思杰系統 (CTXS) 2021 Q1 法說會逐字稿

Good morning, and welcome to the Citrix Q1 2021 Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference to Ms. Traci Tsuchiguchi, Vice President of Investor Relations. Please go ahead.

Great. Thank you, [Rayon]. Good morning, and thank you for joining us today for today's first quarter 2021 earnings call.

Participating on the call will be David Henshall, President and Chief Executive Officer; and Arlen Shenkman, Executive Vice President and Chief Financial Officer. Please note that we have reposted our first quarter earnings letter 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. Actual results could differ materially from those anticipated. Additional information concerning these and other factors is highlighted in today's earnings letter and in the company's filings with the SEC. Copies are available from the SEC or on our Investor Relations website.

On this call, we will discuss various non-GAAP financial measures as defined by SEC's Regulation 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 our earnings letter found on the Investor Relations page of our website.

Now I'd like to turn the call over to David, our President and Chief Executive Officer. David?

Thanks, Traci. Good morning, everybody, and welcome. Thanks for joining us today. I'm pleased with the momentum in the business, especially around our cloud adoption and the migration of our installed base. Our transition to the cloud is progressing well, and we expect our first quarter results to mark the trough in terms of the impact on the business model, the income statement.

So beginning in the second quarter and then continuing throughout the year, we expect to see top line acceleration in our income statement metrics as these headwinds that we've been dealing with on the model transition turn and become a tailwind. To provide insights into the transitioning business model, we've been reporting ARR metrics for Subscription and SaaS. And then beginning today, we're also disclosing total ARR, which includes perpetual license maintenance contracts.

In Q1, the organic performance of these metrics, excluding any contribution from the Wrike acquisition, showed continuing strength. In fact, SaaS ARR accelerated to 43% year-on-year growth and total ARR was up 15% from last year. So overall, the fundamentals in Q1 were actually quite strong. I'd like to note that this quarter involved -- really included 3 unique items that impacted recognized revenue. And I want to cover those briefly here in detail before we open up the call for Q&A.

The first is the Wrike acquisition, which closed at the end of February. Second item is we experienced supply chain constraints in our hardware business, impacting over $10 million worth of products. So we expect these issues may persist for several quarters, so we're adjusting our full year expectations accordingly.

And the third issue was the duration of on-premise term-based subscriptions, really influenced by the limited use licenses we sold to customers at the beginning of the COVID pandemic. So as a reminder, in Q1 2020, it benefited by $47 million related to this license type. So far, we've either converted to cloud subscriptions or issued new term-based licenses for about $50 million of total bookings value against this group. We have ongoing conversations with many more about the Citrix Cloud migration.

So the limited use business continuity licenses really generally fell into 3 categories: first one, project-specific use cases, like a U.S. government agency that planned on building field hospitals to treat COVID patients. Obviously, those licenses would have no use beyond the project term.

Second group would be companies that are adopting a hybrid work style post pandemic. Many of these customers are either evaluating or they're already beginning to migrate these licenses and their overall Citrix infrastructure to Citrix Cloud.

And then the third group are employers that are supporting temporary work from home, and they're really still assessing their long-term work and their real estate plans. The customers in this third cohort tended to opt for shorter-duration on-prem term contracts versus multiyear subscriptions in Q1.

So let me just give you a little context here. We estimate that recognized revenue in the quarter would be about $25 million higher if it wasn't for the shorter on-prem term license duration. In hindsight, of course, these dynamics are really not surprising, but they are different than what our guidance had called for.

In the aggregate, business continuity licenses expand our installed base and, of course, our subsequent opportunity for these to move to the cloud over time through migration. Going forward, we continue to encourage investors to focus on annualized recognized revenue, of course, which we believe provides the most accurate measure of the underlying business performance.

So operator, with that, let's go ahead and open up the call for questions now.

(Operator Instructions) The first question is from the line of Raimo Lenschow from Barclays.

David, can you talk -- like, let's double-click a little bit more on the limited licenses and the renewals there. Like, in terms of what -- what were you able to do in terms of kind of convincing clients to go one way or the other? And like -- and how did that play out then in reality?

And then the follow-on is then, a little bit, it's like -- if you think about the -- on the Networking side, just kind of -- you talked about the component shortage. Like, how will that play through for the rest of the year?

Sure, Raimo. Let me start with Networking and work backwards. There's definitely some component shortages. And I think supply chain constraints shouldn't be a surprise to anyone. It impacted our ability to ship over $10 million worth of revenue in the quarter.

So there's 2 things going on there. If you looked -- when you read through our earnings letter, you'll see that the Networking business actually is very heavily weighted towards Subscription. In fact, 89% of bookings in Q1 were Subscription. Underlying that is an increasing run rate of hardware appliances to support these pooled capacity licenses.

So while we don't disclose it externally, the ARR of that business has been accelerating over the last several quarters. And so with that, you see a little pressure on COGS, given the increasing component prices, but also in the unique item in this quarter.

The boxes out of Q1 will ship in Q2, but we're assuming that this is going to be a sliding problem. So there could be some issue moving out of Q2 into Q3, et cetera, et cetera. So we just adjusted our full year to account for that. We don't think the issue is more broad than that. And the fortunate thing is that it is a reflection of just the underlying strength and our overall App Delivery and Security business.

Second question, actually, your first question regarding the limited use licenses. So as I said just a minute ago in my remarks, reminding everybody, we had about $47 million of impact a year ago. And we had put in place programs to really help customers through business continuity in the time of need. And that was for all kinds of different use cases like I highlighted there.

The focus over the last quarter or 2 has been on getting those customers to think about the longer-term subscriptions, mostly Citrix Cloud. So those companies that have already adopted go-forward plans around hybrid work, around real estate and around whatnot, those are the ones that have been successfully migrated towards Citrix Cloud or part of an ongoing conversation right now.

The third group were the ones that are really still thinking about this in the context of business continuity. And so our underlying assumption had been that we'd be able to convert those to much longer-term subscriptions. But in reality, what came back was 1 year -- in general, 1-year term because of their business continuity. And so we're going to approach those going forward as just opportunities to help the customer think through their long-term plans and ultimately migrate those to Citrix Cloud.

Okay. Perfect.

And as I said a minute ago, Raimo, last point -- as I said a minute ago is that, in the aggregate, we've booked about $50 million worth of commitments against this overall pool.

The next question is from the line of Brent Thill from Jefferies.

I think there are a lot of questions around the expected duration shrinking, and it's kind of counterintuitive to what you did in helping companies during the pandemic that they would come back and actually be shorter versus longer. Can you just explain a little more what you think is going on there?

Well, it's 3 things, Brent, a similar answer to Raimo's question. And so those customers that have already adopted longer-term use cases like those that are adopting a hybrid work model, those contracts are longer in nature. If you look at the duration in our SaaS business, unchanged. It's still targeting a 3-year duration for our typical contract. Actual duration is just a little bit shorter than that.

In this group of -- this group of licenses that are truly business continuity, and people are looking at those as business continuity, they're still related to the pandemic. Those customers haven't worked their way through yet. And so it would be natural for them to offer a shorter-term license as they figure out what their long-term plans are. Net-net, this has just allowed us to increase our installed base. It increases our pool and our opportunity going forward for conversions.

And the $10 number you gave on cash flow, does that change in your view? Or are you still committed to that number?

Yes. We haven't changed that. I mean the '22 numbers are unchanged at this point in time. And I think the most important takeaway is that the duration is a limited-impact item related to these unique one-off licenses that we created a year ago to help customers in need. That's not an ongoing phenomenon.

The business model is transitioning nicely. You see the success across all of our ARR metrics, which have continued to accelerate. And we believe that Q1 was the trough in terms of that business model evolution headwind. We're going to start reaccelerating here in Q2 and beyond, and that will pull through the rest of the P&L metrics as well as cash flow.

The next question is from the line of Matt Hedberg from RBC Capital Markets.

I don't think you've actually disclosed the mix of hardware and software on App Delivery and Security. But in your letter, you noted that you expect the software mix increase. I'm wondering if you could just sort of give us general terms on maybe where that sits today and where that might go in the future?

Yes, Matt, we really haven't. I mean it is migrating more towards subscription and software right now. And then over a longer period of time, it will be migrating to SaaS. So if I step back a little bit and just provide a bit of context in that overall business, a couple of years ago, it was largely hardware based. And we have a software heritage that underlies our business, and we were able to deliver those technologies across a number of different form factors, virtual appliances as a container and coming soon as a service.

And so what that has afforded us is the opportunity to start transitioning customers to what we call a pooled capacity. It just gives them incredible flexibility for delivering their network infrastructure across all types of hybrid cloud deployment models. And that's really resonated. That's one of the reasons why the volume of hardware and our subscriptions is up as much as it is.

Going forward, it's going to continue to migrate towards more of a cloud-delivered platform for App Delivery and Security, being able to give customers a much more friction-free way to adopt different technology bundles based on their own network architecture and help modernize IT.

Overall, I think that this quarter, being 89% Subscription bookings, was probably a bit of a high mark. But it's definitely been trending up and to the right. So I think it's going to bounce around a little bit. We're still going to always have a hardware component so long as customers are focused on a hybrid multi-cloud model. So I would expect that part of it to continue for the next several years, but gradually moving towards more complete Subscription and then ultimately SaaS.

Got it. Okay. And then in terms of -- just sort of the geographic performance. Total ARR was up, I believe, mid-15% organically, which is great to see, total revenue down 10%. And when I look at a geographic basis, obviously based on revenue, so all geos are down from a revenue perspective.

I assume that's not necessarily the trends that you're seeing relative to ARR. I wonder if you can give us a bit more granularity on, from a geographic perspective, maybe based on ARR, what you saw maybe which geos did better?

Yes. Not a whole lot of change on a geo basis. In the aggregate, our sales teams exceeded their plans for Q1, the way that they're measured on ACV bookings. The geos have all been executing well. I mean EMEA has been one that has done particularly well over the course of the last year or so. The Americas, being our largest business, was kind of leading the transition early in the business model evolution.

And I think that, really, throughout all 3 geos, you're going to see their business reaccelerate as we go into Q2 and beyond. And as I've said a couple of times, these headwinds from the model transition become tailwinds. But we didn't necessarily have any problem geos whatsoever.

The next question is from the line of Mark Moerdler from Bernstein Research.

Appreciate the additional color. I'm going to stay on the Workspace side of the business, starting first on can you give us more color on those term license? Any sense of how much of the term license is converted to SaaS versus term licenses as some sort of percentage?

And as a follow-up, and then I've got one more after that, I apologize, but how much is still remaining of that $47 million that could convert? Is it meaningful that could convert in Q2?

Mark, I mean, most of the unique program for limited use business continuity was contained in Q1. I mean that's where the vast, vast majority of it, if you remember, last year. And so given that there's a lot of permutations in terms of license type, in terms of what they bought and also where they're migrating, we've been trying to just aggregate it up into bookings dollars. In that way, we just don't confuse people.

And so the way I look at it is we had a special set of circumstances a year ago. We generated about $47 million of revenue. We've already booked $50 million of revenue commitments against that. And we probably have a large pool, an 8-figure pool of licenses that we're continuing to discuss about cloud migration.

And then those that are on short-term on-prem term, we'll continue to work with those customers, obviously, as we do. A lot of those are existing customers today. So we have ongoing conversations about their longer-term plans. And as they work those out, of course, the goal would be to just continue to roll those into Citrix Cloud migrations, which I mentioned a couple of times, and you see that in the investor letter.

I mean, we've just seen great progress with our transition and trade-up motion. Good momentum coming out of the second half of last year, continued into the first quarter of this year. We expected that to continue throughout the year. So all the things that we had talked about over the last 9 months are really clicking and doing well, and we're seeing an acceleration of installed base migrations to Citrix Cloud.

And as a quick follow-up to that, if you put aside the limited use licenses, how did the team deliver otherwise on SaaS? Did you hit your numbers? Did you beat your numbers, putting the term -- the 1-term special terms to the side?

Well, it's hard to put it aside when we talk about the overall business. And so -- because our teams are goaled in the aggregate. So when I look at it on what they are measured on, our teams exceeded their plans.

The next question is from the line of Karl Keirstead from UBS.

Two for me. One, David, just to clarify, just curious whether the shorter-duration issue on on-prem term contracts was really a phenomenon from this pool of customers signing limited duration deals? Or did you also see that phenomenon of shorter-term commitments more broadly as your normal renewals came up in the quarter? So that's my first question.

And then maybe I'll just ask my second question right away, and it's for Arlen. Just on free cash flow, I know you've reaffirmed the comfort with the $10 in 2022. But I think most investors and analysts are around $8 a share for this year. So I just wanted to just ask whether that's still a reasonable assumption for this year?

And if it is, then it requires a pretty decent improvement in your operating income to cash flow conversion in 2022 to get to $10 per share. So this is probably the kind of bridge you'll offer at the next Analyst Day you do, but maybe you could sort of tease it out a little bit with us on this call to give us comfort in that $10 number.

Sure, Karl. Let me take your first question. So just to be clear, we did not see changes in duration in our SaaS or our strategic contracts. The duration item was simply a reflection of the renewal of these limited use business continuity things from a year ago. And that's where this is isolated. This is not a broader-scope issue whatsoever.

They -- in hindsight, it was a bad planning assumption on our part. We thought that these would extend from their short-term duration originally to a long-term contract. In reality, they rolled into another short-term duration because they are business continuity related. Again, it's a very isolated item, totally messy in Q1 versus our anticipation, but it's not a broader issue.

And then, Karl, on cash flow, you're absolutely right. I mean, as we noted in the letter, we'll be holding an Analyst Day in the third quarter. We'll be providing some additional details. In terms of your comment, we had commented in our year-end letter that we -- that cash flow will be up modestly from '20 to '21.

Obviously, and again, we'll walk you through this when we get together, there'll be an impact from the Wrike acquisition. So we expect '21 to be a transition, but to go into '22 strongly. And our guidance remains unchanged.

The next question is from the line of Sanjit Singh from Morgan Stanley.

David and Arlen for the ARR disclosure. And sort of related to that, if I sort of just back into the maintenance ARR piece, it's about $1.4 billion. And so 2 questions there. Of the $1.4 billion, is there -- could you give us a rough sense of what the split between the Workspace and Networking looks like on the maintenance ARR side?

And then the second piece of that would be, we're seeing the SaaS mix of Subscription bookings continue to move up into the right. You guys are targeting 50% to 60% for the year. As customers migrate over, are you seeing the type of uplift that we -- that you initially outlined a year or so ago in terms of seeing that 30% to 40% uplift?

Sure, Sanjit. This is David. So yes, we are seeing the uplift. It's actually been very, very consistent. And so we're very happy with the progress we're making on the installed base. And like I just said on an earlier question, I mean, that's been accelerating over the last few quarters, and I expect that to continue through the balance of the year.

I mean all the programs and the plans that we had talked about in the last 9 months, they are delivering as expected. So happy with that progress. And yes, directionally, we're, of course, trying to increase the mix around SaaS. Obviously, on-prem term licenses, there's an accounting impact like we saw in Q1. It just creates more noise than it's worth. And obviously, the long-term goal is to get everybody on our SaaS platform.

Could you repeat the first part of your question?

Yes. Just the maintenance ARR, the mix between Workspace and Networking?

No, sure. The large, large majority of it is Workspace. I mean if you look at recognized revenue, it's probably an 80-20 split. And maintenance would fall generally in that direction.

And then one more, if I could just sneak it in. It's just a higher-level one. In terms of what you've seen your user base grow, I think you're up to 10 million cloud subs. We talked about 100 million overall users. I think some of them are concurrent. But I mean, broadly, since the pandemic, any sort of view on how much the base has grown since the pandemic has started?

Yes. It's definitely grown. I mean, I think the most important thing for us strategically is to be looking at how many of those are paid subscribers on Citrix Cloud. And you just mentioned that it was well over 10 million. In the aggregate, the number is up over 30% year-on-year. Interestingly, in Q1, the absolute rate of additions is twice what it was a year ago when we entered in the pandemic.

So we're seeing great progress there. So I'm very happy with that overall migration. And this was supposed to be the year where we start to accelerate installed base migration. That was absolutely true in Q1, and we expect that to continue to be the case. So as far as I'm concerned, we're on track to ahead of plan in that aspect.

The next question is from the line of Tyler Radke from Citi.

Maybe we could start with just ARR, and again, I appreciate the disclosure on total ARR. But if I look at the guide, it would seem to suggest that maybe there's a slight decel from where it grew in Q1 throughout the back half of the year. Maybe just help us understand kind of your assumptions around the trajectory of that, kind of the puts and takes? And what could potentially cause ARR to not decelerate in the back half of the year?

Yes. Let me talk about the 3 ARRs just for a minute here. I mean, Subscription ARR, and I'm going to speak exclusive of any contribution from Wrike. I mean it continued to accelerate for, I don't know, the fourth or fifth quarter in a row now, up 63% year-on-year. And that's clearly a reflection of the overall business model transition that we've been making. And so with that number now at around $1.4 billion, that scale, we're very happy with that performance. SaaS ARR, again, continued to accelerate, which is good.

Total ARR is an interesting one. I mean we're just releasing that metric right now. As we go through the year, we'll continue to disclose subsequent quarters and provide more visibility into historicals. Right now, we think that, that total ARR, a pretty good reflection of the underlying growth rate in the overall business.

We've said in our earnings letter that we think somewhere in that low teens range is probably a good plan for the balance of the year. And the only reason for a downtick of a point or 2 is just -- is if there was any uplift related to this one-off limited use license, if that added a point or 2, we just want to be a little bit careful there. So I still think that's a double-digit-growth business, and then we'll work to keep it at the top end of the range.

That's helpful. And maybe just a follow-up on the Networking business. So I understand that the component shortages, you're not the only ones kind of dealing with that. But what's your kind of the expectation on when that gets resolved?

And for the products that you weren't able to ship, do you think this revenue -- that simply just gets deferred, and you like kind of see a snapback in the future quarter once you kind of resolve the supply chain issues? Just help us understand how you're thinking about that impact longer term and how that gets resolved.

Yes. There's definitely is component pressures in the supply chain right now, and you're right. We've seen that across a lot of people in the industry. For us, it's not a huge number. We wanted to call it out because it was a unique item. But that $10 million revenue will ship in Q2. But we are just assuming that it's a sliding problem. So there's some amount of revenue that slides out of Q2 into Q3, Q3 into Q4, et cetera.

And so when it does snap back, I mean, we'll talk about it. And we'll talk about it openly. But again, it's not a huge number in the overall, [I expect]. But our expectation is that it's going to continue through the balance of the year. If that changes, again, we'll disclose that.

The next question is from the line of Robert Majek from Raymond James.

On the 50 million of new term-based licenses for pandemic conversions, can you just clarify whether the average duration was, in fact, around 1 year? And you mentioned that you don't expect the impact from the lower-term duration to recover in subsequent quarters. I believe your comment was just in reference to '21. Can you just help us understand whether we might see duration -- term duration recover in '22?

Yes. Just to be clear, I think the term duration that we have talked about in relation to these licenses is a Q1 phenomenon, not a 2021 phenomenon. As we look into the balance of the year, pipeline and our deal-based forecast than others show a duration that is much, much more normalized. So this is a very, very isolated item.

Those licenses did convert to Citrix Cloud, for example. Citrix Cloud durations are unchanged. They're much longer because those tend to be much more strategic contracts. This is just an isolated issue related to people that are employing business continuity in the face of the pandemic. It's not a broader issue than that.

One more question, if I can. In my checks, I've been picking up a lot of momentum for Desktop as a Service offering. Can you just help explain the shortfalls of competing DaaS solutions? And why the growth of DaaS won't negatively impact your VDI business?

Well, we have a DaaS solution as well. I mean the reason why customers adopt DaaS is that it's just Desktop as a Service can be just a simple, easy way to turn on a handful of desktops in a fully managed, outsourced kind of manner. And I think broader trends that we've seen throughout the pandemic is an adoption of cloud that's accelerated across the board. You see that in just about every aspect of the industry.

And so one of the reasons why our business has been accelerating in the cloud is just that. It gives customers more agility, more ability to manage, et cetera. So our strategy, of course, is focus on the idea of hybrid and multi-cloud, where a lot of our customers are somewhere in between.

We want to give them the ability to run DaaS, either Citrix DaaS or one of the cloud platforms, manage it with the overall Citrix Cloud and still maintain on-premises licenses, running their workloads in public cloud, you name it. It's just that broad hybrid approach. And I think that's going to continue. I think you'll certainly see more and more infrastructure move to cloud over time.

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

Just a quick question for you around sort of the technology strategy as it relates to sort of the broader conversion to the cloud. Obviously, one of the benefits customers get from moving to the cloud with any company is to be on the most-updated version of the technology. And I was just kind of curious this year if there's any upcoming releases that are going to make the benefits of being on the cloud even more apparent, potentially, to your existing base that might still be on perpetual?

And if you're, I guess, anticipating any kind of inflection because of that? Or that would be potential, I guess, upside in terms of a faster rate of conversion? Just trying to get a sense of how you're thinking about sort of the technology releases in terms of being a little bit more of a, I guess, a carrot for clients to move at a faster pace, potentially?

Yes. Kirk, I can talk about inflections in terms of the actual underlying bookings because it's all Subscription and SaaS. You don't see the typical inflection in the P&L, the way you would have back in the old days of perpetual licenses. But we have seen an inflection in just the amount of customers migrating to the cloud.

We talked about that beginning in the back half of last year and really continuing here with overall bookings up well into the triple figures on a year-over-year percentage basis. And the reason that's happening are just the same things we've talked about before. It's easier to manage. It's easier to stay current, stay updated.

In fact, the business that we're doing with some of our major partners, like Microsoft, for example, is stronger than it's ever been. We can go in and demonstrate to a customer that, for example, Citrix Cloud plus Microsoft Azure and WVD, the 3 of them together is the cheapest alternative and the most flexibility for them to be able to manage and run their infrastructure. And so I think it's just a solid message, and that's the reason why it's been accelerating.

Okay. Then just maybe to put a finer point on it, I mean, are there things that are going into the cloud technology that won't be available to the on-prem customers at some point in time? Meaning, at some point, there's a more explicit sort of strategy around that, too. That works in their benefit, ultimately, but I'm just kind of curious if there's anything accelerating in terms of the gap between the technologies just because cloud is going to innovate at a faster pace?

It really already is, Kirk, I mean, it's a really important point on it. Most of our innovation is coming through the cloud. And all the things that we have delivered over the last year, I mean, the vast majority of that is cloud related. Whether we're talking about automation and microapp workflows, whether we're talking about DaaS as a prior comment, whether we're talking about the ability to add secure Internet access, which is effectively -- think of that as secure web gateway capabilities and do it all in the context of a Citrix Cloud management profile.

We now have instrumentation across all of our cloud properties, including Networking, that allows you to aggregate up analytics and give visibility into performance and to security into other use cases that you just can't get on-prem. And it's one of the reasons why the migration has been accelerating. It's just the value is there and more and more customers see it.

That was the last question. This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. David Henshall for any closing remarks.

All right. Thanks, operator. I just want to thank everybody again for joining us this morning. I'd like to leave you with a few closing thoughts. First is we are accelerating our transition to the installed base of the cloud as we've been forecasting and discussing this morning. We expect this to continue.

Our acquisition of Wrike really extends our strategy, and it's expected to be neutral to 2022 non-GAAP earnings and cash flow, while obviously accelerating revenue pretty substantially. And finally, these secular trends, whether it's cloud or distributed hybrid work model, should provide a healthy tailwind to our organic and combined businesses in the future.

So with that, look forward to speaking with many of you throughout the quarter. Thank you very much.

Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.