Citrix Systems, Inc.

Good morning and welcome to the Citrix Q1 2021 conference call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Tracy Sushiguchi, Vice President of Investor Relations.

Thank you, Rayo. Great. Thank you, Rayo, and good morning, and thank you for joining us today for today's first quarter 2021 earnings call. Participating on the call will be David Henshaw, President and Chief Executive Officer, and Arlen Shankman, Executive Vice President and Chief Financial Officer. Please note that we have posted 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'll discuss various non-GAAP financial measures as defined by SEC's Regulation G. The 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, Tracy. 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 the second quarter and then continuing throughout the year, we expect to see top line acceleration or 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 SAS. 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 REIC acquisition, showed continuing strength. In fact, SAS ARR accelerated to 43% year-on-year growth, and total ARR was up 15% from last year. So overall, the fundamentalists in Q1 were actually quite strong. I'd like to note that this quarter involved, uh, really included three unique items that impacted recognized revenue. And I want to cover those briefly here in detail before we open up the call for Q and a, the first is the right acquisition, which closed at the end of February. Second item is we experienced supply chain constraints and our hardware business impacting over $10 million worth of product. 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 Citrus Cloud migration. So the limited use business continuity licenses really generally fell into three 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 multi-year 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 this 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 install 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.