 13% year-on-year to $46 million in the quarter. Our investments in our go-to-market initiatives this year, such as increasing our sales capacity; and focused demand generation activities, are paying off in both higher growth and more strategic alignment with our customers. Given our success, this will continue to be an area of focus as we move forward.

Let's now turn to operations. In Q2, our adjusted operating margin was 30%, up more than 400 basis points from last year. While we continue to maintain a disciplined approach to spending, we've also been increasing investments in demand generation and awareness of the integrated workspace and networking strategy. We'll continue to balance margin expansion with the investments needed to keep growing pipeline and sales capacity as we transition the business model.

As mentioned, cash flow from operations was $170 million for the trailing 12 months. Cash flow from -- for the trailing 12 months, cash flow from operations was over $1 billion.

Deferred revenue was $1.72 billion, up nearly $40 million sequentially. Unbilled subscription revenue increased sequentially by over $70 million. Combined, deferred and unbilled revenue grew 10% over Q1 of FY '18, reflecting strength -- reflecting our strength in the quarter.

Please note that the adoption of the new revenue accounting standard ASC 606 creates about a 500 basis point headwind that you would need to adjust out when comparing deferred and unbilled revenue for Q2 '18 to Q2 '17.

We also closed Q2 with approximately $38 million of product backlog. At the end of Q2, we had over $2.3 billion in cash and investments. We also repurchased 1.8 million shares in the period and still have approximately $500 million under our remaining share repurchase authorization.

Since we announced our $2 billion capital return program in November of 2017, we've repurchased almost 17 million shares for approximately $1.5 billion at an average share price of approximately $90. As we announced at our Investor Day in May, we intend to declare a dividend of $0.35 per share starting in the fourth quarter of this year.

Now turning to Q3 '18 and full year 2018 guidance. In line with our multiyear strategy, we expect to see the continued acceleration in the adoption of our cloud services and subscription-based offerings, which creates some headwinds to reported results. However, given our recent results and momentum, we are raising our expectations for Q3 and for 2018.

We now expect for the full year 2018 revenue between $2.92 billion to $2.95 billion, improving our growth rate for the year by more than 100 basis points at the midpoint from prior guidance; adjusted operating margin of 30% to 31%; and adjusted EPS of $5.30 to $5.40 per share. For Q3 of 2018, we expect revenue between $715 million to $725 million and adjusted EPS of $1.23 to $1.26 per share.

I'd now like to turn it over to David to give further color on the quarter and more color on Q2, our vision, strategy and areas of focus.

Welcome, everyone, and thanks for joining us today. As Drew noted, Q2 was yet another strong quarter, posting upside to financial expectations while continuing to execute on the strategy transformation across the company. I'm really proud of how this team has performed over last year. More importantly though, customers and partners are embracing our strategy, driving the multiyear plan.

Despite the headwinds from the continued mix shift, our reported numbers are clearly stronger than most anticipated in Q2, largely due to the strength of new product bookings for the Citrix Workspace. In fact, our reported revenue growth rate more than doubled from last year, while at the same time, the contribution from subscription license increased from 11% to 15% of total revenue. Couple this with cost discipline, and we continue to demonstrate a lot of upside against margin and EPS goals.

Looking specifically at the business transition. I want to reiterate the important metrics that we use each quarter to measure and communicate progress. In Q2, subscription revenue, which has been accelerating over the last year, grew 49% to over $110 million, as Drew mentioned. On a TCV basis, the mix of product bookings coming from subscriptions was 42% versus 32% a year ago, driving greater forward visibility.

For the current fiscal year, we're still targeting up to 40% subscription bookings mix for the full year. And this has led to the balance of unbilled revenue from subscriptions increasing over $70 million sequentially, further demonstrating just how strong bookings were in Q2. This is most evident in the Workspace business, which, as Drew mentioned, has now seen its strongest growth rate in many years.

What's happening here is that the strategy and vision that we laid out over the last year is really resonating. Customers are seeing that Citrix adds a lot of value to their long-term initiatives in terms of simplifying hybrid cloud environments, reducing the burden of IT and accelerating the adoption of Citrix innovations. Additionally, due to our support for all major infrastructure providers, we give customers the flexibility to migrate workloads to and amongst the different clouds of their choice.

In total, Citrix Cloud now includes more than a dozen services with options for SaaS and hybrid models as well as services for those customers with only on-prem implementations to help them manage and monitor their infrastructure more effectively.

I'd say customer momentum really stepped up after our Synergy event in May. We've had great feedback regarding the alignment and clarity of our strategy as well as the record volume of new innovations and announcements we made with partners like Microsoft, Google and others.

Our message there focused on the future of work and how we can help IT lower infrastructure costs while driving higher employee productivity. The current cloud mobile era of technology has really created unprecedented flexibility in compute and work styles. However, what we're seeing is that most customers are deploying a growing number of discrete point product solutions in order to manage this, an approach that is really both complex and expensive. Our focus has been to abstract away much of the complexity associated with these niche products and highlight the benefits of our complete integrated Citrix solutions.

I'd say of all the innovations at Synergy, of particular interest to customers was the Citrix Workspace app, the analytics platform and our next-generation unified networking and security vision that we call the Secure Digital Perimeter.

So the Workspace app provides access to all application and content needed to be productive. This includes differentiated capabilities, such as federated identity, unified experience, out-of-the-box integration to leading SaaS apps and a broad approach to universal employee management.

Most importantly, we built a general-purpose solution to provide security management for all application types, including value for those customers that chose not to deploy or use app virtualization or VDI. And this opens up a much broader commercial opportunity for us.

Attendees were also positive about the launch of Citrix Analytics platform for real-time detection and automated resolution of potential security threats across user, device, network and file elements. This leverages the instrumentation that we've built really across the portfolio to provide more -- very unique capabilities and the generation of actionable insights.

And finally, as I said, we received good feedback on our unique security approach that supports trusted computing outside the corporate data center, as our networking products have been extended into the cloud more than ever before. This included announcements such as Citrix Cloud app control, SD-WAN service for MSPs and SD-WAN on Azure, which leverages Azure's virtual WAN service to enhance overall app performance and user experience at branch operations and at the Edge.

Basically, our transformation isn't about just porting our existing discrete products to cloud service, but unifying our products into complete solutions that more holistically address the needs of the market, and in the process, giving us an increasing advantage over traditional and upstart competitors who continue to deliver just point products. So lots of great stuff.

Turning back to Q2. Let me give you some large customer examples to highlight the diversity of use cases, the accelerating adoption of our services and our continued competitive advantage in the market.

All in, we had a really big quarter for large deals, which you can see in the results and in the growth in unbilled revenue. This is a reflection of our increased focus on C-level conversations and the confidence that our customers are seeing in our ability to partner with them well into the future.

For the first time, we closed 4 transactions greater than $10 million each in a quarter. And all the top 10 largest Citrix Cloud deals this quarter exceeded $1 million.

In one such transaction, seeking cost savings, flexibility, increased security and improved end-user experience, Willis Towers Watson, a leading global advisory, brokering and solutions company with more than 40,000 employees worldwide selected Citrix Cloud for its workspace delivery needs as they execute on a cloud-first vision. It was our close partnership with Microsoft that created the alignment needed to deliver a seamless solution to help this company shift easily from an on-premise delivery model to an Azure-focused model powered by Citrix Cloud.

In another transaction, which is a major win against 2 primary competitors, Braskem, the largest petrochemical company in Latin America, chose Citrix Workspace delivered as a service to fulfill their vision of moving into the cloud with a truly integrated workspace experience. Compliance and security were the top concerns for Braskem, and the Citrix Workspace was the only solution that allowed them to control all of their apps; desktops; and most importantly, their content, while also delivering a unified consumer-grade experience for their employees and their customers.

Here are just a couple of examples why our cloud services are proven to be so valuable to both new and existing customers and why we're winning these types of opportunities. These examples also demonstrate how our customers are committing to us for multiple years, validating our direction as part of their current and future road maps.

So let's talk about networking for a minute as this business was stable in Q2 across both the hyperscale SSP segment and the enterprise accounts, as Drew mentioned. In fact, the mix was 41% SSP, same as last year. What's driving this is really 3 factors. For customers focused on a digital workspace, the integrations we've built across the portfolio create demonstrable added value for security, identity and performance. For ADC accounts, our industry-leading software-first approach gives them unique flexibility to embrace the hybrid cloud. And really for all customers, Citrix Analytics is a differentiator for visibility into the network, the workspace, the user and other important areas.

Networking wins in Q2 included a large Internet-based publishing company choosing Citrix networking to help drive their multi-cloud strategy, helping them future-proof the organization with a hybrid model, which will scale easily as this company grows through acquisition.

A U.S. auto parts manufacturer replaced a competitor's ADC solution with Citrix to facilitate their secure connection to external contractors, citing our superior long-term vision for cloud and networking services.

And finally, there was also several new SD-WAN wins in a variety of areas, including cross-sell to existing Workspace customers to provide optimization of HDX traffic; and to net new customers investing in our larger strategy of integrated networking delivered via Citrix Cloud.

So entering the second half, I feel really good about our momentum and our purpose. We're more aligned and more focused on customer success than ever before. Clearly, financial results are strong, and we're proving that you can drive a cloud transition and accelerate revenues and margins together. And it's a powerful combination.

Looking forward, our focus is going to remain on 3 strategic motions: One, accelerating to the cloud to help our customers work the way they want to, on-prem, hybrid or in the public cloud; second, unifying our portfolio to deliver a simple, intuitive, elegant workspace with a premium on experience, security and choice; and lastly, extending our solutions into new areas to help our customers meet the demands of the future while expanding our addressable margin and driving incremental revenue and relevance for Citrix in areas such as security, analytics and the Secure Digital Perimeter.

It's clear that our customers are looking to operate in a multi-cloud, hybrid cloud world, and Citrix is clearly positioned to provide simple, secure and unified solutions to help them address these challenges as well as simplifying their road maps. We're excited about the future, and I'm confident in the progress that we're making so far in 2018.

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

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

David, just wanted to focus in on Workspace Services because, as you mentioned, that's the highest growth rate we've seen in a while in that segment. And as you pointed out, too, we even saw the mix towards subscription move higher quarter-to-quarter and a lot year-over-year. So it seemed like license was strong and subscription was strong. But what is the feedback that you're getting from customers that's driving, essentially, like, both those 2 to move up? And how should we think about sort of the big deals impacting that dynamic? And I just got one follow-up to that.

Sure, Phil. Thanks very much. I mean, you take a step back and let me just add a little context here. So I mean, we laid out our strategy in the second half last year and we're executing against that strategy. I'm really happy with the performance of the team and the reception

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with them over a protracted period of time. Our sales teams around the world are executing extremely well and they've been focused on building more direct strategic relationships at the C-level as well as investments in capacity, and those are really helping. So when you look specifically at the Workspace business, we did have a record number of $1 million-plus transactions. We had multiple 8-figure transactions. Good balance across the geos. Both the EMEA area and North America were well into the double digits from a demand point of view on that side. I'd say that we had a quarter where you also saw perpetual license very strong as well. So while subscription was huge, and that drove a lot of the unbilled, I'll come back to it in a minute, we also had good perpetual license quarter. So the rising tide really lift the boat. Citrix Cloud is a big driver. All 10 of the largest deals there were all over $1 million each. The subscription mix within the Workspace crossed 50% for the first time, much higher if you include installed base trade-up as well. That's an early program, but one that's starting to get some good traction. And CSP, which we haven't talked too much about, but just as a reminder, that's for our partners that are looking to build the infrastructure to deliver some sort of vertical services for their end customers. I mean, that business is still growing in the 30% to 40% range. So really across the board. Very happy with that.

Great. And then just a follow-up on cash flow. I mean, obviously, we've seen a big increase year-over-year in the first half here. And I know second half of last year was particularly strong, too. But if I just say, "Hey, the second half of this year is flat with the second half of '17," I mean, that puts you almost on path for $7-plus of free cash flow per share this year. And I know your guidance for 2020 is $7-plus. And at Analyst Day you said, "Okay, that might shift into '19." But maybe kind of help us think through kind of second half free cash flow, but also sort of the progression to those 2022 numbers.

Yes, Phil. Good question. I mean, it's clear that we're, from a bookings stance -- standpoint, we're running well ahead of our original expectations. So on a trailing 12-month basis, where we're well over $1 billion of cash flow from ops, and that translates into the low-$7 free cash flow, a little bit behind that. So the way to think about cash flow, just as a reminder to everybody, that as we go through this transition, one of the things that we are doing is reducing the frequency of billing cycles. So we're putting more and more revenue on -- off the books, that was that big step-up in unbilled revenue that you saw. And so that really needs to be looked at in concert with actual reported cash flow. So please look at -- when you're trying to calculate bookings, look at the change in deferred, the change in unbilled and then recognized revenue. Those are really the 3 pieces to really triangulate what future cash flows are going to look like for us.

And our next question is one of Rob Owens from KeyBanc Capital Markets.

If you look at the strength that you saw in new product bookings from Citrix Workspace, how much of that's coming from new customers and customer acquisition versus kind of selling into the legacy base the new capability? Can you provide any color there?

Sure, Rob. It's both, of course. So you can look at it probably in 3 ways. One is when we talk about trade-up and transition, or TTU, that we have referenced a couple of times. That is more of an installed base customer that we are migrating to Citrix Cloud. That is -- we kept that entirely out of the conversation so far, and I want to keep everything focused on net new. And so TTU is a motion that's now into the 8 figures, but it's still pretty early. We're going to focus more on that in the second half of the year. So net new is where the bulk of all the demand is coming from. That is, in some cases, because we're so broadly distributed. We're already touching almost all of the Global 5000, but these are net new opportunities within those accounts to a large degree. And then truly net new, companies that we have never done business with in any product in our history, we add several hundred per quarter.

And usually, when companies are going through a product transition, especially within your largest category, to more subscription, you don't see the product and license strength that you saw this quarter. So could you provide a little more context or color around exactly what's going on there? And as you kind of evaluate the puts and takes then for Q3, and I guess, some of the conservatism around growth, is it not sustainable relative to product and license? Was there something in the quarter that was an aberration or something of that nature?

Rob, no aberration, I'd say. I mean, listen, we're super happy with the progress that we've made. I think this is the fourth quarter in a row that we've been able to raise our external expectations. I mean, we're taking full year guidance up by, I don't know, 100, 150 basis points from a growth rate point of view, and that's despite having a really large Q2, we're also raising expectations for Q3. So really positive, but I don't want to get ahead of ourselves as well. Seeing growth in product and subscription for this business at 20% is a growth rate we haven't seen in 8 years, so it's nice to see that happening. But I want to see a few more data points before we start talking about what the real trend of the rate is. So we're going to maintain a very positive and appropriate point of view going into Q3. Also, Q3 as you know, it's the summer quarter where customers are out for large parts of it, so it tended to be a little bit more back-end loaded. So once we get through Q3, we'll talk about where we think the new trend line is.

And our next question is from the line of Heather Bellini from Goldman Sachs.

This is actually Ted Lin on for Heather. A couple for me. Can you give us, I guess, a little -- some more color into the unified and integrated workspace and networking offerings in terms of the ability to open new conversations or drive higher-level conversations?

Sure, Ted. I mean, the way to think about it is, when we talk about the integrated workspace, I mean, that's a combination of 3 big forces that we laid out in the middle of last year that are really shaping the way we're driving operations in the company. The first one is about unifying the portfolio. That's simply bringing point products and their development teams together so that we can create truly integrated solutions. That's one. Second piece was accelerating to the cloud so that we can build out a portfolio of cloud solutions to allow us to meet customers wherever they are in their journey. And frankly, I think most are going to be on a hybrid cloud model for some period of many years. And it's important for us to be able to help them bridge that, regardless of what they're trying to do in real time. And then third area is a little bit more about vision, and that's where the secure perimeter comes in, where we can talk about the evolution of networking services and how they are ultimately going to be impacted as more workloads move to the cloud, as compute moves out to the Edge, it becomes a little more of a mesh of services over time. Now a lot of companies aren't deploying that way yet, but when they look at engaging with a partner like Citrix for a current project, being able to communicate the vision and where we're going to give them confidence that we're going to be there as their projects catch up to that, is really important. And it's one of the reasons why we've been focused so much on enabling our teams to sell at more strategic level, to be able to talk about the business from a top-down point of view and give this broader perspective of infrastructure versus point projects along the way. And I think that's one of the things that has really led to the uptick in large transactions. And again, like I said, it's very early coming out of Synergy, but the feedback that we've received from that on some of the newer initiatives that are, frankly, all hitting the market either in the last couple of weeks or in the next couple of weeks, great feedback. And we'll just work with customers to get those folks started in their infrastructure and see where we go from there.

Great. That's very helpful. And then on maintenance, I think you're now on year 2 of the mandatory migration to CSS maintenance. What are the types of uplift that you're seeing? And what were your expectations going in?

Drew, why don't you take that question?

Yes. Sure. Great question, Ted. Yes. We're really pretty much through the -- just the CSS uplift. That really started over a year ago. And so most of that's rolling into revenue now. But in terms of the new business, the uplift that we're really seeing as we build deferred, as David pointed out -- or as we pointed out earlier, deferred and unbilled were up $170 million sequentially. And the bulk of that's really coming out of new business, primarily the subscription business. And again, 42% of the product bookings this quarter were subscription. So you could see the growth there. It's really driven off the new business on the subscription side.

One interesting thing to add to that was that when we adopted 606 last quarter, we had to take a haircut of a better part of $100 million on deferred revenue as well. So some of that price uplift that we're able to achieve over the second half of last year, we had kind of get washed away from an accounting change. But that said, it's definitely one of the things that's helping drive the overall acceleration of revenue growth over the last 5 quarters.

And our next question comes from the line of Raimo Lenschow from Barclays.

This is David Rainville actually on for Raimo. Maybe another question around -- more high-level question around Workspace, if that's okay. It seems that both subscription and perpetual did well this quarter, highlighting the strong percentage in subscription bookings in the segment, too. I'm just wondering, can you give us a little bit more color about what's driving customers to go for one or the other? And what you're seeing in the workspace, like, competitive landscape at the moment?

Yes, let me take the last part of that question first. I mean, the landscape continues to be very, very competitive, as you can imagine. So no change on that front. But you have to step back for a minute. It's the broader forces that we've talked about for a long time and were a key element of our overall Synergy conference. I mean, the fact is people are concerned, CIOs, CEOs, about getting more productivity and engagement out of their workforce. And while this current era of computing, we call it the mobile cloud era, has created unprecedented flexibility from a compute standpoint and from a device standpoint. In most customers, their environment, all that does is add complexity. And so what they're doing is they're employing a number of little point product solutions to help address everything from app delivery to identity, to managing SaaS and connectivity. And that's excessive and it's complex. And so our approach has been to abstract away as much of that complexity as we can and provide this vision for a unified workspace and one that helps them cut cost, helps them simplify, but more importantly, kind of drives that enablement around productivity of the workforce; but do it in a secure manner, do it in a way that embraces the way that people are working today. So that's kind of the uber-backdrop and the message. And when it comes to individual customers, it depends on really what they're driving immediately from their own initiatives. I mean, the 2 that we referenced by name in the script, like -- Willis Towers Watson, everybody knows they're a leading advisory and brokerage firm with tens of thousands of employees. I mean, they're adopting a cloud-first approach. And so they're very much focused on Azure. And because of the partnership with Microsoft, be able to help manage their entire workspace as a cloud-delivered service from Azure was really what -- the critical part of the conversation there. So that's one good example. Customers that also have large on-premise deployments, sometimes in very highly regulated industries or maybe outside the U.S., they're just going to continue to expand that, and that's what we saw at the same time. So just depends on where they are. I'd say longer term, most will migrate towards some form of hybrid cloud. That's certainly a core part of our strategy. But we want to make sure that we're not pushing customers to adopt faster than they're ready. And it's important for us to have this support for both architectures.

That makes sense. And maybe just a quick follow-up. At the Analyst Day, you mentioned roughly 400k enterprises that -- as a Citrix customer. What is the wider long-term opportunity for Workspace-as-a-Service, as a subscription, when you think in the long term? And of course, not looking for an exact number, but just more of a framework and how you think about this.

I'll tell you my -- the high-level framework. This is an important way that we talk about it internally, that the Citrix Workspace app was designed as a general purpose solution. What I mean by that is it adds value to applications of all types: SaaS, mobile, virtualized, et cetera and as well as content and doing that in a way that doesn't rely on virtualization. And so that's an internal, important way for the people to think about it. It's not just a renaming or reimplementation of a virtualization solution, but it's truly general purpose infrastructure, and it allows you to address those use cases very individually and tailor those for every user inside of every enterprise. So when we think about it, that's strategically where we're going and why we announced some of these new capabilities like cloud app control service and others that are a critical part of that workspace vision. We're just bringing those to market now. There's obviously a long ways to go from an execution standpoint. But general purpose is clearly the way that we unlock a much broader opportunity than we might have been looking at in the past.

And our next question is from the line of Nikolay Beliov from Bank of America.

David, the first question is for you. With the new products you introduced at Synergy, how do you bridge -- how do you create a bridge between the endpoint buyer, security buyer, and I think buyer -- a networking buyer within the organization? How is the selling motion changing in light of the diversified portfolio?

I think the portfolio has gotten -- it's interesting, the portfolio has gotten a lot simpler over the last 2 or 3 years. I mean, that was a critical element. Is -- part of our strategy was about focusing on the things that are truly important to the customer and then stripping away everything else. And that's frankly, allowed us to go much faster from an execution point of view. When we think about the workspace and some of the new elements today, it's -- the core strategy, if you want to talk at a high level, it's a C-level conversation. It's an infrastructure conversation, it's not for the project buyer. That said, all of the advancements that we're making in the individual capabilities, be it in ADC or be it in file sync and share or virtualization, all of those are designed to enhance their category competitiveness as well as differentiation for those customers that are still looking at it purely from a project basis. But by the time we start talking about a large transaction, you're generally dealing with the CIO, VP of IT, somebody at a very senior level that can help coordinate what might have historically been a point product buyer. And again, that's part of the enablement that we're working through right now. It's one of the things that when we bring customers into the briefing center, you'll see a mix nowadays of executive leadership, security, networking and others, just depends on where the customer is. And frankly, it depends a little bit on the customer's size.

Got it. And then my second question is around ShareFile. The growth rate is -- the sell rate here to the low teens versus 20%, 30% in the past. Is the low teens kind of like the new normal? What's the strategy here? Are there plans to rejuvenate the business?

Well, I think as everyone knows, we had a pretty major strategy shift in that business over the course of the last year. The thing that we articulated was we were going to emphasize the integration with the holistic workspace and focus more on the enterprise than it had been as a cloud storage solution with a lot of SMB-type focus, and that's a core part of the strategy. And so, less of a standalone sale and more of a sale in the context of the workspace. I mean, that's the direction we're going, so I think the growth rate right now is just a reflection of that. I mean, we're not allocating dollars in between the bundles, so there's -- it's going to be consumed that way more and more over time. Probably 1 year to 2 years out, we'll be talking about the workspace as largely the one element of revenue, that's the one that matters most from a visibility standpoint. But today, it's still important to look at them individually.

And our next question is from the line of Gregg Moskowitz from Cowen and Company.

So David, it's terrific to see 4 transactions over $10 million each in the quarter, especially for Q2. How would you characterize the large deal pipeline at this time? And then also, I know that you don't explicitly guide to it, but what are your high-level expectations for unbilled in Q3 and Q4?

Yes, let me take the last question. I mean, unbilled -- I mean, as everybody has seen, unbilled had a really big spike in Q2. It had very, very strong bookings in the second quarter. We're not going to forecast that going out. It's one of those things that as we went through this transition, we committed to reporting to because we wanted to make sure that everybody has the elements necessary to truly measure the progress against our transformation, but we're just not going to forecast that at this point. Incredibly happy with the number in Q2 and we're certainly well above our internal expectations. As I mentioned before, the 2 largest geos both showed double-digit growth, which was great. We haven't disclosed it yet, on an ACV basis, we had similar growth rates to the TCV. And so, we're not changing duration at all, it's just a function of a really strong quarter. In terms of looking forward, I'll repeat what I said earlier that we're happy with where we are. We've been showing better and better progress every quarter. But I also want to just remain normally cautious like we always are in terms of forward outlook and let's not get ahead of ourselves. It's the summer quarter, so come back in Q3 and we'll talk about if we're on a different trajectory or not. And as of right now, we're executing against our 2022 plan that we laid out. We are ahead of the ramp rate clearly, but that's the backdrop that we're executing on right now.

Okay, perfect. And then in terms of that third geo, so the APJ business, it did perform better this quarter, at least in terms of revenue growth. Is there anything in particular that you would attribute that to?

It's just APJ is the smallest of the 3 regions. It tends to be a little bit more volatile from a result standpoint. It's surprisingly consistent, having all 3 geos at that 7%, 8% at the same time. I wouldn't expect it to be that way from a underlying demand and bookings standpoint. As I said, the 2 strongest in Q2 were North America and Europe. Actually, the Americas and EMEA, let's put it that way, and APJ was trailing. That reverses itself probably in Q3 or Q4. But overall, we're just happy with the progress we're seeing across the globe, because our sales team are continuing to execute better and better all the time.

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

Got 2 questions for you. First one is, you saw a stronger -- as everyone's discussed, with strong -- seen the stronger Workspace results and even that was given the negative impact of the subscription transition. Can you give us a sense of how much that transition impacted what the reported number would be?

Mark, I'm not sure I 100% understand your question. But I will say that over 50% of the TCV bookings for Workspace were subscription, leading to very little recognized. When we look at that growth in -- the growth in subscription from an unbilled standpoint, I mean, subscription's increased, what, a little over $70 million, Drew, sequentially? And the vast majority of that is just Workspace cloud -- Citrix Cloud, excuse me, for the Workspace. So that's really the driver. The underlying bookings, clearly were in the double-digit range.

Right, but if you'd not have been moving subscription, obviously, the growth would have further -- been faster than what was reported.

Well, sure.

Okay. No sense of how much?

Well, I don't think it's important to break it out at this point. I'd rather not get into the habit of disclosing that because moving to subscription billing is the -- it is the strategy right now, and that's where we're going. And the fact that we can actually post accelerating growth while we're driving an even bigger percentage mix is pretty cool. We're very happy with that right now.

Agree. Quick follow-up. Roughly, the discussion is about the continuing or increasing relationship at the C-level between Citrix and the larger clients. Can you give us a sense of if that's part of a trend in terms of a move of more to direct? Or is any change in terms of how much of the revenue, how much of the relationship is through the channel versus direct and how you expect that to change as you continue with your subscription change?

Well, sure. I think that as we've been talking for the last year or so, I mean, we've been making a very direct effort to enhance our relationships at a strategic level with our customers. And we've been investing in everything from a number of global roles to do that, more quota sharing capacity. Mark Ferrer and team have been driving just a lot of operational changes across the board. That said, we still fulfill the vast, vast majority of our business through partners. The partner network is changing, as you would imagine. It's changing with the landscape of technology. So we have been recruiting new partners along the way, folks that are more comfortable with selling cloud and are participating with Microsoft network and areas like that. And we're continuing to work on enablement for our existing partners. We're -- I think we're still pretty early in the game from an enablement standpoint, that frankly, it's one of the reasons why the various channel check notes that I read pre-quarter, some were wildly positive and some were negative. And I think that's just a reflection of a channel in transition, and it's a matter of who you talk to. And so, we have several thousand partners that transact with us any given quarter. Some are moving much faster than others, and it's incumbent upon us to keep driving enablement, making sure we've got programs in place so that people can make a lot of money. And just from a program standpoint, we are trying to drive more aligned with the strategy and much less about trading up an installed base customer. And so, there's a strategy shift going on at the same time.

And your next question is from the line of Kirk Materne from Evercore ISI.

This is actually Peter Levine in for Kirk. So just 2 quick questions. Can you discuss some of the competitive dynamics that you're seeing on the network side of the business? Do you feel like it's more kind of taking share or it's just kind of an overall uptick in the networking side?

Yes. Well, networking's -- no change in the competitive dynamics. I mean, it's always been a highly competitive market. And I think that if you look backwards, the business in ADC, we've been taking share gradually for probably a decade now. And when we look at it, it's just kind of inching up. SSPs continue to be a little lumpy but they've -- I think we're doing a better job of broadening that base to help reduce some of the volatility there. But the bulk of the business is coming from the enterprise and I'd say that there's really 3 factors. One is that the customers that are focused on the workspace, we have built nice integrations across that. And so, you can do unique things with the combination of the solution that really differentiate and drive value, whether it's security, identity, performance, et cetera. In a typical competitive ADC account, we've got a really good hybrid cloud story. We've always been a software product that can be deployed across hardware appliances, virtual appliance, in a container, et cetera. And that's just given us a lot of flexibility to [address a swing] at whatever project that a customer has. And I would say the one area that's popped out as a differentiator over the last couple -- last year, 1.5 years has been around analytics. And so our analytics approach just provides a lot more visibility into the network or the workspace or the user, if you're one of those customers, and that's been a nice differentiator. So we've got a good solution there, and I think we probably continue to take share, it's on a gradual basis.

And then can you provide us any updates on the Microsoft partnership? How much of that is influencing some of the growth in the larger deals you guys talked about on the call?

Yes. The partnership's great. I mean, it's been strong now for 2 decades. It's a really important part of what we do because Microsoft is so synonymous with applications and a critical part of our customer environments. We continue to work very closely on a lot of different initiatives, whether it's integration, extension on the mobile side. They're an important part of what we're doing to integrate with Intune, in EMS. The cloud side is obviously super important as we have leveraged Azure in not only as the foundation for our cloud, but when we go in and drive joint solutions with customers, Azure is certainly getting a lot of traction when it comes to enterprise workloads, so a lot of mind share on that side. When we can talk about bringing things together relatively seamlessly, that's a nice value-add. And then just as we've leveraged the platform for resource zones, like we made an announcement at Synergy that we're going to be working with Azure Gov for those types of customers that want Citrix Cloud in a highly regulated environment. So it's pretty multifaceted and just a great partnership for a long time now.

And our next question is from the line of Drew Foster from Citigroup.

Wondering, given the strong results this quarter and really year-to-date, at what point you might consider raising what many might to be conservative 2020 targets laid out at Synergy this year? And then a quick follow-up.

Yes. I'd say that in terms of raising the 2020 and 2022, I mean, we're 3 quarters in as -- when we laid them out the first time, and it's great to be well ahead. And yes, we'll come back and revisit it from time to time. I mean, when we were in May, which was just couple of months ago, we added another couple of years to that, which shows the further inflection and the power of the model transition. So I mean, we'll see. I don't think we're in any rush to update the longer-term targets, but we certainly will when it becomes obvious that we're just running well ahead of plan, no timeline at this point.

Great, okay. And then just last question. You mentioned expanding to new growth areas as a strategic growth area that you pointed out, and does that imply that we should be thinking about a step-up in M&A? And if so, what particular areas are most attractive?

When I talk about that, as you look at some of the adjacencies around the newer initiatives, newer meaning the analytics side of the house, the Secure Digital Perimeter, it opens up some opportunities for us. But in terms of M&A expectations, like everybody, we are constantly looking at opportunities but we have a good discipline. We have a good discipline for answering the question of what exactly do we get synergies from, whether it's a buyer, a route to market, a technology platform, and we just don't have a -- we don't have a desire to acquire for the sake of acquiring. And so, we will be -- we'll continue to be active looking and then it's just got to be the right fit for us actually to move forward.

And our next question is from the line of Michael Turits from Raymond James.

This is actually Robert Majek on for Michael today. Can you just talk about XenMobile and how that offering is doing and perhaps, give us an update on the competitive landscape in EMM?

Yes, yes. Actually, we don't talk too much about standalone mobile that much anymore. We talk about it in the context of the workspace. And people -- talk back a couple of quarters, I mean, a large part of our strategy on mobile was to get out of the commodity side of mobility and MDM, MAM is kind of a commodity-type service and look at it in the context of the workspace. So what we've done is drive integrations across the workspace and really expanded that from a universal endpoint management standpoint. So if you look at some of the new announcements around Synergy, we really have probably the broadest approach to universal endpoint management now, including certain IoT devices and other things. So our approach is going to be less standalone and more integrated. That's a common theme across our portfolio right now because like I said earlier, the challenge that all of our customers are having of managing all of these discrete point products is complex and it's hard. And the more that we can simplify, I think the more interesting that it's going to be. The only other thing that I mentioned just a minute ago on an earlier question is the work that we'll continue to do with Microsoft to embrace and extend Intune in the ways that really help those customers have what is a great solution, but there's just more we can do on that to partner.

And our next question is from the line of Rob Oliver from Baird.

One for Drew. Drew, you mentioned the increased investments in demand generation. Can you add a little bit of color there and talk about it? I know, David, you just talked a lot about some of the partnerships and adding new channel partners, particularly those focused on Azure. But Drew, could you provide a little bit more color on kind of where you see some of those investments being most necessary?

Sure, Rob. Again, just looking forward, we -- we're riding -- we do feel like we got a bit of a tailwind off of Synergy, and we wanted to make sure we're building out for the rest of the year and next year. And we've obviously been very disciplined on spending. What we wanted to do was just get really focused, laser-focused on where we saw opportunities for return. And so we've been investing really in 2 things, I think, demand generation, lead generation and then turning that back into the sales force and building capacity in quota-carrying reps and SEs. And that's been the focus of it and obviously, we saw a strong close to the quarter, as you could see in the numbers. And really, just focusing on delivering the messages from Synergy about cloud. And so far, everything we've seen has paid off and we're going to continue to do that into the future. But you could see, we've obviously, during the year, taken up the op margin guidance and overperformed this quarter as well. So it's looking very good.

Let me just add on top of that. There's 2 other areas that are important. One is just the overall awareness and branding. I mean, we were -- we need to be a little bit more visible. Part of this transition and transformation is helping reshape Citrix in terms of more general-purpose versus being focused historically on virtualization, so that's one. On a related note is also around enablement, which I've mentioned a couple of times. And we've got a lot of work to do, as you would imagine, in terms of just continuing to drive enablement forward across both our internal teams and our partners around the world.

And our next question is from the line of John DiFucci from Jefferies.

David, I'd like to go back to Rob Owens' question because I just want to make sure we understand the results here. And you gave a lot of data, but it's not quite broken out the way it used to be. And it really goes into the product and license line, which grew 1% this quarter, but it was $20 million or more better than what was implied in guidance. In -- that line used to see a lot of volatility because of the networking space, because of large Internet providers that you sold to. And I'm just curious, is that what did that this quarter, too? You talked a lot about the strength in Workspace Services, but the line grew 1%, which it's nice to see growth, it's decent, but it is a lot better than what was implied in guidance. So just trying to understand that line. I know there's a transition going on, but it'd be helpful with a little more color here.

Yes, John. As you know, the -- I guess, it's probably over a year ago now when we laid out a new way we wanted to report revenue, maybe 6 quarters ago in anticipation of lining the strategy up so it'd be easier to really get a view of where we're going. That's why we broke out subscription as the primary focus. When I look at the business, I tend to look at the combination of product plus subscription together as a way to measure the success of the (inaudible). And so if I look at networking for example, the product plus subscription, networking was about 7% growth, and the product plus subscription and workspace was about 20% growth. And so, that's how we look at it internally. There was no weird anomalies in terms of SSPs on the network side. Networking growth was 5% and within that, the slowest element was around maintenance, maintenance grew like 3%. And then the rest of it was the settlement I mentioned. Does that help?

Yes, it does. So it doesn't sound like you've got any huge product sales to large Internet providers. So that is helpful. And I guess -- and I think someone else's question and Drew addressed it, but I just wanted to be sure I understand it too. And the -- under the Workspace Services and sort of the CSS program, it sounds like you've sort of lapped that benefit. So the benefit you're seeing now, it sounds like it's more of an underlying, I don't know, foundational build versus sort of a pricing increase benefit, which was sort of what was going on there for a while. Is that accurate?

Yes. I mean, look, what's really happening is we're building the new business, it's the cloud and subscriptions. And you could see it in the combination of the deferred revenue -- the deferred and unbilled growth, so $170 million quarter-on-quarter. And that's where you're really seeing the new business build. The great thing is there obviously you get predictability of revenue. You create better economics because it's a recurring revenue stream, I think which we all like. And then from the CSS perspective, yes, there's a little bit left, but I think we're really through anything material there. And there's always a little bit of a tail there, but it's very small at this point. We lapped that during the quarter -- earlier in the year.

And our next question is from the line of Keith Weiss from Morgan Stanley.

This is Sanjit Singh for Keith. David, I wanted to go back to CSS. I think at the Analyst Day, you mentioned, I think, you had 81% of the base on CSS. Has the early conversation started to happen in terms of getting some of those CSS customers to move to Citrix Cloud? Any early indications on what percentage of those customers are beginning to convert to Citrix Cloud to maybe avoid the rest of the price increase on CSS?

Well, let me clarify one thing. I mean, there's no way to avoid necessarily. I mean, because when we look at the upgrade paths, if you're an existing customer, there's one path that moves from a support offering, and then there's another path that moves from CSS. And the only difference is really, price. You're kind of working backwards from what the cloud price is. And it's not a price increase, I also want to be pretty careful when we talk about that because this is really about just demonstrating incremental value when we talk about cloud. And this was back to the enablement point that I mentioned before. And so the cloud, when we deliver cloud, it's not just -- like I said, it's not just about our infrastructure, but all of the new innovations that are only available as a cloud service. Like for example, unified experience, the analytics platform, the cloud app control service that I mentioned before, federated identity, integrated content. All of these things are really the value-add that a customer gets when they consume Citrix Cloud, granted that they'll all be consuming that at a different pace. But that's really been the main driver. When we talk about installed base, there's a program called trade-up and transition or TTU. That's what we've referenced for a few quarters now, and that was -- that business is starting to ramp. It's now into the 8 figures from a TCV point of view, but it's really a second half focus item more than anything else. So as we laid out at Analyst Day, the first part of this year is about just driving net new demand, net new customers and really getting that engine going and trying to incent both our field teams and our go-to-market on those items. And so that's where the very big bulk of compensation comes from. And then the TTU piece is a little bit downstream. So again, critical part of our subscription transition, but one that we wanted to sequence behind the net new.

I appreciate the clarification there, David. And I guess my follow-up question is also sort of going back to Analyst Day. One of your messages there was around the corporate mid-market SMB opportunity that still seems relatively underpenetrated. This quarter seemed to be more enterprise heavy and I just wanted to get a sense of how you're feeling about the traction or your -- the programs that you have to drive growth in some of those underpenetrated markets. What's your assessment of that as we go into the second half?

Yes, a few things. I mean, one is when we look at the CSP, I know there's a lot of acronyms, but the cloud service provider part, that business is largely -- well, it's all partner driven and it's largely focused on that SMB segment. That is well into the plus 100 million run rate at this point in time. And it's growing somewhere north of 30%. And so that's probably the most direct way that we look at that. I mean, as we go forward, some of the other initiatives that we are thinking about is continuing to simplify the approach to the cloud, make the products more applicable to a smaller, simpler use case. But just really where the infrastructure gives the most value is when you typically have a larger, more complex environment, some concern around security and governance compliance. I mean, those are the types of attributes that are driving such success in markets or verticals like financial services and government and health care and others. So not -- I wouldn't say we're more focused on the enterprise today. It's just that the enterprise is a strong market.

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 comments.

Well, thank you, everybody, for joining us today. Obviously, we're working really hard on continuing to execute against our strategy. We're very happy with the results in Q2 and the ability to continue to increase our outlook as we go forward. Thank you very much, everyone, for your support, and thank you for joining us today. Look forward to talking to everybody again in about 3 months. Thank you.

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