Citrix Systems (CTXS) Q3 2018 Results - Earnings Call Transcript

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About: Citrix Systems, Inc. (CTXS)
by: SA Transcripts

Citrix Systems, Inc. (NASDAQ:CTXS) Q3 2018 Earnings Call October 24, 2018 4:45 PM ET

Executives

Dawn Morris - Citrix Systems, Inc.

Andrew H. Del Matto - Citrix Systems, Inc.

David James Henshall - Citrix Systems, Inc.

Analysts

Philip Winslow - Wells Fargo Securities LLC

Michael Turits - Raymond James & Associates, Inc.

David Rainville - Barclays Capital, Inc.

Nikolay Beliov - Bank of America Merrill Lynch

Mark Grant - Goldman Sachs & Co. LLC

Sanjit K. Singh - Morgan Stanley & Co. LLC

Drew Foster - Citigroup Global Markets, Inc.

Peter Levine - Evercore Group LLC

Operator

Good afternoon. My name is Jamaria, 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. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. Thank you. I would now like to introduce Ms. Dawn Morris, Manager of Investor Relations. Ms. Morris, you may begin your conference.

Dawn Morris - Citrix Systems, Inc.

Thank you. Good afternoon, everyone. And thank you for joining us for today's third quarter 2018 earnings presentation. Participating on the call will be David Henshall, President and Chief Executive Officer, and Drew Del Matto, Executive Vice President and Chief Financial Officer. This presentation is being webcast on Citrix Systems Investor Relations website. And 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 risk and uncertainty. Obviously, these risks can 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 our Investor Relations website.

Furthermore, we'll 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 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?

Andrew H. Del Matto - Citrix Systems, Inc.

Thank you, Dawn. And welcome to everyone joining us today.

Our transition to the cloud continues to gain momentum, driving our Q3 revenue growth rate, which about doubled over last year. Financial highlights include revenue grew 6% year-over-year, led by subscription revenue growth of 37% year-on-year. Our adjusted operating margin was 32%. Adjusted EPS was $1.40 per share, up 16% versus last year. And cash flow from operations was $301 million, a Q3 record, growing 18% over last year.

Q3 was the typical back-end loaded quarter due to summertime seasonality around the world. This impacted the timing of revenue from cloud and subscription transactions, the bulk of which closed in late September. The result was a deceleration in the subscription revenue growth rate from our second quarter. We expect subscription revenue to reaccelerate in Q4, as we'll see a full quarter of revenue from our September transactions, plus the benefit of a typically more linear bookings quarter.

Our Q3 enterprise business was solid, as we closed 55 $1 million-plus transactions, with concentration in healthcare, technology, and government sectors. We saw strength in our cloud and subscription offerings across our portfolio, particularly in Workspace Services as customers embrace our future of work vision, driving higher productivity and employee engagement. All of our geographies grew at a consistent rate, with the transition of enterprises to our subscription offerings strong across all regions.

Citrix cloud simplified hybrid cloud adoption, providing the same infrastructure on-premise or in the cloud. Customers are realizing the value of reduced infrastructure complexity, better overall user experience, increased security, faster access to innovation, and flexibility to align with their business initiative.

Next, let's take a closer look at Q3 results within our primary businesses. Workspace Services maintained its momentum, growing 7% year-over-year to $462 million. This was driven by a continuation of recent trends towards our unified workspace and TFP (04:29) offerings. Within Workspace Services subscriptions were roughly half of the total Workspace product bookings mix in Q3. We also saw stable results in the Networking business. Networking revenue increased 5% year-on-year to $195 million in Q3, with subscription revenue increasing 95% over the last year. This reflects strength of our hybrid cloud offerings, providing the flexibility, performance and visibility as enterprises anticipate and execute their cloud strategies.

Finally, our Content Collaboration revenue increased 12% year-over-year to $47 million in the quarter. As we discussed over the past year, ShareFile is becoming more of an integrated file sync and sharing solution for our enterprise Workspace customers, moving away from its prior focus on just the standalone F&B space. As such, the reporting of the Content Collaboration results will be integrated within our Workspace business during 2019. We'll provide more details on our Q4 2018 earnings call.

Let's now turn to operations. Our adjusted operating margin was 32% in Q3. We'll continue to balance expanding our profitability with the investments needed to support growing pipeline and sales capacity as we transition the business model. As mentioned, cash flow from operations was $301 million, up 18%, bringing our trailing 12-month cash flow to $1.1 billion. Deferred and unbilled revenue combined grew $187 million, or 11% over last year. Unbilled subscription revenue grew nearly 330% or $140 million versus Q3 of last year. Deferred revenue was $1.68 billion in Q3 of 2018. Please note that the adoption of the new Revenue Accounting Standard, ASC 606, creates about a 300 basis point headwind that you will need to adjust for when comparing deferred and unbilled revenue for Q3 2018 to Q3 2017.

At the end of Q3, we had approximately $2.5 billion in cash and investments, and repurchased approximately 1 million shares in the period. Today, we announced that our Board of Directors authorized an additional $750 million for share repurchases. This brings our total current authorization for repurchases to approximately $1.1 billion. Since we announced our $2 billion share repurchase program in November of 2017, we've repurchased approximately $1.6 billion at an average price of approximately $91 per share. We expect to complete the remaining $370 million in share repurchases during our Q4. As you can see from our announcement, Citrix's Board of Directors also declared a dividend of $0.35 per share to be paid this quarter. Additional details can be found in today's release.

Now, turning to guidance for Q4 2018 and the full year. In line with our multi-year strategy, we expect to see continued momentum in the adoption of our cloud services and subscription-based offerings. As such, we are increasing our full year guidance for 2018 to include revenue between $2.95 billion and $2.97 billion, adjusted operating margin of 30.5% to 31.5%, and adjusted EPS of $5.55 to $5.60 per share.

We'd also like to provide an initial view into our expectations for FY 2019. Please note that while we are still working through our planning cycle, which is typical at this point in our fourth quarter, in 2019, we plan to continue investing in go-to-market capacity, demand generation, innovation in the infrastructure areas necessary to scale our cloud services. At a high level, as of now, we are currently looking at FY 2019 revenue growth to be about 4%, and adjusted EPS of about $6. Very important to note that behind these numbers, we are assuming that the mix of subscription as a percent of product bookings increases from 40% this year to between 50% and 55% next year. This incremental mix shift will create a 1% to 2% point headwind to the revenue growth rate for next year.

For quarterization, I would encourage you to look back at the historical seasonality of our results for the ramp of margins and EPS throughout the year. 2018 results were skewed due to our 2017 restructuring and the adoption of ASC 606. 2019 operating margin expansion and EPS growth will be skewed towards the second half due to normal seasonality, our continued shift to subscription revenue, and our recent investments in building sales capacity. We'll provide more detail on our next earnings call in January.

I'd now like to turn the call over to David to give further color on the quarter and our areas of focus moving forward. David?

David James Henshall - Citrix Systems, Inc.

Welcome, everyone, and thanks for joining us today.

As Drew noted, Q3 was just another good quarter of upside to financial expectations while we continue to execute on the transformation across the company. More importantly though, customers and partners are embracing our strategy, really driving the multi-year plan. Despite the headwind from the ongoing mix shift, reported numbers are once again really solid, largely due to the strength of new product bookings for the Citrix Workspace. As you heard, our reported revenue growth doubled over last year, while at the same time the contribution from subscriptions increased from 12% to 15% of total revenue. Regardless of cost discipline, and we delivered a lot of upside against both margin and EPS goals, it's good performance for Q3 which, as Drew pointed out, historically has some seasonality to it due to the summer holidays around the globe.

In the quarter, our Workspace business continued to lead our execution. What's happening here is that the vision we laid out last year for delivering a general purpose Digital Workspace is resonating. Customers are seeing that Citrix adds a lot of value in their long-term initiatives in terms of simplifying hybrid cloud environments, improving security, and accelerating the adoption of new innovation. Additionally, due to the support of all major cloud platform providers, we give customers the flexibility to migrate workloads to and among the clouds of their choice. In total, Citrix Cloud now includes more than a dozen services, with options for staff and hybrid models, as well as services for those customers with only on-premises implementations, to help them manage and monitor their infrastructure much more effectively.

As we talked about last quarter, customer momentum, it really stepped up after our Synergy Sales Conference in May. We got great feedback regarding the alignment and clarity of our strategy, as well as a record volume of new innovations and announcements that we made with great partners like Microsoft, Google, ServiceNow, and Samsung. Our message has been focused on the future of work and how we help lower IT infrastructure costs while delivering higher employee productivity and engagement. The current cloud mobile era of technology has created really unprecedented flexibility in compute and in workstyle opportunities. However, most of the customers we see need to employ a variety of discrete point product solutions to help manage this, an approach that, frankly, is just really complex and very expensive. Our focus has been to help them abstract away as much of the complexity associated with these niche products as possible, and highlight the benefits of our complete integrated solutions.

As we promised, all of the new innovations that we unveiled at Synergy were released for general availability during Q3. And over the next few quarters, we'll be working with customers on the adoption of the Workspace app, providing access to all of their applications and content needed to be productive across all users in the enterprise. This includes differentiated capabilities such as federated identity, unified experience, out-of-the-box integration with leading SaaS apps, a broad approach to universal endpoint management, and, if required, access to Citrix virtual apps and desktops from an easy-to-use, all-in-one interface.

Most importantly, we're now delivering a Digital Workspace for general purpose use, which is ensuring that every employee has access to everything they need to be productive, all in one package. Every employee, every app, on any network. This translates into greater value and productivity for customers, and expanded market opportunity for Citrix.

And in September, at Microsoft Ignite, we announced the development and planned release of a new cloud-based desktop as a service offering, positioning us to gain share in the fastest-growing segment of virtualization market. The Citrix DaaS offering, developed on top of Windows Virtual Desktop and hosted on with Microsoft Azure, enables businesses to deliver services in a turnkey end-to-end solution built with our market-leading HDX technology to provide maximum performance. So stay tuned for further announcements on the future launch dates. Lots of exciting innovation across the board.

So, turning back to Q3. Let me talk about a couple of large transactions that highlight the discussions that we're driving with both new and with our existing customers. The first is a 150-year-old banking organization operating in the western U.S. They have been a longtime XenApp and XenDesktop customers, delivering virtualized applications in media. They started evaluating Citrix Cloud earlier this year as part of their corporate hybrid cloud strategy, but after Synergy, they started looking at the new Workspace app as a potential way to unify existing branch office applications and widely used SaaS-based applications into a single access and user experience. As our evaluations progress, they also embraced Citrix Content Collaboration as a way to deliver secure content to branches, and Citrix Analytics to provide an enhanced visibility and security to their application usage.

This evaluation concluded with a roughly $1 million subscription transaction for our cloud service, using the current customer transition program we put in place a couple quarters ago. Ultimately, we're not only modernizing the management of their virtual apps and desktops, but we're expanding to new users with improved experience in security in additional use cases in SaaS, Web, and mobile apps.

Second example I want to highlight is a global food and beverage company. This company was hit hard by a malware outage last year. It impacted a large number of employees for over two weeks. They asked Citrix to propose a solution that supported existing BPO projects using Azure cloud while at the same time addressing new use cases like BYOB and Mobility all from a single platform. And, of course, security was of paramount concern. Final solution we landed on was a three-year agreement for the Citrix Cloud app service, providing high availability to applications with an Evergreen infrastructure that's continuously managed and updated.

Additionally, secure global access and two-factor authentication will be enabled with our virtual networking, allowing them to also retire their current VPN solution for simplification and cost reduction. Here's just a couple of examples on how our focus on delivering experience, security and choice are proving to be so valuable for 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, fully validating the direction as part of our current and future roadmap.

So let's talk about Networking for a minute, as revenue in this area was stable in Q3. However, on a bookings basis, the hyperscale SSP segment was actually relatively weak, down about 20% year-on-year, with the enterprise segment growing in double digits. In total, the mix for SSP was 21%, compared to 27% of the mix a year ago. As we've been discussing over many quarters now, the SSP business is highly concentrated, and therefore can be pretty volatile on a quarter-to-quarter basis. Our strategy has been to invest in the larger enterprise market, addressing traditional ADC use cases, hybrid multi-cloud, and DevOps, as data center architectures are gradually shifting more towards microservices. Our software-based approach here to Networking gives us strong flexibility to help customers migrate through this evolution.

Another good example of this in the third quarter was a European mobile network operator and a current ADC customer. Historically, their use of ADC has been fairly simple and pretty straightforward. However, as they looked forward, they requested a proposed solution that was not just NFV-ready, but really more future-proof from an architectural standpoint. The final solution that we delivered and closed as a $2 million contract will include both physical and virtual networking products, integrated with full capacity licensing to enhance their mobile network and provide additional capabilities like TCP optimization, content filtering, and others. This exemplifies how our shift to software-based networking and more flexible and scalable licensing is a step in the right direction in helping grow preferences in this market.

Finally, there are several new SD-WAN wins in a variety of areas, including cross-sell to existing Workspace customers to improve the performance of remote sites, optimize HDX traffic, and other capabilities. While still a relatively small part of the overall business, SD-WAN is growing pretty rapidly right now, and we've launched a number of product and go-to-market initiatives to help support managed service providers, Microsoft Virtual WAN and Office 365, as well as deeper integrations in our Workspace Service.

So as we exit this year, I feel really good about our momentum and purpose. We're more aligned and more focused on the customer success than ever before. Clearly, the financial results are well ahead of our multi-year targets, and we're proving that we can drive a cloud transition and accelerate both revenue and margins. It's a really powerful combination. 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 and simplify their roadmaps. We're excited about the future, and I'm confident in the progress we've made so far in 2018.

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

Question-and-Answer Session

Operator

Operator, if you can let us know if there's anybody on the line.

Operator

Yes, we have a question from Philip Winslow.

Philip Winslow - Wells Fargo Securities LLC

Hi. Thanks, guys, for taking my question. And congrats on another great quarter here.

David James Henshall - Citrix Systems, Inc.

Thanks, Philip.

Philip Winslow - Wells Fargo Securities LLC

The question to the team just on Workspace Services, because obviously you saw another quarter of mix shift towards subscription. I think you said 57% versus 34% in the year ago quarter, and then 50% last quarter, because, obviously, we're seeing that shift there. But if I look at just the revenue numbers that you're putting up as well, continued strength there, even just with the shift towards more ratable numbers that showed up on the balance sheet, unbilled. So, I guess, the question is, if you look at the past few quarters here, what sort of, I guess, is driving that overall strength and reacceleration in the Workspace Services business? Is it going back to some of these big customers you have engaged with a while? Like the example you gave, and sort of, I guess, catching up on demand there, just any sort of color on what's driving that reacceleration would be great.

David James Henshall - Citrix Systems, Inc.

Sure, Phil. It's David. So, couple things. Overall Workspace bookings on an ACD basis are up double digits this year. So we've seen the underlying business dynamics really, really move up. And what's driving that is a combination of a couple of things. For those customers that are focused on virtualization and VDI, that side of the house, we just continue to develop against our underlying strengths, the best performance, the best security, the best manageability. So all that is continuing to move forward. Citrix Cloud is the real driver though. I mean, and that just allows for even traditional on-premises customers to have a number of services that help optimize the underlying infrastructure, provide health checks, just give them much more flexibility, much more simplification, and then the ability to stay current and adopt our new innovation.

The bigger strategic direction though is, as we talk about the future of work and we talk about the Workspace, and everything that that's going to be able to address, we're unlocking non-virtualization use cases. You'll hear me talk a lot about general purpose. And what that means is really the idea of creating more of a general purpose Workspace platform that is now applicable to every user in every enterprise, regardless of whether you need virtualization or not, because of new capabilities to deliver security to SaaS, or security to mobile apps and really provide an integrated experience across any device. So it's that broader – the overall broader strategy and articulation that's really helping uptick the market overall.

Philip Winslow - Wells Fargo Securities LLC

Got it. And then just one follow-up to that. I mean, obviously, in Q2 you had substantial big wins, but just million dollar, and the mega-sized wins. This quarter seemed to be a bit broader in terms of where the strength came from. Just wondering if you could give us some color on sort of what you're seeing on sort of the big deal front, particularly in terms of pipeline, as well as just the sort of the breadth, I guess, the strength that seems to be coming back as well. Thanks.

David James Henshall - Citrix Systems, Inc.

Yeah. Big deals in general were good. They're down a little bit sequentially from Q2 to Q3. It's always our seasonally weakest quarter and our most back-end loaded quarter, so that's nothing unexpected there. I wouldn't be surprised if we see a record number of large deals coming out of Q4, really across all geos and all enterprises. You saw in the reported numbers, we've got good balance across the three geos right now. So it's not really concentrated. It's just general strength.

Philip Winslow - Wells Fargo Securities LLC

Great. Thanks, guys.

Operator

And your next question comes from Michael Turits. Excuse me, Michael, your line is open.

Michael Turits - Raymond James & Associates, Inc.

Hey, guys. Good afternoon. Sorry, I was on mute there. Question for you, David. I just wanted to get a better sense on net scale in the SD-WAN space and kind of what the traction has been like, and then in particular who you're going up against. Is it Cisco and VMWare mainly?

David James Henshall - Citrix Systems, Inc.

I talked a little bit about Networking overall in my prepared comments. SD-WAN, it's a pretty crowded market space right now. It's fairly nascent, so it's not moving the needle too much. And therefore, the growth rates are large, but it's off a small base. What we're focused on there is a couple things: Optimizing the Workspace, where we can just continue to help with delivery to branches, optimizing the HDX traffic. And more things that we're doing fairly recently though haven't really impacted the numbers yet. With Microsoft or on the Virtual WAN, optimizing O 365, providing solutions for MSPs, a number of those are really future investments. So I'd say stay tuned on the SD-WAN piece. It's a little bit more of a future at this point.

Going back to the big business on the rest of Networking, it's really a tale of two segments, more than anything else. The SSP segment, as everyone knows, is highly concentrated and therefore is always really volatile quarter-to-quarter. Q3 was one of those quarters that was – it was down pretty sharply. It was actually down about 20% year-on-year, when I looked at underlying bookings, represented just 21% of the overall mix versus the enterprise which was up about low double digits in terms of demand. So that's been a function of our strategy though as well. We knew that the SSPs have been concentrated for a long time. So we've been investing much more broadly around expanding capacity in the enterprise, making sure that we have a really strong story around hybrid, multi-cloud; the ability to really be flexible with licensing across physical and virtual environments; a number of those initiatives that we've talked about many times.

So, I would say competitively, the landscape hasn't changed too much. It's a lot of F5 in the traditional ADC category. And then a number of vendors, when you talk about emerging markets, like SD-WAN.

Michael Turits - Raymond James & Associates, Inc.

Got it. And then one other thing that I want to touch upon, just as you increase that mix shift to subscription, just any update you can provide on the channel and the go-to-market strategy there would be great.

David James Henshall - Citrix Systems, Inc.

Yeah. I mean, the overall strategy doesn't change that much. I mean, we've obviously been going through a lot of work with our channel to really help them understand where we want the channel focused in a, let's call it, the cloud-first world, as you look forward to a number of years. So I'd say channels in transition, in a lot of ways. Those partners that have made the transition towards being CSPs and really embracing subscription and Citrix Cloud are doing extremely well. They have – I've heard reported growth rates that are – they're much, much stronger than even our overall business. Those partners, however, that are more historically focused and oriented towards renewing maintenance agreements, that's more of a challenging transition. We've certainly put the incentives behind the strategic direction of the company, and we're going to keep pushing there over the next couple of years. We are doing more direct touch, as you'd imagine, as we sell more cloud services. And we have been continuing to build out our direct go-to-market now for a few years. And so you'll see us continue to do that as well.

Michael Turits - Raymond James & Associates, Inc.

Great. Thank you.

Operator

And your next question comes from Raimo Lenschow.

David Rainville - Barclays Capital, Inc.

Hey, this is actually David, on for Raimo. First, thanks for clarifying the subscription revenue bookings (27:23) just quoted us. That makes sense. Maybe more of a high-level question first for David. Since the Microsoft announcement about entering the Desktop-as-a-Service market, I'm curious to see what you heard from customers so far. And maybe longer term, how do you see that relationship with Microsoft evolving?

David James Henshall - Citrix Systems, Inc.

Yeah. The relationship with Microsoft, overall, continues to be great. Yeah. I mean, we do so many things across Azure, across Citrix Cloud, across interoperability, whether it's on the Networking side, on the Mobility side, and then obviously on the Workspace side. So, as Microsoft continues to evolve their platforms, it used to be called RDS, now it's Azure Remote Desktop. We'll continue to build on top of those platforms and just extend the service for customers.

The thing that we announced, however, just at Microsoft Ignite, was two important points. One was, we'll effectively become a Microsoft CSP in some dimensions. And really what that means is that we can now provide more turnkey complete solutions, bundling in Microsoft capabilities along with Citrix native data service built on top of Azure. We haven't announced exactly when that product is going to be GA, so stay tuned for that as well. But it's just a continuation of the relationship we've had for a couple of decades now. Feedback from customers has been, love to see it, anxious to get our hands on it. And that's pretty much where we are. We'll, of course, be doing that on a white glove basis over the next quarter or so, and then talk much more about GA as we go forward.

David Rainville - Barclays Capital, Inc.

That makes sense. And maybe, if I may, a quick follow-up on the transition. In the previous calls, you mentioned that the first half of 2018 would be focused more on net new customers or net new white space for Citrix Cloud and subscription, and that TTU motions would kick in in the second half of the year. Just curious what you're trending here, and what kind of the split between net new customers versus existing base you've seen this quarter?

David James Henshall - Citrix Systems, Inc.

Yeah. TTU continues to be a small minority overall number, and that's by design. And so, if you step back and think about it strategically, we wanted to make sure that we're generating a lot of momentum in net new accounts and net new use cases. It may be an existing customer, but just outside of what I would consider their traditional virtualization of one. So that's how you should think about where we've had the focus.

Now, as we go forward though, I mean, TTU is Trading-Up and Transition, is what the acronym stands for. Combination of helping those customers today that have a virtual deployment operate it much more efficiently, and give them the ease to adopt hybrid cloud in their own environment, but also start to expand into much more of these general purpose capabilities that I talked about before. So that'll be a bit more gradual motion. And we'll start to ramp that in Q4, and then, of course, into next year.

David Rainville - Barclays Capital, Inc.

Thanks.

Operator

And your next question comes from Nikolay Beliov.

Nikolay Beliov - Bank of America Merrill Lynch

Hi, guys. Thanks for taking my question. David, you spent some time talking to customers. What are you hearing, in terms of the microenvironment, emerging economies, Brexit, Italy, all the moving pieces globally going on? What's the customer sentiment?

David James Henshall - Citrix Systems, Inc.

Yeah. Nikolay, I'd say, overall, the general environment's pretty good still. I mean, there's a little bit of noise out there. We've seen a bit of volatility in the last couple of weeks. But in general, the underlying demand drivers for most people remain strong. And so therefore that translates into pretty good spending environment. Of course, there's discussions going on about midterm elections, interest rates, Brexit, and all the normal things, but I think people are taking them in stride. And we haven't seen a material change in the demand environment.

Nikolay Beliov - Bank of America Merrill Lynch

Got it. And Drew, just wanted to get a sense for, did you say the unbilled/DR for 3Q was $140 million or $240 million?

Andrew H. Del Matto - Citrix Systems, Inc.

Unbilled for Q3 was $243 million.

Nikolay Beliov - Bank of America Merrill Lynch

$243 million. What was it last year, same quarter?

Andrew H. Del Matto - Citrix Systems, Inc.

$216 million, roughly.

David James Henshall - Citrix Systems, Inc.

No, that was last quarter.

Andrew H. Del Matto - Citrix Systems, Inc.

Oh, I'm sorry, yeah, I'm off. It's 50 – yeah, looking through our call here, $57 million.

Nikolay Beliov - Bank of America Merrill Lynch

Okay. You provide in the supplemental numbers last quarter different numbers, so I guess we can go from this offline. But going forward, how do you expect – talk to us about the seasonality of unbilled/DR. Is Q4 going to be the highest and then it tapers down in Q1 and starts building up in 2019? I think that's important for us to help us model subscription revenues using the waterfall.

David James Henshall - Citrix Systems, Inc.

Nikolay, let me jump in there, because I don't think we have talked about the duration of unbilled revenue yet. We'll start – we'll provide – cause that's the one piece you just need to really triangulate what you're getting at. So, unbilled, just to remind everybody, our typical cloud contract is three years TCV with annual billings. So we'll bill that first one upfront and the other two go into unbilled. And, as Drew said, unbilled is nearly $250 million right now, versus $50 million a year ago. So, I mean, we've had a huge increase in unbilled as we've been driving this transition. So you really should look at that in concert with the actual deferred revenue numbers as well.

Nikolay Beliov - Bank of America Merrill Lynch

Yes.

Andrew H. Del Matto - Citrix Systems, Inc.

As the mix increases, it continues to increase. That's how to think about it. It follows the mix. The mix (33:04)...

Nikolay Beliov - Bank of America Merrill Lynch

Yeah. And going back to my question about the seasonality, is Q4 going to be the big in unbilled/DR and then is going to taper down in Q1 and build out throughout the rest of 2019?

David James Henshall - Citrix Systems, Inc.

Nikolay, we're not in a position where we're going to give a lot of forward guidance on unbilled at this point in time. So we'll talk about it coming out of Q4, and much more seasonality. We've got four quarters of actuals right now, and they've all been pretty strong growth. The strongest of the year, of course, was Q2 this year. We just had a blowout quarter last quarter, and so we wanted to get a little bit more history under our belt before we start forecasting some of these off balance sheet items.

Nikolay Beliov - Bank of America Merrill Lynch

Got it, Thank you, guys.

Operator

And your next question comes from Heather Bellini.

Mark Grant - Goldman Sachs & Co. LLC

Hi. This is actually Mark Grant, on for Heather. Just a couple of quick ones for me. Drew, given the revenue and the earnings forecast for next year, and I know we're going to get a lot more detail on this on 4Q, but can you give us a sense of how you're feeling about free cash flow next year, and then any potential updates on churn metrics given the subscription transition?

Andrew H. Del Matto - Citrix Systems, Inc.

Sure. Well, it's still – we're still in the middle of – we're early in Q4. So we're still early in the planning process. And – so the first – in terms of operating cash flow, you can see that it's clearly going – yeah, it's clearly following the revenue, right? As we continue to build the mix up, as the revenue goes up, it's going to follow that; and obviously the other dimension is, as we expand margin, then that just falls to the bottom line. So I think you can get a sense for how we guide in terms of the 4% revenue growth, and about $6 a share in EPS should give you some level of guidance, and that should pop some number out of the bottom.

Right now, operating cash flow for the quarter was up 18% year-on-year, that's operating cash flow. And then, again, we've seen a nice uptick kind of following this trend of the revenue being up along with the margin expansion, where we're now, roughly, I think, through Q3, trailing 12 months, about little more than $7.50 per share on a free cash flow per share basis. And so we can – we obviously expect that that should continue to go up as we move towards our 2020 targets – progress against those targets.

Mark Grant - Goldman Sachs & Co. LLC

Great. Thank you. And then, any update on the churn metrics?

David James Henshall - Citrix Systems, Inc.

No. Nothing new there.

Mark Grant - Goldman Sachs & Co. LLC

Great. Thank you.

Operator

And your next question comes from Keith Weiss.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Hi. This is Sanjit Singh for Keith. Thank you for taking the question, and congrats on the strong results this quarter. I was – (36:00) I wanted to do a little bit of a status check relative to some of the initial milestones you laid out last year, in terms of your 2020 targets. You talked about hitting, I think you said, 50% to 55% of subscription bookings mix in 2019. Does that sort of put on you on track in terms of your overall 2020 goals, when it comes to subscription ratable mix, as well as top line growth? Would you say that you guys are sort of tracking to plan or ahead of plan relative to the framework you introduced last year?

David James Henshall - Citrix Systems, Inc.

No, we're well ahead of plan versus the plan that we laid out. In fact, if we were to look at it on a revenue basis, we'll exit this year, based on current guidance, better part of $100 million ahead of plan. Cash flow, as Drew just pointed out, cash flow from ops per share is already at $7.60 or so, trailing 12 months. So I'd say we're executing very well. We are going to exit this year at about 40% mix, up from mid-twenties last year, mix of subscription versus perpetual bookings. And we'll continue to drive that next year. If we can get up north of 55% while it's still a couple of hundred basis point headwind to revenue growth, that's well on the way to our overall goals. I think it's fair that after we exit this year, we'll come back, and going into 2019, update our multi-year goals just once we close out the full year. I think it's a good time to do it.

Sanjit K. Singh - Morgan Stanley & Co. LLC

That makes sense. And then, just one quick follow-up. The perpetual license business has been stronger than certainly we have expected the last couple of quarters. Any sort of comments that you have on what's driving that strength for the license business, given that you've seen some weakness from the cloud service providers in NetScaler. So, are we seeing more sort of on-prem Workspace deployments than maybe you guys have initially expected? Any sort of color there would be helpful.

David James Henshall - Citrix Systems, Inc.

Yeah. I'd say it's two things, not just cloud service providers, but we had strength in NetScaler Enterprise, and so that part of the business is largely perpetual license, and that's the primary driver there. Workspace, it's – it was well over half subscription these days. But since the overall business is growing so nicely, that means perpetual is growing at the same time. So I'd say it's basically just moving from strength to strength.

Sanjit K. Singh - Morgan Stanley & Co. LLC

Understood. Thank you very much.

Operator

And your next question comes from Walter Pritchard.

Drew Foster - Citigroup Global Markets, Inc.

Hi. This is Drew Foster, on for Walter. Thanks for taking the question. You've seen some good progress in terms of large Citrix Cloud deals booked so far this year. And I'm curious to what extent those wins are serving as references to other customers in your pipeline. Thanks.

David James Henshall - Citrix Systems, Inc.

Yeah. I mean, as you'd imagine, big cloud customers always want to talk to other ones. So we'll – on the public references, we'll talk about publicly, but most of them are private. So we'll connect CIO to CIO. The top 10 deals for cloud in Q3 were all over $1 million each.

Drew Foster - Citigroup Global Markets, Inc.

And then, just trying to get a better idea of the CSP business in terms of scale. How does that compare in scale relative to the larger Citrix Cloud business?

David James Henshall - Citrix Systems, Inc.

I'm sorry, did you say the SSP business?

Drew Foster - Citigroup Global Markets, Inc.

CSP. Yeah, CSP, sorry.

David James Henshall - Citrix Systems, Inc.

CSP business. Yeah, CSP is a minority now. I think CSP business runs $120 million a year, roughly. Is that right, Drew?

Andrew H. Del Matto - Citrix Systems, Inc.

That's right.

David James Henshall - Citrix Systems, Inc.

Yeah, versus the overall number.

Andrew H. Del Matto - Citrix Systems, Inc.

So call it maybe a quarter of the subscription business.

David James Henshall - Citrix Systems, Inc.

Yeah.

Drew Foster - Citigroup Global Markets, Inc.

Got it. Thank you.

Operator

And your next question comes from Kirk Materne.

Peter Levine - Evercore Group LLC

Hi. This is Peter Levine, in for Kirk. Thanks again for taking my questions. I just have one here. Your initial guide for 2019, you talked about capacity and infrastructure investments in 2019. Can you kind of provide a little more color on what those investments will look like? And then, the second part to that is, in the second half of 2018 versus the first half of 2018, I think your capacity, your head count was somewhat flat. Can you talk about new heads you're bringing on and how do you plan on deploying? Is it geography product-based? And how that would look in 2019 as well. Thanks.

David James Henshall - Citrix Systems, Inc.

Yeah. As Drew pointed out, we're investing in capacity and the infrastructure needed to ramp our cloud services. So you can think about that in three big buckets. Capacity, quarter carry, and customer-facing people, that will be across the globe. As we see opportunity, we'll continue to invest there. Second area would be around customer success. Those folks will be more responsible for picking up a customer after the initial sale, making sure that they're doing the correct level of enablement, ramping new services, et cetera. Just really making sure they're successful. That will ramp up. And then, the third is around just cloud operations, the difficult things to manage the cloud. These are already big teams, but I'm sure we'll continue to invest behind that. The one area that we didn't really talk or you didn't ask about is around innovation. That's been a combination of both remixing the types of skills that we've had. We've had a lot of that going on over the course of the last year, but also we're continuing to invest in innovation capacity as you see R&D start to tick up a little bit as well. So, those types of things, we'll continue to do into 2019.

Operator, any further questions?

Operator

There are no more questions in cue.

David James Henshall - Citrix Systems, Inc.

Great. Well, thanks, everybody, for joining us. We'll talk to you again in three months.

Operator

This concludes today's conference call. You may now disconnect. Have a good day.