Citrix: Cloud Subscriptions, Recurring Revenue Take Their Toll on Profit

Citrix has lowered its business outlook for the remainder of the year after missing its revenue guidance for the most recent second quarter. According to the company’s earnings report released Wednesday, subscriptions accounted for a greater percentage of revenue than anticipated, a trend that Citrix now expects will continue.

Revenue of close to $749 million was lower than the $772 million Citrix had forecast, with subscriptions accounting for 62% of sales. That compares to 42% for the same period last year. In its most recent guidance, Citrix had estimated subscription revenue would fall in the range of 50-55% for last quarter.

“The higher subscription mix created a 600-700 basis-point headwind to reported revenue,” according to a Citrix letter to shareholders.

Speaking on the company’s earnings call with analysts, Citrix president and CEO David Henshall said the company “clearly underestimated the demand for subscription licensing,” and acknowledged that the shift will continue for the rest of the year.

Citrix’s David Henshall

“The subscription transition for new licensing is really happening faster than we forecasted across both of our major businesses, which is strategically where we’re driving the company,” Henshall said. “The obvious consequence here of the faster shift is in revenue, margins, earnings and cash flow are going to be impacted in the short term, with the offset represented in unbilled and deferred revenue in particular.”

Despite missing its revenue targets, Henshall indicated he is optimistic that the shift to deferred revenue will have a beneficial long-term impact. Citrix’s shift to the cloud is still in its early stages, but starting with Wednesday’s earnings release, the company is reporting annualized recurring revenue (ARR), which Henshall said will be an important key performance indicator for its business.

Total subscription ARR for the quarter was $644 million, an increase of 33% over the same period last year, the company reported. ARR for SaaS offerings for the quarter was $418 million, up nearly 50%.

“As we continue to move through the business-model transformation, we expect to see very strong continued growth in both of these metrics,” Henshall said.

Citrix shares were down 5% on Thursday after reporting the revenue miss. IDC analyst Shannon Kalvar doesn’t believe the shortfall is immediate cause for concern.

“I see slower transition as being a cause for concern because, if It were slower, then their investment in maintaining [their] older technology increases,” Kalvar said, adding that the shortfall shouldn’t come as a surprise.

“They’ve completely replatformed their product,” he said. “And if we look historically at other companies that have chosen to do that – with Microsoft as the biggest example – there’s always some kind of dip in revenue and earnings, when shifting over to a new platform with a subscription-based model.”

Cornerstone IT’s Jim Moreo

Henshall also emphasized the arrival of new products coming later this year, announced at its Citrix Synergy conference in May, including updates to its Workspace App that include a new contextual interface using artificial intelligence and new “Micro Apps,” and support for Microsoft’s forthcoming Windows Virtual Desktop (WVD). While partners see pent-up demand for WVD, some say it remains to be seen whether Citrix can bring something additive.

“If they could come up with the tools that Microsoft’s missing, which is what Citrix has historically done, they might have a place, but to be frank, I haven’t seen them yet,” said Jim Moreo, principal of Cornerstone.IT, a managed services provider (No. 338 on Channel Futures 2019 MSP 501 list) and a Citrix gold specialist.

Citrix, along with VMware, CloudJumper, Igel and several third parties, will have an opportunity to …

… compete with workspace environments that can run on, and enhance WVD.

“Microsoft builds great technology and platforms, but they do not do operational environments very well,” IDC’s Kalvar said. “That’s the reason companies like Citrix have made so much money for the past 30 years.”

Since rolling out Citrix Cloud and last year’s Workspace App, Henshall has acknowledged for some time that the company has intentionally focused compensation incentives on new business, not converting existing XenDesktop, XenApp and Netscaler implementations.

“We’re making sure we have enough capacity to serve our customers,” Henshall said.

The company will start offering incentives for its installed base next year, he added.

Beyond incentives, partners such as Moreo hope Citrix will steer more of them toward service opportunities — in addition to commissions on subscriptions. Moreo said Citrix tends to steer service opportunities toward its own services organization and larger, platinum-level partners.

“They have hundreds, if not thousands, of gold partners out there that are not being introduced to opportunities that could just as easily help implement their new products,” Moreo said.

The recent departure of longtime channel chief Craig Stilwell is also of concern to him.

“Craig handed me my gold partner plaque 15 years ago,” Moreo said. “He was a big partner evangelist and hopefully they will bring in someone who is pro partner.”