Citrix Systems, Inc.

Q2 2021 Earnings Conference Call

7/29/2021

spk04: Hello, and welcome to the Citrix Q2 2021 conference call. All participants will be in 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 your touch-tone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I would now like to turn the conference over to Tracy Tsuchiguchi, Vice President of Investor Relations. Please go ahead, ma'am.
spk01: Thanks, Keith. Good morning, and thank you for joining us for today's second 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 second quarter earnings letter to our Investor Relations websites. 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 websites. On this call, 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 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?
spk08: 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, execution challenges, some areas that are reflected in our Q2 results. And, you know, we believe that the cause of this has been really the increased complexity around managing this faster transition model types and motions that are key components of our reported revenue and overall P&L. 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, 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 in 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 transitions. At our financial analyst meeting in October, which we'll have in conjunction with our third quarter earnings results announcement, we plan to provide an updated framework to more simply model our faster transition to SAS 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 to provide the most accurate measure of the underlying business performance as we go through this business model transition. So with that, let's stop and open it up for questions. Operator?
spk04: Yes, I'm sorry. Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And this morning's first question comes from Raymond Lynch with Barclays.
spk05: Hey, thanks for taking my question. David, can you kind of link the comments from the first quarter to the second quarter now? So if I do remember correctly, in Q1, we talked about term customer signing at the shorter duration, etc. And you were hoping that that would improve. And now the second quarter sounds slightly differently. So is there, like, a change in the story? Is it the same story, just identified the issues better? Thank you very much for that. A little bit more clarity here. Thank you.
spk08: Sure, Remo. Actually, two different issues. In Q1, just to remind everybody, we had a lot of very special, you know, 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. Duration has come back to normal levels as we anticipated. No change. You know, you tend to see slightly longer duration and fast contracts and areas like that, but certainly along our lines of expectation. I think if you step back and think about Q2, you know, we put it in context for just a minute. There's three 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. Second is migrating the installed base to cloud, and the third is driving net new business bookings. With mix, we've consistently come in, you know, much higher with the SaaS mix, 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 nine 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 are co-sell with hyperscalers, and particularly like Microsoft, for example, is up sharply. However, new business bookings was really the challenge, too. 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, et cetera. 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, just 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 four things that we're doing to really focus on reorganizing and prioritizing the sales team, increasing direct quota carriers, channel leverage, and prioritizing SaaS. I'm happy to go into more detail about any of those four.
spk05: Yeah, and if I listen to you, David, those issues kind of sound like they kind of evolved over time. It's just that, like, Is this kind of the announcement today and the discussion today a little bit the culmination of kind of a realization on the management team that something needs to change?
spk08: Remo, I think that's fair. I think that, you know, we obviously are coming off of, you know, a record year in 2020 across many of the metrics of the business. You know, COVID has certainly been a, you know, a secular tailwind to the types of solutions that we sell. And 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 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.
spk05: Okay.
spk04: Thank you. Good luck. Thank you. And the next question comes from Mark Modler with Bernstein.
spk12: Mark Modler Thank you very much. David, this quarter, total ARR X rate grew 13 percent. Can you give us some more color on the moving parts that are driving your 10 percent total ARR growth guidance?
spk08: Yeah, Mark, it's a, it's a good question. And that's one of the reasons why we keep focusing on, on SAS ARR and totally Iraq. Cause I think it looks through all of this noise with the business model transition. It gives a better picture for what's going on. What's driving that as the workspace in, in general, um, just to give a couple of statistics there, uh, you know, workspace, you know, fast in particular and, uh, consumption based bookings, you know, up sharply on a year over year basis. from a mix. We don't talk about bookings by product much, but I'll tell you on a mixed basis, it's about 70% of workspaces 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 install-based migration. I just mentioned that on Remo's question, but we are running, you know, 2 to 3x the rate that we were a year ago. We've increasingly seen, you know, 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 alignments on that motion. And Those are the primary drivers behind the 13% total ARR growth for the business.
spk12: 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?
spk08: Yeah, we called that out in our guidance. If you look at the detail in our letter, you know, we're assuming that total ARR, you know, could slow down closer to 10% exiting the year at 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 keeping people informed.
spk13: Okay, that makes sense. I appreciate it. Thank you.
spk08: Thanks, Mark.
spk04: Thank you. And the next question comes from Brent Thill with Jefferies.
spk11: David, on the sales reorg, can you frame the extent of 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?
spk08: Yeah, Brent, we're not necessarily changing the sales force. 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. We are, you know, doing more to make sure we've got alignment. You know, there's been, in my opinion, kind of a mixed message, you know, 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, you know, 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 as the primary motion? How do we make sure that incentives line up in the field, for example, and in the channel to support that? Removing some of these what I call complexity issues. 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 alignments.
spk11: You mentioned the Microsoft relationship, but there's been a tremendous amount of questions with Cloud PC launch 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?
spk08: Yeah, so let me back up for a minute and talk about Microsoft at the high level and then specifically about Win365. I think as everybody knows, for the better part of 30 years, we have consistently embraced the Microsoft platform and extended it as part of our solutions. And that's really what's built this long-term partnership from which we both benefit. You know, that said, of course, we're always working to make sure we're educating the market, we stay aligned. And if you look online, I mean, and look at what we're doing together, you're going to see an increasing volume of a lot of joint collateral projects. focused on joint migrations, how Citrix plus ABD, for example, together is the lowest total cost of ownership, you know, as compared to, like, native ABD, while at the same time improving experience and security for customers. You know, 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 process. And so, you know, and then, of course, a number of other things from a product strategy standpoint. So, You know, we're working together on Windows 365 and looking at ways where we will potentially integrate and do more together. You know, we'll talk more about that after these products are actually released into the market, you know, later in the quarter, et cetera. In general, you know, 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, et cetera. And, you know, primarily it'll be focused on those you know, simple turnkey DAS use cases, and we'll work to integrate, you know, that as 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, et cetera. So that's the way we think about it in general terms.
spk11: Thanks, David.
spk04: Thank you. And the next question comes from Carl Kirstead with UBS.
spk06: Thanks. I'll ask one for David and one for Arlan. 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 you know fairly highly penetrated was it a little bit of competition maybe anything other than maybe internal sales execution and then for arlen you you did indicate that um operating cash flow in 21 would be below the levels of 2020 but for the first half operating cash flows 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? For instance, do you think that cash flow this year for Citrix could at least be above the 2019 level of 785? Much appreciated.
spk08: Yeah, 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, you know, relatively isolated, you know, set of issues that we think have just impacted our overall execution. When we do research looking at our, you know, competitive analysis, win-loss, you know, there's been no material changes on that front. Sales cycles have been generally consistent with where they are in the past, and overall opportunity pipelines or where they need to be from our, you know, to be able to hit our numbers. It's just, you know, the execution items that we have highlighted there. If you look at the workspace, it's definitely not an issue of it being overly penetrated. You know, these markets are actually accelerating. You know, you can look at some of the industry analysts that point to, you know, market growth rates and Citrix grew sharply in workspace technologies last year. We are the market leader in this area, and we will be growing this year 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 byproduct 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 You know, we're hoping to do that at our upcoming analyst meeting just so that we can, you know, normalize all of these business model shifts and give everybody a true picture. But similar to the way I answered Raimo's question, you know, what's driving our SAS ARR growth right now organically to accelerate three-quarters in a row is workspace. You know, what's really driving the total ARR in the low teens is workspace. And so I don't anticipate that mix changing materially over the balance of the year. 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.
spk06: Got it. Thank you, David.
spk02: Carl, excuse me, on cash flow. Look, we feel very good about the long-term durability and growth in our cash flow. And, you know, as you know, there are a number of moving parts that hit any quarter. And in this quarter, we had some payments around cloud hyperscalers and infrastructure. We had some changes in and some payments around taxes. We had some impact from our accruals and our bonuses. 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 third quarter, 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.
spk11: Okay, terrific. Look forward to that.
spk04: Thank you. And the next question comes from Sanjit Singh with Morgan Stanley.
spk07: 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 in 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 is underperforming? Or is it more because you think that the SAS bookings mix should be higher or the SAS ARR mix should be even greater than it was? If you could sort of comment on those two pieces.
spk08: Sanjay, it's a good question. I think in general, you know, we've 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 SAS. 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, you know, we just think that it's more of a volume question, you know, 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, you know, that's really the genesis of a lot of these changes that we're talking about. The other one is, you know, I think just recognizing where customers are going and how they're buying software. And this general trend towards much more of a land and expand consumption-based approach you know, different buying centers. 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, you know, when I reference quota carrying capacity, it's one of those areas where it's behind where I'd like it to be. And, you know, these don't impact short-term much, but it really gives you much better flexibility and growth opportunities long-term. 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.
spk07: 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
spk08: that transition or the unit economics of that transition has that changed any in any particular way versus what we talked about um at the end of 2019. nope i don't think so i think we're still seeing that that uplift that we had called out from a uh you know from from a maintenance stream up to a sas stream what we are seeing though is as as we're moving into more and more large deals strategic we're seeing more opportunities not just a transition like for like but to actually address incremental use cases and expand the user base within those accounts. And 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, secure 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.
spk07: Appreciate the thoughts, David. Looking forward to the analyst.
spk08: Thank you.
spk04: Thank you. And the next question comes from Kirk Matarn with Oracle ISI.
spk10: ISI, thanks very much. David, you mentioned execution a couple of times, 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 on 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 or maybe the kind of data you're getting in from the channel isn't as accurate as you'd like. I mean, it sounds like there's a number of things going on, but could you just 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, you know, 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 to maybe piece apart the demand element versus things that are you know, could be refined better? Because it sounds like it's more of a refinement of the processes versus a demand issue.
spk08: Yeah, 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, you know, 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. And that has been, unfortunately, much less accurate recently than we would like. And so then you diagnose, you know, what is causing that? And some of the root causes are just, you know, 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? And those types of things are what cause, you know, 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 term, 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 VADs. I think they're overly focused on fulfillment, and there's been an inconsistent alignment with the field where They're operating in a supporting cast, or they're actually driving net new demand and servicing customers. And refinements like that are really important because complexity just slows you down. It 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.
spk10: If I could just sneak in one follow-up. You've mentioned 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 22? Yeah.
spk08: We are, Kirk. I mean, it's not an incremental expense. 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.
spk10: Okay, that's great. Thanks, David.
spk04: Thank you. And the next question comes from Matt Hedberg with RBC Capital Markets.
spk09: Hi, you guys. Great, thanks. Hey, David. You know, a lot of what you guys are talking about this morning, it sounds like it's disappointment with the new business process. You know, I guess I'm wondering, you know, if you could talk a bit more about the retention and the conversion of some of the customers that took advantage of some of these bespoke licenses last year. Obviously, you're having a lot of success with SAS ARR. It's accelerating here. But overall, I guess, are you on plan for sort of the conversion of these bespoke licenses, and are you happy with the retention thus far?
spk08: Sure. 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 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 – The renewal rates is one way to look at that. I mean, we haven't called those out specifically since, you know, an analyst meeting. But, you know, those have been trending positive for the last several quarters. So, you know, we're probably right around as high as they've ever been in our history. That's SAS as well as maintenance. The overall conversion of the installed base, as I said, I think we've really got a motion there that is resonating with customers. You know, the products and the product maturity and the product resiliency are is where we need it to be. And then the co-sell with, you know, Microsoft and the other hyperscalers is doing really well. And so that's why that pace is up, you know, two, three X from where it was a year ago. And I expect that install-based migration to continue. You see that when we call out certain metrics like, you know, paid subscribers on Citrix Cloud. That's another good metric. I think that was up, you know, more than 50% year on year. So that part of the transition, those things are going, you know, really, really well. And You know, one of the – just reminding everybody what we're calling out here is optimizing more on the kind of new business execution side, you know, so we can, you know, stop having as much volatility of total results as we have had over the last couple of quarters.
spk09: That makes a lot of sense. It's good to hear the comment on renewal rates. That's super encouraging. And I guess, you know, there's been a couple questions on specific changes from a go-to-market perspective. I guess, you know, when you think about these, you know, these dials that you can turn here, How much of it is just, you know, better alignment from marketing? Or is it sales comp plans need to change a bit more? Maybe just because you guys obviously have a long history of a well-oiled sales machine. Just, you know, 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.
spk08: Yeah, Matt, it's really all of the above. I think, you know, alignment is an overused term, but it's super accurate. And it's just, you know, driving simplicity and, you know, removing some of the variability that creates complexity. And, you know, just imagine if you're a sales individual right now and you're tasked with managing duration and different products and, you know, 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. I think that helps a lot. And then just make sure those teams have all of the support that they need operationally to execute as quickly as possible. 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.
spk09: Got it. Makes a lot of sense. Thanks, David.
spk04: Thank you. And the next question comes from Taliani with Bank of America.
spk13: 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 lifestyle. with other companies and data centers, whether it's F5 that had seen like 13 and 17% growth in legacy hardware and appliances in the last two quarters. And I'm just wondering what are the trends with the legacy part and what's the outlook for that?
spk08: Yeah, Tal, I think it's dependent upon what you mean by legacy necessarily. 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 on specialty hardware. you know, you're seeing that come out of subscriptions. I think in the AD&S business, which is the proxy for networking, the second 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. I think in general, take a big step back. I mean, what's going on in the market is, you know, last year, the first, you know, two, three quarters was really focused on somewhat transactional COVID related, you know, 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 based migration has picked up so much. Um, you know, and we expect that to continue. It's a, you know, I think the, the, the type of project is becoming, uh, more and more strategic and not sure if that's what's driving, you know, legacy necessarily. But certainly where we're taking those products is cloud-delivered platforms, simplicity of deployment, underlying simplicity and modernization of infrastructure. And a lot of those things just mean, you know, drive them to the cloud, remove moving parts, and then help them just have a more complete view of their infrastructure.
spk13: Right. So many companies have 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 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 expected growth rates? Meaning, what could you have done differently now? in order to address, to better address the go-to-market or the positioning with customers. 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 the questions are going about.
spk08: Yeah, that's a fair question. I mean, if I step back and you talk about our growth rates and could they have been faster? In hindsight, yeah, I think we had tried too hard to manage the business model transition between the pace of SaaS adoption and our short-term financial metrics. And these are goals that are obviously somewhat incongruous. And going forward, you know, as we've talked about a lot this morning and some of the changes we're making is more, you know, lean into it, you know, embrace the SaaS move more rapidly, and then just drive lower complexity, you know, internally. 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, you know, it's one of the reasons why we keep focusing everyone on ARR, because it is the right proxy to look at, you know, how the business model transition is going. And our SAS ARR growth has accelerated for the third quarter in a row. You know, it's somewhere close to $900 million, growing at nearly 50% year on year. We have $3 billion in total ARR growing in the low teens. And, you know, those are the leading indicators that we look at when we look at our, you know, where we expect the overall business growth rate to, you know, eventually get to as we get through this transition. So the real message today is, you know, we're cleanly aligned on the execution issues that we have had, and we're taking steps immediately to address those. We're focused on simplifying the overall business model and leaning into the transition so that it becomes, you know, 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.
spk04: Thank you. Thank you. And the next question comes from Tyler Radke with Citi.
spk03: Yeah, thanks. The 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 SAS number was pretty strong. But was this just new kind of, you know, on-prem subscription business that came in at a lower duration or that, you know, didn't come in that was expected at a higher duration? Just trying to understand the magnitude of it. You know, just given the revenue recognition dynamics. Thank you.
spk08: Yeah, Tyler, let me take that. So, yes, I think you're right that there was a higher mix of SaaS, too, overall. But, you know, 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 out here. You know, the overall volume of getting deals closed that we anticipated with the right mix is where, you know, the execution items stem from. And that's why, you know, we have a line of sight into all those things that can fix this very quickly. And that's what we're executing on. But I think I would focus, you know, we're focused on volume. more so than mix. We can embrace the mix, but, you know, that's not our primary driver right now.
spk03: Right. So volume, but, you know, I guess it would be volume on, you know, mathematically the SaaS business kind of has more of a razzle recognition. So, you know, I guess it would be volume on new business that wasn't necessarily SaaS to drive that difference.
spk08: Yeah, 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 into recognized P&L in a given quarter.
spk03: Got it. Great. And then just one follow-up. David, I know you've been at the company a while and seen probably a fair number of sales reorgs and realignments. How long do you think this one last, and I think in terms of the long-term targets, you know, you talked about potentially updating those in about three months from now. Do you feel like you'll have better visibility to do that at the time, just given the scope of this transition? Thank you.
spk08: 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, especially in Q3 from a guidance standpoint. We think that's just the prudent approach that we should be taking right now. But a lot of this is more about not about wholesale rebuilds. just simplifying the things that are causing too much complexity. You know, remove the moving parts and allow the teams to do what they do well. A couple areas are a little bit more medium and long term that I've called out. You know, increasing quota carrying capacity. That doesn't impact a Q3, but that sets you up for, you know, 2022 and beyond so that you just have, you know, greater flexibility in both growth and predictability. So, I mean, I think it's a combination of both, you know, short, medium, and long-term. But, you know, the most impactful, frankly, is just, you know, getting to that point where we are, you know, as much as possible 100% SaaS, and that will take some time because one of our, you know, one of our core differentiators, of course, is being, you know, customer-centric, being able to drive a hybrid model, being able to allow them to maintain some level of on-premise deployment, 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, 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.
spk07: Thank you.
spk04: Thank you. And this concludes the question and answer session. I would like to return the call to David Henshaw for any closing comments.
spk08: Thanks. Thanks, everybody, for joining us today. Let me just leave you with a few closing thoughts consistent with the Q&A session. You know, the transition of our installed base to the cloud has continued to gain momentum. It accelerated again in the second quarter. You know, I think we are very rapidly and decisively addressing a lot of these execution-related challenges we experienced in the second quarter. We're taking immediate action, obviously, to fix them. 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 in our pace through this transition. Really look forward to speaking with everybody at our analyst meeting, and again next quarter. Thank you very much.
spk04: Thank you. The conference is now concluded. Thank you for attending today's presentation. May I disconnect your lines?
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