Citrix Systems Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 28, 2021

There are 13 speakers on the call.

Operator

Hello, and welcome to the Citrix Q2 2021 Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Tracy Suchiguchi, Vice President of Investor Relations. Please go ahead, ma'am.

Speaker 1

Thanks, Keith. Good morning, and thank you for joining us for today's Q2 2021 earnings call. Participating on the call will be David Henshall, President and Chief Executive Officer Arlen Shankman, Executive Vice President and Chief Financial Officer. Please note that we have posted our Q2 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.

Speaker 1

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.

Speaker 1

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 on the Investor Relations page of our website. Now, I'd like to turn it over to David, our President and Chief Executive Officer. David?

Speaker 2

Thanks, Tracy. Good morning and thanks everybody for joining us today. As you see in the letter, our cloud transition is progressing well. Our success in migrating customers to the cloud has continued to gain momentum over the last three quarters and our organic SaaS ARR growth rate continues to accelerate, Up 47% year on year, while total ARR was steady at 13% growth. However, it's clear that we've had some sales execution challenges Some areas that are reflected in our Q2 results and we believe that the cause of this has been really the increased complex Managing this faster transition to the cloud while simultaneously managing all the different license model types and motions that are key components of our reported revenue and overall P and L.

Speaker 2

So we believe we've identified the root causes and we're taking immediate actions to remedy these execution challenges. And this is including reorganizing our sales team, including sales leadership realigning our customer facing organizations to improve overall focus as well as indirect channels. We're reallocating resources to increase our capacity of quota carrying sales reps to better support longer term growth, And we're refining our channel focus to prioritize landing and growing new business activities. While our SaaS transition metrics obviously are progressing really well, We acknowledge that many of our 2021 guidance ranges as well as the financial modeling guideposts we provided back at our Analyst Meeting 2019 are going to take us longer than anticipated to achieve. So taking into account our year to date results and the Changes we're making organizationally and with our overall go to market activities, recalibrating the shape and the path of the overall business model transition.

Speaker 2

At our Financial Analyst Meeting in October, which we'll have in conjunction with our Q3 earnings results announcement, we plan to provide an updated framework To more simply model our faster transition to SaaS and the expected business and financial outcomes. So through this, we of course continue to encourage investors to really focus on annualized recurring revenue as we believe this continues So with that, let's stop and open it up for questions.

Operator

At this time, we will pause momentarily to assemble the roster. And somebody's first question comes from Raimo Lenschow with Barclays.

Speaker 3

Hey, thanks for taking my question. David, can you kind of link the comments from the Q1 to the Q2 now? So if I do remember correctly, in Q1, we talked about term customer signing at the shorter Duration, etcetera, so and you were hoping that that would improve. And now, Q2 sounds slightly differently. So is there like a change in the story?

Speaker 3

Is it the same story just identified the issues better? Thank you very much for that. A little bit more clarity here. Thank you.

Speaker 2

Sure, Raimo. Actually, 2 different issues. In Q1, just to remind everybody, we had a lot of very Special business continuity type licenses, very short term in nature, things we put together back at the early stage of the pandemic That had impacted overall duration. These were really just unique ability to try and serve customers. Duration is not a factor in Q2.

Speaker 2

Duration has come back to normal levels as we anticipated, no change. You tend to see slightly longer duration and fast contracts in areas like that, but Certainly along our lines of expectation. If I can just step back and think about Q2, let me put it in context for There's 3 main focus areas around go to market. The first is accurately forecasting the totals and the mix of different license types. Obviously, they have a different impact Financially.

Speaker 2

2nd is migrating the installed base to cloud and the third is driving net new business bookings. With mix, we've consistently come in much higher with the SaaS Both in Q2 and in our forward guidance. Installed base migration, as you see in the letter, has been really positive. We've really stepped up the pace over the last 9 months or so, more than 2x where we were this time a year ago. Customers are seeing a lot of value in this migration and our co sell with hyperscalers, Particularly like Microsoft, for example, is up sharply.

Speaker 2

However, new business bookings was really the challenge in Q2. I think we believe that the root cause of that is a combination of really three things, primarily the complexity that has Existed with trying to balance all of these different moving parts, the mixed messaging and priorities inside the field that that has caused, Whether it's duration, as you mentioned, migrations, new products, etcetera, I think it's confusing and it's just frankly inefficient. We are behind where I'd like to be in overall quota carrying capacity,

Speaker 3

just

Speaker 2

due to investments in other areas of go to market as well as the pace of our hiring process. And the third is, we just haven't done enough in my opinion to really enable our traditional channel partners to participate in the SaaS transition of the company. I think they're focused too much on fulfillment and an inconsistent alignment with the field. So that's why we listed those 4 things that we're doing Really focus on reorganizing and prioritizing the sales team, increasing direct quarter carriers, channel leverage and Prioritizing SaaS. I'm happy to go into more detail about any of those 4.

Speaker 3

Yes. And If I listen to you, David, those issues kind of sound like they kind of evolved over time. Is this like Is this kind of the announcement today and the discussions, a little bit the culmination of kind of a realization on the management team that something needs to change?

Speaker 2

Raimo, I think that's fair. I think that we obviously are coming off a record year in 2020 across many of the metrics of the business. COVID has certainly been a secular tailwind to the types of solutions that we sell. When you rattle off all the different transition metrics, I mean, we're doing extremely well on that part. We've just had problems with really managing and accurately forecasting a lot of these new A lot of these new business areas and so that's what we're focused on taking actions for to really align not just to drive a lot more consistency which has to be an outcome, But also really focus on where customers are going over the long term and embracing that model.

Operator

Okay. Thank you. Good luck. Thank you. And the next question comes from Mark Mahler with Bernstein.

Speaker 4

Thank you very much. David, this quarter total ARR ex rig grew 13%. Can you give us some more color on the moving parts So driving your 10% total ARR growth guidance?

Speaker 2

Yes, Mark, it's a good question. And that's one of the reasons why we keep focusing on SaaS ARR and total ARR. So I think it looks through all of this noise with This model transition gives a better picture for what's going on. What's driving that is the Workspace in general. Just to give a couple of statistics there, Workspace, SaaS in particular and consumption based bookings, up sharply on a year over year basis.

Speaker 2

From a mix, we don't talk about bookings by product much, but I'll tell you on a mix basis, it's about 70% of Workspace is now coming via SaaS, Up from 50 or less a year ago. So we're pushing in that transition. Part of the complexity that we're calling out right now is I think that the teams have tried Too hard to guide this mix one way or another versus really embracing how quickly it should be moving. And so I'm happy with that. And then the second piece of it that's really driving it, of course, is the installed base migration.

Speaker 2

I just mentioned that on Raimo's question, but We are running 2x to 3x the rate that we were a year ago. We've increasingly seen customers migrating to Citrix Cloud And areas like the co sell that I referenced just a minute ago is really helping drive that. So I think we're getting better and better alignment on that So those are the primary drivers behind the 13% total ARR growth for the business.

Speaker 4

Okay. And for the full year itself, Are you basically expecting that the reorg is going to slow things a little bit nearer term as everyone moves into the new motion?

Speaker 2

Yes, we called that out in our guidance. If you look at the detail in our letter, we're assuming that total ARR could slow down closer to 10% exiting the year. We want to be careful that we are contemplating potential disruptions that always come with go to market changes and things like this and Not trying to get out in front of it, but being very thoughtful about our guidance for Q3.

Operator

Thank you. And the next question comes from Brent Thill with Jefferies.

Speaker 5

David, on the sales reorg, can you frame The extent of the change that you're making, is this 30% of the sales force you're changing around? Is it 70%? Can you just give us a sense of the magnitude of that shift?

Speaker 2

Yes, Brett. We're not necessarily changing the sales Of course. I mean, we've got a lot of good sellers. I think what we're doing is, we're more adding in the areas that I think really matter. For example, discrete quota carriers versus non quota carriers.

Speaker 2

We are doing more to make sure we've got alignment. There's been, In my opinion, kind of a mixed message out in the field and that includes both our direct sellers and our channel in terms of what our priorities are, how we're balancing This transition and that's causing that's just causing execution as well as forecasting inaccuracies. And so a lot of this is about how do we land new customers very cleanly and how do we do that with our channel? How do we have people prioritizing SaaS Yes, the primary motion. How do we make sure that incentives line up in the field, for example, and in the channel to support that?

Speaker 2

Removing some of these, what I call, complex So don't think of it as a wholesale change as much as just eliminating some of the things that are slowing us down And just getting much, much better alignment.

Speaker 5

You mentioned the Microsoft relationship, but there's been a tremendous amount of questions with Cloud PC launched and the impact. Can you just speak to what you think that means to the business long term and How does that impact the Microsoft relationship?

Speaker 2

Yes. So let me back up for a minute and talk about Microsoft just at a high level and then specifically about Win365. So I think as everybody knows, for the better part of 30 years, we have consistently embraced the Microsoft Form and extended it as part of our solutions. And that's really what's built this long term partnership from which we both benefit. That said, of course, we're always Working to make sure we're educating the market, we stay aligned.

Speaker 2

And if you look online, I mean, and look at what we're doing You're going to see an increasing volume of a lot of joint collateral focused on joint migrations, how Citrix plus AVD, for example, together Is the lowest total cost of ownership as compared to like native ABD, while at the same time improving experience and security for customers. I called out our co sell that we do. I mean it's up well over 100% year on year and we're now at the top or near the top of their co sell deal registration And so and then, of course, a number of other things from a product strategy standpoint. We're working together on Windows 365 and looking at ways where we will Potentially integrate and do more together. We'll talk more about that after these products are actually released into the market later in the quarter, etcetera.

Speaker 2

In general, a lot of what we do is look at this in terms of where we leverage integration points, and that's a statement across workspace, Across networking, etcetera. And primarily, it will be focused on those simple turnkey DAS use cases and we'll work to integrate That is a, let's call it, an easy to integrate workload alongside what our customers are already doing with hybrid, on premise, other third party Solutions, etcetera. So that's the way we think about it in general terms.

Speaker 5

Thanks, David.

Operator

Thank you. And the next question comes from Karl Keirstead with UBS.

Speaker 6

Thanks. I'll ask one for David and one for Arlen. So David, you've pinned the financial metrics changes today on largely internal sales execution. But I'm just wondering if you could comment on what maybe external demand factors you saw in the June quarter that May have contributed to the new business challenges. Did you see a greater appetite from your customer base to Move away from on premise deployments, does it feel that maybe the Workspace product is getting fairly highly penetrated?

Speaker 6

Was it A little bit of competition maybe, anything other than maybe internal sales execution? And then for Arlen, You did indicate that operating cash flow in 'twenty one would be below the levels of 2020. But for the first half, operating cash flow is down a full 50%. So you might sort of get Street estimates all over the map in terms of interpreting What down means? Are you able to frame it for us?

Speaker 6

For instance, do you think that cash flow this year for Citrix could at least be above the 2019 level of $785,000,000 much appreciated.

Speaker 2

Yes. So Carl, let me take the first Part of the question. When you step back and look at the market, I mean, we've had a relatively isolated A set of issues that we think have just impacted our overall execution. When we do research looking at our competitive analysis, win loss, There's been no material changes on that front. Sales cycles have been generally consistent with where they are in the past.

Speaker 2

And Overall, opportunity pipelines are where they need to be from our to be able to hit our numbers. It's just the execution

Speaker 3

items that we have highlighted there.

Speaker 2

If you look at the items that we have highlighted there. If you look at the workspace, it's definitely not an issue of it being overly penetrated. These markets Are actually accelerating. You can look at some of the industry analysts that point to market growth rates. And Citrix grew sharply in Workspace Technologies last year.

Speaker 2

We are the market leader in this area, and we will be growing this Sure as well. An earlier answer to Raimo's question, I think one of the things that will be really helpful for everyone is providing more of an ARR by product at some point in the future so that we can get a cleaner look past all these business model changes to be able to look at the underlying growth rates. And We're hoping to do that at our upcoming analyst meeting just so that we can normalize all of these business model shifts and give everybody a true picture. But similar to the way I answered Raimo's question, what's driving our SaaS ARR growth right now organically to accelerate 3 quarters in a row is Workspace. What's really driving the total ARR in the low teens is Workspace.

Speaker 2

And so I don't anticipate that mix changing materially over the balance What I do expect though is our accuracy of whether it's forecasting or execution to improve throughout the second quarter, I mean, the second half.

Speaker 5

Got it. Thank you, David.

Speaker 7

Carl, on cash flow. Look, we feel very good about Long term durability and growth in our cash flow. And as you know, there are a number of moving parts that hit any quarter. And in this quarter, we had some payments around cloud hyper Scalars and Infrastructure, we had some changes and some payments around taxes. We had some impact from our accruals and our bonuses.

Speaker 7

So there's a bunch of moving parts. We're going to provide some more detail around how we're thinking about the transition as we go through our Analyst Day at the end of the Q3, and we'll provide you some additional insights about how to think about that and really think through some modeling, and particularly about the long term benefits of where we're going with the transition and the durability of that transition.

Speaker 5

Okay, terrific. Look forward to that.

Operator

Thank you. And the next question comes from Sanjit Singh with Morgan Stanley.

Speaker 8

Thank you for taking the question. I think a high level question, David. One of the things I'm still frankly a little Confused about, just given that we've seen a number of transitions, cloud transitions and software. And typically, if you're going to miss revenue Because your cloud business is accelerating, and your mix is higher than expected, that's typically a good thing. And so Going back to the motivation for the sales restructuring, is it because that the revenue was underperforming Or is it more because you think that the SaaS bookings mix should be higher or the SaaS ARR mix should be even greater than it was?

Speaker 8

If you could sort of comment on those 2 pieces.

Speaker 2

Sanjay, it's a good question. I think in general, we Definitely been under forecasting mix for some time. I mean, we've seen this for a few quarters now where we're coming in higher and higher in SaaS. And you're right, That is a good thing because that reduces volatility long term and it creates a much higher uplift for economic value created. The changes that we're talking about are we just think that there it's more of a volume question.

Speaker 2

Just in our overall bookings volume, The complexity around that, the accuracy of our forecasting and things that we believe can be further streamlined and optimized. And so That's really the genesis of a lot of these changes that we're talking about. The other one is, I think just recognizing where customers How they're buying software and this general trend towards much more of a land and expand consumption based, And we want to make sure that we're aligned to where that's going in the future as well. And then lastly, it's When I reference quota carrying capacity, it's one of those areas where it's behind where I'd like it to be. And these don't impact short term much, But it really gives you much better flexibility and growth opportunities long term.

Speaker 2

And so reallocating resources in the way we're spending on go to market is an important one Because that just gives us a much broader reach.

Speaker 8

Understood, David. If I could just sneak one more in related to that topic. As we think about The migration portion of the transition and getting the customer base to the cloud. The underlying unit economics that we did talk about At the end of 2019, in terms of uplift and sort of a lifetime value of that cloud transition, is there anything about That transition or the unit economics of that transition, has that changed in any particular way versus what we talked about at the end of 2019?

Speaker 2

No, I don't think so. I think we're still seeing that uplift that we had called out from a maintenance stream up to a SaaS stream. What we are seeing though is as we're moving into more and more large deals, strategic, we're seeing more opportunities, not just to Transition like for like, but to actually address incremental use cases and expand the user base within those That's obviously the goal long term. And then further beyond that, it's how do we layer in some of these new innovations that we've brought to market over the course of The last few quarters, everything from analytics, Internet access, secure workspace access and all these other new solutions, which are still pretty nascent, But will be increasingly important as we go into subsequent quarters and years.

Speaker 8

Appreciate the thoughts, David. Looking forward to the Analyst Day.

Speaker 9

Thank you.

Operator

Thank you. And the next question comes from Craig Materne with Evercore ISI.

Speaker 9

Thanks very much. David, you mentioned execution a couple of times, Yes. But on the other hand, you did have a good quarter, Workspace is accelerating on sort of a subscription basis. So can you just maybe Give us an example of what you're talking about in execution. It sounds like at the end of the deal, there's just too much variability around either the Construction of the deal from a financial perspective, maybe the kind of data you're getting in from the channel isn't as accurate as you like.

Speaker 9

I mean, it sounds like there's a number of things going on. But could you Maybe unpack that a little bit more because on one hand, it seems like it's not a demand issue. It seems like it's more, I don't know, it's more structural or just like you're not Having as much confidence in what in the pipeline, frankly, going into the end of the quarter in terms of how that's going to spit out financial results. So I just want So maybe piece apart the demand element versus things that are could be refined better, because it sounds like it's more of a refinement of the processes versus a demand issue?

Speaker 2

Yes, Kirk, let me unpack it just a little bit. I mean, when we talk about execution, that's obviously an inside out statement against our own expectations And where we believe we're doing well. And so the way that will manifest itself is in a couple of areas. One of them is just accuracy in terms of forecasting. And that could be everything from the totals to the mix of license types to products and other areas.

Speaker 2

And that has been Unfortunately, much less accurate recently than we would like. And so then you diagnose what is causing that. Some of the root causes are just Mixed messaging in both our direct and our indirect channels where what are we prioritizing? Are we prioritizing duration? Are we prioritizing products Or different license types.

Speaker 2

And those types of things are what cause unnecessary complexity and unnecessary volatility. And so we're using this really as an opportunity to address not only that, but some of the other areas that I called out, which are really focused more on medium and long But I think overall just stem to drive better alignment. When I call out the channel, I mean, I think one thing in my mind is important. I think the channel right now Today, and when I say channel, I mean more of our traditional VARs and VARs. I think they're overly focused on fulfillment.

Speaker 2

And there's been an inconsistent alignment where they're operating in a supporting cast or they're actually driving net new demand and servicing customers. Refinements like that are really important Because complexity just slows you down, makes it harder to do business within Citrix, and all of those things impact our overall accuracy. And so that's what we're trying to drive towards. And one of the reasons why we are pushing to a higher and higher mix of SaaS is that allows us to Effectively not let our own internal execution impact the external financials, but it's also the way we generate much higher lifetime Economic value for Citrix investors and customers at the same time.

Speaker 9

If I can just sneak in one follow-up. You've mentioned you're not you'd like to see more capacity from a quota bearing rep perspective. Does that mean are you guys going to accelerate hiring in the Back half of the year to try to get those people on board and hopefully ramped up and ready to go for calendar 'twenty two?

Speaker 2

We are, Kirk. I mean, it's not an incremental Spence, I wouldn't look at it that way as much as a reallocation of some of the dollars that are being spent right now in areas that I think have yielded a lower result.

Speaker 9

Okay. That's great. Thanks. Thanks, David. You bet.

Operator

Thank you. And the next question comes from Matt Hedberg with RBC Capital Markets.

Speaker 10

Hi, guys. Great. Thanks. Hey, David. A lot of what you guys are talking about this morning is it sounds like it's disappointment with the new business process.

Speaker 10

I guess I'm wondering if you could talk a bit more about the retention and the conversion of some of the customers that advantage of some of these bespoke license last year. Obviously, you're having a lot of success with SaaS ARR. It's accelerating here. But overall, I guess, are you on plan for Sort of the conversion of these bespoke license and are you happy with the retention thus far?

Speaker 2

Yes, Matt, the bespoke licenses, if you're talking about Some of that short term business continuity item from the early part of last year, that's largely run its Of course. I mean most of that was either focused on temporary capacity that was used in the early part of the pandemic or things That have moved into permanent capacity already and just expanded the overall base. And so if I step back and I look at the you mentioned retention and whatnot, The renewal rates is one way to look at that. I mean, we haven't called those out specifically since an analyst meeting, but those have been Trending positive for the last several quarters. So we're probably right around as high as they've ever been in our history, and that's SaaS as well The overall conversion of the installed base, as I said, I think we've really got a motion there that is resonating with customers.

Speaker 2

The products, The product maturity and the product resiliency is where we need it to be. And then the co sell with Microsoft and the other hyperscalers is doing really well. And so That's why that pace is up 2, 3x from where it was a year ago, and I expect that installed base migration to You see that when we call out certain metrics like paid subscribers on Citrix Cloud. That's another good metric. I think that was up More than 50% year on year.

Speaker 2

So that part of the transition, those things are going really, really well. And one of the just reminding everybody what we're calling out here Is optimizing more on the kind of new business execution side, so we can stop having as much volatility of total results as we have had over the last couple of quarters.

Speaker 10

That makes a lot of sense. It's good to hear the comment on renewal rates. That's super encouraging. And I guess, there's been a couple of questions on specific changes From a go to market perspective, I guess, when you think about these dials that you can turn here, how much of it is just Better alignment from marketing or is it sales comp plans need to change a bit more? Just maybe just you guys obviously have a long history Of a well oiled sales machine.

Speaker 10

Just what do you think are some of the most important aspects of this? And again, I guess, I'm thinking more on Sort of the inside out looking piece as opposed to the channel?

Speaker 2

Matt, it's really all of the above. I think alignment is an overused But it's super accurate. And it's just driving simplicity and removing some of the variability that creates complexity. Just imagine if you're a sales individual right now and you're tasked with managing duration and different products And license model types and conversion of the installed base, it's just a lot. And so we need to remove some of those moving parts and make sure that there's A simpler go to market model.

Speaker 2

I think that helps a lot. And then just make sure those teams have all of the support that they need operationally So I mean, think of it as refinement as much as anything else, but all those things you called out, whether it's incentives or programs Or individual sales strategies, those just need to be better aligned than they have been up to this point.

Operator

Got it. Makes a lot of sense. Thanks, David. Thank you. And the next question comes from Tal Liani with Bank of America.

Speaker 11

Hi, guys. My question is along the lines of the last few questions. I want to talk about legacy. What are the trends in legacy? And the reason why I'm asking is because we see kind of renewed life with other companies and data centers, whether it's a 5% that had Seeing like 13% 17% growth in legacy hardware and appliances in the last two quarters.

Speaker 11

And I'm just wondering what are the trends with the legacy

Speaker 3

All right.

Speaker 11

And what's the outlook for that?

Speaker 2

Yes. Tal, I think it's dependent upon what you mean by legacy necessarily.

Speaker 3

But I mean, if you

Speaker 2

mean hardware, for example, I But I mean, if you mean hardware, for example, I mean, we have I think as everybody knows, Been driving more and more and more of our app delivery and security products to kind of be hardware agnostic and less and less reliant Specialty hardware. And so you're seeing that come out of subscriptions. I think in the AD and S business, Which is the proxy for networking. The 2nd quarter increased, I think, 66% year on year in subscription and Software represented just under half of that total. So that's the direction that we've seen there.

Speaker 2

I think in general, take a big step back. I mean, What's going on in the market is, last year, the first two, three quarters was really focused on somewhat Transactional COVID related projects and whatnot. And over the last few quarters, people are refocusing on longer term strategic more Transformational type projects. It's one of the reasons why our installed base migration has picked up so much, And we expect that to continue. So I think the type of project is becoming more and more strategic.

Speaker 2

Not sure if that's what's driving legacy necessarily, but certainly where we're taking those products is cloud delivered platforms, Simplicity of deployment, underlying simplicity and modernization of infrastructure, A lot of those things just mean drive them to the cloud, remove moving parts and then help them just have a more complete view of their infrastructure.

Speaker 11

Right. So many companies had gone or are going through the same transition. And generally, we see great success, At least great growth on that part of the business. The business is transitioning, might be too small, but for some companies, but the growth rates are pretty high. And the question is now looking backwards, what went wrong in your preparation for the change that results in lower than Growth rates, meaning what could you have done differently in order to address to better address the go to market or the positioning with customers?

Speaker 11

I think the main reason why I'm asking this is that the question here is, is it about execution or is it about lack of demand, meaning Something that is wrong fundamentally with demand and not just about execution and that's where I think all

Speaker 8

the questions are going about.

Speaker 2

Yes. It's a fair question. I mean, if I step back and you talk about our growth rates and could they have been faster? In Sure. In hindsight, yes, I think we had tried too hard to manage the business model transition between the pace of SaaS adoption in our short term financial metrics.

Speaker 2

And these are goals that are obviously somewhat incongruous. And going forward, as we've talked about a lot And some of the changes we're making is more lean into it, embrace the SaaS move more rapidly and then just drive lower We clearly haven't always gotten this right, and I think it's caused more volatility than it should have. But if you take a big step back and you talk about growth rates, and it's one of the reasons why we keep focusing everyone on ARR because it is the right proxy to look at how the business Model transition is going and our SaaS ARR growth is accelerated for the Q3 in a row. It's somewhere close to $900,000,000 growing at nearly 50 Year on year. We have $3,000,000,000 in total ARR growing in the low teens.

Speaker 2

And those are the leading indicators When we look at our where we expect the overall business growth rate to eventually get to as we get through this transition. So the real message today is we're cleanly aligned on the execution issues that we have had and we're taking steps immediately We're focused on simplifying the overall business model and leaning into the transition so that it becomes faster to get Through this and really emerge the other side in a model that I think is easier to understand, easier to predict and just frankly easier to manage.

Speaker 5

Thank you.

Operator

Thank you. And the next question comes from Tyler Radke with Citi.

Speaker 12

Yes, thanks. A question either for David or Arlen, just mechanically trying to understand the mechanics of the revenue Shortfall here in the quarter and the outlook. Obviously, the SaaS number was pretty strong, But was this just new kind of on prem subscription business that came in at a lower duration or that didn't come in It was expected at a higher duration. Just trying to understand the magnitude of it, just given the revenue

Speaker 2

Yes. Tyler, let me take that. So yes, I think you're right that there was a higher mix of Fast to overall, but what we talk about today and what we talk about internally is just aggregate volume of new business. And those are the Things that we are focused on changing. And I think it's really a result of all the areas that we've called The overall volume of getting deals closed that we anticipated with the right mix is where the execution items stem And that's why we have a line of sight into all those things that can fix this very quickly, and that's what we're executing But I think I would focus we're focused on volume more so than mix.

Speaker 2

We can embrace the mix, That's not our primary driver right now.

Speaker 12

Right. So volume, but I guess, it would be volume on mathematically, the SaaS business kind of has more of a razzle recognition. I guess, it would be volume on new business that wasn't necessarily SaaS to drive that difference?

Speaker 2

Yes. I mean Tyler, it's both. I mean when we say volume, we mean that in general terms and then it's just exacerbated by the mix when it comes to translation To recognize P and L in a given quarter.

Speaker 12

Got it. Great. And then just one follow-up. So David, I know you've I've been at the company a while and seen probably a fair number of kind of sales reorgs and realignments. Like how long do you think Just one last and I think in terms of the long term targets, you talked about potentially updating those in about 3 months from now.

Speaker 12

Do you feel like you'll have better visibility to do that at the time, just given the scope of this transition? Thank you.

Speaker 2

Sure. I think the changes we are addressing are immediate in some areas And immediate in driving simplification and accuracy and whatnot. I think as everybody sees, we are contemplating Some level of disruption that are especially in Q3 from a guidance standpoint, we think that's just a prudent approach that we should be taking right now. But a lot of this is more about not about wholesale rebuild, just simplifying the things that are causing too much Remove the moving parts and allow the teams to do what they do well. Couple areas are a little bit more medium and long term I've called out.

Speaker 2

Increasing quota carrying capacity, that doesn't impact the Q3, but that sets you up for 2020 2 and beyond, so that you just have greater flexibility in both growth and predictability. So I mean, I think it's a combination of both Short, medium and long term. But the most impactful, frankly, is just getting to that point where we are As much as possible, 100% SaaS, and that will take some time because one of our core differentiators, of course, is being Customer centric, being able to drive a hybrid model, being able to allow them to maintain some level of on premise Deployments and we will continue to do that. We're just doing it in a different rate and pace, let's put it that way. So I think we have contemplated the potential disruptions in Q3 and Q4.

Speaker 2

And we'll emerge The rest of this year with more accuracy and I think set up for a more rapid recovery as we go into the subsequent years.

Speaker 9

Thank you.

Operator

Thank you. And this concludes the question and answer session. I would like to return the call to David Henshall for any closing comments.

Speaker 2

Thanks. Thanks everybody for joining us today. Let me just leave you with a few closing That's consistent with the Q and A session. The transition of our installed base to the cloud has continued to gain momentum. It accelerated again in the second quarter.

Speaker 2

I think we are very rapidly and decisively addressing a lot of these execution related challenges we experienced in the Q2, and we're taking immediate We intend to emerge, as I've said a couple of times, with a simpler, easy to understand structure that I think aligns objectives with more predictable Results, obviously improving long term results and our pace through this transition. Really look forward to speaking with everybody at our analyst meeting and again next quarter. Thank you very much.

Operator

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

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Earnings Conference Call
Citrix Systems Q2 2021
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