infotable_text.csv

text
"In Digital Media, we continue to be the undisputed leader in helping customers inject creativity into their jobs, schoolwork and their daily lives"
Premiere Pro’s virtual reality workflows are seeing strong adoption with the majority of the films in the Virtual Reality category at Sundance having used it in their creative process
"Thanks to the completeness of our offering, our continued innovation and our growing partner network, we continue to see strong market momentum, with major customer wins this quarter at Dick’s Sporting Goods, Mercy Health, Hutchison UK, Autotrader"
"I think we’re continuing to seeing good strength across each of the groups, particularly as it relates to Q1. We saw some good SMB, small and medium business, demand that continues to do well"
"As you know that’s the team offering, which is a higher price point offering"
"I would say, Acrobat, had strong unit quarter that’s reflected both in Creative Cloud, as well as in Document Cloud"
"In addition to that, we continue to see good progress on retention"
"And so, as people migrate off the performance or the promotional pricing and get on to the full plans; and then new unit adoption, as well for the new offerings, especially the photography solution; and international continue to do well"
"And also, there is no question that we’re combating piracy as the ability to get boxes in most countries diminishes"
"So, I would say across the spectrum of the different offerings"
"And from an ARPU point of view, as well Sterling, I think Mark mentioned that in his prepared remarks"
"I think big picture, the conversations that we’re having day-in and day-out, our enterprises recognizing that digital is transforming their agenda"
And then they decompose that into what are the key things that they have to do in order to use that as an opportunity rather than a challenge
"I think if you talk to also the consulting companies, they're being brought in to aspirationally help all of these companies, rethink their business model processes and people"
"But top of the agenda for even the CEO and the CIO and CFO, is what are we doing with respect to delivering a better engaging customer experience? Next week at Summit, we'll talk a little bit more about how that expands on our vision or what we can do, and what people are asking to step up and do"
"But I think the way it manifests itself in the business is people are saying if it's just so key to my future, I want to bet and standardize on companies that have a comprehensive platform, which is why we're always pleased to see us being rated as the number one platform that exists for this kind of technology solution"
"Walter, maybe I'll give you some color which we didn't touch on as another demand driver, which is in the enterprise"
"As you know, we are coming up on the anniversary of lot of the three year ETLAs"
And the first time when we did the three year ETLAs Creative Cloud was relatively new
"And so, what we were doing was in-effect providing them with subscription model that mirrored their, what I would call custom way of buying CS in the past"
And so that clearly represents an increase in ARPU as well
"And so, that's really what's still driving a lot of the upside in ARR with the potential to look at optimizing further out as well"
"It's a really good question Heather, and there's no question actually in our mind that where Creative Cloud was first the door opener for us to have conversations with the enterprise"
"There is an increased expectation from customers that the content lifecycle that we talk about, namely, the ability for them to accelerate how they deliver campaigns or how they personalize the experience that they wish to deliver across all of these different channels, is predicated on making sure that that content from, content all the way from creation through asset management and all the way out to delivery, is more seamless than it’s ever been"
"So, I would say three years ago, two years ago, we were talking about that as one of the benefits"
I would say today every conversation with the enterprises they see that as a differentiator for us
And the expectation is that’s how they will accelerate both the campaigns and how they will ensure personalize delivery
"Let me take the second first, which is, you’ll get an update as well as Summit"
"And from my point of view, the benefit with the Microsoft relationship is really customer driven"
"Customers are asking for integration with Azure, Power BI, as well as Dynamics"
But next week we’ll give you a little bit of an update on that
"On the first question, as it relates to the competitors, I think we have talked about"
"Clearly, there are other players that you are alluding to that that are also seeing this as a market opportunity"
But our track record and our winning percentage record in the areas that we’re strong continues to be excellent
"And I think our vision of where we want to take this and how we want to continue to expand it, I think it still makes us a unique leader"
"But certainly, there are other players in this market as well Keith"
"So, that's one area that we're continuing to make sure we invest"
The second one that tends to be a way in which you compete effectively is the inventory
"So, I think having the inventory and having the inventory across different kinds of assets, including premium and including partnerships with some of the people that you're talking about, that also helps us ensure that we're competitively, either ahead of the market or at least in line with the market"
"And the third one that we think about when we think about stock is how good is our technology to find the right asset, based on the intelligence that we can provide"
And that's where I think you know we will demonstrate superior advantage to anything else that’s out there
"Because our ability to understand these assets and, irrespective of what keyword is being used to search for a particular asset return the right"
So in other words search relevance and search is going to be a key part of it
"And I think at MAX, we showed you a lot of really cool ways in which we will make that more relevant"
It’s an area we’ll continue to invest in
"I would say actually on the field side and on the partner side, we have evolved that over many areas"
Where we think we have a world class organization that does that
"In some cases, you have those deals, the larger the size the time taken can increase, but that’s why we want to build a healthy pipeline and continue to execute against that"
"So, I feel very good about it, and that is without a doubt one of the areas where we’ve invested in over the last few years"
"We actually feel really good about all of the technology that we have, and we were always on the lookout for small innovative companies"
"And I think both Mark and I have always talked about; we look for is it bringing our strategic advantage; what is the culture of the companies that we’re looking at, because we are very, very thoughtful about making sure that we continue to expand on the vision of what people want; and the third is financially whether it make sense"
"But we feel really good about the core value that we have, and we’ll continue to be on the lookout for things that meet our criteria in all of those; namely, continuing to expand strategically what we can do; ensuring that the culture fit is right, and financially making sense"
"I think, Kirk, from my point of view as we are going more and more to these large enterprises with solutions across the Creative Cloud, Document Cloud and the Marketing Cloud, we have a quarter back model, and the named account model with this quarter back is that they are clearly bringing to bear opportunities like the ones that you are talking about"
"If you are in there primarily with Marketing Cloud ensuring that we sell more solutions, sale Stock, sale Sign and continue to drive the CC DLAs"
"And so, I think the model that we have in the field is really one of how do we comprehensively to these larger accounts ensure that they are getting the benefit of the breadth of our solutions"
"So, a good question and it's clearly one of the areas that we are focused on"
"And since that was the last question, I think in summary, we were really pleased with the strong start to Q1. It was an outstanding quarter, and I think the Q2 targets that we gave reflect the continued momentum in the business"
"We're looking forward to next week's Adobe Summit, it's our largest ever"
"Thank you, Laura, and good afternoon to all of those listening in today"
"Ryzen CPUs have been consistently ranked among the top-selling processors at global etailers and retailers, and press reviews and end-user sentiments have highlighted the strong performance and value proposition"
"In early April, we launched our enthusiast-class Ryzen 5 processors and received overwhelmingly positive reviews that demonstrate our multi-threaded leadership and unmatched value proposition"
The Ryzen CPU partner ecosystem also continues to strengthen
We have seated more than 300 software developers to support their work optimizing for Ryzen CPUs and have already seen double-digit performance gains across a number of top-tier gaming titles
"Last week, the first Ryzen-based OEM gaming desktops were announced, and we continue the rapid rollout of Ryzen-powered systems with additional launches planned for major OEMs later this quarter"
"In early Q2, we launched four new Radeon RX 500 GPUs, featuring our Polaris architecture that deliver improved performance"
These new mainstream GPUs provide a compelling solution for the millions of gamers looking to upgrade their PCs to support advanced display technologies and deliver optimal gaming experiences
"Vega is a forward-looking architecture that combines a revolutionary memory subsystem, next-generation compute engine, advanced pixel engine and new geometry pipeline to dramatically improve performance and energy efficiency for the next generation of GPU workloads"
"Turning to our Enterprise, Embedded and Semi-Custom segment"
"We see solid demand for our latest FinFET based semi-custom offerings in 2017, including the planned holiday launch of Microsoft's 4K-focused Project Scorpio console featuring a new AMD SoC"
"On the data center front, in March we demonstrated that our upcoming Naples server CPU would offer more cores, I/O, and memory bandwidth when compared to the highest-end dual socket x86 server CPUs currently available, resulting in better performance across multiple workloads"
Naples platform development work continued to accelerate in the quarter
We are in the final stages of preparation in advance of launch and are very pleased with the status of our silicon and customer engagements
"Our focus in 2017 remains on launching our Naples server CPU with broad customer, partner and ecosystem support"
I look forward to discussing more about our long-term strategy at our Financial Analyst Day later this month
"Now, I'd like to turn the call over to Devinder to provide some additional color on our first quarter financial performance"
"So look, we're very pleased with how the Ryzen launch went"
We did Ryzen 7 first early March and then Ryzen 5 here in the middle of April
All of the feedback that we've gotten so far from both our customers and from end users has been very strong
"I think the value proposition is very strong at both the Ryzen 7 eight-core devices, as well as the Ryzen 5 four and six-core devices"
"Relative to how it performed in the quarter, actually, it performed as we expected"
"So with a global launch, we were reaching many distributors and many channel partners, and I think that's gone well"
"We did see some early shortages in terms of motherboards, and that was our motherboard partners ramping their supply in line with our CPU supply, but that was really dissipated after the first couple of weeks"
So I think that's the next piece of the Ryzen launch for us
And there will be a ramp of game consoles going into the second quarter
"So as we go into the second quarter, we certainly are adding both the Ryzen 5 in addition to the Ryzen 7. So if we look at the forward guidance, up 17% quarter-on-quarter, that is driven by additional Ryzen, as well as a semi-custom ramp that I just talked about"
"Everything that we see is – we're getting positive reception throughout the ecosystem and we're going to continue with go-to-market activities, and as I mentioned, the OEM component of that will kick in in the second quarter"
So both the 16-nanometer and the 14-nanometer have done really well
So it is focused on the price points above Polaris
So the Polaris refresh for us is the RX 500 series that we launched just a couple weeks ago
And that is what we would use in those mainstream price points in 2017.
So we are on track to launch the rest of the Ryzen portfolio in PCs
"We'll launch Ryzen 3 earlier in the second half, and then we will launch Ryzen mobile towards the holiday cycle for the second half"
"Stacy, maybe let me start and see if Devinder has some comments to add"
"Stacy, maybe I just want to clarify because I want to make sure that we were clear"
"I think it really is a full-year statement, and I think it's a recognition of, as we transition from 14-nanometer to 7-nanometer, 7-nanometer masks are substantially more expensive than 14. So I don't think you can exactly put it the way you put it"
"So, look, we're really pleased with where we are with the Naples program right now"
"And so, overall, I think, that is how the server outlook will be"
But you should see a number of customers announcing what AMD platforms over the next couple of quarters
So we believe we're highly differentiated with Naples in the sense that we have more cores
"So for certain workloads, I think, Naples is going to do very, very well, certainly, in the cloud as well as in certain HPC workloads and big data workloads that can use all of that memory and I/O bandwidth"
"We will be talking more about the positioning of Naples and the key workloads, as we go through the next couple of months prior to launch"
And now it's about making sure that we help our customers get to market
"John William Pitzer - Credit Suisse Securities (USA) LLC Lisa, can you hear me?"
John William Pitzer - Credit Suisse Securities (USA) LLC Yeah
"All right, John, that might be hard for me to answer very specifically, but let me give you the high-level view"
"So we started selling Ryzen on March 2, and a good piece of it was – basically for us positioning into the distributors"
"In terms of where we are in the transition, Ryzen, non-Ryzen, we still have a long ways to go"
"I mean, the way we should think about it is Ryzen 7 was at the very high-end"
"We have Ryzen 3 that will come next, and then we have the entire mobile portfolio as well"
"I think everything that we've seen, the ASP uplifts are definitely very beneficial"
So I think it's just – it will take us a couple of quarters to transition the overall portfolio over to Ryzen
"John William Pitzer - Credit Suisse Securities (USA) LLC Lisa, as a follow-up to that, I know you guys are coming up with an Analyst Day next month and some of these targets might change"
"So the long-term guidance, 36% to 40%, I think we have multiple ways of getting there"
"Certainly, on the PC side, it is not anticipating that we gain a significant amount of share over our historical numbers"
"I think as you go into 2018, you'll see a larger percentage of that be in servers"
John William Pitzer - Credit Suisse Securities (USA) LLC Thank you
"So without commenting on the exact numbers between Semi-Custom and Ryzen, I think, it's fair to say that the Semi-Custom business will have a reasonable ramp in the second quarter as will Ryzen"
"In terms of relative to our expectations, it's actually very close to our expectations of what we expected the ramp rate to be, as we're going into this new segment"
"As I think I've mentioned on one of the previous questions, we don't expect to be at peak run rate in the second quarter"
"And so, I think, the second quarter will certainly be higher than the first quarter"
"And we expect the second half to be higher than what we're seeing in the second quarter, as we ramp more and more SKUs, as more OEM platforms come online"
"As you guys know, the PC business tends to be a very back-half loaded business"
"On the GPU side, we actually haven't seen anything abnormal"
"From an inventory standpoint, we think it's normal to maybe even slightly lean because we were going through a transition from our 400 Series to 500 Series"
"From what we see, I think we feel good about the gaming segment overall"
"For us, it's not just the channel business, but it's the ramp of our OEM business"
So we have a number of new OEM systems that are also ramping here in the first half of the year
"As it relates to ASPs, we are excited with the launch of Vega that will see a significant improvement in our ASPs, just given our current presence in the high-end segment of the GPU market"
"So yes, overall, I think, we feel good about the market"
Maybe let me start on the OpEx and then have Devinder comment on the second piece of the question
"The key areas are in GPUs and server, and it's both on the R&D side as well as on some go-to-market"
We've actually added Sam [Samsung] to our CPU market coverage
"They will certainly continue through this year, and that's all contemplated in the model"
"We think, from a value proposition standpoint, performance, performance per dollar, it's very strong"
I think it's more of the ebb and flow of the market
And so that was just the timing of when the OEM platforms were ready
"And then, again, when you're launching so many different SKUs – I think, launching Ryzen 7 first, then Ryzen 5, then Ryzen 3 – was absolutely our plan to make sure that we hit all of the logistics and stuff on plan"
"But, overall, like I said, nothing different than what we expected"
"Thank you, Laura, and good afternoon to all those listening in today"
"All major PC OEMs have announced premium Ryzen-based desktop systems, with widespread availability expected for the back-to-school and holiday seasons"
"Demand for Radeon RX GPUs was strong in the quarter, driven by gaming and cryptocurrency mining"
"In June, we began the introduction of our Vega GPU architecture with the launch of the Radeon Vega Frontier Edition, delivering a powerful professional workstation graphics card designed to tackle demanding design, rendering and machine intelligence workloads"
"In addition, Apple also announced expanded iMac offerings, which are powered by the Radeon Pro 500 Series"
"These new GPU accelerators will significantly increase performance, efficiency and ease of implementation for machine learning and high-performance computing workloads"
We also showcased a server powered by AMD's EPYC SoC and four Radeon Instinct MI25 accelerators working together to deliver groundbreaking performance of 100 teraFLOPS
Interest and excitement are high as we recently started shipments of our Radeon Instinct MI25 accelerators to strategic datacenter customers
This console cycle continues to outpace previous cycles as Sony recently passed a milestone of 60 million PlayStation 4 consoles shipped
"Last month, Microsoft announced the new Xbox One X with availability in November"
This system will be Microsoft's smallest and most powerful Xbox ever made and will be based on the combination of high-performance CPU and GPU IP that only AMD can provide
"In our server business, last month, we launched our EPYC family of high-performance datacenter processors, reentering the incredibly important $16 billion datacenter market and setting several new industry performance records"
"With up to 32 high-performance Zen cores and an unparalleled feature set, our EPYC family of processors deliver greater competitive performance at every price point across a full range of integer, floating point, memory bandwidth and I/O benchmarks and workloads"
"Our two-socket and one-socket EPYC CPUs are designed to deliver industry-leading performance on critical enterprise, cloud and machine intelligence workloads and provide a substantial TCO advantage"
"At our EPYC launch event, we were joined by more than 20 leading server manufacturers and global ecosystem partners who showcased optimized support and EPYC-optimized platforms"
"We received compelling endorsements from OEM, cloud providers and mega datacenter operators, including HP Enterprise, Dell, Baidu, and Microsoft Azure, with more than 20 EPYC-based platforms announced at launch"
"And we expect an additional 20 EPYC platforms to be available in the second half of 2017. With the strong global ecosystem and customer interest we have built around our EPYC processor family, we are on track to reenter the datacenter market in a major way"
Now I'd like to turn the call over to Devinder to provide some additional color on our second quarter financial performance
The launch that we did in June was very well-received
"We had a number of customers as well as partners, OEM providers, ODM guys, as well as cloud providers who participated in that"
"In fact, we're adding additional customer support to really ensure that we help customers get their platforms up and running"
We would expect some additional customer announcements in the second half of the year
"And then as we stated with both cloud and the enterprise accounts, depending on their qualification cycles, it can take anywhere up to four quarters to qualify the parts"
"I think very good traction, and we continue to lean in hard on the datacenter opportunities"
So certainly the overall quarter for Graphics was strong
"Q2 tends to be seasonally down, and we were up in the quarter"
I would say the better performance was due to two things
"First of all, we did launch our RX 580 and RX 570 gaming cards in April"
"And those cards are very, very well-positioned in the market, so they're doing well with gamers"
"Relative to cryptocurrency, we have seen some elevated demand"
"If you look at GPUs across the world, the inventory in the channel is actually quite lean"
And so we're working on replenishing that inventory
"Our priority, though, really is on our core market, which is the gaming market"
And so a couple of things that we are certainly doing are we're prioritizing supply towards the gaming market
"So you'll see system integrators, as well as on some of the major e-tailers we have bundles with Ryzen and Radeon"
"And then some of our partners are also offering mining specific cards that have a different feature set, such that we're really segmenting the market between gaming and mining"
But we'll certainly continue to watch the developments around the blockchain technologies as they go forward
"So, look, I think the overall road map execution has been very good, very solid"
"I think our customers see that Ryzen performance, the EPYC performance on the CPU side, and then certainly the Vega performance on the GPU side have met our commitments"
"And the important thing, particularly in the enterprise market, as well as the commercial market, having a road map – a strong road map with multiple generations is important"
We stated at our Financial Analyst Day that we're already investing heavily in 7-nanometer
The 7-nanometer will be key for us on both the CPU and the GPU side
And I would say that development is progressing well
"We have multiple design teams that are working, and we expect that that will give us a strong competitive road map for the next several generations"
"When you take a look at our client business, think of it as desktop and mobile"
"And then within the desktop segment, it's channel and OEM"
"But when we look at where we are in the progression of the Ryzen rollout, we're still in the early innings"
So we had our first full quarter of Ryzen Desktop in the channel
And that will flow through into the second half of the year
And we should expect that as we go into the second half of the year and we have Ryzen really take off in the OEM sectors as well as once we introduce Ryzen Mobile towards the second half of the year is when you'll see sort of more of the full portfolio over to Ryzen
We do have a bit of a year-over-year headwind when we compare game consoles
"We will be launching Vega, actually, in a week at SIGGRAPH"
"And yes, Vega will be shipping into gaming, into professional workstations, as well as into the GPU compute segment in the third quarter"
"So I think from an overall standpoint, we see strong demand in graphics for the third quarter"
"And there is a crypto – probably, a cryptocurrency component as well relative to overall demand"
"And we are working with our add-in board partners to segment the markets in terms of the feature set that go into the cards, as well as prioritizing some of the gamer ecosystems"
So in terms of system integrator supply as well as bundling and OEM supply
So I think we are doing quite a bit to make sure that we protect against any downside as it relates to cryptocurrency
"But overall, I would view it as GPUs are strong, and we see GPUs continuing to be strong, and so it's a great market to be in"
"Yeah, Vivek, I think we are actually very pleased with sort of the conditions around the server market for us"
But I think the other conditions that are different and perhaps even more favorable than in the past is the fact that the cloud datacenter guys are making up such a large piece of the market and they tend to move faster in their qualification cycles given the fact that they have more control of their own software environment
I think that value proposition is recognized by the customer set
"Obviously, we continue to watch the competitive market"
"So I think, Vivek, you're referring to when we initially launched Ryzen 7, there were some games, particularly in 1080p resolution, that were not as good as some of the higher resolutions"
"We've seen game developers, content developers really sort of support the Ryzen ecosystem"
I've actually been very happy with how they've jumped on the support of it
"We have been continuing to improve the ecosystem, so if you look at the motherboards and if you look at the memory capability, they've significantly improved just in last three or four months"
"I think you'll see as we go through Threadripper launch, which is coming up very shortly, that the Ryzen ecosystem is strong"
"And as it relates to EPYC, I think very similar comments"
"I think the ecosystem has been very supportive of the EPYC processor family, and so I don't see that as an issue"
"I would say, Joe, we have a broad set of customers that we're engaging with"
"So, definitely we see top-tier cloud guys very engaged with EPYC and talking about a number of different instances"
"Microsoft Azure was at our launch event, and Baidu was at our launch event, and we're working with a number of other cloud vendors as well"
But we also have a very strong OEM support base as well
"So with HPE and Dell putting out a number of platforms with EPYC, I think that will ramp enterprise customers in 2018 as well"
"So I view it as really both sides of the equation are important for 2018. I think we will see cloud be a little lumpier, so certainly they tend to buy in stages"
"So they may be a little bit lumpier, but I think overall we are very focused on both cloud and enterprise accounts"
"Joe, it was completely a function of demand, demand within lead time"
"I think from a supply standpoint we've had a very strong supply chain across the board, across both CPU and GPUs"
"Overall, though, I think we're going into a stronger second half of the year"
"It's just demand was quite strong, particularly in the April, May timeframe is when we saw a spike, and it takes some time to react to those signals"
"Again, Hans, I think we have been working closely with a number of different customers, including in virtualized environments"
"We see no particular issues, other than just getting their platforms up and running"
And so I think we continue to believe EPYC will do very well in those environments
"Hans, actually, the feedback has been actually quite good"
"And I think, what we are able to do – obviously, it's a decision to make, right? We could've built one big monolithic chip, or we decided very strategically to build a modular approach, because it just gives us so much flexibility when we talk about the combination of CPU cores and I/O"
"I think there is some work to do to make sure that the latencies are appropriately taken care of, and the customers are working with us on that"
"I think the flexibility is really, really appreciated, particularly when you look at what we can do with single-socket servers as well"
So we feel very good about where EPYC is positioned
"I think the customer feedback continues to be very strong, and our goal is to get as many platforms out as possible with EPYC this year"
"When you look at our typical seasonality, as you said, we tend to be down in Q4. Now, semi-custom is still a large, large piece of our business, and semi-custom will peak in Q3 and it will come down in Q4. I also think that we want to be cognizant of the fact that some of the graphics demand that we see might be temporal"
So we're not counting on that staying through the full year
"Frankly, I think we'll see what happens with the whole mining stuff"
"But I think when you look overall, I think that it shows that the business is strengthening"
Ryzen will continue to grow through the second half
EPYC will continue to grow through the second half
Vega and our GPU business will continue to grow through the second half
"And the only headwind that we have is sort of the game console business, just as part of normal seasonality"
"So I think there are a couple points, John, that I want to make sure that we're clear about"
"Although OpEx is going up and R&D is going up, we're doing it in a very thoughtful fashion, and so staying within the confines of the business model is really important"
"And as Devinder said earlier, our model that we laid out at Financial Analyst Day for 2017 has us, let's call it at approximately 31% ER, and we're going to stay within that model for sure"
"It is fairly incremental in terms of adding things like customer support, field application engineering, software support, given that we're familiarizing people with our architecture"
Pitzer - Credit Suisse Securities (USA) LLC Thank you
"The Radeon Instinct, similarly, has a lot of interest from the marketplace"
We started shipping actually in July to some strategic datacenter customers
"There I think it is – this is definitely a lumpy business, and so it goes – as a cloud guy puts on a new instance, you would see a larger buy"
And we'll continue to invest and work closely with customers to ramp those platforms
We're being conservative in our estimates for what will happen as we get in the fourth quarter
I think the visibility is it's not – it's anyone's guess at this moment
"However, I think what we are doing very clearly is prioritizing sort of the core customer set so that we're segmenting the market"
"You can never segment it perfectly, but I think we are segmenting it well"
And we continue to be very closely in tune with our partners and how this develops
And my expectation is that there will be a leveling off of the demand at some point
"And as we fill the channels, that will become clear what the level-off point is"
"But right now, as we said, the channel inventories are very low"
"And so it's hard to call the absolute demand, and we're ensuring that we're not over-calling the demand"
We look forward to spending more time with you in the coming quarter and thank you for your time
Let me provide some specifics for the third quarter
We also took another step in our IP monetization efforts by closing a patent licensing agreement that had a positive impact on both our segments
"Operating income was $155 million in the third quarter of 2017, a solid improvement on $70 million a year ago"
"As you heard earlier from Lisa, customer interest and deployment plans are strong"
"Inventory at the end of the quarter was $794 million, down 5% from $833 million in the prior quarter"
Free cash flow was $32 million compared to $20 million in the year-ago period
"Before turning to our outlook for the fourth quarter of 2017, which is a 13-week quarter, let me remind you, for comparative purposes, that the fourth quarter of 2016 was a 14-week quarter"
"We do not anticipate significant changes to the diluted share count in the fourth quarter and you can find additional information regarding the share count in the CFO commentary, which is posted online"
"With that, I'll turn it back to Laura for Q&A session"
"Yeah, so, Vivek, just to remind you, in line – you've heard us talk about our IP monetization efforts, and this is very much in line with that"
"And as Lisa said, the benefit is spread over both the segments"
"I think if you look at IP from that standpoint, we have several IP deals in the pipeline for Q3. Basically, we thought it was likely that we would be able to close on IP-related deal in the quarter, and that's how it turned out"
"And then, obviously, there's opportunities from an IP standpoint to benefit the P&L if we go ahead and put that in the equation"
"I mentioned in our last call that holiday season traffic would play a large role in where we would land relative to our fourth quarter guidance, and it did"
Media-related traffic was particularly strong in the quarter
but also from upgrading and penetrating more of Akamai's solutions deeper into this customer base
"If you exclude the large Internet Platform Customers, which are based in the U.S"
"Moving in to 2017, we expect to see similar elevated levels of litigation spend"
"Excluding these charges, non-GAAP depreciation was $74 million consistent with Q3 levels and at the low end of our guidance due to the timing of some network deployments that shifted into Q1. Non-GAAP operating income for the fourth quarter was $174 million, up $10 million from Q3 levels and up $6 million from the same period last year"
"For the full year, the 2016 non-GAAP effective tax rate was just above 29%"
"Finally, our weighted average diluted share count for the fourth quarter was 175 million shares and in line with our guidance"
We expect 2017 capital expenditures to be back in line with our long-term model range
"Our balance sheet also remains very strong with roughly $1.6 billion in cash, cash equivalents and marketable securities on hand at the end of the quarter"
During the quarter we spent $79 million on share repurchases buying back roughly 1.3 million shares
"For the year, we spent $374 million buying back approximately 7 million shares"
"In addition, we expect further currency headwinds from the strengthening U.S"
"We also plan to broaden our offerings within our Security, Web Performance and Media Solutions portfolios"
This guidance also reflects a fully diluted share count of 175 million shares
"We expect to spend approximately $90 million and $96 million, excluding equity compensation"
We look forward to having an opportunity to go into more details with you about the business and future trends at our upcoming Investor Summit in Boston on March 14. Thank you
And now Tom and I would like to take your questions
"You'll see that continue to ramp and further penetrate in 2018, but it's probably going to take a couple of years to see it kind of fully penetrated"
"As an example for Cloud Security, which we've been in market now for a little over four years"
I think about 38% of our customers via Cloud Security Solutions
"So still a lot of ramp to go even in Cloud Security, so it takes a while to have those customers ramp, but you can certainly see that we started a few years ago from roughly a few million dollars in Cloud Security to now over $400 million"
We're in a good position with the DDoS solution because of our unique distributed platform
"For DDoS, it would be a different kind of approach"
So we don't see that as being a significant threat to the DDoS business
"And as we talked about, our share buyback is intended to offset dilution, but it's a programmatic trade that buys more shares when the stock price is lower and buys fewer shares when the stock price is higher"
"I think in years past, we averaged more than 1,000 hires per year"
So you should expect head count more similar to what it's been in the past than basically what it's been in 2016. Unknown Speaker Okay
"Well, yeah, I mean, as Tom mentioned that we probably will see continued decline in the Internet Platform Customers in the first quarter; one, because seasonally they declined Q4 to Q1 anyways, because they also have a seasonally stronger Q4. But I'd say the bigger component of it is not that, and it's more that we had a very strong Q4 for Media"
"Media traffic was kind of seasonally very, very strong"
"We had a large number of gaming releases, a fair number of software download events that the Media business can be a bit spiky that way"
"So some – I'd say the bigger part of the sequential decline is driven by the Media business, certainly not the performance in Security Solutions"
"But if you see that become more mainstream, I think we're poised to benefit significantly from that"
And you'll have surges at times and then it won't at other times
"You may see even a catalyst, as Tom mentioned, as you see more VR and things like that in the gaming space that require performance to work well, but I think that between things like that and OTT, that's going to be the cause of kind of re-acceleration in the Media business"
"Actually, the build-out that we're doing is, as you can imagine, our Security business now is on an annualized run-rate of over $400 million"
And so there's build-out we're doing to support our Security business
And there's also build-out that we're doing with our secure delivery network
"More customers want to have their traffic served over a secure delivery network, so we're building out capacity in that area"
"I mean, we'll cover it more at the upcoming Investor Summit, but I still think the long-term model for the company in the low 40s is the right one"
"But I think that even beyond 2017, we intend to operate the company in the high 30s"
We want to make sure we're investing to capitalize on that because now is the opportunity
That means we were 14% in 2016. We'll be back in the 16% to 18% range in 2017.
We've been able to take the offerings that we have and further penetrate them into the installed base
And there's still a significant opportunity to do more there
"I mentioned earlier that 38% of our customers buy security, so that means there's an opportunity for 62% of customers to actually buy one of our Security Solutions"
"And so I think you're going to see that we're going to further penetrate the offerings, and I think as we bring more innovation to the table, there's more of an opportunity to sell more into the installed base"
So it's whatever you're seeing is not really attributed to that
I don't think there's really been a fundamental change in the Internet platform companies in terms of their utilization quarter-to-quarter
"Generally, the trend that we expect to see is they're going to try to do more of the delivery themselves"
"Obviously, they'll take the easier stuff and work on that first"
That said this stuff is hard to do and to do well and actually to do affordably
So I think that we will continue to have business with these customers
You won't see it manifest itself significantly because it's going to take a while to get the head count on board and the spending to ramp
"So I think you're probably going to begin to see that effective in Q2. And then my expectation is that, again, it'll stay in the high 30s thereafter"
But I do expect that kind of in Q2 and beyond that it's going to operate in the high 30s
"Well, part of that is, again, when you talk about acceleration, you're talking about year-on-year"
I think you know that certainly the driver of that has been what's been going on with these large Internet Platform Customers
"And we've proven we can do that, Security being the most recent example"
"While there's more to sell there, I'd say that probably not a significant, significant opportunity there"
"And, yeah, we have seen when customers upgrade to Ion that there is an ARPU uplift at times, but I also think there's other things to sell for our Web Performance Solutions"
"As Tom mentioned, Image Manager is another offering to sell into the installed base"
"So if they're buying Ion, now they can buy Image Manager"
And I think you're going to see us have other adjacencies like that within Web Performance as well
"And then back to the top six customers of platform customers, is there any change you guys are seeing in terms of your share of the traffic that you're delivering relative to what the platform company may be doing themselves for using a multi-CDN strategy for?"
"It is important to note that while the pricing environment in the Media business remains highly competitive, aggregate price per bit declines remain roughly within historical norms"
The large Internet platform customers who are based in the U.S
"Excluding these charges, non-GAAP depreciation was $75 million, up slightly from Q4 levels and in line with our guidance"
"Finally, our weighted average diluted share count for the first quarter was 175 million shares, unchanged from Q4 levels and down 2 million shares from Q1 of last year"
"Our balance sheet also remains very strong with roughly $1.6 billion in cash, cash equivalents and marketable securities on hand at the end of the quarter"
"During the quarter, we spent $72 million on share repurchases, buying back roughly 1.1 million shares"
"Before we look ahead to Q2, I wanted to spend just a minute on our recent Investor Summit"
"For those of you that joined us in person or via the webcast, the themes we shared this year were the same as in prior years"
"As I said at the Investor Summit, we are committed to balancing both top-line and bottom-line over the long term"
This guidance also reflects a fully diluted share count of 174 million shares
"In summary, I am very excited about the opportunities that lie ahead for Akamai and our ability to execute on our plans for the long term"
"Thank you, and Tom and I would like to take your questions"
"Yeah, let me start with, we are very bullish on the Media business"
So it was relatively strong in January and then it moderated in February and then it moderated further in March
"And that was really the driver of kind of, I would say, missing our internal expectations"
"But I'd say we are very, very optimistic about the Media business long-term"
"And as we said to you guys before, the nature of the Media business is it does go through periods where traffic spikes, traffic softens at times"
"But over the long-term, we think this is a very good business and it will be a very good grower for the company"
"Well, you got to be careful because the Americas also includes our Media customers as well as our Web customers"
"Again, this tends to be the nature of the Media business"
And I think we've gone through these spells before where media surges and you start to see media accelerate
"That as gaming becomes more and more latency sensitive and performance sensitive, as you see more and more things like AR and VR that, I think, that all of a sudden, the differentiation for Akamai becomes more and more apparent"
"I think we're going to go through some near-term slowing in media, but optimistic about the long-term for media"
I'm not sure what else to tell you about the guidance
"So we expect that to further moderate to the areas that I mentioned, which is in the Americas and notably within gaming"
So I think what you're going to see here in the guide is you kind to do it at the midpoint
This is a business that is now a annualized run rate of $450 million
"So we're very, very positive about the Security business and our execution in the Security business"
"And you've got to remember, this is all subscription model offerings"
This is literally a subscription model business that now is approaching $0.5 billion
We certainly have more opportunity in our Asia Pacific markets where we're not nearly penetrated
"And I think, as Tom said, traffic is still growing very rapidly; it's just not growing as rapid a pace as we had projected"
"I'll take those and then Tom may, if he has anything else to offer"
"So we're not guiding necessarily, Michael, for the back half"
I think we're really talking about Media in particular
"There may be a quarter or two where you go through something lower than that, but we'll manage it back accordingly"
You're right with the moderation in media that I don't believe this moderation in media is going to be a long-term phenomenon
So I think there's enough opportunity in media that we can get media growing again and get the company back to double digits
I can remind you of a couple years ago when the Media business was growing significantly
I don't think that would be in the best interest of our shareholders or the company
"I think when it comes to that Media business, it's aggressive across the board with the entities that you just talked about"
"In fact, one group you didn't mention that you would have three to five years ago is the carrier"
The carriers were aggressively competing with us three to five years ago or in the past and now they're mostly standardized on Akamai's capabilities
"Generally speaking, those folks are taking, doing less in-house maybe than they did before"
I think they've recognized this is not their core area of expertise and doing more outsourcing going forward
"Obviously, these giant platform companies, most of those guys spend billions of dollars a year in infrastructure"
"And they're just at a different scale where it becomes possible for them to think about spending hundreds of millions more, trying to do some content delivery"
So I don't see that being an issue in terms of OTT going forward
"With the carriers, I think we're seeing actually the quality levels for video increase as opposed to a scenario you're describing where it would decrease"
"You get higher quality levels and we see the carriers already experimenting with sort of super-high quality, which means more traffic"
"So that, I think, it's more likely to go that way then to lower quality levels"
"On the other hand, maybe there's more traffic, which helps"
"There's Image Manager, there's Bot Manager, there's the next generation of Ion focused on mobile, the next generation of Kona, again, focused on mobile"
"If we look at the results, it was a little bit of a noisy fourth quarter for LoyaltyOne and Alliance Data due to expiry"
"Not only do we have more AIR MILES redeemed and expected due to heavy media attention to the issue, but also had a new law and act in Ontario of Canada which forced a one-time charge"
"Core EPS was $16.92, up 12% from 2015 and $0.02 better than guidance"
"In calculating core EPS, we added back the $242 million related to elimination expiry, but not the full breakage reset"
Expansion efforts in Canada continued to exceed expectations and U.S
"For AIR MILES it was tumultuous year with all the publicity surrounding the upcoming miles expiration date, AIR MILES issued increased 1% for 2016, below our expectations for about 3% as sponsor promotions dropped in Q4 as there was simply too much noise in Canada to be effective"
This is a normal change in accounted estimate and is reflected in our operating results
"In addition to non-core offering, essentially the old-value click business was a consistent issue all year as we endeavor to pivot it towards a more of a data-driven solution"
"There could be a little bit of positivity to it based upon the trends we're seeing, but I basically think what has happened, Andrew, some of the changes we made in '15, where we could start a cardholder friendly had burned in and I would expect them to be stable, to maybe slightly increasing going forward"
"I'll tell you right now, we don't really see anything that's pressing for us in '17. What that means is we have $500 million authorized share repurchase plan"
"As Ed talked about before, it could be best used early in 2017, which we think will happen"
What that means is free cash flow at the [indiscernible] will be up a little bit year-over-year
That enables us to be more active with the buy back
"I think having been in it for 25 years, we were pretty good at looking at vintages and seeing what flows there"
"So what we do every year or throughout the year is we will go client by client, which is 155 different portfolios and within those clients, vintage by vintage and we will look at every single vintage and see how they are performing"
"Again, what has happened is you have a certain band of credit that you cater to and coming out of the great recession, we had people who were signing up for the card, who are at the very high end as the recovery continued and the people repaired their credit"
We had more and more people come into the allowable band and that's sort of what causes that normalization
"Again as I tell a lot of folks, we are returning to a level that is comfortable for us"
"It's a bottom's up, vintage-by-vintage, portfolio-by-portfolio, client-by-client look"
"A year ago we had a strong conviction that this would be sort of a year and-a-half, two-year cycle to normalize"
Now we can see it in terms of what the delinquency flows
"We can see it, the stuff normalizing as we look out six months"
"Now, the guest work is out of it and now it's just a question of 'let's get the next six months out of the way' and we're fully normalized"
Let’s go to the next slide and talk about LoyaltyOne
This is the whole we’ve talked about before
"From a collector standpoint, our active collector statistics overall are down from last year but on par with 2015 levels"
"Our promotions in market such as a recently completed cruise promotion where every mile earned during the qualifying period was an entry into one of 1,300 cruise packages are stimulating issuance per transaction which is positive news"
"Epsilon agency, auto and CRM were all at double digits with the CRM/Direct at a robust 47%"
Web mobile applications increased 13% while traditional channel applications such as in-store increased 6% during the quarter
Web mobile applications now count for over 30% of all applications
These capabilities will allow us to continue to add etailers such as Wayfair and its clients
"The APR we charged is variable rate tied to primary, an increase in prime rate will reset the APR to the card holder within 2 billion cycles"
"Again, that’s primarily focused around the Epsilon division"
"You’re right, we ended last year with about 1,000 associates in India"
The target will be to continue to grow that within the Epsilon division
"Based on the trends we’re seeing, should it be lower than 6.6% at year-end? I’d say based on trends now, that would be an accurate assumption"
"I’ll tell you what I look at most, George, is what did payroll do"
And I think that’s really the trend we’ll look to continue at the back half of the year
"Like we said, we had a couple of new programs within the auto we’re rolling out"
But the good cardholder does not and of itself they’re going to walk away from this account
"We had two small retailers go into liquidation, but they’re very small portfolios, really aren’t affecting us"
"In terms of any material client, there’s none that have given us any pause at this point"
"I’d say, Moshe, I think that the three clients we lost last year midyear definitely affected us"
They did shift to a little bit different model than what we’re providing for them
We’ve not seen any further client attrition
"I’d say, Ramsey, it’s a little bit early"
We’re just now introducing the packaged offering to the market
But it’s too early for us to really know what the answer is going to be there
I don’t expect it to be quite that good for the full year
"As Ed talked about, probably 20, 30 basis points versus a very strong start to the year"
I’d say it’s coming from pretty much all angles
"Obviously, it’s the influence of co-brand that we put in there over the last few years, which has a little bit lower OpEx"
I would say there’s really no one silver bullet
It’s a combination of different factors that really allowing us to drive that operating leverage
"The way we look at it, Ashish, we knew that we had a little pressure early in 2016 that will play through starting this year at 25.5% gross yield is consistent with the average we had last year"
"So we would tell you there could be a little positivity to it based upon, obviously, any changes with the Fed raising rates and so forth"
"The thing that always creates noise within your gross yields is if you do find a bulk file and you acquire it, it puts temporary pressure"
"It could up maybe 10, 20 basis points given further interest rate increases coming through"
"But really, it goes back to mid-2015. If you remember, we’ve put some changes in place that were cardholder friendly"
We had to burn through those issues in the temporary pressure we put
"And we would tell you at this point, we’re past that"
Let's slip to the next slide and talk about LoyaltyOne
"Fortunately, the future looks brighter for this segment"
"Importantly, the negative draw over from the elevated redemption rate is gone entering the fourth quarter of 2017. AIR MILES issued was down 7% year-over-year"
"Normal spend is on track, but we have seen less promotional activity in the grocery vertical"
We believe the onboarding of new clients will fill this hole quickly
The percentage is essentially being flat with last year
Now the question everyone has been asking what was the impact of the hurricanes
It is important to remember that this is a temporary impact
"Under FEMA-designated individual assistant disaster areas, affected cardholders are not required to make payments nor will any interest or late fees be assessed for two month period"
"If you had basically the same gross yields year-over-year, you'd see it flat-flat"
We would tell you we're still in the process of adding collectors
And we'll staff them up over the remaining of Q4. I would still expect the OpEx leveraging in Q4 to be better year-over-year
"That said, we're still very much on trend to that guidance we gave last quarter of about 40 to 50 basis points improvement on an annual basis"
So you have to basically influence the fact that you take a whack on your gross yields is not influencing your OpEx
"So if they were in to 150 days past due and they were affected, it would just mean that's going to freeze and that would not have rolled into the charge off after 180 days"
"I'd say, Dan, we think the core is still very strong"
"Occasionally, you get some timing differentials when new programs are coming onboard"
We'd expect it to bounce back in Q4. We just had a little bit of a timing with fewer new programs launched in Q3 than what we've been doing before
"But like I said, I think that will bounce back in Q4."
"Occasionally, it just shifts as to which quarters till when the program is going to onboard"
"And I would say, we said a little bit lower in Q3."
It was about $40 million impact to card and a $40 million to total
That number can jump up to north of 40% in the fourth quarter as you get the holiday spend
"It's the traditional bricks-and-mortar or about 85% in store, 15% online"
"So that's really the ability for us to capture the data, identify you, track you online and give you a relevant target it off and it gives us the ability to do that"
"We'd put it this way, Darrin, is the improvement is not definitive on us onboarding Signet"
We estimate that it's up to 15% of our accounts were within the Florida affected area and the Houston and Texas affected area
"That doesn't mean that all of them would have gone into this program, but it's up to 15% of our accounts were affected"
"I’d hate to say anything is permanent, but I'd tell you what we would target is about 20 basis points improvement per year, and that's expressed as a percentage of average AR"
"Tim, we'd tell you not really anything that we've seen different between the interactions online versus bricks-and-mortar"
"That's just the ability to minimize shopping cart abandonment, the ability to capture"
The shift you saw that is put in held-for-sale is a vertical that's really just not a core vertical for us
"It's something we'd probably look to try to get off our books toward the end of this year, early next year"
It's really time for us to basically do a little bit of cathartic process to the file and get rid of the things that we don't want to focus on
"And so that shift to held-for-sale, that's exactly that small vertical that we're just decided not to pursue"
"So just like we saw in June, we saw a little bit of improvement in recovery rate"
"So it's a combination of natural trends, a little bit of sale of previously charged-off paper that really drove the improvement"
"All of you should have the prepared remarks document, which is the best source for our financial details"
That's up from 23% in Q4 last year and just 19% two years ago
That's a lot of progress over a relatively short period of time as we continue to grow the volume of business with both our large enterprise customers as well as on our e-store
As we indicated we believe there is still room for our direct business to grow over the next few years as we progress on the model transition
We started the year with a goal of keeping non-GAAP spend flat to down 1% we ended up reducing it by 3% for the fiscal year and 4% in the fourth quarter
We accomplish this by making sure we're investing in critical elements of our transition by reducing standard other areas
"Part of the reduction this year was the result of the restructuring we announced at the beginning of the year, coupled with a relentless focus on driving efficiencies across the organization"
We remain committed to keeping spend flat through fiscal 2019 and believe that we can do so without compromising the long-term health of the company
"As I mentioned in December, the work we've been doing over the past several quarters on our operating structure has allowed us to move about $1.7 billion of our offshore cash into foreign subsidiaries that are branches of Autodesk U.S"
If we look at our cash balance at quarter end approximately 85% can be used without incremental U.S
Of course we need to keep some of our cash for operating needs but we intend to put the majority of it into our stock buyback program and execute on that over the next several quarters using both programmatic and opportunistic means
We've been increasing our buyback this year and in Q4 we repurchased 2.9 million shares
For the year we repurchased nearly10 million shares resulting in a reduction of over 4 million
We're making steady progress on this front and over the past two years of reduced our basic share count by about 3%
Overall we're extremely pleased with our Q4 and full-year fiscal 2017 results
"We have increased confidence of the transition is working for our customers, for our partners and for Autodesk and they were on track for the fiscal 2020 targets we set"
"I turn now to our outlook our view of the global economic conditions remains consistent with our view of the past several quarters, but most of the mature markets performing relatively well, but many of the emerging markets have been challenging"
"We continue to monitor for changes in Europe stemming from Brexit, but today we have not experienced any impact"
"it's far too early to determine any impact from proposed policy changes around tax reform, trade in tariffs, infrastructure spend or whatever the next executive order might be"
"As we look ahead to fiscal 2018, it will be our first full-year in the subscription only model and as such we believe it's prudent to take an appropriately conservative approach to our outlook for the year, while remaining confident in our ability to achieve our long-term targets"
"Subscription additions are projected to increase by 600,000 to 650,000, which equates to about a 20% increase"
"To alleviate the need for the recon table, we've been including in prepared remarks and should significantly improve the link between our financials and our business model transition"
"We apply this methodology to our fiscal 2017 results, our total ARR would have been about $40 million higher"
"We have factored this change into our guidance assumptions for fiscal 2018, so that we are comparing apples-to-apples"
And we will give you visibility to all of fiscal 2017 with the small tweak
"To wrap things up, we've executed well over the past several quarters and we are looking forward to building on the success as we head into fiscal 2018 and the next stage of our transition"
I want to thank our employees and partners who have worked so hard to make last year a success
"As we undergo the CEO transition, both Andrew and Amar have our full confidence to lead the Company to continued success"
"Operator, we’d now like to open up the call for questions"
And Heather within that the strength comes from BIM 360 largely followed by Fusion and then shotgun
The price for maintenance after the 5% uplift is exact same price they would pay if they converted to subscriptions incentive
So it's from a modeling standpoint for fiscal 2018 at the same whether they convert or not
What we'd say is that the 73K number was as expected
This was our largest pool of maintenance customers up for renewal and our renewal rate was exactly where we'd expect them to be
"So we will get better at tracking every single customer that goes from column A to column B, especially as we do the maintenance and subscription program"
But I think there was nothing unusual about this 73K number that we saw
"Ken, if you look at the seasonality of where we typically sold licenses, which is when the maintenance agreements will expire, right"
It’s an annual maintenance agreement when you sold the license becomes the same quarter that maintenance comes through
"The two biggest quarters for that are Q4 and Q1. So 73,000 in Q4 as Amar said was really – churn rate was right in line with our expectations, it is a big quarter in Q1 of renewal opportunities"
"In Q4, there's another big opportunity for renewals in Q1 as well"
"So obviously we're not guiding to that level of granularity, but it's not on line with what I would expect to see just based on the size of the renewal opportunity"
"Kash, we're not providing that level of granularity under new model, but as always happens in Q4. Q4 and Q1 are the biggest quarters for enterprise subscription adds, Q4 because we sell the most EBA’s and then they come on line throughout the quarter"
"Q1 is where we typically get the catch up because as you recall of EBA’s, we actually measure the active users because it’s a consumption model that's not a named user model, we haven't measure the active users and that takes 60 days before we can report those"
"And then to the second part of your question Rob, on 606. I could have probably actually let Amar that as well because he has been into it up to his eyeballs"
"We are not expecting it to have any impact and I think I mentioned to you last time we met and I've said it a couple of times, the person is now our System Controller, used to run our rev ops team and has been a member of the AICPA task force on 606 for a couple of years"
So we've had great insight into where this is headed and kind of how it's going to be interpreted and how the guidelines will be applied and going through what we're going through the business model transition
So we've been working this for quite some time and I think Andrew just mentioned and Amar did as well
And so we're quite confident that we're going to have a nominal impact from 606.
"So good question, I mean look I think our unit volume for this year was right where we expected it to be and I think our growing momentum based on the factors that Andrew touched upon, we are certainly seeing increasing momentum through license compliance to what we would have called a legacy customer base"
They're all factors that we believe will drive that result that we pointed to
"Yes, so one of the reasons we structured the program the way we did is we were really focused on minimizing the churn off of that maintenance base"
"So we feel that the way we structured the program, the huge incentives for loyalty that we're giving the maintenance customers is really a churn minimization plan"
"Our competitors have historically tried to make incursions into our installed base as we move to subscription, but the truth of the matter is none of them have been particularly successful and it's really hard to compete with software that that prices and accessibility levels that are far below what they've been historically when you come in with more expensive perpetual software"
So yes competitors try to make encourage their incursions
They haven't been successful and I think we structured this program as a churn minimization program with a primary goal
"Thank you, Christian, and thank you all for joining our call this morning"
"Additionally, within the midmarket and upmarkets in particular we also experienced the effects of political uncertainty leading up to and following on from the November U.S"
elections which slowed decision making among some clients and prospects during the quarter
Our value proposition remained wrong and we have a successful track record of managing change for our clients
"As you have seen with ADP many times in the past, change can provide us with significant opportunities to grow and expand our solutions to help deepen our client relationships"
"We expect that the environment in 2017 and beyond will be no exception and at this current uncertainty and related hesitancy, will be a short-term phenomenon"
"But at the same time, we remain cautious as we enter the time of the year when clients in our industry are most likely to change providers"
TMBC and its founder Marcus Buckingham are cutting-edge innovators in using data and research to drive talent management practices
"Their cloud-based performance and talent management solution now known as ADP StandOut coupled applications with coaching and education to give leaders the tools, insights and data needed to improve employee and team performance"
We look forward to delivering new data-driven solutions to the market that bring together the unique capabilities of ADP and TMBC
Other examples of our innovative successes can be seen in the traction of our ADP DataCloud and ADP Mobile Solutions app
"As you know, we introduced our ADP DataCloud to allow business leaders and HR professionals to generate actionable insights from the workforce data embedded in their ADP HCM solutions"
"Today, several thousand clients are using our DataCloud analytics platform and we continue to advance the solution with new capabilities"
"During the quarter, we added depth to the geographic benchmark data and added time and labor benchmarks such as market-based absence and overtime"
These new benchmarks are unique within HCM and leverage our close to 30 million anatomized U.S
employee records to assist HR professionals in developing and fine-tuning their strategies
"With respect to the ADP Mobile Solutions app, we recently announced the number of users has surpassed the 10 million mark"
Our Mobile Solutions app is the most downloaded app in the HCM market with users spanning 200 countries
"We've continued to add new features and functionality to embrace the modern users' needs from workers accessing stock profiles, editing team schedules or approving time-off requests to users changing their 401(k) contribution or viewing their account performance"
Organizations know that employees expect technology to be easy to use and accessible from anywhere while simultaneously being powerful and secure
Our Mobile Solutions app is the first app of its kind and continues to be consistently among the top three business apps in Apple App Store
"We welcomed more than 400 associates to a new signature building and anticipate our presence in Norfolk will ultimately reach 1,800 associates"
"We are similarly on track in hiring in Orlando where we expect to eventually have about 1,600 associates"
"We anticipate opening that facility in the spring of 2017 with a capacity of 1,500 associates in that location"
"Lastly, before I turn the call over to Jan, I would like to add how gratified we are for the recognition we continue to receive from the HCM industry and the customers we serve"
"During the quarter, ADP received the Everest Group's highest recognition for our GlobalView HCM solution"
"Their report recognized us for the scalability of our solution while noting ADP's reporting, analytics and mobile app are key differentiators for us"
"In addition, ADP DataCloud earned a Cloud Computing Innovation Award from Ventana Research, recognizing our ability to deliver positive business impact"
"In bestowing the award, Ventana noted ADP's ability to provide organizations with data that can reveal the workforce trends and provide the deep insights needed to make better business decisions"
"In closing, despite the recent uncertainty in the U.S"
"business environment, we continue to believe that change will be beneficial to us as we are well-positioned to help our clients navigate the complexities of HCM"
I remain confident in ADP's future and in the success of our strategic initiatives
"With that, I'll turn the call over to Jan for further review of our second quarter results and an update to our fiscal 2017 outlook"
"One was the known factor which is the difficult grow-over and obviously, we had some sense of that and factored it in in terms of our guidance for the year because we were obviously below our long-term 8% to 10% as a result of what we knew was going to be a more limited base to sell into since we had already sold half of our clients on ACA"
"So that was a known factor, but the reality is we didn't know exactly how much difficulty we would have in selling additional modules of ACA over what we sold last year"
So that is a factor that obviously has become more difficult to measure given the talk of the administration of repeal and replace of ACA
"So I guess, in a nutshell, whatever we assumed about the difficult grow-over, I think, it became a much more difficult grow-over as we think many companies in the midmarket and upmarket are probably – have a wait-and-see attitude in terms of what's going to happen around the Affordable Care Act"
"I think that there's also this kind of second factor which obviously we have no scientific way of measuring which feels like people are in general just delaying and waiting to see what happens not just with ACA, but with a variety of other things that the administration is talking about"
"Having said all that, there are also a lot of positive things and we see that reflected in some of the public markets or the equity markets in terms of anticipation of lower tax rates and fiscal stimulus and so forth"
"And in particular, one of the things that I noted, I've seen a chart that shows – I believe it's the NFIB confidence index, but small business confidence indexes are kind of off the charts positive and in a strange way, it's a little bit reflective of kind of what we're experiencing which is continued success which we don't give guidance by segment, but we have very good and strong new business bookings results in our down market and not so much in our mid and upmarket"
"And of course, the PEO, we generally consider to be a down market business but that business does have obviously a relationship to ACA and what's going on around regulation and the variety of regulations that had been talked about previously that now may be subject to change on a go-forward basis"
"So there's a lot of moving parts and hopefully that provides you a little bit of color, but we don't have really great precise scientific tool to be able to ascertain how much of the weakness is coming from each factor"
"I mean, the most obvious one is this the discussion around the Affordable Care Act, so we – as I mentioned in my prepared comments, ADP generally does well when there's change, but not when there's uncertainty about change"
And so I think a protracted debate about what replacement means or what will be happening is probably not helpful to us in terms of our new business bookings results
"So we, on a medium to long-term basis, are, I think, optimistic that whatever form comes of healthcare reform whether it's more state based or just a different way of providing because I think the administration appears to be committed to maintaining the number of people that have insurance so that will require some form of tracking and some form of enforcement or tax credits and it maybe more state based, but that's something that we hope to be able to help our clients navigate through when the administration and Congress, I think, get further along in terms of figuring out what exactly they want to do"
"And there's a number of other regulations that are probably less public and less significant on an individual new business bookings basis, but they all add up to quite a lot of bit of potential change which I think would be very good for ADP"
"As you can see from our retention notes, we haven't add – I think, Jan makes a great point which is what's fascinating is obviously the challenge for us right now is the new business bookings, but we haven't had cancellations or in fact we have clients that are still being implemented on ACA, but it's natural that once you've made a decision and you're committed and you're on the path and it is the law, by the way, it still is the law, it makes sense to go forward, but I can see how some people, if they're doing it in-house or doing it themselves might be hesitant to make a decision given the uncertainty around what's actually going to happen regarding the law"
"And by that I mean that we have seen several year decline in benefits participation rate, in other words how many eligible employees of the PEO actually take benefits and that sort of the trend upward as we got closer to the deadline"
"So the last, call it, two years right before ACA, given the fact that the law was intended to increase participation and companies were coming to the PEO in order to comply with the law, we saw those participation rates trend up"
And now we saw the increase in the second quarter be a smaller increase than in the prior second quarter and in the quarters before that
"And I think if your question was really around did our retention – I think, you started off by asking about retention, did retention benefit from slower decision, that's possible"
"So it is possible that on the other side of the coin, if you will, people didn't make as many decisions than we were able to hold on to clients, it'd have very difficult for us to measure that, but it's possible"
"And I think your broader question about overall pressure is a very, very good question which we spend a lot of time looking at and talking about"
It took some of the pressure that we had historically had off
"And we feel comfortable at least right now that we are in a place where we're able to still achieve the guidance that we've provided on a long-term basis, but over time that could change"
"But I think for now, I think we're in an okay position"
"And as I think we were clear in our comments, the second quarter exceeded our expectation"
"Other than that factor, we feel pretty good about where we are"
"Jan, I think to add to that, I think we have some historical data to support Jan's points like, obviously, we don't have any historical data to really be able to ascertain what's happening, what month and with what regulation"
"So we are in new business bookings, I think, somewhat tied to the strength of the economy and so, as Jan said – and we are, obviously, we try to be as transparent as possible"
We were sitting here talking about potentially entering a recession
"We would have to, I think, temper our optimism based on that 20 years of history"
"In terms of this issue of the specific regulations and change and so forth, there's also a lot of history in ADP"
"There's more than 20 years of history where even though there are bumps along the road in terms of the amount of regulation and the type of regulation, in general the trajectory has been in one direction"
"statement because governments try to effect public policy through employment and through employers, whether it's around safety, or taxes, or a variety of healthcare in this case"
"And so we like where we are, we like the space we operate in, and we're optimistic about, I think, the future, although obviously, we're not exactly happy about what's happening in the short term here"
Because the reality is that when we wake up every morning we're thinking about how you grow over $1.75 billion in new business bookings
And to give you a specific answer like in the next year or two we don't plan on sharing on this call that it had the same impact as ACA
I think the belief by them and by us is that we have obviously a very big data set to be able to enhance the work that they do to really help people create a better workforce
"And so I think the combination of the coaching, the data and the analytics along with combining that with ADP, I think, we think that we could really do something special here"
"I think that that's as good a math as – for example, when we had some challenges with retention in the last year, that's kind of the way to look at things is to use simple math to put things in perspective"
"We would obviously prefer to have $100 million then to not have the $100 million, but I think in the context of what we're trying to accomplish for the company from a value generation standpoint, EPS, share buybacks, et cetera, it really doesn't – for now, it doesn't have a major impact"
"So I think what we've had is we had – and I think we've been every quarter I think very, very clear"
"So clearly, maybe we didn't emphasize enough how much help we were getting"
"I think, as we said multiple times today, we're not going to a zero regulation environment"
"So 99% of the laws and regulations that affect employers are still in place today that were in place two months ago, and they're probably going to be in place a year and five years from now, and there may be new ones"
And so we have always been there to help our clients with compliance and with regulation
"Having said that, we're clearly entering a period of time with tightening labor markets where I think many employers' attention is going to turn to how to attract and retain a workforce"
"And this is something that we've been building to over the last four to five, six, seven years by investing in our talent management suites"
by investing in tools to help our clients use data and analytics to run their business better and manage a better workforce
"So we've been preparing fortunately for this strategic opportunity here for many years, and it's coming and it's coming fast because I believe we reported the ADP Employment Report this morning, and that's only going to add to I think the tighter labor markets"
"Because as we've seen multiple times in the last 20 to 30 years, as unemployment gets to the level that it's at now and we understand that there might still be a little bit of slack as a result of labor force participation, but that slack will also inevitably come out of the system, whether it's in 6 months or in 12 months"
"How do you attract and retain the best workforce when everyone else is trying to do the same thing? So we're not ready to say there's a war for talent yet, but clearly there are pockets of that"
"So as we mentioned, obviously some of the uncertainties that have been created as a result of this change in administration and the talk about repeal and replace of ACA are certainly not helping us in terms of our new business bookings here in the second quarter, but we still are pretty positive about our business model"
"I think you've heard that from us today that we're well positioned for helping our clients with what are becoming very, very tight labor markets, and we're also optimistic that there will be some change"
"In the meantime, we're going to rely on our historical track record of being able to navigate through obviously these uncertain times and wait for the inevitable pickup in the economic activity as well as government activity around some of these changes"
"Thank you for joining us, and we appreciate your interest in ADP"
"Thank you very much, Carlos, and good morning, everyone"
"Our effective tax rate this quarter was aided by an incremental tax benefit related to prior period software development efforts, $0.04 of which was not previously anticipated and $0.02 tax benefit related to the adoption of new stock-based compensation accounting guidance"
Our new business bookings performance this quarter was disappointing
"We're confident in the competitiveness of our portfolio and the strength of our distribution capabilities, and in turn, our ability to execute on our pipeline of market opportunities"
"Average client fund balances grew 2% on a reported basis, or 3% on a constant dollar basis compared to a year ago"
"As a result of improving employment, we have continued to see pressure from lower state unemployment insurance collections impact client fund balances"
This pressure was offset by a combination of wage inflation and growth in our pays per control metric
"And as a result, we now expect new business bookings for fiscal year 2017 to decline about 5% to 7% compared to the $1.75 billion sold in fiscal year 2016. We have also updated certain other elements of our fiscal 2017 forecast, which I will now take you through"
This forecast continues to include 1 percentage point of combined pressure from the sale of our CHSA and COBRA businesses and the impacts from foreign currency
The details of this forecast can be found in the supplemental slides on our Investor Relations website
"As a result of the software development related tax benefit, some of which was not previously contemplated in our prior guidance and the additional benefit related to the stock-based compensation accounting change, we now estimate our adjusted effective tax rate for fiscal year 2017 to be 31.4% as compared to our prior forecasted rate of 32.4%"
"Our forecast also continues to contemplate a return of excess cash to shareholders via share repurchases of $1.2 billion to $1. 4 billion, subject to market conditions during fiscal year 2017. This forecast includes any repurchases required to offset dilution related to employee benefit plans"
"So, with that, I will turn the call back to our operator to take your questions"
"In the process, clients continue to make buying decisions and buy incremental modules as they do, and we have seen that trend continue in particular in the midmarket"
"So the change – if a client buys more, I don't have the most recent statistics here, but I think the trends continue that a number of clients purchases incremental modules as they see the power of the integrated platform"
But it would be immaterial for the new business bookings number in total
"And I think that it is – as I think we've been trying to signal for, I think, probably three years if you go back to my notes, it's very hard because we're obviously in uncharted territories, because we were in something completely new"
"And it was a very comprehensive regulatory framework that required a lot of information from HR platforms, payroll platforms, benefit platforms, et cetera"
And this is why we were cautious all along because that is a little strong
"Now, what has now added, I think, potentially to that pressure, which again we can't quantify scientifically is that we have, I think, a different environment politically that's creating some uncertainty, that certainly has impacted our new business bookings"
We just can't put our finger on exactly to what extent
"So as an example, we knew we had a grow-over issue just for ACA itself because we had already sold 50% of our addressable client base"
"And even though we've gotten some, it's significantly lower than plan, which is not surprising given the headlines and the frequent votes on repeal and replace of ACA"
And so I think that's a second factor that I think was not certainly anticipated as we entered into this fiscal year in terms of our planning process
We knew we had to grow over the mathematical grow-over issue
"And then the third one that you mentioned, which again, is very hard for us to put our finger on, but I think you're onto something because we experienced the same thing back when we had the Y2K phenomenon in year 2000, where you do have some amount of pull forward, if you will, of business because we've seen this particularly on some of our wins last year from ERPs were quite high and elevated"
"And I think some of that, it appears, with the benefit of hindsight is, people on kind of older legacy technology trying to find a new solution for ACA"
"So as we mentioned, before we think some of our retention issues last year may have been related to the same factor of people kind of just out looking for new solutions as a result of what I would call an event, which is a significant event called ACA"
We really wish we could put our finger on exactly how much each one is accountable
"I think the only thing, Jim, just keep in mind our new guidance is down 5% to 7%, is our expected new business bookings guidance and I think Carlos captured it"
"And it always was meant to cover multiple year type of cycle elongated and it was not a commitment obviously, as you see realistically – not a commitment to perform every single fiscal year"
"a little comment to this on the outlook, which Carlos described correctly kind of roughly in line with fourth quarter and the full-year guidance"
"And maybe a tiny bit of further detail, Lisa, is when we look at our competitive position against this multitude of competitors in the quarter, some competitive positions have improved and some have not"
And that is a fairly typical thing we see each of these competitors evolving quarter-by-quarter up and down
"So when we say the general competitive dynamic we feel has not changed, it's rooted in this analysis, and we see in some cases we have improved and some cases we have not"
"So it's a mixed bag obviously, but we believe it hasn't changed"
"Well, next fiscal year, we are clearly half – still a little bit of grow-over but not that material"
So next year should be a clean year relative to the ACA-related grow-over
"Just a further clarification, we have tried to illustrate this a few times"
"And as a consequence, our clients (54:35) typically provides ADP-wide about 50% of our incremental new business bookings, however, come from selling more to existing clients"
And that dynamic has now changed because we have fuller bundles now in particular in the midmarket
"Just a quick reminder, as one of the advantages of ADP is that we serve such a broad range of segments and markets in the U.S"
"and globally and multinational, and so as we had our challenges in the mid and upmarket, we continue to perform tremendously in the down-market, in the PEO, multinational"
"You're never complete on operations, Mark, but the majority of our work is actually this fiscal year and next fiscal year"
So in next fiscal year I'd still anticipate some dual ops
"It's a fragmented and there's no clear trend to it, and so they go to a variety of different targets"
"Some in the ERP space, some to our traditional competitors, some to other solutions, so it is a wide range"
"And on the tax rate, Ashwin, this quarter was onetime unanticipated strong outcome relative to our tax strategies of the R&D credits"
"So this quarter is not a regular quarter, it was a onetime effect and so we're going to be returning to our – well, that said, we're not giving guidance for next year"
But it's certainly not going to be at the level that you saw in the third quarter
Our belief that our core strategic platforms need to be funded and need to be innovative
"So those may be the core tenets kind of really executing around the strategy that we have laid out for the last few years, also on 2018 is a fair assumption to make"
"Thank you, Christian, and thank you all for joining our call this morning"
"In line with expectations, our new business bookings declined 7% this quarter and 5% for the year"
"While we are disappointed with this year's overall bookings performance, it's important to look at the underlying dynamics"
"We continue to be very pleased with the momentum and performance of our downmarket and the PEO, both of which continue to demonstrate the value of a broad-based portfolio of solutions"
"And in turn, our ability to execute on our pipeline of market opportunities"
"Client satisfaction continues to improve, retention remains high on our strategic platforms, and we are pleased with our progress in upgrading our clients to our latest cloud-based solutions"
"This quarter, we are also pleased to see retention improvements across all our market segments with retention improving by 60 basis points and finishing ahead of our expectations"
Our excellent retention performance in the downmarket and improving performance in the midmarket reinforces our core belief that our focused and steady upgrade strategy is the right thing to do for our clients as well as for ADP in the long-term
"Last quarter, we mentioned the introduction of ADP Accountant Connect, where we are leveraging the scale of our strong 510,000-plus client base downmarket to create a compelling value – to create compelling value for our referral partners"
"This unique solution provides our accountant channel partners with a unified view of payroll, including reporting and tax information for our shared clients"
"We now have more than 8,000 accounting firms using the platform, which is making life easier for the accountants and the clients we share"
"This is helping to deepen relationships with an important source of referral business, while increasing our value proposition for RUN clients"
"We are incredibly pleased with the adoption of the platform by our accountant partners, and we're also especially pleased that we recently received the Accounting and Tax Technology Innovation Award (sic) [Tax & Accounting Technology Innovation Award] (6:39) by CPA Practice Advisor"
ADP's success is rooted in part on our ability to help clients manage through regulatory change
"This is especially true from our PEO, ADP TotalSource, which served more than 485,000 average worksite employees this quarter"
The value proposition of the PEO gets stronger as the complexities of managing the workforce increase and expectations of employees evolve
Great PEOs are built to adapt to these dynamics and help clients navigate these changes
"We're proud to be among the first PEOs to receive this important new designation, which certify that ADP adheres to the highest standards"
"Becoming a certified PEO, further distinguishes ADP and is a another example of the lengths to which we are willing to go to ensure our clients know they're working with a trusted partner"
"As our clients' needs have grown globally, so have our capabilities and our reach"
"And today, we are supporting clients in more than 110 countries around the world"
"Success in the HCM market on a global scale is not easy to achieve, given the complexities of doing business in many different countries and the local knowledge and understanding that is required to support clients"
"Constellation Research, a strategic advisory firm, recently recognized this by naming ADP GlobalView HCM to the Constellation ShortList for Human Capital Management Suites for the second consecutive quarter"
Constellation evaluated more than 25 global HCM platforms to determine the top five best-of-breed vendors
"In naming ADP to the ShortList, Constellation recognized us for the depth of our global compliance expertise"
"At the same time, we are beginning to see some signs of stabilization in our mid- and upmarkets new business bookings performance as we lap the difficult fiscal 2016 compares and the fiscal 2017 effects of regulatory uncertainty following the U.S"
"These dynamics, together with a continued strong performance of our multinational solutions, downmarket offerings, and the PEO, give us confidence heading into fiscal 2018. ADP is built for the long haul"
"We believe these efforts will continue to drive sustained long-term success for our clients, our associates and our shareholders"
"And with that, I'll turn the call over to Jan, who'll review our fiscal 2017 results in more detail and share our fiscal 2018 outlook"
"Well, I think as we've said in our comments, the midmarket, the PEO, multinational have all been quite strong"
"And really, especially, in a downmarket, as we mentioned, has been really no impact from this grow-over issue with ACA"
"So, we've, I think, had what I would consider to be the best results in several years in that space in the downmarket"
"I think in the upmarket, we did, I think, feel after November that there was some elongation in terms of decision-making, which is a little more logical because you have relatively sophisticated buyers there"
"And I think some were probably waiting to see what would happen with the regulatory environment, given that there was talk of repealing ACA and repealing a number of other regulations within weeks, as we all know that hasn't happened"
"And so, I think gradually things feel like they've gotten a little bit better and things have loosened up a bit"
"But as we know from what's going on in Washington yesterday and today, I think in that space in particular, I think there's still, I think some probably wait and see on the part of buyers"
"By the way, those – that will be two years of – so we had a step up of – and it was a 20 basis point impact of dual ops this year"
"And so you shouldn't have to, I think, worry too much about trying to figure out the analysis there"
Because should not be – should not enter into the picture
"Other than, obviously, we're incredibly excited about what is going to be the outcome of the Strategic Alignment Initiative down the road"
We're about halfway through in terms of the hiring plans
"So I would say that, I think, we joke around that I think this is the easy part"
"So putting buildings up and hiring people, we definitely accomplished it"
And we're right on track in terms of – and on schedule in terms of our objectives
"Obviously, they're in the process of being trained"
"So, I think all systems, so far, we haven't seen anything to indicate that our expectations that we had of the project are going to be anything other than what we expected"
So we're very excited that we've been able to kind of stay on track
But I think it's a little early to really declare victory
"Not to mention, obviously, the consolidation effect of having large groups of associates, which we've seen already in two locations that we've had for several years, El Paso and Augusta, creates very, very high engagement, better NPS scores, better client experience, and better associate experience as well"
"And I think the last thing you mentioned, which should also, I think, address is, is it related to pricing, and the answer is not"
"For the last several years, we've been trying to gradually bring down our, 'price increase'"
It's not a big deal on the 'overall gross and net price increase that we passed through to our clients
So – but there's no change in pricing in terms of new business or the competitive environment or anything to that effect
The good news for us is that the scale really starts to pick up again for us in the second half
"So if you look at the way this issue has worked with the grow over, part of the confusion might be related to the fact that our fiscal year is in the middle of – obviously, ends in the middle of the year, and the impacts are really calendar-year impacts"
"And so, if you go back and you look at quarterly numbers, you will see that we had two strong quarters the first half of this fiscal year, and then now we just had two relatively weak quarters because of the grow over issues"
"Now, of course, that means that we have to hit our plans in retention and new business bookings, but that's the way math does work"
"Everything we've been telling you, I think, is accurate about the impacts of the grow over of this ACA issue, which were significant"
"And so that affected our new business bookings, which is what's causing the grow over from new business bookings"
"And then, obviously, now, from a comparison standpoint, you lose a point"
"And so our hope is that once we get past the next couple of quarters, that we get back here to business as usual"
"I think our strength in particular – and we think we've talked about this for several years, is really our multinational solutions really do appear to be highly differentiated"
"And again, multinationals is both very, very large companies with very large populations of employees, but we also have multinational solutions for a company that may be headquartered somewhere in Europe and has 20 employees in four countries in Europe"
"So we really go all the way from very, very large Fortune 100 – or world Fortune 100 companies all the way to what I would call local multinationals, if you will, or regional multinationals"
"Our international business, I think, has gotten better on, what I would call, a relative basis, because it's been a difficult backdrop in Europe, which is our largest international business"
"We also have a business in APAC and Latin America, but our largest concentration other than Canada in North America is in Europe"
"And so that European business on a relative basis, slight improvement in the underlying pays per control"
It looks like GDP is starting to pick up a little bit there
So we've got good leadership and I think the business is performing very well
We're very happy with our international and multinational business
"I think in total is about $500 million, Jan? Is that"
"For rounding purposes, call international $1 billion"
"I think we did about a couple thousand this quarter, probably 2,500 to 3,000 the previous quarter to that"
"So we're kind of in the same general ballpark, which just as a reminder is much lower than it was at its peak when we were in the middle of ACA, because we had a lot of accelerated migrations in order to get clients on the right platforms to be able to do ACA compliance for them"
"And then with the benefit of hindsight, that was an issue for us that caused some of our retention challenges"
"We have I think it's 5,000 to 6,000 clients left in the midmarket? I'm checking for"
"And so you can see that at the pace that we're on now, we have a shot at getting it done by yearend"
"We might have, whatever, 500 clients, 1,000 clients left at yearend, that doesn't obviously concern me because we would have done, I think, 60,000 clients"
"So if we have to – and again, the way our business works is everything has to stop in the middle of November because of yearend"
"In other words, the company just becomes focused on getting through the yearend process"
"So it could be that we have 500 to 1,000. But it's obviously helping us on a number of fronts because our retention on our strategic platform is much higher than our legacy platform"
"So I think it's – I would say that it's probably not something that will be an enormous amount of focus for all of you going forward, but it is an incredible accomplishment"
"Because I was talking to the person who runs R&D for that organization about a week ago, and he named all the platforms that we had 10 years ago when he first went to that business"
"And we're down to one platform here, and we're close – almost across the finish line"
"I think your math is probably pretty close, directionally close"
So that's why you hear us being so keenly focused on retention over the last several quarters
"In terms of competitive information, we've said before that we really don't have any one competitor who takes more than 10% of our business, if you will"
"So there's really not – and that's been consistent for a long, long time"
"So we have a lot of competitors, who operate in multiple segment s"
The competitors in the downmarket are different from the midmarket
"But in general, we have competitors that tend to be more focused on a particular part of the market than us, which are broadly focused"
"In other words, clients that we lose to a particular competitor and clients we take away from a particular competitor"
"And again, this quarter, unfortunately, it's the same story as other quarters, which is there's no discernible pattern other than there were a couple of competitors in particular that we were able to reverse the tide on, which I'm incredibly proud of because as you point out, we have – there's a few of our competitors that aren't even at the size that you mentioned of $300 million"
"So there's some glimmers of hope in the last couple of quarters that when we put our minds to it, we can push back, and I think that having clients all-in-one platform, having ACA behind us, there's a number of factors that I think that give me confidence that that focus will be even more heightened on a going-forward basis"
"And that we'll be able to hopefully make that $300 million, $250 million or $200 million and hopefully slow down some of our competitors"
And I'll be careful and I'll let Jan do the closing here
"But even more, 'relief' and improvement in the second half"
And I would call it significant improvement and relief in the second half
"And again, that's all mathematical, and it all works that way, and I think that's probably – I said probably more than I should say, and I'll let Jan"
"But obviously we, for the sake of comparability and to make sure that it looks like other ADP business as we do exclude the pass-throughs in the way we count it"
So I'll add that we had record retention in a couple of other places as well
The SBS business in down-market had record retention
We had a couple of other places that had record retention as well
"And I think that in most of those cases, the only thing I can put my finger on is execution because they are good businesses, and there's a good backdrop"
"But for the benefit of hindsight, that's kind of always been true"
And I think the one variable seems to be execution
"And so the retention in SBS, for example, now in the downmarket is 3 to 4 percentage points, not basis points, higher than it was five or six years ago and higher than – and that much higher than we thought we would ever be able to achieve"
You heard what we were doing with things like Accountant Connect
It's very hard to do those things when you have three or four platforms
So we have a lot of data and many years of data around that
So new business bookings and retention have less visibility
"But we have ways of getting at what we think are the right targets, which I think as you mentioned are much better obviously in the second half"
"So again, all things being equal, if the economy cooperates and we continue to execute well and the math holds up historically for ADP, we should be able to get to those numbers"
"Those are kind of the controllables that we focus on that, I think we're doing frankly an exceptional job on right now"
"So we're now returning to our normal practice, which is we are anticipating to offset equity based dilution for our employer compensation, which is about $400 million or so"
And then we should expect – we're aiming to be back at our long-term model that we have shared
And I think the long-term model includes – not that we guide to it – but the long-term model anticipates the return of excess cash to our shareholders of approximately 1% – resulting into approximately 1% of share count reduction
"That will be our long-term model and pending on market conditions, obviously"
"Because as Jan just said, we put in incentives to try to get people over the finish line"
And so there's a lot of moving parts here that I think may have contributed
"But it was better than the alternative, so we're happy that we had the finish that we had"
"But I don't think that there's really anything you can scientifically read into it, other than maybe underneath the surface there's some better environment in terms of the – because some of the uncertainty – I mean, at some point people have to get back to business as usual despite what's going on in Washington with regulation and with ACA and so forth"
"I think with the right economic backdrop, I think should give me – and it does – a high level of confidence and optimism"
"Again, we haven't heard anything in terms of that would change, for example, the way taxes are collected in this country or that would affect our fluid – I'm not sure exactly maybe where – if there's something you think or you know that we don't know"
But we're not aware of anything other than they're trying to reduce the corporate tax rate
"And obviously there are some, I guess, preferences and benefits that are going to be taken away in order to do that, but those generally apply to, like, the energy sector, manufacturing sector and other"
So in theory there are going to be winners and losers
The people with very low effective tax rate are going to probably get an increase in their effective tax rate
And the people who have a high effective tax rate are going to see a decrease because the statutory corporate tax rate is going to – not going to – they're saying they're going to take it down
"So whether it's 25% or 20% or 30%, that can only help us"
And we don't have any significant tax preferences that we take advantage of that would go the other way
"From a client standpoint, we do have a tax credit business"
We haven't heard any talk about – those are targeted job credit-type taxes that are – tax breaks that are very popular
"So we haven't heard any talk about that, those being repealed"
"I would say it's very likely that if there's any tax reform, that it would be very positive for ADP"
"But obviously as Jan said, we have no sense of the likelihood of that"
And it feels like we have more of it than we had three years or five years ago or 10 years
And so it's very important for us to stay on top of it
"But if you're asking about 12 months specifically, there are definitely competitors who have gone – who have kind of come down segments or gone up segments"
"But I think, based on my experience at ADP, nothing different from what's been happening for decades where a competitor decides if they're in the downmarket, that they can go up into the midmarket"
"And they try it and then maybe three years later, they go back, or sometimes they stay"
"Likewise, we've always had enterprise-size competitors that are in the upmarket who decide to come downmarket a little bit into the midmarket"
"So I don't think I've seen anything worth, I guess, reporting"
But plenty of that type of stuff that you just mentioned
But I think it's normal competitive actions by competitors
"As you can see, I think these strategic initiatives that we've laid out over the last several years, I think are beginning to deliver on some of the objectives we have around not just shareholder value but also around delivering world-class solutions to our clients"
"Obviously, we continue to be excited about the prospects ahead of us"
We definitely have challenges in 2018 with a softer bookings performance
"And as you can tell, we're incredibly bullish and confident still"
"So thanks again for your interest in ADP, and thank you for joining us on the call today"
"Thank you, Christian, and thank you for joining our call this morning"
"Despite the short-term bookings pressure, we continue to be very pleased with the performance of our down-market businesses and the solid results in our multinational business"
Our client upgrade initiatives continue to progress nicely and now we have more than 83% of our clients on our strategic solutions
"I'm proud of these efforts and of our speed to execute, which have enabled us to rationalize our footprint by exiting nine subscale facilities this quarter"
This represents a closure of 63% of our total planned exits under this initiative in just over one year
It isn't just our own internal metrics that are helping tell the story
"Last month, G2 Crowd, a leading business software review platform ranked our Workforce Now solution number one in satisfaction for payroll and HR management suites in their fall mid-market grid report"
We're excited about the innovations we continue to introduce to the market that are helping clients meet the dynamic needs of an evolving workforce
"A few weeks ago, I had the opportunity to attend the HR Technology Conference in Las Vegas where few of these innovations took center stage"
"In addition to this recognition, we scored a second three-peat at the show after our Pay Equity Explore Solution was named one of HR Executive's Awesome New Technologies"
"Pay Equity Explorer is a powerful tool that combines data science and benchmarking and is built on the biggest data sect in HCM, the ADP Data Cloud"
"It was developed to help clients uncover insights and identify potential opportunities when it comes to gender or race pay gaps, so they can stay competitive in the war for talent"
"While we are incredibly excited about the solutions we are delivering in the market today, we are even more excited about the future"
"At the event, we previewed our next generation of client-centered innovation including a low code application development platform that enables internal and external development teams to build agile country, segment and client-specific applications, leveraging the latest technology and delivered by the public cloud"
We also shared progress on our efforts to deliver next-gen payroll and tax filing engines which will further increase our differentiation in payroll and payments
"At the core of HCM is ensuring employees are paid accurately, securely and in a timely fashion"
"For those not familiar, Global Cash Card is a leader in digital payments, including pay cards and other electronic accounts"
The digital payment space is an exciting one for the future of payroll
"From the employer's perspective, digital payments can be less expensive, more immediate and a more secure option than other means of payment such as paper checks"
"Fiscal 2018 is off to a good start, and we look forward to turning over full attention to advancing our strategy and delivering on our commitments to all stakeholders, clients, shareholders and associates alike"
"And with that, I'll turn the call over to Jan for a further review of our first quarter results"
"Well, I think as I mentioned in my comments, I think this quarter, the improvements were really across all of our ES segments"
"And as we've said in the past many times, retention can be a very volatile metric especially as you get into the up market"
"But this quarter, we happened to have good news and we're very happy about it"
"We see our NPS scores coming up and so, we're very pleased with that"
"I would say that, to your question about the mid-market, we are not finished yet with the migrations of our clients in the mid-market"
"We still think that we'll be close to done, if not done, by the end of the calendar year"
"But we do expect to be substantially done by the end of the year and that does put pressure on our retention because as we've mentioned multiple times, and the same still holds true, there's quite a substantial difference in retention between our strategic platform in mid-market and our legacy platform"
"So, what you're alluding to, we hope and we expect will happen a couple quarters from now as we get all these migrations and the mid-market behind us"
But that would not be one of the reasons why there was improvement in the mid-market as well as in the rest of ES this quarter
"So, the right way to look at this is about 60 basis point improvement in retention for the quarter"
"I don't think anything further to report there, but that's becoming a very large, we're close the 0.5 million worksite employees"
", if you look at it as, which we do, as an employer even though there are sub-clients"
"Obviously there's more than 10,000 clients in the PEO, but it's a very large – the way we treat it for, the way we have our retirement program and the way we have our workers' compensation and benefits, et cetera"
We are a co-employer and consider ourselves a co-employer for the purposes of some of the responsibilities around employment
"And so technically, I think we're probably in the top five now in terms of size of employers in the U.S"
"So just to make sure we get our language clear here, because we have introduced some new terminologies"
"So, when we refer to next-gen platforms, so we have our strategic platforms, which are Workforce Now, RUN, Vantage and our Global View multinationals platform"
We did start talking and we mentioned it in our introductory comments that we talked to industry analysts in mid-September about our next-generation platforms which we have only a handful of clients on today
"So, I just want to make sure I clarified the language there"
"As we go forward, we'll be more careful about making sure that we pick the right language"
"So, and I'm sorry, what was the rest of the question?"
"So since we still have a lot of work to do in the up-market where we've really only begun the migrations, I think that's consistent with what we've said before in our publicly released information around the proxy contest"
"It's very important to note that when we talk about our strategic platforms, we have a number of areas of our business where there's really no immediate plan to migrate or move clients"
"So, we could probably in the future be able to provide some more color around the quote-unquote addressable market"
"In other words, what part of our client base is really up for migration, if you will, but the right answer, the straight answer is 51%"
"But we're not aiming to get to 100%, I guess is the"
"We disclose a lot of information, again as we've been trying to communicate with shareholders about some of the things we've been doing here over the last five or six years"
"We've disclosed, I think, some additional information about that"
A large part of that was in the next generation platforms that we just announced recently that we've been working on here in some cases for three to four years
"So, that's a sense of what's happened with the innovation spend"
"On the maintenance spend, for the sake of I guess government work, it's about flat"
"But again, in the world of some inflation, the fact that we've held that constant, we see that as a good news story"
"It was a conscious effort to really shift the mix, if you will, in the balance of our spending to more innovation and less maintenance"
"A lot of our maintenance spend is focused on platforms that serve tens of millions of employees that get paid, both on our tax engine and our payroll engine"
"And so as we develop these next generation technologies, when we retire those legacy platforms, which is a ways down the road, then obviously, we would expect actual decreases in maintenance spend"
"But for the last several years, this has really been a story of increasing the spend and making sure that that spend is focused on innovation while we build out the necessary platforms to move clients to and then reduce the spending on those legacy platforms"
We have retired I think it's around 13 legacy platforms
"So, it's the first time in a long time at ADP that we've actually retired things"
"So, it's not like we haven't made any progress, but those were relatively small dollar items in terms of the overall maintenance spend"
And we have no plans to get off of them in the next three to six months or any kind of timeframe like that
"So this is a, as we always say, this is an evolutionary process, not an overnight change"
"So, I'm going to let Jan maybe go through a few of the numbers here"
But just quickly on the hurricanes and Jan will give you a sense of impact
"But I just want to take a moment to also point out that these were massive storms, especially in Houston and in Puerto Rico"
We obviously have a very large presence in Texas and in Houston specifically
"And what our associates and our infrastructure people did to be able to continue our business, not necessarily as usual, but to make sure the business went forward and that we served our clients was nothing short of heroic, including flying airplanes from Tampa when no other planes were flying into Puerto Rico to deliver supplies to our associates but also to deliver payrolls to the businesses that were actually still functioning and still wanting to pay their people so that they would be able to actually have money for, in obviously what was an incredible crisis"
"So, the fact that you're asking the question, I think shows the strength of ADP that we continued to perform and to deliver business as usual in the face of what was obviously a very, very challenging situation"
I think Jan maybe has a little bit of color on the numbers
"And just to point out, there have been times in our history in the PEO where it's been even higher than this"
"So as Jan said, it really depends on the general health care inflation environment"
"It's clearly not sustainable from a – it's not just about our PEO or our own company, but this is why there was healthcare reform to begin with, that you can't have this kind of healthcare inflation for a long period of time, because it just doesn't work from an economy standpoint"
"So, it's safe to say that this is a number that has to, by definition, maybe not over a quarter or two or over one year, but that number has to at some point converge or regress back to the mean"
"And this is probably from a three or four year standpoint, this is probably the highest it's been and it's probably in line with what you're hearing out in the world, right"
Which is healthcare inflation's picking up a little bit
Because what we're focused on is growing EPS and creating value for our shareholders
"One last thing, because you did mention about the distraction on the – I just wanted to answer that question because others may have the same question"
"I think the way I have been, had a lot of investors asking is the same thing, because there's a lot of concern about the distraction of the proxy contest and I would say that it's an extremely high distraction for an extremely small group of people"
"I think we had, we obviously feel better about what's going on with retention and I think the trends in the business"
But I think you're correct that that just happens to be the way the numbers have fall out as well
"And so that was an important part of that picture, if you will, in small business, the improvement in retention"
"I am hopeful, based on what we're seeing so far, that we are going to experience good improvements in retention in our mid-market as well once we're through migrations all of our clients on one platform"
But the absolute starting point is important as it is always in any situation
"And again, we don't give specifics sub segment data if you will"
"Neither do any of our competitors, I would just point out"
But it's just important to note that some of what's happening in terms of these numbers is still these mathematical grow-overs and comparisons
"And the two quarters that we're in right now, the quarter that we're just reporting plus the next quarter, are really mirror images of the first two quarters of the calendar year"
"And so we had 12 months of easy comparisons, and then we had 12 months of hard comparisons"
"And we have, I guess right now, a couple more months before we get through those difficult comparisons"
"Well we hope, we do for example invite clients on a regular basis to visit our Innovation Center in New York City in Chelsea to kind of get first hand knowledge of some of the things that we're working on"
We have other things that we are working on as well that we share with our clients
"I think that would be true in each of our business segments, but it's obviously very important in the up-market enterprise space where the client lifecycles are very, very long"
So we have very high retention rates in our up-market business
"And obviously if they are staying with ADP for that long, that means they've already been through multiple changes in technology with ADP over the years"
"So these are all, I think, part of leveraging technology, which is one of the central themes that we've had here for the last five or six years"
"So the second part is a tricky question, because the way it gets shared, if you will, is it makes our company stronger"
"It allows us to, for example, theoretically, to be more careful with price increases"
"None of which – so I guess the answer is, we haven't changed anything"
"Like it hasn't – if rates were as you know because of the way our portfolio is laddered, even though we felt multiple years of pressure on the downside, we are getting a little bit of help here on the upside"
"But there's really, this isn't like an overnight, and I don't mean overnight in the sense of rates"
"But because of the laddering, there's not that kind of dramatic of a change that we are all of sudden that it's raining money out of the helicopters and we have to figure out what to do with it"
It's better than it was when it was going in the other direction
"So I think historically, I think it probably make us stronger, more competitive"
But we really don't – there's no pricing mechanism
"We didn't raise prices, when interest float income went down and rates went down"
And we don't plan on lowering prices when it goes up
"And, Jan, just to add, just to be even more clear, we lost $300 million in float income and that's assuming that the balances have stayed flat, but the balances actually grew from about $15 billion to over $20 billion during that period of time"
And I am thinking back to like 2007 and 2008 when we peaked in terms of our float income
"And as Jan just said, we don't have those kinds of arrangements"
We didn't increase our prices when that was going on
And so I think it feels fair to us to now enjoy the fruits of a better environment on a go-forward basis would be the way we would look at it
"So what we built was, we built a platform on which we can build apps that could serve a number of different clients"
"It could be used in the up-market and frankly someday, can be used in the mid-market"
We shared a lot of information with industry analysts and we're trying to share as much information with all of you without sharing so much information that it creates a competitive problem for us
And so we're not ready to say exactly what we're doing and where we're going
And that's really only talking about the low code development platform
So this is our gross-to-net payroll engine and our tax engine as well
There we expect and the plan is to have that be completely transparent
These engines are back-office engines that are really not visible to the clients
"And so there's really no expected impact assuming that we execute well in the kind of transition, if you will, to a new gross-to-net payroll and also tax engine"
"The expectation for improvements, though, are fairly significant in the sense that we'll have a lot more flexibility around the things we can do around payments"
"So we may choose to, we may not necessarily do it, but we'll have the ability to do same-day payments, real-time payments"
"We'll have a lot more flexibility around speed to make changes, whether they're statutory or competitive changes in our systems"
"So these are really modernization efforts because those platforms serve us incredibly well today at high scale, high reliability and high security"
"And the other, I'm sorry the second part of your question was?"
"So I have to preface my comments by saying, it hasn't been exactly business as usual"
"So one of the things we did last year is, in the face of the challenges we were having, we decided to actually invest in head count"
"And we opted last year really to, in order to make sure that we had a good couple of years of new business bookings, we invested in our head count"
That's pretty healthy for us when you look at the last five or six years
"So I guess the answer your question is, the reason we feel good about our forecast, which again is subject to interference by, as we just saw the government had a fairly large change in direction nine months ago"
"I don't think so because as Jan said, I mean I think it's first of all, it's early"
We're through the first quarter and I think you could tell that we feel good about our results
But I think it's way too early to think about how the first quarter impacts 2020 for us
"Yeah, and I think part of the reason for that is we've obviously invested a lot already"
But now we're in the process of quote-unquote hardening and also getting clients
"We do have clients, by the way, on each of the three next-generation platforms"
These are real platforms that we've invested hundreds of millions of dollars in over multiple years
"But from a timing standpoint, I think it's clearly way too early I think for us to be factoring those types of improvements into our forecast"
"Over the last several months, obviously we've been involved in this proxy contest and I just want to acknowledge for a minute our associates, because obviously, some of them may feel like their efforts have been put into question during this process"
"And as I mentioned, I think the distraction has been largely to a small group, but inevitably our associates also hear some of the noise out in the market"
And I just want to thank our associates for the resolve that they've had in delivering to our clients what the clients expect from ADP
"The dedication, I think, and the attentiveness and the integrity, more importantly, of our associates is what makes this company great and it's what our founder I think insisted on"
"And I'm confident that with their help and their support, we're going to continue to make ADP successful"
I also want by extension to thank our shareholders and the confidence they've put in our management and our board
"As we've gone around visiting and talking to investors, the encouragement that we've gotten from them, I think just strengthened our resolve to continue to do the right thing for them, and also on their behalf"
"And so with that, I want to thank you again for joining us, and thank you for your interest in ADP"
"Before reviewing the quarter and outlook in more detail, I'll make a few callouts to begin"
"We're reaffirming our fiscal year 2017 guidance this morning, and I will give you a sense on where we expect to land within those ranges"
Our effective tax rate after adjusting for the gain was 31.3%
"Our full-year GAAP tax rate is expected to be 33% or 34%, excluding the Message Automation gain"
I will touch on these topics again through my review of the quarter and our outlook
Adjusted EPS rose 19% to $0.69; and GAAP EPS grew by 21%
There are three items of note that had an impact on EPS
"Excluding the impact of the Message Automation gain, our tax rate was 31.3% in the third quarter"
"As we have in recent fiscal third quarters, we recognized one or more discrete items, which had the effect of lowering our third quarter rate that had only a small impact on the forecasted full-year rate"
"We expect our tax rate for the full year to be approximately 34%, excluding this gain and 33% with the gain"
That decline primarily reflects the shares Broadridge repurchased over the past three fiscal quarters
"Moving to slide 9. For the nine-month period, our adjusted operating income grew by 16%; and adjusted EPS rose 12%"
"Turning to slide 10, a review of the performance of our ICS and GTO segments"
These larger deals are typically more complex and have longer conversion times
"Moving on to slide 11. Broadridge's annual free cash flow generation is typically weighted to the second half of the year, and I expect fiscal 2017 to follow the same pattern"
Broadridge generated $130 million in free cash flow in the third quarter and $93 million year-to-date
"We continue to expect to achieve our guidance for the full-year free cash flow of $350 million to $400 million, inclusive of unusually high capital expenditures"
"At this point, we expect to be in the lower half of that range"
"During the third quarter, we invested $38 million in capital expenditures and software spend and spent $20 million net of cash to acquire Message Automation, adding to the compliance capabilities of our GTO business"
We also want to maintain an efficient and lean capital structure
"So, as our cash flow picked up, we increased our share repurchase activity"
"In total, Broadridge repurchased 1.6 million shares for an average price of $69. That brought our quarter-end outstanding share count to 117.1 million"
That capital return was in addition to the $40 million return with the quarterly dividend
"Now, let's turn to our fiscal year 2017 guidance, which can be found on slide 12. We are reaffirming our guidance for the full year"
There are few factors at play in the fourth quarter to note
One additional housekeeping item with regards to our guidance
"We continue to maintain a balanced approach to capital utilization, investing in our business while taking advantage of the increase with seasonal cash flow to step up repurchase activity"
We look forward to closing out fiscal year 2017 and updating you on our plan for fiscal year 2018 on our August call
"With that, I will now hand the call back to Rich for his closing remarks"
"So, there'll be a little bit of delayed gratification"
"That said, it's giving us very good visibility into the next couple of fiscal years, which is a good spot to be in"
"And Rich, you captured exactly why, which is as I can tell you since I've been here, this is a recurring activity at Broadridge"
"As Rich said, maybe a bit more intensity and formality around this"
But this is kind of a muscle that we exercise pretty regularly
You will find guidance for additional items in the CFO commentary
"Next, I will take a moment to review our capital allocation priorities"
"In January of this year, the board authorized the repurchase of $525 million of our common stock"
"We did not repurchase shares in the first half of the year, but we do expect to repurchase some shares in Q3. I also want to provide a few additional comments before we take questions"
"As a reminder, hardware and IP have become a larger portion of our business, which may lead to more variability in our results from quarter-to-quarter"
"The dollar further weakened in Q2, but so far, we have been able to manage through this challenge"
"Looking forward, we are excited about the new opportunities resulting from our system-design enablement strategy, and we are confident that we will continue to drive strong financial and operating results"
"And with that operator, we will now take questions"
"So Jay, this is John, I will take that first question on the cash flow"
"I'd just point you to the DSOs, that we had a six day decrease in DSO from Q1. A number of large payments came in after the end of the first quarter, driving a more favorable comparison between the quarters"
"So Q2 ended up being a very strong quarter for us, for collections"
"But so you will see a little bit more, a shift to the first half for cash collections"
"But our guidance reflects our confidence in the business, and takes into account everything we know at this time"
"And note, that we delivered excellent financial results for Q2, software and IP were both strong, and we increased our outlook for the year"
So software and hardware in the first half is only part of what is a really good story
"As we said, we'd like to maintain more flexibility with the most recent authorization"
Board and management make their decisions through the lens of shareholder value
"We purchased shares in the first half, but we do obviously expect to repurchase shares in Q3."
"So I'll start with an overview of our financial results for the quarter, followed by some comments about our capital allocation and the Q3 outlook"
"Today our board approved an increase of $0.03 to the quarterly dividend, bringing it to $0.29 per share, a 12% increase, representing a yield of approximately 3.5% on today's closing price"
We remain firmly committed to our capital allocation strategy and returning value to our shareholders
"Switching declined 5%, driven by weakness in Campus partially offset by strength in the ACI portfolio, which was up 28%"
"Collaboration grew 4% driven by ongoing solid performance of WebEx, unified communications and TelePresence"
The joint Cisco and Microsoft solution provides the tools for enterprises to grow and modernize their applications in a highly flexible and scalable hybrid cloud environment
"Wireless grew 3%, with ongoing strength in Meraki and the continued ramp of our 11ac Wave 2 portfolio"
We had very strong performance in our advanced threat security of 65% as well as strength in unified threat management and web security solutions
Our focus continues to be developing a best-of-breed portfolio while offering customers the benefit of deep architectural integration spanning the network cloud at endpoint which we believe is outpacing our competitors
We're seeing continued strength in the Americas which grew 4%
Total emerging markets declined 7% with the BRICs plus Mexico down 5%
"From a capital allocation perspective, we returned $2.3 billion to shareholders during the quarter that included $1 billion for share repurchases and $1.3 billion for a quarterly dividend"
"To summarize, we had solid performance in Q2 and managed the business well"
Let me now reiterate our guidance for the third quarter
This guidance includes the type of forward-looking information that Marilyn referred to earlier
I will now turn it back to Chuck for some closing comments
"No, I think just to add to that, I think we do feel good about what we're seeing from macro in the U.S"
"And I'd say to your point, Pierre, when you do adjust for that extra week last year, our guide, we always call it like we see it"
"So I think – like Chuck said, I think the U.S"
"is solid, and again we're still cautious on outside the U.S"
"No, yeah, I think what I say is between 1% and 2%, right"
And we are trying to make that shift in the core part of the business
Cisco ONE is an example of where we are taking our ELAs and our big cross enterprise ELAs that really are a core networking business to do that
I'll just point to another example though like the Spark Board that Chuck mentioned
"It's a great new innovation and extension of TelePresence, but it's a great example of where we're selling that"
"Now we're selling the equipment, but we're selling it with a subscription"
So that's an example of how we've been able to kind of to drive new offers that had been traditionally just pure system or hardware
"And again, the teams are driving hard to find more ways to accelerate new offers that way"
"Yeah, on the deferred, Mark, I mean that is part of why we're trying to make this shift to software"
It's our customers want those offers and to have easier way to run their IT departments
I'll say there were two specific kind of headwinds that we faced this quarter
"And to your point on APJC, I'll refer back to a year ago, we were benefiting from a national program in China where they were rolling out set-top boxes to tier 2 and tier 3 cities"
"So we had, if you go back a year ago, SP video in Asia was extremely strong because of that"
It's a very tight supply right now and we're seeing dramatic increases there
"But other than that, I'd say the color's in the same line"
Our pricing is in – it's in the ranges that we've been the last six to eight quarters
"I'd say a little on the higher end, but in line with where we were Q3, Q4. A little worse in (37:06) last quarter, but we were very low last quarter"
"And I will say that I do anticipate those two headwinds to remain there next quarter as well as we had very strong SP video, that China program, in Q3 as well"
"We have had an issue from a supplier come out, and we did book a reserve for $125 million, you can see in our GAAP results and in the press release, to cover that"
"We always, and continue to stand by our customers through any situations like this"
"This is a failure rate that will happen over time, but we're working with our customers to work through that"
"I'd say from a pure size, collaboration and security and Meraki are the biggest pieces of that, because they have just continued to grow their businesses significantly"
"But I will also say my switching, my routing, as well as data center and we've done Cisco ONE bundles as well as big enterprise license agreements"
They've also been growing huge double digits as well
"So at the end of the day, the year-over-year increase is across the board"
"And again, just the biggest chunk of it between collaboration, security and wireless, they are two-thirds I'd say of the balance, but the other pieces are rapidly -"
Hopefully that gives you the color you're looking for
"Again, we're working very proactively with our customers and in terms of how quickly and where they want to do their replacement"
Our results this quarter demonstrate the continued progress we're make on our strategic priorities
"Today, the network is becoming more pervasive and critical to business success as billions of new connections are added"
"We expect these new connections will become increasingly automated, intelligent and secure, delivering unprecedented insights and intelligence to our customers"
"Cisco's vision is to deliver highly secure intuitive technology across our portfolio that is designed to constantly learn, adapt and protect to drive business outcomes with greater speed and agility"
"This extends to the network, next generation data center architectures, advanced IoT applications end-to-end analytics and our Collaboration technologies"
Our vision is resonating with customers and partners around the world as we help them build more secure intelligent platforms for their digital businesses
"Today, most of our customers are operating in complex, multi-cloud environments and Cisco is well positioned to provide them with networking capabilities, enterprise class security and support together with cloud scale, agility and economics"
Our new partnership with Google is a good example of this
This partnership is an example of the work we are doing with all of the large web-scale providers
We're also investing to develop and acquire new technologies to extend our Multicloud Portfolio
"These new intent-based networking capabilities are providing customers' unparalleled insights and intelligence, together with highly-differentiated security and programmability"
"Our new subscription-based Catalyst 9000 switching platform has been adopted by more than 1,100 customers in just over three months"
"We expect continued momentum throughout fiscal 2018, and we're pleased that the vast majority of Catalyst 9000 customers are buying our most advanced software subscription offer"
"Additionally, we saw a good performance in our next-generation data center switching platforms as customers continue to shift to 10 gig, 40 gig and 100 gig architectures and embrace multi-cloud adoption"
We continue to advance our intent-based networking for data center and private cloud environments with the latest software release of ACI
"Over 4,000 ACI customers are benefiting from increased business agility with network automation, simplified management and improved security"
Applications are absolutely central to every digital business strategy
"To maximize their effectiveness, companies require a highly-secure network that closely monitors applications and workload performance across a complex multi-cloud environment"
"Within our Applications business, we are enabling new capabilities based on advanced AI and machine learning across our portfolio"
"Additionally, we announced our latest innovation on the Cisco Spark platform, Spark Assistant, which is the world's first enterprise-ready, AI-powered voice assistant to further enhance our customers' meeting experience"
"BroadSoft has 19 million subscribers in the growing cloud voice and contact center space and will enable Cisco to offer an even broader portfolio of collaboration solutions to our customers, on-premise and in the cloud"
"With an expanding threat landscape, cybersecurity is the number one priority for businesses worldwide and is at the heart of every company's digital strategy"
"In a multi-cloud world, as our customers' environments become increasingly distributed, security requirements only increase"
"At Cisco, security continues to be a strategic imperative and fundamental to everything we do"
"As customers adopt and advance intent-based networking, our end-to-end security is the foundation to keep our customers protected from advanced threats"
"As a result, we believe Cisco is delivering the most effective and comprehensive security solutions in the market"
"To summarize, we delivered a solid quarter as we continue to execute well against our strategic priorities"
"We remain focused on providing our customers with the most innovative portfolio of offerings in the industry, powered by intent-based capabilities and delivered through a range of consumption models providing more flexibility than ever before"
Now I'll turn it over to Kelly to walk through more detail on our financials
"So we have to get a little more time under our belt but what I will tell you is that when we look back at a transition like the 3850 years and years ago, it's very much in line"
"And I think that as more customers have the opportunity to test the automation and programmability and all of the software features that they're testing right now, we would hope that the platform continues to accelerate"
So one quarter down but we feel good about where we are
So what I said in the script is that a vast majority of our customers that are buying these platforms are opting for the advanced and I would say that it's a vast majority
We knew when we introduced a subscription on a switch that we needed to ensure that there was unique innovation that was available to our customers in order for them to see value in that
We couldn't just simply shift the capabilities that they had gotten before in a perpetual model
"So the anchors that are in that advanced subscription are the overall automation capability, which really gets at the OpEx of running these networks"
And the second part is the encrypted traffic analytics where we can determine when there's malware inside encrypted traffic without decrypting it
And we think that those two are phenomenal incremental capabilities that our customers didn't have before and I think that's why we're seeing such a high attach rate
So we're very pleased with where we are on that as well
"We've been talking about this for several calls now, about how we reengaged with the large web scale providers back right after I became CEO"
And these are long processes as they made major architectural decisions and they have franchises that you're trying to reenter
"But if you look at – whether it's the announcements we made with Microsoft a couple of quarters ago, the announcement we made with Google, you alluded to Alibaba, which there's a summary of that win on our website if you want to go see that"
"And so we continue to make progress and we're continuing to execute on what I told you that we're executing on over the last year and a half, which is trying to go deeper"
I think the other thing that has become eminently clear is that these large web scale providers realize that it is going be a multi-cloud world and they definitely have come to the conclusion that the edge is going be mission critical for our customers going forward
"And as they think about that, we are very natural – we're the very natural partner for them to partner with as the network is the only common denominator across all these cloud environments all the way out to the edge of our enterprise customer's network"
So we're just continuing to execute against what we set out two years ago and we hope to continue to see success
"And I think, Paul, from a perspective of the web scale, it's really just what I described"
And we continue to execute against our strategy and it's – – these are large franchises
"And if you remember on a call back two or three calls back, I said that we're now expanding our discussions into 360-degree relationship discussions"
"The Google announcement was reflective of that comment, because not only are we working on their infrastructure but we're also working significantly on this multi-cloud enablement, hybrid cloud enablement and helping bridge our customers, their premises-based solutions, their edge-based solutions, their cloud applications, their SaaS applications"
And so we're continuing to execute on that right now
"Yes, Ittai, so thanks for your comments by the way"
"On the hyperconverged offer, our HyperFlex offer, I would tell you that it has continued to probably be at the high end of my expectations"
I'd say couple of quarters ago it began to exceed what I was expecting so I changed my expectations and it's – but they're doing a great job
I think we know the use cases where it's very competitive and I think that it continues to – they continue to operate at the high end of what I expected from them
"On the question relative to SD-WAN, I think you nailed it right"
Our customers – and we've talked about this for a couple of calls – our customers have been trying to assess what this SD-WAN architectural transition looks like
We've now taken customers through the road maps of what they can expect and how to position the different alternatives that we have and how those portfolios are going to come together over the next 12 to 18 months
So I think that it is a by-product of the SD-WAN discussion
"And I would expect that we'll start to see customers move somewhat this quarter and then in the second half of the year, I think our customers will continue to begin to deploy some of these solutions"
"So, again, happy with where we are relative to the positioning of the different platforms"
But what the customers are doing right now is they're basically becoming accustomed to the platform
I don't think we need to make any changes right now because the attach rate of the most advanced subscription offer is at the very high end of what I would have expected
So I think we're very pleased with where it is right now
"And assuming we execute on the value and the innovation that our customers continue to gain from that, then I think that we'll begin to see them then buy the subscriptions on some of their install base as well"
"So I think that the thing that is resonating with the customer is if you're looking at the environments that they're all beginning to operate in, they're operating in an environment where they have multiple SaaS providers, multiple cloud providers"
They've got their private data centers with applications running
They've got now edge connectivity with IoT coming in
"And so, the robustness of an architecture that they have to have that protects across the network, across the endpoint, across the cloud is really what I think is differentiating it"
"And we've also – we've been on a multiyear journey of selling software and subscriptions against the threat intelligence and the malware intelligence that we have, and I think that's what's continuing to pay off"
"So I think it's resonating with our customers and it's an architecture that we continue to innovate on, we continue to expand on"
"And I think that's certainly helpful, and just we're seeing positive feedback on the launch"
"I think that if you look at some of the performance we saw around the world, to your point, in Europe and Asia we've talked about Huawei's activity over the last couple of quarters, I would say that our teams have been very focused on it"
] launch that we did in June really changes the discussion
So they continue to be very tough but we think that competing on the price of the box upfront is something that we can shift over the next couple of years
"So at our Financial Analyst Conference this summer, we articulated a long range guide in line with what you just described"
We're going to have quarters that are going to vary from that but that's definitely our long-term objective
"And I think our teams are focused now on what is it we need to do for the next wave of this architecture? Once we have this architecture built where we can actually defend and apply real-time defense against known threats, we can learn about a threat through malware and e-mail, and we can protect against it in the network, in the cloud, in the devices at the endpoint all at the same time"
So the teams are working hard to continue to drive innovation there but also looking at what other elements can we fit into this architecture over time
And I think that's how we think about the long-term guide
"And, Jim, just the market segment perspective that is probably pretty clear"
"Our largest enterprise customers, which the way we define it is really just is an organizational segment that we have"
"We did see – we saw negative mid single digits there, which you saw in the slides"
Our enterprise customers what I would tell you is that they're some of the biggest customers who take the longest amount of time to evaluate new platforms and new capabilities like The Network
So we're actively in those discussions with the enterprise customers
And our commercial customers tend to just move more quickly than others
"And then finally, on the public sector side, which we didn't talk about a lot, I think the big call out there I would say is that two quarters ago we talked about the pressure in the federal business"
Last quarter we said we saw it improving and what I would tell you is that in this quarter we saw the year-end it seemed fairly normal
So that's probably the commentary I could provide on the market segments
"First off, we are committed to executing on this vision to deliver a highly secure intelligent platform for our customers' digital business"
"First, we are fundamentally reinventing networking with our intent-based networking platform"
"We intend to further accelerate our leadership here extending intuitive technologies across the broad portfolio that we have while increasing application, visibility and automation"
"Secondly, security is fundamental to everything we do"
"You can't build a next generation digital business without a comprehensive security strategy across endpoints, network and the cloud"
"Third, it is very clear that it's a multi-cloud world, and Cisco is in a unique position to help our customers navigate this by expanding our multi-cloud portfolio and extending our web scale partnerships with strategic cloud providers"
Our Google partnership is an example of the work we are doing with all of the large web scale providers
"Fourth, we're unlocking the power of the data with advanced analytics such as our solutions AppDynamics, encrypted traffic analytics and Talos threat intelligence"
We're also embedding AI and machine learning technologies across the breadth of our portfolio
"And lastly, we will continue to deliver a more enhanced customer and employee experience through our broad Collaboration portfolio including our intent to acquire BroadSoft"
I'm excited to join you today in my new role at Citrix
"Up until now, we've been trying to gradually manage this move to a more subscription-based model, but the rapid shift in demand from customers is showing that we need to be much more aggressive and speed up this transition moving forward"
The faster-than-expected shift is a strong indicator of our customers' belief in our long-term vision
They want their infrastructure to run in either a hybrid or a SaaS model
Our holistic approach gives customers the confidence that they can transition to the cloud at their own pace with Citrix and have the future flexibility to access cloud-based innovations that their businesses are going to need
"We're currently working on a multiyear plan including capital, and we expect to share these details and metrics on the Q3 call"
Citrix has a mission that has remained largely unchanged for nearly 30 years and we have a strategy that is clearly resonating with our customers
"Our desktop and app business is accelerating because the cloud and hybrid approach gives customers the flexibility they want, along with the growing need for security-use cases"
"We're seeing this especially with large competitive wins worldwide, particularly in education and healthcare during Q2. For example, a large U.S"
"health system and a major Korean university chose Citrix to better manage their cloud transitions while maintaining the security and compliance needed, and alleviating growing concerns around ransomware and malware within their organizations"
Organizations are clearly going to evolve their networks to a more software-defined perimeter approach over time
"And since NetScaler is a software platform, we're very well positioned to meet our customers' needs well into the future without forcing them to go through a complex and expensive hardware refresh cycle"
"This quarter we saw many large joint customer wins for Citrix Cloud with Microsoft Azure driven by the strength, usability and simplicity of our solution"
"Arizona State University, for example, which is currently undergoing a hybrid cloud effort as part of a new Cloud first IT initiative is just one large example"
"government regulations, and they cited Citrix Cloud on Microsoft Azure as the single easiest and most secure way to mobilize their workforce and meet their regulatory compliance needs"
And the work that we're doing is extending to other partners as well
"This quarter, we announced an expanded partnership with Google to bring Citrix Cloud's desktop and application delivery and NetScaler CPS to the Google Cloud Platform, and to better integrate ShareFile and the security and control that we can offer with the full G Suite of solutions"
"And just this week, we'll be announcing the availability of Citrix SD-WAN 9.3 with an extended partnership to make it available on the AWS marketplace"
"From a competitive standpoint, we had more than 1,100 competitive wins in our core areas"
"For example, M&T Bank replaced a major competitor of XenMobile because of better user experience and features like single-touch desktop access and our ability to securely integrate with our existing NetScaler infrastructure"
"In fact, several customers also replaced networking competitors with NetScaler, including Telecom Italia, citing superior performance, usability, stability and overall scalability as the driving factors in these large deals"
"Going forward, we're going to manage both the transition and efficiencies in a balanced manner"
"We have, clearly, work to do, but you'll see our response over the next several quarters"
"Additionally, we're working hard to align the entire company towards a multiyear cloud transformation, and as I said, after Q3 of this year, we intend to share new metrics and our multiyear plan so everyone can better understand the rapid pace of our evolution, the demands we're seeing from our customers in our hybrid cloud vision"
The remaining 15% was coming from an installed base that was just doing a migration
"So at this point in time, the vast majority is net new"
"I mean, we haven't had any change in leadership across our R&D and innovation engine"
"In fact, it's stronger than it has been in many, many, many years now"
"And the driver there is really just to allow us to move faster, to deliver integrated solutions both on-prem and the cloud, and I feel really good about our roadmap"
"Just released like, for example, a NetScaler software web gateway, which is a web security solution with user behavior analytics built into it"
So we're working hard across all those fronts and I think you should expect to see more innovation coming from us as you go forward
"I mean it's just to remind everyone, we announced a voluntary migration in the first half of the year"
"In the second period, roughly 40% of customers that were renewing chose to renew on CSS, versus their option to renew on subscription advantage"
"The uptick in price we saw on an ASP basis was about 19%, so it's moving exactly as we expect"
The mandatory migration starts right now in the beginning of Q3. So this is the part where we're being just a little bit cautious to make sure that we understand any potential impact to renewal rates or ASPs
"But as of right now, we haven't seen any degradation"
Our challenge is just make sure that we're out and educating customers along the way
"So feel really good, good progress and we'll see over the back half of the year"
"Second, in terms of – you had a number of questions in there, and I'd probably bucket all those in the context of our multiyear plan"
"I mean, the leadership team right now is working aggressively to lay out what is effectively a 2020 plan"
"And within that, we're looking at the pace at which we want to shift to a subscription-based model, both in a hybrid fashion and in pure SaaS"
We're doing that over the course of the next three months
We see opportunities to not only run the business more efficiently but to actually deliver an acceleration of customer value by migrating them to the cloud
"And as I said to Rob's question, that's going to accelerate our ability to innovate and deliver tightly integrated solutions on a faster time scale"
And that's important because frankly that's what customers are looking for right now
"Kash, let us do the work, and then come back with some real specifics"
"And as we go into next year, we're going to be much more programmatic in terms of how we're driving alignment with both our field-facing teams as well as our partner network, how we're aligning the offers and we're aligning incentives"
So that's going to impact the P&L in the short term
"I mean, we didn't get into a whole lot of details on the prepared remarks, but when you look at networking in total, there's a couple of things that I would point out"
"First, in the aggregate, there's a little bit of a headwind, about a $10 million headwind from some portfolio rationalization we did a year ago"
That was the last big quarter for ByteMobile and so that one is effectively zero right now so we got a little bit of a headwind there
The fastest-growing part of the networking business has been in pure play
And part of the reason there is just simply what we've said for the last several quarters
We've got a software-based platform that allows customers to have much more flexibility
"We've got a number of different innovations that we've brought forward like MAS, our Management Analytics System, which provides a nice competitive differentiator"
"We've created pooled-capacity licensing so customers can share capacity across their cloud and prem models, and a number of other innovations is allowing us to grow pretty aggressively"
"So that's what we're doing so that's the primary strategy, expand the base and drive share, and we've been successful over the last couple of quarters doing that"
"Mark, it's an imperfect number so that's the caveat"
"If you were to look at all things that were delivered via subscription and you were to change that to a perpetual license, it's probably approaching $100 million for the year"
But I want to put the caveat on that that there will always be some level of subscription
"So it's a little bit apples and oranges, but that's an approximate number the way to think about it"
Best way to measure the business in the short-term is look at the other metrics
"So I don't know the exact number off the top of my head, but roughly it would be 60%, maybe as much as 65% of the renewal pool would come up in the Q3, Q4 timeframe"
"I'm not exactly sure what you're talking about, Kirk"
"As we've talked about, a lot of work went into the U.S"
"EMEA was up mid-singles, APJ had the second double-digit quarter in a row, and those teams are really coming together and starting to jell"
"I'd say in terms of the actual focus from the teams, we've made it comp neutral in terms of selling subscriptions versus perpetual license for the most part, and so we're not really trying to drive one or the other"
"Obviously, as we go through a more longer term transition, we'll be thinking about that in more ACD terms versus TCD"
"But that's a transformation that's 2018, not 2017."
I think the thing that's masked that for a lot of people as they looked historically is how much was coming off of SaaS from the GoTo properties
"Besides that, we're just looking at things coming off the balance sheet plus the current bookings forecast"
We are building up more and more off the balance sheet so that will provide a cushion over time as well
The place where you're going to see that hit the P&L is most directly through the SaaS line
So that's a place you'll start to see that come back in
"In terms of OpEx, I don't want to get into any details"
"Like I said, we're looking at prioritization and where we're going to drive spending in the back half"
"Yeah, Josh, I can't talk to the individual one-offs"
"I mean, there's always situations where every large deal as you'd imagine is highly competitive"
"We don't lead on price, historically, so I'd have to understand more detail to give you a specific answer"
"But I looked at ASPs coming out of the quarter, and for the most part, ASPs are unchanged as to where they were a year ago"
"At a micro level, yes, it's a hypercompetitive environment right now"
"I mean, there is almost never a transaction over a couple hundred thousand dollars that isn't a head-to-head bake off with some other competitor"
We're going to win on integrations and features and performance
"We will get aggressive on price if we have to in some circumstances like everyone will, but that's certainly not our strategy"
So just to work collaboratively with the leadership team
"I wouldn't anticipate that you're going to have any large announcements from this, but it's just in the context of us transforming the business and doing it as quickly as we can"
We hope that everyone is excited as we are for the next great chapter in Citrix's transformation
"We're driving customer value, and we're really looking forward to sharing the details of our multiyear plan with you at the end of this quarter"
"Like other members of our leadership team, I spend much of my time with our strategic clients"
"And I listen for new ways to add value to their businesses, including how to help speed their transformation journey"
"Our clients of course pay close attention to the rising expectations of their customers and the competitive moves of their peers, so they know how fast things are changing and how easy it is to be left behind if their business, operating, and technology models are not digital through and through"
We're responding by investing in the build-out of repeatable industry-specific solutions that we can deploy across our practices
These platforms solve pressing problems and deliver measurable results
"Frank talked about clients needing to digitize their entire enterprises, so let's look at a few examples of how they're deploying digital at scale"
"You may recall that Onvida also serves as the foundation for the physician and patient communication network of LifeBridge Health, a client I talked about last quarter"
We are now in the process of onboarding their thousands of B2B customers as we move more than 25% of their phone transactions to digital channels
Another area where operating models need to be modernized and automated is workflows
"To bring intelligence to these workflows, we've developed and are deploying our proprietary digital automation fabric"
"This fabric combines image recognition, artificial intelligence, machine learning, and process automation"
Here are two examples of clients applying our advanced framework
"The result, our implementation reduces staff by a third and can pass (14:55) more than 200 million pages a year with data accuracy that exceeds 99%"
"And for a global property and casualty insurer, our deployment has substantially reduced unnecessary claims and saved tens of millions of dollars"
We continue to expand this framework to other industry solutions
Now I want to turn to the financial performance of our business segments and geographies
"Broadly, we've seen a healthy pickup in demand across our payer clients"
These competitive pressures persist despite continued uncertainty about the ACA's future
"We've invested heavily in our healthcare practice, creating a differentiated offering that has positioned us well to meet evolving client demand"
And we're actively helping many of our clients manage through this transition
Our clients in CMT are focused on creating a differentiated experience that delivers personalized content to their customers
"It uses human intervention, machine learning, and digital platforms to ensure the right content is viewed by the right person at the right time and place"
Now let's look at our performance in emerging geographies
Europe was up 5.7% year over year after a 6.1% negative currency impact
This co-lab combines human-centric design with digital technologies to enable clients to deliver engaging new experiences for their customers
"In recent calls, we've talked about Cognizant's evolving workforce and delivery"
The engines of our digital practice areas are our talented and deeply skilled professionals
"To ensure they stay on digital's cutting edge, we're investing tens of millions of dollars this year to continuously deepen and broaden their skills in areas such as analytics, artificial intelligence, data science, and digital security"
Cognizant is also building skills and capabilities in local communities where we operate around the world
One way is by partnering with educational institutions to establish and fund retraining programs in high-demand digital technologies
"For example, we partner with Per Scholas, a national organization to create a job training program in the south Bronx"
"It's designed to help New Yorkers access career opportunities in tech, and we plan to hire at least 350 of the program's initial graduates for our client sites in New York's five boroughs"
"We've also been developing similar training programs in Des Moines, Tampa, Phoenix, and Charlotte as well as internationally"
"For example, in Singapore we're partnering with educational institutions to provide the local community with STEM-related training"
"And in Switzerland, we run an apprentice program that trains students in application development and testing"
"In short, our company runs on talent, and we remain committed to attracting, developing, and retaining the best talent in the world"
"To wrap up, we're driving digital scale by building repeatable industry-specific solutions that enable clients to add significantly more value to their businesses"
Now I'll turn the call over to Karen to cover our financial performance
"Look, I think when you look at healthcare, we've invested very heavily on our healthcare practice, and it's really created a differentiated offering which has positioned us well"
"And if you look at the entire practice, with what's happening with the healthcare ecosystems, with the providers, the payers, and the pharma, with all the collaboration that's going on there, and these are all big practices for us, so I think that we're positioned very well in healthcare"
So there's still some uncertainty with what happens with the ACA
"But overall, I think this year and going into next year with the position we are, we're well positioned"
"Regarding some of the BPO, we haven't seen any impact on that at all"
"Where the challenge is, is a little bit on the banking side"
Where we're challenged is on a couple of the large money-center banks
The good news here is obviously we're in a better position than I think we were at this time last year with them
"Now as these projects become larger scale enterprise initiatives, I think we're well positioned to benefit from that"
"But right now, that's our focus area right now in terms of continuing to invest and continuing to be well positioned for those large enterprise transformations"
"Moshe, the large money central banks obviously have both a European and U.S"
So I think you're seeing softness there because of the discretionary work not kicking in as fast as we would like it
"Now again, like I said, we're engaged in a lot of the digital initial work with those banks"
"And as these banks continue to get healthier, I would expect that you would start seeing some more of the enterprise transformation initiatives that we're expecting"
"If you look at it from the business to the operations to the technology layers, I think there are very few companies that can help these banks"
We could say that as we continue the process of building out regional centers in the U.S
"as opposed to our historical model where folks have been more onsite in our client locations, I think that that will help drive utilization actually higher, because when we have people in a physical location, our ability to redeploy them across clients and so on and so forth, the project then becomes higher"
"Our journey of building out regional centers is well underway, but we have some ways to go on that"
"So I think as regional centers become a greater portion of our overall onsite workforce, I think that will be a contributor to being able to take onsite utilization up higher"
"And I think, operator, we have time for one more question"
"Good morning, everyone and thank you for joining us today"
Three of our four business segments were strong contributors to our performance
"Netcentric, a leading independent Adobe partner in Europe and a leading provider of digital experience and marketing solutions for some of the world's most recognized brands"
"Now, we're in the business to help our clients adapt, compete and grow in the face of continual shifts and disruptions within their markets"
"Therefore, we've systematically built out significant capabilities to enable clients to transition from the physical to the digital world"
Today making that shift has become mandatory for them
"So we work with them to transform their business, operating and technology models simultaneously"
This three layer transformation is what we mean when we talk about digital at scale
"In prior calls, we've discussed how we enabled this transformation, applying our deep industry knowledge, innovation, advanced technologies and consulting expertise"
"More recently, we've also been emphasizing our client co-innovation centers and our platform based software and solutions"
The result of developing and integrating all these capabilities and intellectual property is that we are turning Cognizant into a different kind of company that's envisioning and building the digital economy
"And this morning, I'd like to highlight how this new Cognizant is resonating with clients and winning in digital"
"The best place to begin is with a few client examples of digital at scale, delivering a competitive upside for Cognizant"
"For a US car company that's preparing for a future of ride sharing and driverless cars, a team of consultants, developers and social scientists from Cognizant and ReD associates help to reimagine the relationship between driver and automaker"
And we also helped a leading life sciences company bring to market new drugs with proven therapeutic benefits for smaller patient populations
"We assembled a team of doctors, nurses, pharmacists and technology and design consultants to drive efficiencies in the clinical development process and apply digital marketing techniques"
"As a result, the client was able to achieve the goal of bringing new therapies to even relatively small patient populations"
"Absent this new approach, these drugs might not have been economical to develop and market"
The upside for Cognizant is that most of the world's companies are now dealing with these digital at scale challenges in one form or another
"These three practice areas, which run across our business segment, mirror our client needs and the parts of their enterprises they need to transform"
And Raj will talk about how our digital practices are progressing in solving client's current and emerging challenges
"Within these practices, our value to clients hinges of course on the depth, breadth and currency of our knowledge"
"So we've been aggressively building high-end digital skills in areas such as data science, design thinking, cyber security, the Internet of Things, artificial intelligence and automation"
"So, we combine these skills with our industry expertise to speak the language and understand the core processes and technologies of every industry we specialize it"
And we draw on this knowledge to build specialized software platforms and industry specific solutions to quickly create new value for clients
"All of these technologies and platforms provide the benefit of scale, enabling Cognizant to develop repeatable offerings that can be used by multiple clients across multiple markets"
"While digital at scale is a heavy lift, Cognizant has the resume to execute this transformation successfully"
It starts with a high level of client trust that encourages and enables the successful co-innovation of solutions with clients
But building digital experiences for the front end of a client's business is not enough
"We have the deep knowledge to help clients reengineer, digitize, manage and operate their core business processes and build software platform for specific processes and industries"
"We couple this with a mastery of the technologies, software and tools to develop digital solutions as well as the ability to combine digital technologies with clients' heritage systems and applications"
"And we provide much of this capability to clients using our highly efficient and reliable global delivery model, which works at scale"
Cognizant bring this entire set of capabilities to the table
That's what continues to differentiate us in the marketplace
"And by integrating all of these capabilities and intellectual property, that's how we're turning Cognizant into a different kind of company that's envisioning and building the digital economy"
And now over to Raj who will talk about the work our three practices are doing to drive digital at scale for clients and then review our business segment performance
I think we're roughly right on track right where we expected to be
And I think we continue to make great progress there
And I think we've demonstrated there that we're well on track there
"This year, if anything I think we're a little bit ahead of where we thought we'd be"
"And we'll continue to, you know, we feel very comfortable as Karen said in her prepared remarks with a target of 22% by 2019. And I think we'll just keep executing on that"
We are already doing a considerable amount of work
"Look I think Arvind, I'll turn it, I'll let Raj answer as well, but it's Frank"
"Look I think changes is, change plays to our strengths actually"
"I think we're very well positioned both at the business model, the operating model and the technology model level"
"So as these changes come to healthcare given that we have such a strong portfolio of assets both software assets, intellectual property in the form of our people and capabilities"
I think you put that together and we're very - we feel like we're very well positioned for healthcare going forward
We do a tremendous amount of marketing work today for our clients across all three practice areas
"So in Cognizant Digital Business, we're doing marketing work that relates to content, content creation, marketing, marketing strategy, channels those kinds of things"
"And in Cognizant Digital Systems and Technology, we're doing a lot of marketing work that you can think about in the broad area of marketing technology, right"
"So across all of our three practice areas, we're doing a significant amount of marketing related work"
"So we'll run them relatively independently, let them continue to do the great work that they've been doing for their clients"
"Yeah, I think what I was referring to when I talked about repeatable is the sort of the solution packages and solution offerings that we're creating which we've been talking to you about in the past things like our BPaaS offerings and so on and so forth"
We've always as a company tracked repeat business from our existing clients
"And I think that's where you'll really start - where you really see it continue to play out is repeat business from our existing clients because that's going to be the metric that we focus on is to say, are we continuing to be relevant to our existing clients"
"And to be relevant to our existing clients, we've got to continue to innovate, we've got to continue to find new sources of value and that shows up in repeat business because every year or every period, our clients are assessing the work we're doing for them and they're choosing to give us new work based on the relevance of that work"
So the metric that we use internally is repeat business from our existing customer base which is the metric we've been tracking from the beginning as far as I can remember
Look everyone thanks again for joining us today and thanks for your questions
We're pleased with the results this quarter and I look forward to speaking with you again next quarter
"As we noted in today's release, our fourth quarter core results reflect the sequential and year-over-year improvement we expected and we're very pleased with our strong operating performance"
"Before I get into the details of our performance and results, I wanted to briefly note that the primary difference between our GAAP and core results for the fourth quarter is, again, a non-cash mark-to-market adjustment"
"During the fourth quarter, the yen weakened which resulted in a GAAP gain of $1.1 billion, when we marked the contracts to market, as required by GAAP"
"To be clear, this mark-to-market accounting has no impact on our cash flow"
We remain very pleased with the results of our hedging program and the economic certainty it delivers
"Since its inception, we have received cash totaling $1.3 billion under our hedge contracts"
"For the investors who have additional questions on the mechanics of the contracts, please refer to the tutorial on FX hedge accounting on the digital media disclosure section of our investor relations website"
"And as always, Ann and her team are available after the call"
"The more significant difference between GAAP and core results for the full year was the $2.7 billion benefit from the strategic realignment of Dow Corning, that was completed in the second quarter"
"As Wendell noted, this transaction provided tremendous value for our shareholders"
"Turning briefly to the balance sheet, adjusted operating cash flow for the year was $2.75 billion and we ended the year with $5.3 billion of cash, approximately 40% of which is in the U.S"
"Now let's look at the detailed segment results and the outlook for each business, beginning with display technologies"
The fourth quarter display market and our results were strong and in line with guidance
"Industry dynamics played out, as we said they would, in October"
The fourth quarter is the strongest season at retail
"Our customers, the panel makers, kept their utilizations high to meet this demand"
Our fourth quarter glass volume tracked with the market and was up low teens year-over-year
Supply chain inventory exited the year at a healthy level and panel makers' inventories remain lean
"Fourth quarter LCD glass price declined moderately sequentially, in fact, more moderately than Q3. For the full year, glass demand grew in the mid-single-digits"
"Our volume for the full year grew mid-single digits, in line with the glass market"
"Now, looking into 2017, we expect the retail market, as measured in square feet of glass, to be up mid-single digits, driven primarily by demand for larger screen size TVs"
"First, TV units at retail are expected to be flat, or possibly up 1%"
"Second, TV screen size should grow about 1.5 inches, consistent with the trend of the last three years"
"And fourth, the value chain enters the year with healthy inventory levels and we think inventory will again be healthy at year-end 2017, expanding during the first half to prepare for a seasonally-strong second half, when inventory will contract"
"Taken together, we expect our demand to be up mid-single digits in 2017, in line with the overall market"
"Specifically for the first quarter, we expect the glass market and our volume to be up mid-teens over last year's first quarter"
"As context, late in Q4, Korean panel makers began to take down some lines, to convert the flexible OLED manufacturing for smart phones"
"New fabs are coming online over the course of 2017. Therefore, panel capacity will increase throughout the year"
"We expect to maintain our worldwide share position, due to our broad and diversified customer base"
"At this point, we already have more than 90% of our 2017 volume under contract"
"For Q1, we expect the sequential LCD glass price declines also to be moderate and very similar to the decline in the first quarter of 2016 which was the best for our first quarter in the past five years"
"Keep in mind, Q1 is typically the quarter with the largest decline for the year, as annual supply agreements are finalized"
"These include fiber market demand exceeding market supply; key industry leaders in telecom investing in optical solutions, particularly as they look to the next generations of network capabilities; and, finally, industry consolidations that favor some of our strong business partners"
"For this business, it's a tale of two end markets, in very different places"
The light duty automotive market grew mid-single digits for the year
Net income for the fourth quarter declined in line with our expectations
"Let's move to specialty materials, where we were very pleased with the performance"
"During the quarter, we saw rapid adoption of Gorilla Glass 5, as OEMs used it on more devices, a testament to our market leadership"
We will certainly keep you posted as the year progresses
"As for our innovation program in pharmaceutical packaging, we continue to make progress and look forward to sharing milestones as we can"
"Now, let's turn to a few more details on our first quarter outlook"
"Those details should help you understand our view of the first quarter, but we wanted to provide a few insights regarding the full year as well"
"We've put a schedule in the appendix to the slides for this call, that will walk you through the comparison"
"Further, we expect our effective tax rate for full-year 2017 and the first quarter will be approximately 17% to 18%"
"Second, to support the success of our innovations in mobile consumer electronics"
"Third, to continue work on the gen 10.5 glass manufacturing facility, adjacent to BOE and display"
"You may recall this project exceeds our target of obtaining $2 of every $3 from others, when we invest in new melting capacity"
"And, fourth, to add capacity for the new gas particulate filter business in automotive"
"Now, finally, I wanted to comment on our plans to return at least $12.5 billion to shareholders under our strategy and capital allocation framework"
"Through year-end 2016, essentially the first year under the framework, we returned $6 billion"
"In February 2016, the Board increased the cash dividend by 12.5%"
"In 2017, as we did in 2016, we planned to continue repurchasing opportunistically, reflecting our view that Corning remains undervalued"
"Of course, the timing and amount of repurchase activities always depends on a variety of factors"
"In addition, we expect the Board to approve an increase of at least 10% per share in the annual dividend rate, in line with the framework"
"Let me close by saying that we're very pleased with the strong fourth quarter results and our positive momentum coming into 2017. Overall, we feel very good about our progress against our framework and the rich set of opportunities ahead of us"
We did see the data center demand pick up in the fourth quarter
It was higher than Q3 and it was also higher than last year
"I think what's important to remember about data center demand is it will be lumpy, because of the project nature of the business"
"A lot of that, of course, driven by fiber of the home and carriers"
"I think you can think about that, roughly half of that coming from the issues we had last year and half of it being the strong market that we have"
"It just doesn't make sense to think about it on a quarter in, quarter out basis"
"And then, Rod, on your last question on IT and screen sizes, I think at the end of the day, we don't expect it to have a big impact on the market"
"We agree, I think, IT is stronger than it has been over the last couple of years"
"But we still think that, you know, the units themselves, relatively flat, screen size relatively flat"
"It may be a little bit of a positive contributor, but I think we would still end up in that range of mid-single digits in terms of the glass market"
"Clearly, Gorilla Glass 5 adoption was strong in the fourth quarter"
"I'm not going to give you the percentage of what it was, but it was strong in the fourth quarter and we expect it to continue to accelerate as we go into 2017 and that's positive, both in terms of the volume itself and of the premium price"
The payment was with a customer and I'm not going to disclose what development work we were doing with that customer
"But I think, you think relative to what your expectations were and the difference that explains most of it"
"In terms of price declines and the amount of volume we have under contract, usually as we enter into the year, we have a high percentage under contract"
"So 90%, I think, was important for everybody to remember, that's the way this business works"
"And then relative to price declines more moderate, somewhere in the 10% range is how that would work out"
"I think that when we entered into our exchange contracts originally in 2014, we said they would be for three years and that we would stay at a constant rate of 99%"
"We have hedged about 70% of our exposure from 2016 to 2022 at about a $1.06 rate, but we're not ready to talk about the constant rate for 2018 yet, in part because we're looking at either other opportunities for us to hedge and we're also looking at different ways that we might hedge, as opposed to the FX contracts that we're using today"
"So I think when we made the FX rate change previously, we did it towards the end of the year"
"And I think that's probably the timing when you would expect us to talk about it again, or maybe even at the beginning of 2018."
And the start of the quarter was our Japan region with a very solid year-over-year increase
The initial customer reaction to the announcement has been excellent
"We gave examples of new opportunities including the explosion of SSL encrypted traffic and the need to intercept, inspect and orchestrate encrypted traffic at speeds and volumes never before required"
"We also spoke about customers emerging desires to have consistent security policies across traditional on-premise data centers as well as private and public clouds, as the movement of application workloads to cloud architecture accelerates"
"We experienced many project wins last quarter, which reinforced our view of these expanding opportunities"
"This implementation allowed them to instantly orchestrate, provision and dismantle ADC resources and concert with our existing Cisco infrastructure"
A Fortune 500 discount retailer with a large online and mobile clientele required an improved security perimeter for its online web presence
"They also required a solution to deal with the onslaught of encrypted ECC traffic triggered by the recent adoption of this encryption method by companies like Apple, Google and Microsoft"
This customer deployed six VIPRION chassis in combination with a Silverline deployment and this was anti-DDoS an encrypted traffic management solution
"In a 5 million plus transaction, a large Asia Pacific Telco operator initiated a 5 year program to virtualize 100% of its IP transport network and chose F5 as its primary ADC provider"
"The solution consisted of F5 virtualization software licenses as well as our carrier-class firewall, our WAF and access management software modules"
We will be demonstrating this solution as well as many others at Mobile World Congress next month in Barcelona
We are continuing to experience momentum in our customers’ effort to lift and shift from traditional on-premises to private and public cloud environment
"This past quarter one of our long-time North American customers, a leading learning management system provider began such a transformation"
"Working together with AWS, F5 crafted a dynamic and secure traffic management solution utilizing F5’s WAF and firewall capabilities in the AWS computing environment"
"This enabled our customer to easily repurpose many of their legacy data center applications to the public cloud without compromising the mature security capabilities they enjoy with F5. In recent quarters, we have seen growing interest in our Internet of Things capabilities and have enjoyed successes with several Fortune 500 customers"
"F5’s leadership and scalability, programmability and diverse protocol support is ideal for managing complex IoT requirements"
The first two offers available in the Herculon portfolio are the Herculon SSL Orchestrator and the Herculon DDoS defender
The Herculon DDoS Hybrid Defender offers customers an unparalleled multilayered defense against volumetric and pervasive DDoS attacks
This is accomplished by developing high performance hardware on-site and enriching its capabilities with intelligence gathered from our cloud-based Silverline scrubbing centers
This hybrid approach improves time to mitigation in scenarios where website and application availability are crucial to customer interactions
By their very nature WAF deployments can be complicated
"We plan to ship TMOS 13.0, known internally as the Daytona release, in this current quarter"
"Daytona is a major release with a host of new functionality, including our high-performance 40-gig virtualization; a sophisticated but easy to install iApp for our SSL Orchestrator; VCMP support for the 100-gig blade, which should extend the 100-gig blade solutions to enterprise customers; and IoT/MQTT protocol support"
We also plan to deliver our unique application connector solution in Q2. Our application connector enables customer applications to seamlessly access multiple public cloud infrastructures directly from private clouds in on-premise and/or co-lo data centers
This provides a truly flexible and elastic hybrid cloud solution to our customers
"As far as the fiscal Q2 outlook is concerned, Andy outlined our guidance for the current quarter"
We have made good progress in all our key strategic initiatives
"We had a really, really solid performance there where we saw a lot of wins with the GI firewall replacing the existing – and I’m talking multimillion-dollar type wins"
"We saw across the board the 100-gig board had a real big jump up in terms of the number of cards shipped from the previous quarter, and then I talked about things like IoT where we think that’s pretty good, and we’re looking forward – we are actually going to have quite an exciting event at Mobile World Congress, showing a lot of customer-type solutions and partner solutions"
"As we said in the script, we’re very, very happy with the way that – the reception from customers, A, from the ones that we announced towards the end of Q4, and then for the ones that we announced at the end of Q1. We even saw quite a strong pickup towards the end of December across the board, and I know that the field are quite excited about it"
"And if you do the math in that, you can see I’m probably being reasonably conservative in the $400 million number because that’s typically in the 90s"
So that was really just a measure to give everybody a feel for how much software we’re actually doing
"I don’t know if that was a slight amount of Osborne or not, who knows"
"But we saw that picking up to normality, so no real big – not much to talk about there"
"And then when we look at the pipeline, we think we’re going to see much of the same as well"
"No, no, DevOps is and – when I – this is John"
"That’s really, really aimed at the DevOp community and I mentioned about F5, we’ve got bunch of beta test going on"
So we think that’s an opportunity moving forward
"And then also in the past we’ve talked about what we’ve been doing with iRules, with iRules LX and with iApps LX, again is very aimed at the DevOps community"
"So that in fact, we effectively the programmability is right in their center of excellence in terms of anyone to do that"
"So that those more and more solutions on the F5 platform, which so long story short, I think we do see DevOps is an opportunity"
Do you want to share anything Ryan? Ryan Kearny Yes
"Our pretty big focus areas and things were really going to be enabling many more kind of DevOps, architectures and environment"
"I bet as a lot of people smiling that one, everybody seems to smile when we talk about retire again"
But the process is actually progressing really well
"Obviously we’ll let you know ASAP when we get something to an own, but meanwhile my focus by a mile is focusing on the business and delivering another quarter, this quarter, another good quarter"
"But also by integrating with your firewall and our WAF capability initiating intelligence, we think that a massive differentiator for us"
"Because of our installed on premise base, installed base so big we can get more and more intelligence for the cloud-based solution"
I mean this is – I’m going to give you an answer
"It’s a little bit dangerous, because as an assumption you can’t take us to the bank"
"We think we’re going to be very, very similar from a percentage point of view, I mentioned in terms of this current quarter versus the previous ones"
"It typically starts at 25%, gets up to about 80% by the end of the year"
"There’s two things we’re looking at, and I think hopefully taking a conservative view is that EMEA has seen a few tough quarters here, so until we’re confident of success there, we’re going to take a conservative stance on that"
Security was double digit and we feel reasonably good about that
But they were the two main areas that we took into account
"I think, frankly, it’s probably a combination of macro and we could probably improve execution in certain areas, probably both"
"We see that as an additional area to where we are today with our core business, which obviously is mostly north/south traffic, mostly application – optimizing applications in that environment"
"So, I don’t think there’s going to be a clash here"
I think it’s more of an additional market type opportunity
On budget – budget flush is always a tough one to actually measure
"I did mention that we saw a little bit of a lull, which could have been linked to the iSeries announcement, and then we saw a strong close at the quarter and some of that can be budget flush, but I wouldn’t say it was – it wasn’t incredibly significant"
"I’m sure we saw some, but I wouldn’t factor it as a big factor in the quarter"
"On the first one, I did mention that we had a pretty solid quarter last quarter with the security software solutions, which obviously is attach rate as well"
We expect iSeries definitely to give us more attach rate; the performance is designed to do that
"Yes, I mean, we have become more and more positive, Paul, over the last year in particular in terms of the opportunity of the public cloud"
And that’s one of the reasons we’ve been giving a lot of customer examples on that basis
So we’re working in the field with the AWS folks in the field; we’re doing the same with Microsoft
"We’re viewing it as an opportunity, and in fact, I highlighted it as one of the three emerging opportunities that…"
"And also remember the studies we’ve done in terms of hybrid clouds, I mean, hybrid clouds is all over the place from the customer perspective"
I can’t remember the exact percentage; I think it was in the 80 – but it’s a very high percentage of the responses we got where the large customers that we sell to are going into hybrid cloud environment
"So we expect it to be strong, but this is far too early"
"With François new to F5, my prepared remarks for Q2 are a bit expanded and will flow as follows"
financial institution needed to provide secure access to third-party affiliates such as mortgage companies and credit card processors
Their decision to deploy VIPRION in an Equinix based co-location facility provided an extensible platform that can be used to lock their third-party affiliates to specific applications
The VIPRION solution also enables millisecond response times as they build and access applications in the cloud
"In EMEA, a large government agency launched a project that includes plans to go digital in every court and tribunal"
"The agency has license virtual additions of LTM, AFM and ASM, allowing it to operating applications seamlessly between on-prem and the cloud ensuring the same level of security"
"Customer response has been positive, and we continue to be happy with the uptick of the new platforms which was in line with prior appliance refresh cycles"
"We launched TMOS 13.0 during Q2, which includes a number of important new features"
"We also introduced new security features and functions, including OAuth 2.0 identity support and improvements to Behavioral DDoS, bot detection and fingerprinting"
"Also included with the launch of the TMOS 13.0 is the new, high-performance 40-gig version of our Virtual Edition"
"In addition, we continue to see steady demand for a 100-gig VIPRION blade, which now includes availability of our vCMP functionality"
"And, finally, we made our WAF solution available as a utility offering in the Microsoft Azure marketplace"
Switching gears to detailed results for the quarter
"And Japan, at 5%, was down slightly year-over-year"
"In Q2, we repurchased 1.1 million shares of our common stock at an average price of $138.16 for a total of $150 million"
Capital expenditures for the quarter were $9.6 million
"We ended the quarter with approximately 4,515 employees, an increase of 55 from the prior quarter"
"First, we will introduce our support for BIG-IP in the Google public cloud"
"We will also be releasing App Connector 1.0, which enables our customers to connect the public and private cloud application infrastructures, effectively extending their private cloud workloads into the public cloud"
"And we will release the next version of BIG-IQ, which further increases it's scalability and will provide our customers with enhanced visibility and analytics"
"As we look to the back half of the year, we continue to foresee momentum from the business drivers we outlined at the beginning of the year"
"For Q3, we are forecasting a GAAP effective tax rate of 34% and a non-GAAP effective tax rate of 32%"
Our non-GAAP EPS target is $2.01 to $2.04 per share
We plan to increase our head count by up to 60 employees in the current quarter
And we believe our cash flow from operations will be at or around $170 million
"We would like to thank the entire F5 team, our partners and customers for their support last quarter"
"And with that, we'll now hand the call over for Q&A"
So two things I'd highlight there related to guide
"Coming back to EMEA, the combination of those two, yeah, they would've had impact on the number we think"
"So that's why we're highlighting it, and it has our focus"
"And then, in terms of what we're seeing there, John, did you want to?"
We've highlighted this for a number of quarters now
"And I think taking it all in collectively, we looked at the picture that we thought we could expect from the business at this time and factored that into the guidance"
And that's resulted in the guidance we gave you today
"And you might have to help me if I miss one of your questions, but I think you started with linearity"
"And actually, early in the quarter, we felt pretty good about our start in January"
"As we got through the first month, we felt pretty good about it and then started to see it taper off"
"It was similar to the prior quarter, in that middle month kind of pull back and then landed okay, I would put it"
But we think we're going to see that get through Q3 and start to build after that
"So on the average deal size; I think last quarter we were at right around $110,000. This quarter it moved up a little bit, $125,000. So one of the things that is giving us confidence is seeing the average deal size move up a little bit"
But our $1 million plus size deals were actually pretty strong across the rest of the world
"And when we evaluate our business, that's an important metric for that"
So not necessarily the – I don't know that I can verify your 20%
"And so, when we look at it internally, we look at the uptick and start to watch when it gets – we're in the second quarter, it's in line in terms of percent with what we've seen previously"
"Your comment's very fair, it was more elongated before"
"And as I said, we have our guidance and we think we'll see that really start to kick in as we exit Q3."
"Well, you have our guidance for June, right? So I'm going to let that stand as it is"
"Then, I think as we go into Q4, which is our calendar Q4, has its own dynamics"
"And then really as we expand out 18 months to 24 months and if you look historically, that's when we've seen it be a real strong driver"
"I think specifically what we say, and this on the October call, is we gave general guidelines of guidance"
"And you have our guidance, as I said, for Q3. And then, we'll give guidance for Q4 and see where that takes us"
"Just one thing to add that we're not seeing – and I think it's important to highlight and was within John's comments was, the competitive landscape there for us hasn't changed"
"And the one area that we came away feeling good about is, competitively we feel as strong as ever"
"And that's why John was highlighting that we saw deals pushing, not deals losing"
"So we are readdressing everything from the structure, and how we're aligning resources and the view of the market coming through in our guidance, but I think that's worth highlighting on a positive note"
"And, yes, if you back into our guidance with what we give you, that might look like it's pulling back a little bit"
"I think, generally, we look at the broader trends that we're seeing across software security"
"We're not going to guide it specifically, but the trends are there and we like what we're seeing"
"We talk a lot about reinvesting that back in the business, and we'll continue to evaluate that on a quarterly basis as we see the opportunity present itself to us"
"But, broadly, the trends are there going in the right direction, and we like where we sit"
"And actually the way to look at this is, we're modeling it is, sequentially it was basically flat, up $0.5 million"
"And really the driver to that is, we did end of life a number of older boxes"
"I think they averaged over 7 years old and they did have strong attach rates to them, still renewal rates"
"The impact of it, frankly, I just – I missed the modeling on it and the impact was bigger than I anticipated"
"I don't think we're going to see anything in the short-term, and we'd advise you of that"
"So we saw that go up 10%, and the majority of that is annual maintenance"
So I would look at that too to balance the expectations
"But as I said, when we started, we now think, off of this new base, it's a bit of reset, but we're going to start sequentially growing again at least in rough dollar basis consistent with what you've seen in the past"
"On the overall demand environment for our core ADC solutions, the cloud continues to cause some degree of pause while certain customers evaluate their application architectures and deployment options"
"As customer needs evolve, we are accelerating our efforts to meet their requirement for our solutions across various deployment environments and consumption models"
"Taking a closer look at third quarter results, the EMEA theater again underperformed relative to our expectations"
"Conditions in the UK did not improve during Q3, and we saw headwinds in this market from a further slowdown in government activity"
"In addition, we are seeing several European-wide regulatory initiatives around data protection and usage creates short-term disruption in spending"
"In North Africa, a major telecom provider building out its LTE network is utilizing a VIPRION deployment to support multiple features, including Gi firewall, DDoS and application security"
"Within the enterprise vertical, attach rates for security modules remain high, and we had a number of wins around our web application firewall offering"
"As mitigating application level threats and ensuring policy consistency takes on increasing priority for our customers, security has become a key driver for F5. As it relates to supporting customers that have begun to make architectural decisions around moving workloads to the cloud, we are encouraged by the early signs"
It is clear from our conversations with customers that they value the programmability and flexibility that TMOS and iRules provide
federal agency as a part of their process to lift and shift some of their applications to the public cloud
"This involved the purchase of a significant number of VE licenses as the customer transitions some of their applications from our hardware ADC platform to our virtual offerings, both on-prem and in the public cloud"
"During the third quarter, we introduced several exciting new solutions aimed at helping our customers manage their applications in a multi-cloud world"
Key new releases included BIG-IP Virtual Edition for the Google Cloud Platform
"I want to take a moment to share some of my impressions from my first four months at the company and my thoughts on the significant long-term opportunity I see for F5. Since joining in early April, I have spent considerable time meeting with customers across verticals and theaters"
"Throughout these conversations, customers told me F5 is a key partner as they evolve their application architecture to support emerging hybrid and public cloud environments"
"One of the changes we are seeing is the demand to consumer technology in multiple deployment models, including private cloud, public cloud, software-only and various subscription and pay-as-you-go models"
"As a company, we have already begun to refocus our energies around supporting the varied application deployment environments and consumption models our customers are demanding"
It is also evident in the new subscription pricing for Virtual Editions we introduced at the beginning of July
"By putting more structure around our subscription offering, we can better engage customers across a spectrum of potential consumption models"
Improving the ease of consuming our solutions is expected to open new customer opportunities and we are encouraged by the initial response
"Before concluding, I want to recognize the contributions of Julian Eames, F5's Chief Operations Officer and Executive Vice President, who will be retiring after the end of our fiscal year"
I know I can speak for the entire F5 team in expressing my gratitude for Julian's contributions and wishing him the very best in his retirement
"Finally, I'd like to thank the entire F5 team, our partners and customers for their support last quarter"
"With that, we'll now hand the call over for the Q&A"
"So where we are in the iSeries refresh cycle, we're about three quarters into the cycle"
I think the shift to virtual isn't necessarily what we think is holding us back
"As it relates to this quarter in particular, we didn't have the performance that we expected out of a couple of geographies; EMEA and Japan, but EMEA more specifically"
"And that's fairly specific to some macro environment challenges in the EMEA, some to do with the regulatory environment, specifically in the UK and more pronounced in the finance vertical"
"No, we are definitely seeing that some deals are getting pushed out as some of our customers think through their architectures"
"And we have customers across the spectrum, so we have a number of customers who 9 or 12 months ago would have said, hey, we're moving everything to the cloud, and it created a significant pause in the their spend"
"And they've now made that decision, they've moved to the cloud and come back and their spend is actually healthier with us than it was prior to them going through the cycle"
"We have a number of customers and we're seeing more of them that are now going through the cycle and, as a result of that, are pushing decisions because they're revisiting their architecture decisions"
"In a number of cases, these are not deals that we're losing"
"We have visibility into these deals, we're not losing them, but they're being pushed out"
And that's why we're using this term that we're seeing a pause
And I think you have to parse the market a little bit
"For the customers that we have typically served and, typically, those customers have large and complex workloads, when they're moving to either private cloud environment or a combination of private cloud and public cloud, we are involved in the conversation, and we feel we have a very strong win rate and we have relevant offerings to support them"
"There are, however, a number of applications that are being basically bought in the cloud, but created directly in the cloud that are perhaps typically less complex workloads than we have served"
"These are, for us, significantly new opportunities, as the world goes more digital, more and more applications"
"And I would say, yes, in that environment, we are not yet participating to the degree that, eventually, I would like us to participate, but that's essentially an opportunity for us to extend our addressable market that we are going to look at how we can execute against that"
"So, I think there are two effects in Europe from what we're seeing"
One is a bit of the uncertainty that the regulatory environment is creating
"There are things like regulation around data protection and all the regulatory, specifically, in the finance vertical, that is causing folks to think about location of data centers, what their hybrid cloud environments are going to look like, et cetera"
"That's the macro environment and we don't control that or how a real prediction into that other than we know that a lot of this regulation should be settled in the early parts of 2018. There are also some things that we believe have more to do with the execution of F5, so the more internal"
So we are realigning our resources against the best geographies and verticals
"I think as I said on the last call, because it's Europe, this typically takes a significant amount of time"
"And we're also making sure that we're enabling our teams in Europe, both enabling and training our teams in Europe for the new opportunities that we're seeing around hybrid cloud environments, for an example"
"So, there are some things we're doing internally that we believe will help and contribute"
"And then the macro environment, we think, for the next six to nine months, we don't expect a significant improvement in the macro"
"We have a pretty strong process that goes bottoms-up against pretty much every geography and vertical, and we continue to be thorough about it"
We're being a bit more cautious about EMEA this quarter
"We're not expecting, as I said, any improvement in the region, and so we've factored that into our guidance"
But the process has been quite thorough as it had been from prior quarters
"The other area that I would flag is in the federal space, there's a bit of timing uncertainty linked to the delay in the budget approval here in the U.S"
And we have factored that uncertainty in the federal space as well in our guidance
"I'll start on the – Paul, on your first question"
"federal, I think in the UK, we also saw this quarter some delays"
"Well, I mentioned the delays in certain deals earlier"
"In the UK, we had some government deals that were delayed a little bit"
"federal number isn't very large, so there'll be an element of ebbs and flows quarter-on-quarter"
"But, specifically, this quarter, I think that was a factor"
"Rod, yeah, just a correction, what I said was that we were three quarters into the cycle not three quarters of the way through"
And it's typically eight quarters – six to eight quarter cycle
So we haven't reached the midpoint of the cycle yet
"So, to be clear, we think it's an eight-quarter cycle and we're about three quarters into it"
"It's tracking very, very closely to what we saw in the prior cycle"
"There are some differences in the – obviously, in the environment"
"Last time we did a refresh, ACE replacement actually happened – the Cisco ACE replacement happened in the similar timeframe and so that gave us an additional boost"
"And also, as we've said before, we're saying that some of the deals getting pushed out as a result of the evaluation of cloud architecture"
"So, there are some things in the environment that are different to what we had a few years back"
But in terms of how the cycle is tracking relative to what we've done in the past is very similar
"And the other thing, Troy, is you're looking at an aggregate number"
"You heard me talk about Europe, and I said we're realigning resources against opportunities"
"When we talk about the evolution of our offering towards subscription, virtual environment, et cetera, again, that requires some alignment of resources towards these opportunities"
"On the first question, yes, actually, we are seeing a higher demand for best bundle than we would have in prior cycles, and that's largely because securities is important and increasingly important"
"One of the things that the cloud does is it dissolve the perimeter, and our solutions for security are application centric; they're not perimeter-based solution"
And that's actually one of the reasons we're doing well with security and seeing more and more opportunities
"We have a number of partnerships in place already in the ecosystem both with cloud providers and a number of IT – other IT players that help us, but we won't roll out doing some things in the marketplace if and when we see an opportunity"
"And when you look at that percentage quarter-on-quarter, we're tracking pretty much exactly with prior quarters"
"That's largely because, in the past, that has been the point at which customers have made the initial deployments of this new platform, they've done the necessary software upgrades and test and proof-of-concept, they're a bit unfamiliar with the platform and they get into the mode of more repeat purchases and that's where we typically see an acceleration"
That's what we have seen in the past and that's why we've looked at that 80% marker as a good indicator of the point in the cycle where we see this
"As I said, again, the environment is different now than it was in the past, but if you look at these metrics we're tracking"
"And a big priority for us is to make our solutions easy to consume, remove any friction there is in consuming our solutions in different environments because we believe that is going to open additional opportunities for us, specifically, in the virtual ADC space"
We're seeing more and more attach rates to our solutions
We're seeing more security stand-alone opportunities
We have best-in-class web application firewall capabilities
"And we think, with the cloud, there's going to be even more of a need for application-centric security"
"So, beyond the refresh, I see these two as important drivers for the medium to long term for us"
"So GDPR is one of the elements that we've seen as uncertainty – yes, creating some uncertainty in Europe"
"In fact, attrition is much better than it was even a couple of years ago"
"So, I'll take the security question and Ryan Kearny will talk about what we're doing about containers"
"So, yeah, the position that we have that's actually quite unique in the security space is, as I said, number one, that we – unlike a number of other players, we're not a perimeter security company"
And one of the benefits that that gives us is we have the ability to see data in the line of the application of between the user and the application
"And because of the capabilities in BIG-IP in terms of scale and throughput, we also have an ability to analyze the in-line data in real-time"
"So that gives us the opportunity to do some interesting things with the data, which we think is important and probably will play into our future"
"Listen, one of the – I think where you are correct is, one of the key, I'd say, intangible assets of F5 is our understanding of applications and the concentration of application networking talent that exists at F5 is – I think is unparalleled in the industry"
Turning to slide 11. Banking and Wealth was relatively flat for the quarter
"When combined with the previous quarter's EMV results, approximately 50% of our clients are EMV-enabled"
"As we've discussed previously, we expect the remainder of cards to be EMV-enabled in a natural reissuance cycle as they expire"
"We're very pleased to complete 2016 at just over 30%, which was faster than anticipated"
"Growth in the quarter was primarily driven by increased card processing volumes in Brazil and payment strength in Australia, resulting from completion of a client conversion in the quarter"
"As we discussed throughout 2016, we continue to see softness in discretionary spending going into 2017. Macroeconomic events during 2016 such as Brexit and the U.S"
The increase was driven primarily by higher incentive accruals in the quarter
Moving to slide 15. Our business model continues to generate significant cash flow
Free cash flow was $435 million for the quarter and $1.5 billion for the year
"In line with our previous guidance, the effective tax rate was 35% for the quarter and full year"
"Turning to slide 16. In the fourth quarter of 2016, we signed a definitive agreement to sell our public sector and education businesses"
"Finally, due to our 2016 performance, we recently announced a 12% increase to our quarterly dividend to $0.29 per share"
"Looking forward to 2017, due to the strategic nature and scale of the IFS and GFS segments, I would like to provide some additional color on segment drivers, which guided our planning process for the year"
"market, consolidating at the higher end of its historical trends"
"Similar to last year, we have also provided additional assumptions to better assist your modeling efforts for the year"
These are found in the appendix of today's presentation
"Of note, I would like to call out our effective tax rate assumption for the year, which is 32%"
Current consensus estimates do not fully reflect the impact of the public sector and education divestiture
"Further, to help with modeling, the quarterly spread of our expectations for 2017, we expect first quarter adjusted EPS in the range of $0.81 to $0.83. For fourth quarter of 2017, our expectations are up to $0.05 per share above current consensus estimates"
"Similar to last year, we have a conservative view on the overall macro conditions and have not assumed any improvements in conditions in the markets we serve"
We are confident in our guidance for the year and our ability to continue to drive value to our shareholders through compelling business model and strong cash flow generation
The IFS and GFS segments were not affected by this
And there was a relatively small term fee associated with the transaction
"One, I tried to highlight the components of what's driving it"
"Of the 300 basis point reduction, about 1 point or 100 basis points is really driven by the accounting change in stock comp, where everybody should get some level of benefit there"
200 points is really driven off of tax planning strategies and lower rate geographies
You've got the $9.2 billion base you're talking about
It will be difficult to get to a $4.70 number with the sale of PS&E
"Yeah, the $850 million was a gross number on the proceeds"
We ended up with a net number of around $500 million
What that read-through is that you had very little tax basis
"So, you ended up having a tax bill associate with that"
We're just getting it a little faster than we anticipate
"We talked about in May, if you look back to the guide, we talked about in May, what would drive to the lower end of the 3% to 6% and what would drive you to the higher end of the 3% to 6%"
Continued higher levels of consolidation would drive you towards the lower end and that's where we're at
We're still at a high level of consolidation and there's very little to no de novo activity in the marketplace
I think the broader commentary is really going to be around continued consolidation
You've seen IFS running in the lower end of that for a few years
"But we think that that lower end, that 3% to 4% zone, is where you're at really given consolidation being the broader driver there"
Those are the three biggies that are headwinds for Q1.
I'm glad you asked the question because I think I actually misspoke to on Ashwin's question
This year we've got a $4.15 to $4.30 range I just outlined
"We believe we can grow that 13% to 18% in 2018, which I still think that collective will imply $4.65, $4.68 to almost $5.00. That guidance has stayed intact"
What I was trying to isolate was PS&E around the original guide would be difficult
"But our range of $4.15 to $4.30 should grow 13% to 18% in 2018, to be clear"
"Yeah, the reported number, $9.2 billion, $9.241 billion is the base to grow off of"
You've got the sale of PS&E of about 3 points negative
"So, you definitely got that right in terms of your base there"
"Yeah, we tried to add some color around the commentary"
"Turning to slide 12, Banking and Wealth grew 2.5%, in line with our expectations"
"Corporate and Digital grew 6.1%, driven primarily by new client signings for our small business solution, coupled with increasing transaction volumes from existing users and consistent demand for our digital solutions"
These results are consistent with prior commentary on our strategy of growing higher-margin IP-led solutions and ongoing synergy efforts
"Moving to slide 14, our Institutional and Wholesale business increased 1.4%, driven primarily by our derivatives utility"
Growth was partially offset by the timing of implementation work
"Banking and Payments grew 6.2%, driven primarily by steady performance in processing volumes in Asia-Pacific and Brazil, while Consulting grew 6.7%"
"Moving to slide 16, for the quarter, free cash flow was $275 million and $637 million for the first half of the year"
"For the first six months of the year, cash conversion was 102%"
We expect cash flow conversion to be between 105% and 115% for the full year
"In the second quarter, we returned $97 million to shareholders through dividends and have returned $192 million in dividends year-to-date"
We ended the quarter with weighted average shares outstanding of 334 million on a fully diluted basis
"We now expect our full-year rate to be about 30% to 31%, versus our original guidance of 32%"
"Moving to slide 17, since our last call, we executed two significant transactions that create long-term benefits to shareholders"
"On May 23, we announced the sale of a majority stake in our consulting assets, which consisted of Capco and a small consulting group from the IFS segment"
The transaction initially values our retained equity interest at about $175 million
The tender was funded on July 25 with proceeds from the European bond issuance and borrowings from our revolving credit facility
"On July 31, all the proceeds from the divestiture of the consulting assets were used to pay the revolving credit facility"
"Finally, our weighted average interest rate declined 60 basis points from approximately 3.9% to 3.3%"
"Turning to slide 19, based on the results of these transactions, operating performance and our lower tax rate, we are increasing our full-year adjusted EPS guidance"
"Finally, we are announcing the authorization of a $4 billion share repurchase program, which will expire at the end of 2020. While we remain focused on deleveraging our balance sheet, we are anticipating generating excess cash flow in the fourth quarter and throughout 2018. Our revised 2017 EPS guidance does not anticipate any share repurchase impact"
"We are pleased with the execution in the first half of the year, which allows us to increase our full-year EPS guidance, even with the divestitures"
"We certainly anticipate having some excess cash flow, significant excess cash flow, in 2018 that we could apply across a number of different ways, but we wanted to make sure we had some flexibility to do share repurchase"
"I think we're always looking to add strategic capabilities and expand our market capabilities, but we always do that in a disciplined way, looking at financial strategic value and relative valuation"
"Right now, we think on a relative basis, we're a very good buy"
So we wanted to make sure we had access to buy some of our shares back
"And right now, based on FX rates, we are modeling a very insignificant impact for the full year"
"But the 4% to 5%, again, removes any divestitures and removes any FX"
"Well, we certainly think once you move compares out, the original guides that we had, which was around 3% to 6% on IFS and 3% to 8% on GFS, still hold together"
"You certainly should see some improvement in acceleration in the back half of the year, particularly in the strategic segments"
"Yeah, I think you've seen us do exactly that in the past"
We feel very comfortable at an aggregate 2.5 times leverage
"Yeah, I think it is just working capital movements"
You've seen some timing around cash tax payments and some of the divestiture activity that we've had
Q2 is always our lowest cash flow generation item over the last four or five years
"So what we try to do is not look as much on the quarter-by-quarter cash flow generation, but look at what the total year's going to do"
"Through the first six months, we're at 102% and I think again we're going to be at 105% to 115%"
"Some of that comes through heavier cash flow at the end of the year, with renewals and license maintenance that we've always seen in the past"
"So feel good about it, have good visibility into it, Brett, so"
"I would tell you we feel very good about what we've laid out to the market, continue to take a conservative stance on the guide to make sure we are delivering our expectations, if not exceeding those expectations"
"So it seems like every time I put a guide together, some of the broader groups tend to get a little higher than I do in terms of picking a midpoint"
"But that said, I feel very good about where we're at, what we've guided to and have continued to keep a conservative stance on it"
We had a convergency in Q3 of last year that we called out last year
"I want to say it was around $15 million, but that's outlined in our view this year, but those are the big chunks, Brett"
So you're not going to see the same amount of net income that will ultimately pick up our 40% share
"Yeah, I think the tax rate itself, I think this is probably about where it needs to be, George"
"in those lowers rate jurisdictions, we'll continue to see a lower relative tax rate than maybe some others in the business"
That's really the only thing in the third quarter of last year
"What you've got to think about is between the consulting sale and the PS&E sale earlier this year, that's about $0.07 that was in last years' that won't be in this years'"
"As you did mention, last year, we had about $0.03 in the quarter related to a conversion fee in the GFS group"
"As Gary mentioned, that group is up about 1,100 basis points from that timeframe, and that is a blend between synergies, the absence of consulting longer-term, and then just ongoing scale in the existing businesses that we had, even pre-SunGard"
"Well, I think part of it would be around the structural improvement we've talked about"
"And if we do what we need to, that should improve cash flows as well Unknown Speaker And, Chris, it's Bill"
"(50:58) The operating teams have done a very nice job of getting very focused to help lower the DSO as well, right? So we continue to want to make sure that we're collecting our cash and as timely as possible"
So I don't know that that's a different aggressive stance
"I just think, to Woody's point, as you see the transformation that's occurred and the continued execution on our IP-led businesses, you're naturally seeing our DSO come down"
"You're seeing our free cash flow conversion trend up, and so we feel good about it"
"As you saw, the second quarter true-up was about a $0.03 benefit, so we're actually seeing that slightly lower in the back half, so about $0.05 is a good estimate there"
"Hi, everyone, and thanks for joining the call this afternoon"
"First, I'll comment on our Q2 results and rest of year outlook, and second, I'll provide an update on some recent developments"
"We reported very good Q2 results, generally consistent with our internal expectations"
"Fuel price and fuel spreads were a bit favorable, but FX interest rates and our tax rate were unfavorable versus the prior year"
We had particular strength in lodging and corporate payments
"So in terms of drivers for Q2, basically three things"
"One, STP made a big contribution, we didn't own that last year"
"And lastly, we had about 1 million fewer shares outstanding"
"MasterCard portfolio that we didn't convert to a new platform continued to grow quite well, up 34% in the quarter"
"So the one we converted, not so good; the ones that we didn't convert still growing nicely"
"We're moving to replace both of those with new, fresher versions"
And STP was just a bit delayed in some of its pricing actions as we chose to test our way in a bit more slowly
"Starting with the macro, so basically outlooking a neutral macro for the second half; FX will be better, interest rates will be worse, but on an overall basis neutral for rest of the year"
Operating performance should be quite similar to Q2. Things that are going well will continue to go well
"But expected acceleration in our corporate payments business, they brought on a lot of new business that will get implemented in the second half that's been previously sold"
"Speedway should be fully ramped by September heading into Q4, and we continue to roll out these PAC Pride extended network cards"
So this set of positives should absorb a couple of the weaker spots that we mentioned
"And then finally, we're expecting a rebalancing of our portfolio here in the second half, replacing our telematics business, NexTraq, with our international payments business, Cambridge"
So these expectations result in the following 2017 guidance adjustment
We'll raise full-year 2017 cash EPS guidance $0.03 from $8.31 to $8.34 at the midpoint
"So that reflects the $0.03 beat here in Q2, effectively leaving our rest of year guidance unchanged"
"This guidance assumes the portfolio rebalancing I mentioned, NexTraq out, Cambridge in; that will be about $0.03 unfavorable in the second half, but that will be offset by the ASR, which will be $0.03 favorable in the second half"
"Okay, let me shift gears and talk about some recent developments"
"We also completed our telematics NexTraq sale to Michelin for $320 million in July, so we now have that cash"
"On the partner relationship front, some good progress this quarter"
We're delighted to announce that Uber has extended their relationship with us
"So, happy to continue to grow that program with them"
"Speedway, we progressed the implementation quite nicely, now 75% complete, expected to finish in September"
"And we've also gotten closer to some decisions on some new international partner opportunities, so hopeful that a couple of things there will come to conclusion"
We've received approvals and waivers/or for all the necessary state money transmitter licenses
We finalized our Year One transformation integration plan and appointed one of our executives to lead the transformation effort
"So, quite pleased so far with STP and its prospects"
"Let me give you an update on system conversion or migrations, we've worked on three IT conversions in the first half of 2017. Two have gone well or very well, and one has gone not so well"
"So on the good news front, we did convert our Comdata processing mainframe infrastructure from running in the Comdata office building to running on the IBM Cloud"
"Second conversion, I mentioned earlier Speedway, we've converted 75% of that portfolio to FleetCor systems"
"The conversion has gone well, quite well, and again, expect to wrap that up in Q3. On the not so good front, we converted a portion, one of our direct MasterCard portfolios off of the Comdata mainframe in Q1. We had problems converting the history or client balances"
"And as a result, we've seen a number of clients leave the program in Q2 because of those bumpy IT issues"
"Basically, a neutral macro environment here in Q2 and previously in Q1. And overall, we're outlooking basically a neutral environment rest of the year, so glad to be off that subject"
"Still on the hunt for some new partner deals, and have extended our relationship with Uber, and we feel like we're past the distractions of the first half and getting back to work, back to business"
"So net-net we feel pretty well positioned to finish the rest of 2017 strong and take some of that momentum into 2018. So with that, let me turn the call back over to Eric"
"So kind of first half, I think I said low teens, I think the second half will be closer to high teens to 20%, and I'd say we would stay at that level probably at least the first six months of next year, and then probably mid-to-high-teens"
"They're happy, we're happy, so they added more term to the existing deal"
"We're still trying to figure out how to take the program internationally, so that's still a work in process"
"Which is the direct, you're saying direct MasterCard?"
I think what we quoted is our collective set of U.S
"I think it was a combo of the one we converted, which went a bit into the ditch, and the ones we didn't grew 34%"
"I think the combination of all of those was plus 17%, the happy stuff that didn't convert and the sad stuff that converted, I think the consolidated number was 17%"
"Well again, I would say, per my comments, likely down, right? I tried to be as transparent as possible that we took a bit of a divot in this conversion"
"We did the conversion and it took a while to get a read on it, and basically the read of what we converted was not great"
"So we'll see obviously more of that as we go into kind of Q3 and Q4. So that particular portfolio will probably be flat over the next couple of quarters, and the other five or six MasterCard portfolios we would expect will continue growing at a pretty – at a 20-percent-plus rate"
"So that's – so I'd say, it's still unclear David, what the shape of that particular file that we converted, but we forecasted it to be kind of flat, the next couple of quarters"
"Again, as you know, it's across of a lot of places, but I'd say the Brazil thing got better, the employment piece – at least the line of business we're in, the transport piece, got significantly better"
"The lodging piece, which I think we had on our to-do sheet (39:13) a year or so ago is in the rear-view mirror, those things are now back to positive"
"The corporate payments business was quite healthy, the base"
"So I think it's, again, when we did this consolidated number"
"It's four or five pieces, David, moving in the right direction that brings kind of the total from minus one to plus one"
It's literally probably four or five things that went a bit our way this quarter
"When you say the large, clarify the question that – when you say the large?"
"But we have completed them, David, they are complete"
"And I think we reiterated what we said before, that our view, management's view is we are in compliance with every law that regulates our business"
And the fuel card would have been 11% instead of 8%
"So when we gave you 10% for calendar 2017, we didn't expect to have an IT divot, and it started in the second quarter, so"
"It's been a long saga for you guys as well, so I'd say that we obviously considered some other alternatives right, prior to entering into the deal with First Data, and B, we've gotten a bit smarter, we've now owned it, whatever, two-plus years"
So we're going to go back – the guy running that's a very good guy
"So, I'd say, Bob, the goal is still in fact, in our forecast, it's either high teens or actually hitting 20% as we exit"
"And so the business is fighting just a general malaise in the economy, and particularly in the trucking sector, which is a big part of the transaction"
"But we've gone crazy, Bob, in terms of what we call dragnet authorization, controls basically to find, identify and shut off fraudulent stuff, because we had our own share of problems four and five years ago"
"Oh, year-to-date – annualized, call it $5 million"
"You can only work on so many things, so that's one we worked on, yes"
"Yeah, $5 million to $10 million favorable in the second half"
"I would say 10% to 12% would be the number if we hadn't gotten distracted, right, calling customers back for this thing"
It means kind of all the things we didn't convert are doing well
"Well, Jim, always – I've been wrong enough on this that it's hard to handicap again, but the update I try to provide is that the timeline to a decision that gets reported back to us has narrowed considerably"
"So, we expect in both cases to hear something imminently"
"And I'd say, like always, we're optimists, we like our chances"
"So we continue to tell you that we're in the hunt for things or people looking at them, people studying them, and people telling us they're going to decide, and so we're kind of reporting back that we expect to hear something soon"
"I think the visibility we have is limited, right? We would have called out that we see the thing turning"
"What I would say is the few industries that are clear, right? We've grown over the oil and gas thing, same thing on the transport, lodging, business, the railroad thing, we're on the other side of that"
It looks like again the Brazil thing is stable to move a bit
So I'd say that it feels like a few of the pieces that were on the wrong side of this thing have moved to the correct side
"But with as many different places and things we're in, and I can't say that we have a great forward view of it"
"We kind of planned it flat, is kind of what's in our forecast for the second half"
"On Slide 9, you'll see our third quarter financial results"
"Please note with the exception of cash flow, all these financials are on a non-GAAP basis"
Reconciliation to GAAP data is included in the filed appendix
"Adjusted net income for the third quarter of 2017 was up 11% to $72.7 million and adjusted EPS was $0.52 per share, 8% higher than last year"
Net income was negatively impacted by a 370-basis point increase in our effective tax rate versus last year to 26.2%
"Quarterly cash flow from operations was 143% of adjusted net income or $104 million, which was $15 million higher than the prior-year"
"Through nine months of 2017, operating cash flow was 116% of adjusted net income"
"During the third quarter, we fully repaid the outstanding $86 million in borrowings under our revolving credit facility and returned $21 million to shareholders in the form of dividends"
"Despite these uses of cash, we increased our cash balance by $33 million to $437 million at the end of the quarter"
We saw weakness in the Middle East region due to slower activity in our Surveillance segment
"Digging in on the segment a bit more, you will see on the left side of Slide 10, a summary of surveillance in the third quarter results"
Surveillance bookings grew to 33% during the year due to a $75 million order we received from the U.S
"Army for gimbels to support their EOIR Force Protection Program, a variant of the RAID program"
This helped drive surveillance and book-to-bill ratio of 1.45 times and increased backlog 21% quarter-over-quarter to $395 million
"Not included in this backlog, but notable nonetheless in October, our UAS business receded a $7 million order from the Australian Army for our Black Hornet Nano UAS Solution, a key stone win for this next generation personal surveillance and reconnaissance solution"
"Detection finished the third quarter with $78 million of backlog, which was down $8 million from the end of Q2, due primarily to the shipments of DR-SKO under the previous order"
Partially offsetting the backlog decline was another large order from the United States Department of Homeland Securities Domestic Nuclear Detection Office for our R300 Compact Spectroscopic Personal Radiation Detectors
The results for the OEM and emerging segment are shown on the Slide 11 as well
Order backlog and OM and emerging increased 2% during the third quarter to $162 million
A portion of these segments will realize in the third quarter
"So, we want to have that firepower let's say on the ready for when we want to do deals"
We can leverage that in a lot of different ways across our company
"But if the right deal comes along, there is a chance that we could take it above 2.5 times, but we just haven’t seen deals like that"
"So, we want to make sure we have the bandwidth to do that and that's part of the reason we did pay down that revolver"
"There was a couple other reasons like swap gain that we realized and a couple other reasons, but yeah, we like having that bandwidth and that's hasn't changed over these last let's say six months"
"It's choppy Noah as you know, it's big orders that we get"
"Deliveries get choppy, but if you look at on a trailing 12-month basis, yes, it's been a very difficult comp and it's a couple of big orders that we got last year"
Our exceptional business model continues to create a consistently high level of free cash flow conversion
"On a rolling four-quarter basis, our free cash flow conversion was 140% of normalized net income"
I'll now discuss our fourth quarter business segment performance and P&L in depth before turning to our balance sheet and cash flow dynamics
"For reference and comparison, our Q4 2015 total contract value at current year FX rates was $1.697 billion"
"Because of the breadth of our value proposition and our ability to focus on our clients' most mission critical priorities, we continue to deliver tremendous value to decision makers and businesses across the globe"
"Consistent with this, our retention metrics remain very strong and are near all-time highs"
"As Gene mentioned, client retention was 84% in Q4, stable on a year-on-year basis, and up 1 point sequentially"
"Wallet retention ended at 104% for the quarter, roughly flat year-on-year and up 70 basis points sequentially"
"We ended the fourth quarter with 11,122 enterprise clients, up 3% compared to Q4 2015. And as always, we continue to benefit from our consistent price increases and discipline around pricing"
"As mentioned last quarter, we implemented a price increase on November 1 that averaged just north of 3%"
The average spend for enterprise also continues to grow
"It now stands at $174,000 per enterprise, up 10% versus prior year on an FX neutral basis"
"Over the rolling four-quarters, we delivered $233 million of NCVI"
Our Q4 Events performance was impacted by three primary factors
"Second, and as we referenced on our Q3 call, we consolidated three larger applications focused events into one"
"We had 123 managing partners at the end of Q4, a 13% increase over the year-ago quarter"
"As we noted last quarter, our Consulting backlog benefited in 2015 from a very large contract booking in a non-target geography, which was a significant driver of backlog improvement in the year-ago quarter"
"Excluding this one large contract, Consulting backlog decreased by 4% year-on-year"
"This represents approximately four months of forward backlog, which is in line with our operational target for this measure"
"This was driven by two primary factors, higher than usual severance and modestly lower utilization"
"Our GAAP tax rate for the quarter was 37.4%, which is lower than the guidance of approximately 40% we gave three months ago"
"In Q4, operating cash flow was $83 million, up 5% on a year-on-year basis"
"In the fourth quarter, free cash flow was $76 million, compared to $73 million in Q4 2015, an increase of 4% year-over-year"
"Managing our business to generate strong cash flow is one of our top priorities, consistent with the negative working capital dynamics that are a key characteristic of our subscription-based business model, we continue to generate free cash flow well in excess of net income"
"We ended the quarter with a strong balance sheet, cash position and liquidity profile"
"Our current $1.8 billion credit facility runs through 2021. As of December 31, we had approximately $1.1 billion of revolver capacity"
"During the fourth quarter, we acquired Machina Research, a market leader in research focused on the Internet of Things or IoT"
Our teams are working diligently through the necessary processes and preparing the filings and arranging the financing required to complete the transaction and start capturing value from day one
And we continue to invest to support our key strategic objectives and drive long-term value for our shareholders
"The details of our 2017 outlook are also included in today's press release, but to summarize, our base level assumptions for our guidance are as follows"
We have used recent foreign exchange rates in setting our guidance and outlook for year
"Total depreciation and amortization should be approximately $67 million to $68 million, inclusive of the amortization of acquired intangible assets"
"Large real estate projects happen with varying frequency, but in 2017, we have two major projects in two important locations occurring simultaneously"
"As in prior years, our free cash flow is expected to again be well in excess of our normalized net income levels in 2017. Specifically, our guidance implies a normalized net income to free cash flow conversion range of approximately 135%"
"Excluding the large building related capital expenditures, our conversion rate would be approximately 145%"
Both lower than our projected full year tax guidance ranges due to the impact of ASU 2016-09 related to the expected timing of excess tax benefits from stock-based awards that I highlighted on last quarter's call
"As we have communicated to you in the past, contract value is reported on an FX neutral basis throughout each year"
"In early July of each year, we restate the opening contract value at current foreign exchange rates"
"As a result of changes in FX rates since January of 2016, contract value at January 1, 2017 is approximately $27 million lower than the $1.930 billion reported on December 31st"
"So before I turn call back to Gene, let me summarize"
We continue to provide tremendous value to our clients and we have continued to invest and strengthen our operational capabilities
"We are in a very strong position to capture the vast market opportunity ahead of us and continue to live, to deliver long-term value for our shareholders"
The addition of CEB will enhance and expand our capabilities to address the most important priorities of virtually all functional business leaders across every industry and size of enterprise worldwide
"As we've discussed all the time as we've talked about our market opportunity, we have strong conviction in the fact that we have an enormous market opportunity in all of the enterprises that currently don't do business with us and we have an enormous market opportunity even in our existing enterprises"
"In terms of the enterprise count, I would just refer you, we had a slight dip in client retention over the course of the year, which you saw come back in the fourth quarter"
That's going to impact that net enterprise number a little bit
"I realize there's still a lot of noise and uncertainty, but you guys have been speaking about it being a difficult environment in 2016. So just wondering if you have any updated thoughts as it relates to your domestic business and internationally post-election? Thanks"
"And Gary, on the second part of your question, in terms of the tenure"
Two things working in our favor that actually give us positive view on the outlook for Events
"So the outlook for Events is really based on the fact that fuller territories, essentially a bigger army selling events and the improvement in tenure mix"
"As we mentioned on prior calls, we have seen a rebound in Brazil"
"We have seen a rebound in the energy and utility sectors, which were probably the two areas – and also in the Middle East as well, which were probably the three areas that were the biggest hit"
"We actually saw a nice improvement in the Americas, nice improvement in Europe, nice improvement in Asia and Australia as well"
So it really was a combination of improvement in some of the areas that were most impacted
"But also a broad-based improvement as well, which ties into the inflection point comment that Gene gave, both on last quarter's call and on this quarter's call"
"Yeah, Machina is very, very small, yes, very small"
"Ultimately over the long term what it will do when we get to full coverage is drive deeper, longer lasting recurring relationships that make the business more predictable, that make our utilization more predictable and at higher levels"
"And as you mentioned, we've been growing the capacity to get there"
"As we look ahead, we're going to continue to invest in managing partners"
"The range we give, again, we are talking about a roughly $500 million base"
So the range from our perspective isn't that enormous
"So, it's really no change in philosophy in terms of the size of the range and no terms in philosophy in terms of the puts and takes to our overall guidance"
"If we see places where we are challenged, we will go a little bit slower in those places"
"So a couple of things so, number one, as you see in the press release, and as Gene mentioned in his prepared remarks, clearing HSR is obviously a big milestone and we cleared that had yesterday, which is great"
We're looking to file the S-4 and Proxy in the next couple of days
"That will be for 9/30/2016 and for full year 2015, both companies will be filing their 10-Ks towards the end of this month"
We will then very quickly follow up with a updated S-4 and Proxy that is pro forma combined 2016 results
We're in the process of working through our financing and we will be lining all that up with the milestones you should be looking at or obviously HSR clearance which we just got through the required regulatory filings and then we will be out marketing our financing instruments in March
"Again, we're targeting, we said first half of 2017 close"
"Ideally, that happens sometime in April, but you never know what bumps could be there from a filing or regulatory perspective, but we're on track to close as quickly as we can, and the hurdles are really around the regulatory filings and then getting out and marketing the financing"
There will be pro forma combined financials for nine months ended 9/30/2016 and full year 2015.
Our exceptional business model continues to create a consistently high level of free cash flow conversion
"On a rolling four-quarter basis, our free cash flow conversion was 126% of normalized net income"
I'll now discuss our first quarter business segment and P&L in depth before turning to our balance sheet and cash flow dynamics
"I'll then provide some high-level comments on CEB's first quarter performance before closing with remarks on our updated 2017 guidance, which includes the expected contribution of CEB for the balance of the year"
"In addition to my comments, today's press release and our 10-Q, I would encourage you to refer to the presentation posted on our Investor Relations website"
"The presentation provides an in-depth overview of our Q1 performance by business segment, covering some of the ground that I normally would cover in my prepared remarks"
"For reference and comparison, our Q1 2016 total contract value at current year FX rates was $1.7 billion"
"The Q1 2017 measure includes the contribution of L2, an industry-leading marketing company that benchmarks the digital performance of brands, which we acquired in March"
"As Gene mentioned, client retention was 83%, down 40 basis points from the first quarter of 2016 and essentially flat on a sequential basis"
"Wallet retention ended at 104% for the quarter, down by less than a point year-on-year and flat on a sequential basis"
Both of our retention figures are close to our historical highs
"And as always, we also benefit from our consistent price increases"
"We ended the first quarter with 11,166 enterprise clients, up 7% compared to Q1 2016. The average spend for enterprise also continues to grow"
"It now stands at $175,000 per enterprise, up 8% versus prior year on an FX-neutral basis"
"Q1 is typically a smaller quarter for our Events business and we held 11 Events in Q1, one less than in the prior year quarter"
"On a same-events basis, attendees were up 11% versus last year"
"In summary, we had a strong Q1 in our Events business"
"On the labor-base side, billable head count of 650 was up 5%, and we had 125 managing partners at the end of Q1, a 14% increase over the year-ago quarter"
"As we noted last quarter, our Consulting backlog benefited in 2015 and the early part of 2016 from a very large contract booking in a non-target geography, which was a significant driver of backlog improvement in Q1 2016. Excluding this one large contract, Consulting backlog decreased by 4% year-on-year"
"This represents approximately four months of forward backlog, which is in-line with our operational targets for this measure"
"This is lower than our base level assumption for the full year, primarily due to the timing of our training academies"
"Our GAAP tax rate for the quarter was 24.9%, which is approximately 1 point lower than the guidance of approximately 26% we gave three months ago"
"Adjusted EPS was $0.60 per share in Q1, down 10% versus Q1 of 2016. As mentioned earlier, our adjusted EPS was towards the higher end of our Q1 guidance"
"Turning now to cash; in Q1, operating cash flow was an outflow of $30 million compared to a $13 million inflow in the year-ago quarter"
"The first quarter is seasonally the lightest quarter for the year in terms of cash flow, given the combination of seasonality in our operations, as well as the timing of incentive payments"
"Additionally, we announced the CEB deal during the first week of January"
"In fact, that's what we advise our clients to do in many similar situations"
"Our new business bookings accelerated over the course of the first quarter, culminating in an exceptionally strong March"
"Because of that timing, some of the cash that we normally would have collected in Q1 will now be collected in Q2. This impacted our Q1 cash flow figures"
This compares to Q1 2016 free cash flow of $18 million
"Turning to guidance, slide 15 of the presentation gives you our high level outlook for 2017 based on 12 months of Gartner plus nine months of contribution from CEB"
"In addition, the slides detail the most significant below the line items to help you with your model"
"As is our practice, our EPS guidance is on both a GAAP and adjusted basis"
Slide 16 of the presentation reconciles the per share differences between our updated GAAP and adjusted EPS guidance ranges
"Putting this all together, we expect adjusted EPS of between $3.32 and $3.60 per share"
"When compared to our previous standalone adjusted EPS guidance range of $3.15 to $3.35 per share, this represents between 5% and 7% accretion for 2017. While it is too early to provide specific 2018 guidance, we continue to target double-digit accretion to our adjusted EPS"
"Total depreciation should be approximately $69 million to $70 million, and amortization should be approximately $196 million, inclusive of the amortization of acquired intangible assets"
Please note that our full year GAAP actual tax rate may also change based upon final purchase accounting
"Finally, our EPS guidance is based on a weighted average fully diluted share count of approximately 89.5 million to 90.5 million shares for the full year 2017. This incorporates the additional 7.4 million shares issued in conjunction with the transaction"
We'd expect to exit 2017 with approximately 92 million shares outstanding
"And again, this is assuming 12 months of Gartner and nine months of CEB"
It is worth noting that CEB's strongest free cash flow quarter has historically been Q1. This was true in 2017 as well
"What you see in our combined free cash flow guidance reflects 12 months of Gartner and nine months of CEB, but excluding CEB's strongest quarter"
"If we looked at free cash flow on a pro forma combined 12-month basis, we estimate that the guidance range would be $415 million to $445 million and adjusted net income to free cash flow conversion rate of approximately 140%"
"While the timing of the deal has impacted the 2017 cash flow guidance, we did acquire a larger cash balance than we anticipated, which we are able to utilize for our strategic initiatives"
"Turning to our Q2 guidance, for the second quarter of 2017, we expect GAAP EPS of between negative $1.12 and negative $1.04. This includes approximately $1.91 per share of non-GAAP adjustment"
The addition of CEB further strengthens our ability to capture the vast market opportunity ahead of us as we are now able to address the mission-critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide
"I'll now turn the call back over to the operator, and we'll be happy to take your questions"
We won't be satisfied if we don't see operational improvements over the course of the year
Singh - Credit Suisse Securities (USA) LLC Understood
"And Tim, on the Q1 performance question, I'd note a couple of things"
But what I'd say is they landed where we expected them to land in the first quarter
"And then the other thing I'd say is operationally, it was encouraging to see sequential improvement, albeit modest but a sequential improvement in wallet retention on that for CEB segment CV"
that's why the wallet retention measure is so important because again it's putting a dollar value on those clients as opposed to the client retention where Gene's Pizza Parlor is created equal to the ExxonMobil's of this world
"And so it points to us retaining higher spending clients at a better rate, and it also points to those clients that stay with us spending more and more each and every year"
"So again, that's why we give both measures, they're both important measures"
"We do think there's a little bit of room for improvement there, but there's the structural things Gene mentioned, which are there and we'll have to deal with for forever"
"And so there is coordination, as Gene talked about"
"So we did see an acceleration from Jan to Feb and from Feb to March, and part of that we attribute to some of the announcement noise as clients look to see if there was something to be gained from waiting"
"And when they found out that there wasn't, they went ahead and bought"
We obviously can't comment on Q2. We're obviously a couple of days into May
We're in the process of closing our books for April
"But again, what we feel good about is we've had really strong performance, Q3, Q4 into Q1, and we expect that to continue"
"Now that we've come out of those and oil and gas or the energy utility sector, rather, is back growing at double-digit rates, we're now growing in that sector again"
"So it is a bottoms-up approach, as Gene talked about, and we also tap the brakes or press on the gas pedal depending on the market situations that we're selling into as well"
"On the backlog question, your observation is right around the grover (59:38) problem"
"The way to think about the backlog on a go-forward basis, again, we target having about four months of forward-looking backlog, and we generally feel pretty positive when we have that amount of backlog ready to go"
Also remember that we are booking and burning within a quarter
So we may book something in January and actually start working it off in February and March
"So there's a combination of wanting to have that four-month forward target, which we have and also there is a fair amount of book and burn within a quarter as well"
"So in essence, if you actually could do a standalone Gartner cash flow, we would have been in the same range where we were"
"And again, so collections that we had anticipated would have come in, in the first quarter are actually now coming in, in Q2. So we'll get the benefit of that in Q2. And then if we have timing as we've anticipated, with April, May and June, we'll get back on track"
So that's the way we thought about the standalone guidance to the effect that we actually could do and model standalone Gartner cash flow guidance
"We feel, given the free cash flow generation capabilities of the combined entity, that we'll be able to do that"
"We will be looking to do some modest deleveraging over the next few quarters, primarily next three quarters to four quarters, most notably taking out the bridge financing that's sitting on the balance sheet right now"
"Starting with our reporting segments; as you've all seen from today's press release, we now have four reportable segments, Research, Consulting, Events, as well as Talent Assessment & Other"
Research comprises the previously-disclosed Gartner Research segment with two additions
"Moving to Events, where we've added CEB's Events business to the Gartner Events business"
"Finally, we've added a new reportable segment, Talent Assessment & Other, which we'll often call TA & Other"
"While we have folded CEB into our reportable segments and added a new one, we are committed to providing the financial community with the appropriate level of transparency to be able to track the performance of the core CEB Research business"
"In addition, we want to provide transparency to be able to continue to attract the performance of the traditional Gartner business"
"On last quarter's call, I mentioned that we were in the process of harmonizing calculation methodologies to make key CEB metrics comparable and aligned with Gartner metrics"
"As an example, for the traditional Gartner business, our total contract value metric represents the annualized value of all our subscription-based contracts"
"While, CEB did report contract value, we have now recast that measure to be aligned with how we've traditionally done it with the Gartner business"
"Similarly, we have harmonized how we calculate wallet retention to also be consistent with how we calculate retention at Gartner"
I will come back and discuss the trends of these metrics in a few minutes as a part of my quarterly segment review
Our exceptional business model continues to create a consistently high level of free cash flow conversion
"On a rolling four quarter basis with three quarters of standalone Gartner and one quarter of Gartner plus CEB, our reported free cash flow conversion was 118% of adjusted net income"
"However, if we calculate free cash flow conversion on a rolling four quarter basis for the combined company, our free cash flow conversion would have been 126% through Q2. I'll now discuss our second quarter combined business segment and P&L in depth, highlighting the performance of the traditional Gartner and acquired CEB business where appropriate, before turning to our balance sheet and cash flow dynamics"
"I will then close with remarks on our updated 2017 guidance, which incorporates our new reportable segments"
Please also note that we've included a lot of this information in the presentations on our IR website
"For reference and comparison, our Q2 2016 total contract value at current-year FX rates was $1.73 billion"
"From a traditional Gartner Research perspective, client retention was 83%, up 40 basis points from the second quarter of 2016, and up slightly on a sequential basis"
"Wallet retention ended at 105% for the quarter, up by almost a point year-on-year and 50 basis points on a sequential basis"
Both of our retention figures are close to our all-time highs
"And as always, we also benefit from our consistent price increases"
"We ended the first quarter with 11,164 enterprise clients, up 7% compared to Q2 2016. The average spend for enterprise also continues to grow"
"It now stands at $179,000 per enterprise, up 8% versus prior year on an FX neutral basis"
"Over the last rolling four quarters, we delivered $265 million of FX-neutral net contract value increase or NCVI"
"Contract value converted to Gartner's methodology was $578 million, a 1% year-on-year increase on an FX neutral basis, compared to a 1% decline in the first quarter"
"In addition, wallet retention also using Gartner's methodology ended the quarter at 94%, an increase of 80 basis points compared to the year-ago quarter"
"The traditional Gartner Events business as you know holds more than 60 large destination events, such as our Symposium series for CIOs"
Evanta holds approximately 200 smaller community-led events that don't require the attendees to travel
"On the labor-based side, global head count of 667 was up 7%, and we had 128 managing partners at the end of Q2, a 14% increase over the year-ago quarter"
"Consistent with our new segment presentation, please note that our Consulting backlog no longer includes the backlog associated with SaaS"
This was primarily due to a continuation of recent trends at TA
"In addition, and as Gene commented, we moved quickly to address some of TA's legacy organizational issues, which we believe will drive improved performance going forward"
"Encouragingly, we did see some improved momentum towards the end of the quarter and ended Q2 with higher year-on-year bookings for the quarter"
We continue to expect our full year GAAP tax rate to be approximately 33% to 34% and approximately 32% to 33% on an adjusted basis
Our GAAP EPS figure also includes $1.91 of non-GAAP adjustments
"Therefore, on an adjusted basis, our EPS in Q2 was $0.88 or $0.03 above the high-end of our guidance range, helped by the lower adjusted tax rate I just referenced"
"Normalizing for this, our adjusted EPS would have been approximately $0.84 in the quarter"
"Turning now to cash; in Q2, operating cash flow was $112 million compared to $148 million for the standalone Gartner business in the year-ago quarter"
"If you recall, on last quarter's call, I focused my comments on our post-close balance sheet rather than the end of March snapshot"
"Turning to guidance; slide 13 of the presentation provides you with our updated outlook for 2017. As is our practice, our EPS guidance is on both a GAAP and adjusted basis"
And I'll also remind you that our full year guidance includes 12 months of Gartner plus 9 months of CEB results
"Given the rapid progress we have made so far with the CEB integration, we are confident of the incremental benefit this will yield going forward"
Slide 15 of the presentation reconciles the per share difference between our updated GAAP and adjusted EPS guidance ranges
We now expect the after-tax of these adjustments to total approximately $4.26 at the midpoint of our guidance
"Putting this altogether, we now expect full year 2017 adjusted EPS of between $3.32 and $3.49 per share"
"Given that our below-the-line assumptions are essentially unchanged, I won't take you through them in detail"
"The addition of CEB further strengthens our ability to capture the best market opportunity ahead of us, as we are now able to address the mission-critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide"
And the deal was immediately accretive to our bottom-line
"As Gene mentioned, the integration is going exceptionally well"
"We set aggressive timelines, and we are achieving or beating them"
"And it's important to note, we've done all of that while driving acceleration of performance in the traditional Gartner business"
"Now, I'll turn the call back over to the operator, and we'll be happy to take your questions"
"I think given everything we've seen in the first 120 days, it gave us the confidence to actually pull that forward, because as Gene mentioned, the integration was going exceptionally well"
I think it's actually really a seasonality thing in terms of the calendar of the events schedule
"So if you think about our business, spending is pretty consistent on a quarter-over-quarter basis, given the bulk of our spending relates to people on board"
"And so I think, essentially it's just we are now just a little bit more heavily weighted in Q4 given the Evanta business"
"And the other thing I'd mention is last year's Q4, we did not perform as we wanted to on the Events business"
"As I mentioned in my prepared remarks, we're actually back on track on our Events business"
"And Gary, specifically it would be an impact probably most acutely on new business"
"From a retention perspective, we're working with our clients, we're making sure they're engaged and getting value and we'll continue to renew them, and as you saw, we actually saw a modest uptick in the wallet retention rate for CEB"
"So, the speed bump potential, again these aren't huge speed bumps, these are probably smaller speed bumps, but is really on the new business side"
"So in essence, we pulled forward the training and the hire – recruiting and training so that we can start the journey a little bit sooner than we had originally contemplated"
So we'll try and focus on the key operating measures so that we can show you progress both on the traditional Gartner side and on the traditional CEB side
"As Gene mentioned, we all are fully integrating across the board, and that makes pulling and parsing some of this a little bit more difficult"
"As we head into 2018, there are some shifts in terms of CEB had a technology business selling to CIOs and technology professionals"
"That said, we'll figure out the right way to provide transparency and progress on was the traditional Gartner business maybe with a few tweaks based on those integration adjustments I mentioned and on the traditional CEB business, again with a couple of tweaks to reflect how we've actually integrated and are running the business"
"I think the way to think about the potential trajectory around wallet retention, they're really two primary drivers there"
"The other way we drive wallet retention at Gartner is by further penetrating existing buying centers and existing enterprises, and with an enterprise-type licensing model, that's difficult to do"
And that's also one of the reasons why it's so important that we're shifting to seat-based because over the long-term that will allow us to actually further penetrate organizations as well and that will flow through into the wallet retention metric over time
"Again that's not going to happen overnight, but if you think about those two levers are the way that we can get wallet retention looking and feeling like the Gartner wallet retention over time"
Is there any benefit from lapping some of the energy and utilities-related drag you guys had referenced last year
And so we're moving in the right direction and we're going to keep driving it
"And as Gene and I both mentioned, we are aggressively going after those"
And some of them will be able to flow through in 2018; some of them will take a little bit longer just given timing of systems integrations and platform integrations and things like that
"Research, that's really valuable to HR professionals"
And they have more value and they'll get more value out of them
"That said, we still have clients who are on legacy stuff"
"And again, as Gene mentioned, if they're happy and they want to keep renewing and keep paying us, we're happy to let them keep doing that"
"We will also, where appropriate or applicable, drill into the traditional Gartner or traditional CEB business performance"
You will also find an in-depth overview of our Q3 performance in a presentation on our Investor Relations website
Our exceptional business model continues to create a consistently high-level of free cash flow conversion
"On a combined basis, over the last rolling four quarters, our free cash flow conversion was 139% of adjusted net income"
"I'll now discuss our third quarter combined business segment results and P&L in depth, highlighting the performance of the traditional Gartner and acquired CEB business where appropriate before turning to our balance sheet and cash flow dynamics"
I'll close with remarks on our updated 2017 guidance
Please also note that we've included a lot of this information in the presentation on our IR website
I'll now focus on the traditional Gartner Research business
We also had a roughly 1 point benefit from foreign exchange
"For reference in comparison, our Q3 2016 total contract value at current year FX rates was $1.790 billion"
"From a traditional Gartner Research perspective, client retention was 83%, up 70 basis points from the third quarter of 2016 and flat on a sequential basis"
"Wallet retention ended at 104% for the quarter, up by 80 basis points year-on-year and roughly flat on a sequential basis"
Both retention figures are close to our all-time highs
"And as always, we also benefit from our annual price increases"
"We ended the third quarter with 11,338 enterprise clients, up 6% compared to Q3 2016. The average spend for enterprise also continues to grow"
"It now stands at $182,000 per enterprise, up 8% versus prior year on an FX-neutral basis"
"We ended Q3 with $571 million of traditional CEB research CV, down 1% on a year-over-year basis"
"In addition, wallet retention, also using Gartner's methodology, ended the quarter at 93%, roughly flat compared to the year-ago quarter"
"While retention rates continue to show improvement, we did see a slowdown in new business as we implemented a number of Gartner best practices around pricing and contract terms"
"As we alluded to last quarter, we believe there would be speed bumps along the way as we integrated the CEB and Gartner businesses"
We continued to see strength in attendees reporting a 21% increase in same event attendees
"On the labor-based side, global head count of 682 was up 8% and we had 134 managing partners at the end of Q3, a 17% increase over the year-ago quarter"
"Once we see signs of improvement, we'll look again at increasing capacity on those teams"
Our bookings performance strengthened in September and our Q4 pipeline looks strong as well
This was consistent with the recent trends of our TA business
"As we discussed on our last call, we also established TA as a standalone business"
This caused some short-term disruptions that we feel are now behind us
"As Gene mentioned in early October, we decided to explore and evaluate strategic alternatives for the CEB Talent Assessment business, formerly known as SHL"
We are less than one month into the process and I'm pleased to report that it is progressing well
We will provide further updates as and when appropriate
"While this is an acceleration from prior quarters, the increase is primarily due to the fact that we were able to reduce the level of open territories in the quarter, which should help us in Q4 and subsequent quarters as well"
"Moving down the income statement, depreciation charges increased year-over-year in the quarter, predominantly reflecting the addition of CEB, while amortization and integration charges were up significantly, again related to the transaction"
We expect our full-year GAAP tax rate to be approximately 33% to 34% and approximately 31% to 32% on an adjusted basis
Our GAAP EPS figure also includes $1.18 of non-GAAP adjustments
"Therefore on an adjusted basis, our EPS in Q3 was $0.65 or $0.13 above the high-end of our guidance range"
There are three primary reasons for our EPS beat in the quarter
Our combined operating cash flow increased 16% year-over-year
"Turning now to guidance, slide 13 of the presentation provides you with our updated outlook for 2017. As is our practice, our EPS guidance is on both a GAAP and adjusted basis"
"At the same time, we've increased our EPS outlook on an adjusted EPS basis"
And I'll also remind you that our full-year guidance includes 12 months of Gartner plus 9 months of CEB results
"As both Gene and I discussed earlier, the situation is getting markedly better as we fill open territories, but those improvements will not have an impact on the Q4 P&L"
Slide 15 of the presentation reconciles the per share difference between our updated GAAP and adjusted EPS guidance ranges
We now expect the after-tax impact of these adjustments to total approximately $4.20 at the midpoint of our guidance
"Putting this all together, we now expect full-year 2017 adjusted EPS of between $3.39 and $3.50 per share, which is a $0.05 increase to the midpoint of our adjusted EPS guidance"
"Finally, our EPS guidance is based on weighted average fully diluted share count of approximately 89.9 million to 90.5 million shares for the full-year 2017. Before concluding, I'd like to provide a little more color around our fourth quarter outlook"
"As you know, the fourth quarter is our seasonally largest quarter"
"I'll also remind you that during the fourth quarter of 2016, we had some softness in both our Events and Consulting businesses"
"As we have rolled into the fourth quarter of 2017, we have great momentum in the traditional Gartner Research business and our NCVI performance through 2017 flows into the P&L"
"We also had easier compares for both the Events and Consulting businesses, and that flows through as well"
"We are expecting to finish Q4 in the year strongly, consistent with our performance through the first three quarters of 2017. In closing, we've continued our strong 2017 performance through the third quarter"
We are running a process to explore strategic alternatives for the Talent Assessment business and look forward to reporting back to you as that progresses
The traditional Gartner business is performing very well
The addition of CEB further strengthens our ability to capture the vast market opportunity ahead of us as we are now able to address the mission critical priorities of virtually all functional business leaders across every industry and size of enterprise worldwide
"As Gene mentioned, the integration is going exceptionally well"
"We set aggressive timelines, and we are achieving or beating them"
We've done all of that while driving acceleration of performance in the traditional Gartner business
"Now, I'll turn the call back over to the operator, and we'll be happy to take your questions"
"And so, it's too early to give full market color or market feedback"
"And I think, Tim, just to add to that point, the same can be said on the traditional Gartner sell side as well, where we filled more open territories than we've historically done"
"In fact, we're probably – we're at historical low levels of open territories, which is a positive"
"And again, that should start flowing through or gives us a bigger army, if you will, as we head into the fourth quarter, but most notably as we head into 2018."
"So, I mean the other thing I'd just add on Gene's point is on the 80, we are – that is not 80 in one area, one function"
"So, I think HR, finance, marketing, et cetera and it's also distributed geographically as well"
"And, Jeff, the second part of your question, just remind me again"
"So, I mean, the way to think about that is on the Gartner side, we've been focused on adding in areas where we are doing the best and obviously slowing down in areas that are a little more challenged"
"And again, we do expect given that we've seen this increase in the second half of 2017, they are in territory and they will be selling in Q4 and obviously they're in their first year"
"Anj, I think the other thing I'd add is we talked about this last quarter, and we talked about it, again, this quarter"
"And, I think what we're seeing in terms of dislocation or impact is kind of noisy a little bit in terms of the overall results"
"So, we're 100% committed that these are the right things to do"
"Again, we've done it on the Gartner side historically"
What's happening there is predominantly related to the TA business
"As I mentioned in the prepared remarks, there's a number of dynamics happening in there"
Some significantly smaller and going in both directions quite frankly
"And while we did see some nice uptick or uptick rather in the backlog position from Q2 to Q3, we're still not exactly where we'd love to be on those two teams"
"But, again, the way to think about it is it's predominantly related to the continued trends on a TA business, and there's a variety of other little or smaller puts and takes in there as well"
"And, Mike, fundamentally, our reason for being in the Events business is to provide that amazing experience for the end-users"
And Joe was at our Orlando event and many of you on the call were at our Orlando event as well
That's the kind of experience that we want to provide to all of our attendees that go to our events across the entire portfolio
"And it's just a great opportunity for, as Gene mentioned, Gartner seat holders to go and actually experience the research live and for non-Gartner seat holders to go and experience the research live"
And the reason that they're willing to carve out a couple days of their busy schedules and buying a ticket is because they get so much value at that event
"So, the way to think about it is we're organized by geography and practice and some are organized just by geography and some places, where we're larger, we're organized by a combination of region or geography and practice"
What I'd say is we talked about two specific teams here
It's out of several across the entire Consulting organization
"So, as Gene mentioned in his comments, and I think I did as well, broadly speaking, the Consulting business is performing well"
Gene described in detail the specific challenges for each of those teams
"We are working them, and we expect to have those things in much better shape as we roll into 2018."
"If we are performing better, we'll figure out how to go faster"
"If it's not going to plan, we'll figure out how to tweak it to make it go faster"
"And the one difference we generally have on the managing partner side as compared to the research sell side is a portion of our managing partners, our promotions is from within"
"And so, in those cases, while their ""more junior"" from managing partner perspective, they know Gartner, they know our capabilities, they have relationships with Gartner clients, et cetera"
"So, there's really no answer around how much is promotion versus how much is hired externally, but we are dealing with those two populations as we grow our managing partner capacity"
"But tomorrow, the issue might not be security, it might be moving to the cloud or it might be digitalizing your business"
"And so, again, we're not generally speaking of consulting organization, where we're going in with spot solutions"
"We do have a consulting team that actually does help with those kinds of things, but our research business, again, which is three quarters of our overall business, it's really about selling the annual subscription and giving our clients the view that the value proposition is broad and deep when they need it"
"And so, when security is a big deal, they have access to that security stuff"
"When cloud is a big deal for them, they have access to the cloud stuff"
"It certainly doesn't hurt as a conversation starter around, hey, you read about the Equifax breach last night or last week, rather, we have great stuff that can actually help you out, that's absolutely true"
I think it's absolutely the latter as you just described it
"Just to put it in perspective, Q3 generally is a pretty small quarter for our contract optimization business"
"And on a year-to-date basis, our contract optimization business is actually up nicely year-over-year"
"So, it was a little bit of a blip in Q3, nothing we'd say or see from a trend perspective, in fact probably opposite, given on a year-to-date basis that we are performing better than last year comparably"
It was a pretty modest increase on a very large number
One is the traditional Gartner Research performance has improved consistently over the course of this year
"As always, we're adjusting for latest foreign exchange rates and things like that"
I'll dive into the business segment performance in a minute
"From a macro perspective, we continue to see competitive pricing and a challenging commodities environment"
although strong results in Germany helped the region
"APJ was mixed with good performance in Japan and India, more than offset by broad softness in the rest of Asia"
I'll discuss these in further detail in context of the enterprise group
"First, we had structural changes including the year-over-year impact from our H3C divestiture"
The pricing environment was also increasingly difficult and hindered our ability to raise prices as an offset
"We anticipate the impact from commodities will remain significant in the near-term, but we believe we can begin to mitigate it as we move towards the end of the year"
"These savings will be a combination of tight control over spending and simplifying the organization through delayering and spend control actions as we become a smaller, more nimble company"
"However, we do expect to maintain share in the high-growth all-flash portion of the market"
"The supply constraints will likely linger in the near-term, which we expect to loosen towards the end of the year"
Aruba was especially strong in North America with over 100 new logo wins and is expected to take more than two point of share worldwide adjusted for H3C
"We've also stabilized the datacenter networking business, which grew slightly"
Orders also grew year-over-year for the fourth consecutive quarter giving us strong confidence that TS will grow through the current fiscal year
We saw a strong order performance in consulting with particular strength in network and data center as well as commercial media solutions
Financing volume declined 7% due to the indirect business and return on equity was up 60 basis points year-over-year to 13.5%
"This is a 160-basis point improvement year-over-year as reported and their improvement is over 10 points when adjusted for one-time items last year, including the TippingPoint divestiture gain"
And now to cash flow; free cash flow was better than expected at negative $64 million
"Turning to capital allocation, during the quarter we paid $107 million in dividend payments and repurchased $670 million of outstanding shares"
"We've now returned $1.5 billion to shareholders in the first-half of fiscal year '17, aligned to our $3 billion full year commitment"
"Moving to our two spin merge transactions, we completed our ES CSC spin merge transactions on April 1 on schedule and on budget"
"As is our typical practice, we will update our outlook when we close the software transaction"
This incremental payment will not reduce our overall cash balances as our ES pension funding requirements were less than expected by roughly the same amount
"In total, we continue to expect full year fiscal year '17 free cash flow of negative $1.8 billion"
"Overall while this quarter presented some challenges, like Meg, I'm confident that our plan is the right long-term strategy to position the future HPE for success"
"So first of all, just to remind everybody, the full-year guide includes a partial year for ES and a full year for software"
"So, it may be easiest to start with Q2. So Q2 we ended up with an EPS of $0.35, now $0.10 of that was related to ES, which was in discontinued operations"
"And then to your point, when you go from through 3Q to 4Q, you'd see that would imply about a $0.19 improvement quarter-over-quarter and there is really three elements to that"
"So, if you were to go look at last year's results, we saw a similar uplift in Q3 to Q4. Same thing in 2015, we would anticipate that same type of lift due to seasonality in Q4 of this year"
"So, the way I would think about that is roughly a third of that will come in Q3 and then two thirds of that will come in Q4 and that's what's going to drive the remainder of the lift"
We did not see that in Q1 obviously because we just separated the ES business in March
"So, all the overhead that we were allocating to ES in Q1, a lot of that was being allocated to EG"
"Again, we were hedged from an FX perspective in Q1 from the prior hedges that we put on in Q4. So, there was some pressure driven by that"
"We did know about that in Q1. To your point, we talked about that"
"So, we saw a big increase in Q1 that was when we got the 40% and 50% lift, but those have continued to go up in Q2. So that drives some incremental pressure"
"And then from a pricing point, we did go out with global price increases, but to be honest with you, the results were mixed"
We saw some traction in APJ and those came in in line with what we thought they would
"When you look at the Americas, we did not gain as much traction as we had anticipated, particularly in the U.S"
and that's driven by some very difficult competitive behaviors and challenges
We saw those same types of competitive dynamics in EMEA as well
"So, the overall pricing mitigation that we had talked about I'd say came in lighter than we had expected"
And then lastly you have typical seasonality from Q2 to Q1 or from Q1 to Q2. So that's driving a lot of the variation from quarter to quarter
"So, we expect that stabilization to continue as we go forward"
"Again, those will be that zero on a run rate basis"
So hopefully that gives you a little bit more color
"So, I'll answer the first piece and then Meg you can jump in here"
"But net-net, particularly given the spinoff and now the fact that we have 110,000 fewer people and we've had a little bit of time under our belt to operate in the new model if you will, we do think there are opportunities and there are going to be opportunities in the usual suspects"
"So, if you think about just tighter spending around travel, around optimizing programs spend, around tighter policy enforcement, we think there's more work to do there and we can continue to do that, but there's also an opportunity to simplify"
"So, if you think about now as a standalone or as a remain co"
"if you will, you have the global structural versus the regional, versus the country"
"You have spanning control, you have all those types of things"
"So, I'll give it a shot and Meg you can jump in here"
"Obviously, we're bias toward share buybacks right now"
That a framework that's worked well for us in the last 12 to 18 months and I would expect us to continue to operate within that framework going forward
"and again I'll take you back to Sam, we guided a $1.25 to $1.35 from an EPS perspective and we had normalized free cash flow of $2.1 billion to $2.4 billion"
"So, as I look at those three categories, those were all primarily EG related"
"So, I would adjust the $1.25 to $1.35 by that $0.12 and then I would also adjust your $2.1 billion to $2.4 billion of normalized free cash flow"
So that will give you sort of a baseline as we exit '17 of about $1.13 to $1.23 and I think there are two or three areas that are going to impact that you need to think about as we move forward
"Again, as we talked about earlier we are making traction in that we anticipate an APJ, but we're finding it very difficult in the Americas and EMEA"
"So, depending on how that equation plays out, that would have an impact on your baseline"
So that's how I would think about the baseline for Remain Co
from both a cash and EPS perspective and we will give much more guidance and clarity and visibility at SAM in October
But we would expect that to loosen up in the second half of the year particularly as 3D yields improve as well as more factories come online
So that should loosen up in the second half of the year
"I think half of that is really around lowering our rehire rates, taking a look at contractor"
"First, I’ll review the results for the quarter, then I’d like to talk about what we see ahead, how we are redesigning this company to be fit for purpose and how we are driving the innovation needed to win in the market"
"Overall, I am very pleased with our Q3 performance"
We saw strong momentum across key segments of the portfolio
"With that milestone behind us, we are off and running"
We expect to see even greater improvement next quarter
Free cash flow was also strong at over $400 million in the quarter putting us in a good position to achieve our full year outlook
We are also experiencing continued strength in High Performance Compute with our combined HPE and SGI portfolio
And early this summer we launched the first fully integrated HPE SimpliVity hyper converged offering
"With Nimble and our marketing-leading 3PAR portfolio, HPE delivers a full range of superior flash storage solutions for customers across every segment"
We are already seeing the benefits of the combination of Nimble and HPE and we couldn’t be more excited about the potential
Wireless LAN solutions grew over 30% in the quarter and Aruba won approximately 70 new logos
Aruba continues to take share from competitors like CISCO by introducing truly breakthrough solutions for the intelligent edge
"For example, in June, Aruba announced a fundamentally new core aggregation switch called Aruba 8400. This differentiated solution has a completely redesigned operating system to support the new requirements of modern networks"
"It enables simplified operations for the network operator, a more powerful and scalable core to support the influx of data, faster time to remediate issues and granular visibility into what’s in the network"
"To further strengthen our consulting capabilities, just this morning we announced our intent to acquire Cloud Technology Partners, a leading cloud consulting company that helps its Fortune 500 customers move to a cloud, build new cloud-based solutions and manage their cloud environment"
"As I mentioned earlier, while executing our business plan for the quarter, we also completed a major milestone"
"On Friday, we officially closed the spin-off and merger of our software business with Micro Focus on time and below budget"
This deal delivered approximately $9 billion in value and I am confident that this was a great move for the new Micro Focus and for HPE
"With that transaction now behind us, we have the right strategy and the right portfolio to succeed in today’s environment"
It is based on what customers are asking for today and where we see the market moving
"Now as a smaller organization with fewer lines of business and clear strategic priorities, we have the opportunity to create an internal structure and operating model that is simpler, nimbler and faster"
"To that end, this quarter we announced a program we are calling HPE Next"
The goal of HPE Next is to produce an organization that is precisely built to compete and win in the marketplace
"To do so, we are clean sheeting the operating model and organization structure to simplify how we work"
We are improving core business processes to clarify accountabilities and make the company more efficient and effective
All of this will be done with a continued commitment to operational excellence and to our customers
For example we are reducing the layers in our customer-facing organizations and shifting resources to the geographic markets that will drive the vast majority of our business
These changes will be better for HPE and for our customers
We will have much more detail on this program and the associated financial impact at our Security Analyst Meeting in October
"But as discussed on previous calls, we do expect to accelerate most of the $200 million of cash payments originally planned for fiscal year 2018 into Q4 2017 to help quickly enable this program"
"For example, we recently sold our Roseville site for approximately $100 million and are now leasing back smaller offices there"
"While we work to create the strong internal structure, we cannot lose sight of innovation"
"Our innovation is at the core of some of the most significant technology trends in the market today like cyber security, internet of things and artificial intelligence"
"For example, security has become a board level issue for customers across industries and market segments"
"In June, we announced the world’s most secured industry standard server"
HPE is the only company that embeds proprietary silicon-based security into its industry standard servers
"This approach addresses firmware attacks, which are one of the biggest threats facing enterprises and governments today"
"In the internet of things and in particularly the industrial internet of things, we see a tremendous opportunity as customers are looking to transform everything from retail environments to manufacturing floors"
"Another example is artificial intelligence, which is transforming industries from retail to manufacturing"
We help our customers use AI to simplify operations and drive business outcomes in a number of ways
"For example, we are incorporating Nimble’s predictive analytics technology that uses machine learning to predict and resolve performance issues across our storage portfolio"
Also our High Performance Compute systems provide the power that is required to crunch the massive amount of data used for AI applications
"As the amount of data grows, we have a strong roadmap to memory-driven computing based on our machine research project that will exponentially extend these capabilities in the future"
"Finally, there is one commonality our customers have, it’s that they live in a hybrid IT world"
Our top priority is to help them succeed in this environment and that requires a single data management plan across different environments
"At Discover we unveiled our vision for our new hybrid IT stack which brings together our industry-leading one view platform with a new multi-cloud management capability as well as key software assets like Cloud Cruiser to create a truly unique, software-defined approach to hybrid IT management"
We already have a number of beta customers and this platform will be widely available by the end of the year
"So, overall, I am very pleased with the quarter and we now have achieved most of our significant milestones for the year"
"While we have more work to do, I continue to be excited about the future of HPE"
The markets where we play today offer tremendous opportunity and with laser focus and a world-class portfolio we are positioned to win
We will have a lot more to tell you at our Security Analyst Meeting on October 18 in San Francisco
"Before I turn it over to Tim, I want to quickly touch on the devastation we are seeing in Texas caused by Hurricane Harvey"
HPE has been part of the Houston community for decades and our nearly 3400 employees are deeply rooted in that community
The well-being of our employees and their families has been our top concern over the past week and we are providing support to many of them
"From a business perspective, we are continuing to assess the impact"
"I want to thank our amazing team in Houston who has been working around the clock to get our office back up at running, answer customer enquiries and make sure their colleagues have the support they need"
"And adding to that Toni, I think we can return to historic levels in 2018 but we are going to be probably a quarter or so delayed and we’ll see what happens in commodity pricing and those other things, but I also think HPE Next will certainly help"
"So, listen, I thought, I was called in very late in the Uber search and I thought it was a very interesting business model to me"
It’s actually quite similar to Ebay in many ways
"And but I would say, that has really nothing to do with HPE which is quite special in its own right and we have a very focused strategy and a path forward to build a very big business on what I think is a quite compelling strategy, hybrid IT, edge computing, IOT and much more"
And we also have a remarkable customer base and partner base
"So, the other thing is I have dedicated the last six years of my life to this company and there is more work to do and I am here to help make this company successful and I am excited about the new strategy"
"So, lots more work to do and I actually am not going anywhere"
"So, the results were quite a bit better in servers"
"Flat overall, but grew 12% to 13% excluding tier-1. And I’d say there is a couple of things going on"
"One is better execution, particularly in Americas, but actually across the board"
And I think that execution will continue and we expect as we said to gain a bit of share in the second quarter
"We are also seeing good traction in hyper converge that grew triple digits, albeit off a small base"
"So, listen, I mean, I think the market is going to continue to be competitive"
"The only thing I will say is what I’ve learnt over the last six years in this business, there is always something that could happen here, whether it’s floods in Thailand, floods in Houston, I mean, this is a remarkable situation that we face in Houston I have to say"
"So, listen a core part of our strategy is we make hybrid IT simple"
And what CTP does very well is very consistent with our strategy which is what customers think to do is they just with their applications and their workloads
"So, that’s what this team does and we will add our expertise on on-prem private cloud"
We’ll add our expertise in – because we do some of this today and it’s an opportunity to scale that practice
"But listen, there are some workloads that customers probably should move to a public cloud and you know Azure is our public cloud partner"
We aim to be the leader in infrastructure behind Azure stack on-prem
"Yes, listen, we are excited now about our storage portfolio"
"3PAR plus Nimble, we get incremental scale, we get InfoSight which is obviously AI for the datacenter in the context of Nimble and I think one plus one here is going to equal more than two and we are really pleased, we are going to combine the R&D"
"We are leveraging, I think the strengths of both companies to give us more scale particularly in the All-Flash segment in the market which is growing"
And you will recall that only about 10% of datacenters have moved to All-Flash
So there is a lot of running room there and we are a leader in that marketplace and we aim to continue that trend
"But I have to say what we have done to the $200 million to $300 million in Q3 and Q4, I do not think it’s actually hurting the business"
I think we are executing better than we were before and you can see that in our results
We are essentially rearchitecting the company to be precisely built to compete and win in our markets and we are actually clean sheeting both the operating model and the organizational structure to simplify how we work and we want to take actions that optimize business processes and operations
And let me just give you a couple of examples of that and this has all become very obvious as ES has moved out
"When ES went to DXE on March 31, a $28 billion business on 110,000 people left this organization and it was in some way is like the tide going out"
You could see where there were real opportunities to improve and I’ll give you a perfect example
"So we have about 50,000 live configs, live configurations in our server business"
"And so, as we are to really focus on the configurations that make the most difference"
"This will – think about it, inventory, nodes, purchasing, supply chain, everything gets simpler and easier"
"Think about decreasing the layers in our customer-facing organization, so there is more accountability and decision-making closer to the customers"
"So, yes, I think the travel and the contractors are interesting and have not hurt the business, but the fundamental rearchitecture and reengineering of this business is I think very, very exciting"
I think it’s going to be good for customers and it’s going to be good for our speed and nimbleness and agility as a company
"Yes, so, listen, I think when Brexit was first announced, we did see a pause in the demand in the UK market"
No question about it because customers were trying to decide do they want to build their next datacenter in the UK or should they be building that datacenter someplace else in Europe
"I think we are still feeling some after-effects from Brexit, because it’s not clear exactly how this is all going to work"
"So I would say, the UK market is a bit challenged for us"
"It’s not only Brexit, it’s also the public sector that is cutting back spending quite dramatically"
"But I wouldn’t say it is doing as well as the rest of Western Europe and frankly the United States, Canada, Latin America and Asia are all outperforming the UK right now"
"Yes, so, listen, I’d say we are cautiously optimistic about our server business"
"Synergy has made a difference, High Performance Compute has made a difference, SimpliVity has made a difference and so there is – and we talk about Synergy is also really helping our blade business"
It’s interesting people are buying more C-7000s because there is a roadmap to a future state
I would also say Gen-10 is a real opportunity for us
I mentioned in my opening remarks that Gen-10 is now the industry’s most secure server
This is a big issue now for everybody and we are the only server company that has built security into the silicon in our servers
"I think, I would add commodity pressure, currency, it’s a very competitive pricing environment still"
"So, the only reason I am not even more enthusiastic is just there is challenges that remain in the market"
We are executing a lot better here than we have in the past with the stronger portfolio
"So, listen, Tier-1 continues to be a headwind for us"
"And so, we need to figure out what the long-term answer is on Cloudline"
"We will, I think have an answer by the Security Analysts Meeting about what we want to do about Cloudline on a go forward basis"
And Tim you might talk a little bit about how much – I think he asked a question about…
"So our objective is we got to go mine our installed base and then when a customer is thinking about upgrading to All-Flash, we got to make sure that we are in a competitive position there"
"What I can tell you is, it’s faster, better, cheaper"
"So, the federal business is an important part of our business in the United States"
We’ve got longstanding relationships with almost every agency and every part of the federal government
"So, a government shutdown would probably a blip honestly for us"
"What I will say is a lot of these purchases are long head, they buy and then the delivery is over a long period of time"
"So probably that would not – if there was a government shutdown in October, that probably wouldn’t affect us until a little bit later in 2018. But listen, the government shutdown I don’t think is our friend or anyone else who sells to the government"
That’s not our friend and we certainly hope that will not happen
"Yes, let me talk a little bit about Aruba and why I think Aruba is seeing the traction that they are seeing"
"First is, you hear about CIOs digitalizing their environment and their interactions with customers"
How many times have you heard a CIO saying I’ve got to digitize my environment
"In many ways, Aruba is the wedge of how that gets done"
Either they are transforming their employee environment in their campuses across the world
"So that it is a more modern work environment, mobile first and fundamentally changing their employee experience or it is a customer who is saying, I’ve got to change my interaction with my customers and whether that is a retail environment, fast food, hospitals, government interaction"
"So, Aruba is on the cutting edge of this digital transformation that every organization is undergoing and that is fundamentally what’s driving demand"
"Whether that is ClearPass or Niara, we win on security virtually all the time"
We have the most secure wireless network and that is an important decision criteria
They bought a company called Meridian which is way finding and GPS
"So whether that is way finding through a large big box retail environment, whether that is way finding through a hospital, this is a very important application that rides on top of Aruba"
"If you think about a hospital environment, where are- most of their assets are mobile and at the end of everyday they are never where they are supposed to be and the ability to asset tag and work to the wireless network has been a big selling point for a number of different customers"
But it is a very rapidly growing market and we are gaining share in the campus branch and edge
"And that by increasing the agility and the decision-making, I think actually, we will do more business"
"We’ve made progress on this over the last several years, but we need to make more progress"
"And how we change our pricing and our quoting to be much more customer-focused and customer-friendly, I think is an important element for us"
"If you think about reducing the number of SKUs and options, this also makes it easier to sell, and faster to configure on offering and I think that will accelerate"
We aim to go into FY 2018 with a clean sheet operating model in a way that I hope customers will see a difference right away and frankly it would be easier for our employees to get things done
"If you think about what was required to hold this company together when it was a very large multi-business company, some of those ways of doing business, we need to let go off"
"And I understand why it was here, it was necessary in terms of growing together such a large company, but now that we are more focused with a focused strategy and a smaller company, I think we can do better in terms of making it easier for our employees to get things done"
"Thanks, Andy, and thanks to everyone for joining us on the call today"
"As you have all seen, we have just announced that I will be stepping down as CEO of HPE at the end of Q1. Antonio Neri, HPE’s President will become President and CEO and join the HP Board on February 1, 2018. I will remain a Director on HPE’s Board"
I said for many years that the next leader of HPE should come from within the company and Antonio Neri is exactly the type of leader I had in mind
"He is a computer engineer by training, has a deep technology background and is passionate about our customers, partners, employees and culture"
The Board unanimously agreed that Antonio should be my successor
This transition is possible because of all the work we have done during the past 6 years to transform HP
Many of you will recall the challenges the company faced when I became CEO and will recognize how far we have come
"During the first couple of years, we focused on strengthening the company across a number of metrics"
"And we pivoted hard back towards partners, rebuilding our entire partner ecosystem and shifting resources to this critical go-to-market channel"
I am proud that today HPE is exiting the year with nearly $6 billion in net cash
"Most importantly, we reignited innovation and delivered groundbreaking new technology solutions"
"For example, we invested in the machine research project, which is focused on creating an entirely new computing architecture for the Big Data era putting memory at the core"
We introduced the first prototype earlier this year and have also begun incorporating certain technologies from the project into solutions available today
"From a much stronger position, we then looked at our portfolio and made a number of strategic decisions to further sharpen our focus and accelerate performance"
"The first critical step was the separation into two independent Fortune 100 companies, HPE and HP Inc"
"This was exactly the right decision, because it allowed both companies to optimize for strength and invest in core strategies"
Next we spun off and merged our application software business with Micro Focus creating the seventh largest pure-play software company in the world
The ES and software transactions delivered more than $20 billion in value for HPE and our shareholders
This unique approach has put us in a strong position to capitalize on the second largest IT market in the world
"For example, in hybrid IT, we acquired SGI to strengthen our high-performance compute business, SimpliVity to bolster our hyper-converged offering and Nimble Storage to complete our storage offering from entry-level to the high-end and accelerate our transition to all flash"
"We acquired Aruba, the leader in wireless networking, which has become the heart of our intelligent edge strategy"
"Since then, we strengthened Aruba with Niara bringing machine learning and big data analytics to network security and Rasa Networks for network performance management and analytics"
We acquired cloud technology partners to extend our cloud consulting expertise and Cloud Cruiser to enhance our IT consumption models like our flexible capacity offering
"For example, we launched the industry’s first composable offering called Synergy, and we now have more than 1,100 customers on the platform"
"In high-performance compute, we launched Apollo, which is helping to bring supercomputing capabilities to the enterprise"
"To address the explosion in industrial IoT, we launched our highly differentiated Edgeline Converged Systems"
"With security becoming a board level issue, we launched the industry’s most secure standard server"
"For the first time, HPE is a Gartner Magic Quadrant leader in all of its core business categories"
"As a whole, these moves have paid off and I am very proud of the shareholder value we have created along the way"
"HP and then HPE have returned nearly $18 billion to shareholders through share repurchases and dividends since 2012. And since the birth of HPE on November 2, 2015, we have delivered a total shareholder return of 89%, which is more than three times that of the S&P 500. I know Antonio will have the same focus on delivering value for our shareholders going forward"
"By fixing, improving and reposition the company I joined, HPE has worked its way into a strong competitive position ready to drive the next phase of shareholder value and you are starting to see the payoff in our results"
"We have stabilized our core rack and tower server business, which grew 6% and 7% year-over-year in Q3 and Q4 respectively"
Aruba performance continues to accelerate and outpace the market growing 19% in Q4 and 22% for the year
Our high-performance compute portfolio is the best in the industry and we continue to win deals and extend our market leadership position
"We are confident in our ability to achieve our full year target of 11% to 12% in FY ‘18. At every turn, HPE is preparing itself for the future"
"In Q4, we moved into the execution phase of HPE Next, our program to redesign the company to be purpose built for today’s and tomorrow’s competitive environment"
"HPE Next is all about simplifying the way we work, driving execution and investing in innovations that will differentiate our solutions in the years ahead"
"I am very pleased that we saw no disruption in Q4. In fact, HPE Next has galvanized the entire company around our vision to drive tremendous value for customers, partners and ultimately shareholders and all of this is being driven by the strong leadership team we have in place"
"Together, this team has owned and refined our go forward strategy which is crystal clear and laser focused"
"First, the world is becoming hybrid and we make hybrid IT simple"
We do that through offerings that help customers optimize their core IT environments with secure software-defined technologies that seamlessly integrate across traditional IT and multiple public and private clouds
Hybrid IT will give customers a new level of transparency and manageability for all their applications and data from the core to the cloud to the intelligent edge
Simplicity ultimately means IT that is invisible and autonomous and that is exactly what we plan to deliver
"To that end just this morning, we announced that we have rolled out HPE InfoSight, our highly differentiated predictive AI technology across our entire 3PAR portfolio"
This is going to be a game changer for our storage business
"Leveraging advanced machine learning, HPE InfoSight is the next step in our vision for an autonomous data center"
"And next week at Discover Madrid, we will officially introduce Project New Stack"
"New Stack is all about what our customers want most, simplicity and control"
"It’s a hybrid IT management platform that lets you deploy, operate and optimize public cloud and on-prem private cloud environments through a simple and unified experience and it will accelerate app development and deployment with integrated DevOps capabilities"
This is what our customers have been asking for and no one else in the market can match the platform we have created
These are all areas where we are well ahead of the market and the industry is taking notice
"Earlier this fall, Aruba was named a leader in Gartner’s Magic Quadrant for wired and wireless networking and placed first provision"
This is the first time that Cisco has ever been displaced from this position
"Our offering in this area, Flexible Capacity is different than anything else on the market"
Look out for more news in this area at Discover next week
Let me say in closing that it has been the privilege of a lifetime to lead the company Founded by Bill Hewlett and Dave Packard
I am proud of what we have accomplished during the past 6 years
We have laid out a strong foundation for a prosperous future and now is the right time for Antonio and a new generation of leaders to take the reins
I look forward to experiencing HPE’s progress as a board member and I am very confident that Antonio will enjoy tremendous success
"And now, I will hand the call over to Tim who will provide details on the financial results"
And we are also going to aggressively add some more specialists to the field
So I think you hit it right on the head a little weakness in the U.S
But you will see some declines in the server business next year as that Tier 1 business continues to bleed off
"And then listen, our Gen10 server, which is on the new Intel chip called Skylake, is off to a good start"
"There is some concern in the industry that because there is not quite the features and functionality advancement that there normally is in their tick-tock that, that might be a slower ramp, but thus far we are not seeing that"
"So, we are cautiously optimistic about Gen10. What I will say about – based on Skylake, what I will say about Gen10 is we have a real point of difference in Gen10 which is we have produced the most secure server in the world"
Security is built in as a root of trust into the silicon
"No one else has anything like this and this is making a real difference, because security continues to be an enormous issue for everyone"
"We are not seeing any diminution of that tick-tock, but we will have to see how it plays out"
"So, Tony, I would say there hasn’t been a change in sentiment"
What I think is absolutely true is Antonio is ready to take the reins and go the distance
"And if you think about it, we have a much smaller, much nimbler, much more focused company"
And I think it is absolutely the right time for Antonio and a new generation of leaders to take the reins
We have got a strategy that is crystal clear and focused
"And I think I have added a lot of value here in terms of shareholder value creation, financial restructuring, nice ignition of the innovation engine, but the next CEO of this company needs to be a deeper technologist and that’s exactly what Antonio is"
He is a trained computer engineer and has worked in almost every business of this company
And I also think Antonio is going to lead the next phase of value creation
"I think over 220% shareholder value from right before the announcement of the turnaround in the fall of 2012, just HPE alone 89% increase since the separation, which is three times the S&P 500 and HPE Next and the simplification of our business and the execution of the strategy that Antonio and I put together between the two of us, he is going to lead that next generation of shareholder value creation"
"And so we’re leveraging a lot of the best practices that enabled us to deliver our recent separations on time, on budget it was the divestiture management office approach or the separation management approach"
"And they went started November 1, all firing on all cylinders with the new organization and with a couple of months under their belt"
"And lastly Shannon, I would say we didn’t talk about it much, but Hurricane Harvey disrupted our supply chain in a reasonably dramatic fashion"
"So, we have announced that we are no longer going to be manufacturing in Houston, any U.S"
"required manufacturing will be done in Chippewa Falls, Wisconsin and then we are redistributing our manufacturing to locations around the world"
"So, that was another part of the weakness, some weakness in Q4. The good news is we go into Q1 with a nice backlog, because we just simply couldn’t turn the supply chain on a dime"
"So, we have got a really nice backlog going into Q1."
"So, I don’t think he is going to lead another one in terms of reinventing that"
"So, you can expect entirely consistent strategy from Antonio"
"Yes, so what I would say is that HPE is a whole lot more relevant to customers and partners then it was"
So now HPE is more relevant they know what we stand for and the core value proposition is the software defined data center on-prem with public cloud like economics
"This whole moved to flexible capacity and a pay-per-use model is actually encouraging people to say, do I need to move every workload to the public cloud"
"And then our new stack offering, our new stack announcement discovered next week, I think it’s going to be a milestone and a cap stone in some ways to the innovation and agenda that’s we’ve driven over the last 6 years"
"So I’d say that those are the main things, I would also say the speed at which we move this company was a slower company then I would have like to seen 6 years ago, and now we jump on opportunities on problems it’s far more nimble, far more agile and I think you frankly just a better run company than it was 6 years ago"
I don’t think we will quantify that on this call
And so I think you will see improvement in the U.S
"And by way, we did very well in EMEA, very well in APJ"
"So, I think you will see an improvement in the U.S"
"So, first of all, I am going to work with Antonio through the transition at the end of January and then I will be a very active board member"
"And actually after a 35 year nonstop career, I have actually come to take a little downtime, but there is no chance, I am going to a competitor, no chance"
"Listen I have to say I become quite loyal to Hewlett-Packard and to Hewlett-Packard Enterprise, I love this company and I would never go to a competitor"
"So, listen I think the storage business is benefiting from the explosion of data and we are seeing that every single day"
We are also benefiting by storage becoming embedded in server architecture
InfoSight I think is going to be a major game changer for our storage business is part of the reason that Nimble is growing at 80% is because it’s AI for the storage arrays in a way that does predictive analytics and predictive maintenance
"So, if we found something that we thought was important in the storage business that benefited from our distribution channel and we saw a good business case and it was priced right, we might think about doing it"
"Aruba, both wired and wireless, has had a really great fiscal year ‘17. And the thesis when we bought Aruba was the wireless would actually drag along the wired and that has actually turned out to be the case, particularly in the United States, where the wired portfolio had a great ‘17 in a particularly strong Q4. Increasingly, we see demand for Aruba on a flexible capacity model"
We also I think are benefiting from the Gartner Magic Quadrant that I referred to or Tim referred to in the script where we are for the first time a leader in networking in the vision category and it’s been – this is the first time in three decades that Cisco has not owned that top spot and we can feel the momentum in the marketplace
"With regard to Arista, so that partnership continues to go along"
"At the moment it’s going along quite nicely and I think we are both pleased with where we are, but there could be more there"
"Good afternoon, everyone, and thank you for joining us today"
Let me start by saying I'm very pleased with our performance this quarter
"As a more nimble company, we've been able to accelerate our strategy, and we're now firing on all cylinders"
"With a strong start to our 2017 fiscal year, we continued to build on our track record of delivering on all of our financial commitments with discipline, focus, and execution"
Let me take a moment to share the notable highlights for the quarter
"We exceeded free cash flow expectations, delivering more than $700 million and returning more than $600 million to shareholders through share repurchases and dividends"
We are doing this with a relentless focus on innovation and engineering technologies that consistently amaze our partners and customers
"A perfect demonstration of this is in Personal Systems, where yet again for the third consecutive quarter the team delivered exceptional results"
Our focus is to bring customer value and innovation to market
"And because of this, we have been rewarded with share gains"
"Without a doubt, our momentum can be attributed to the strongest portfolio in our history"
We worked very hard to ensure that HP's PCs and printers are the world's most secure and manageable
"Last week at RSA, we announced HP Sure Click, the world's only integrated browsing solution that protects HP devices from the number one attack vector, which is malware"
The supplements our best-in-class security stack and is part of our HP Secure promise to customers
"If you ask Ron Coughlin, HP's President of Personal Systems, about the magic within the business, he would tell you that we are continuously changing the way we create and deliver computing experiences that amaze"
It is based on a unique understanding of the market and direct collaboration with our customers and partners
Several large wins this quarter resulted from these deep partnerships
"Corning, a leading innovator in material sciences, and Roche, one of the largest biotech companies in the world, both depend on HP to deliver a comprehensive package for everything from desktops to workstations to notebooks"
"Now turning to Printing, we made great progress in stabilizing the business"
"We continued to deliver highly secure and innovative printing solutions for our customers and partners and had several significant wins, including one of our biggest ever with one of the world's largest providers of technology solutions to the automotive industry"
"We expect the transaction to close in the second half of 2017, subject to regulatory approval and other customary closing conditions"
"Customers such as Jabil, Materialise, and Shapeways have received installations, and we are tracking to our strategy to disrupt the $12 trillion traditional manufacturing market"
"And according to them, some of their own end customers have said they couldn't believe 3D Printing could produce that kind of quality"
"Overall, quarter one was a quarter of innovation and solid execution"
"I'm proud of the results we were able to deliver, but we're never satisfied"
"We're continuing to accelerate and deliver for our customers, partners, employees, and shareholders"
And I remain confident in our ability to deliver on our financial commitments going forward
"Again, fantastic quarter across all of our business segments"
"And now, I'll turn the call over to Cathie to provide more details on our financial outlook"
"Actual performance continues to meet and it sometimes beat the Four Box Model forecast, which means that we firmly believe that the strategy that we're executing to is the right strategy and that you've seen those metrics play out inside the business results"
So it gives us increased confidence as we head towards the end of 2017 that we'll stabilize in constant currency
And then you're seeing that show up in the units at positive 6% versus last year negative 16%
"Okay, I'll start, and then I'm sure Cathie will no doubt chime in here"
"I think Cathie answered the question on Print pretty substantially, so I'm not sure that there's much additional information to add there"
"We also had currency in Personal Systems, but we were also facing fairly competitive or increased prices for components"
"The innovation portfolio is as strong as it's ever been, more than 23 awards that we won at CES"
And you saw obviously Personal Systems up 10% year over year as reported or 11% in constant-currency
And that makes all sorts of sense from our perspective because we're trying to look always through the lens of a customer
"And a customer-centric approach means that we try to develop technologies that make sense for a customer, whether they happen to be laser or ink-based or whatever else we have in our kit bag as opposed to being driven by technology lines, and that's why we made that alignment change"
I think it's always helpful to answer this question in two parts
"There's the short-term view of the market, and I'll get Cathie to tackle that, and then I'll give you a long-term view of how we see the PC market, and then we'll close out with the rest of your question"
"And more broadly speaking, if I helicopter up a little bit, I don't think our views have fundamentally changed on this business"
I always like to remind everyone; it's a $333 billion market
It's very competitive and it continues to consolidate
"So when we take share faster than our competitors three quarters in a row and we're executing the way we're executing but not taking share for share's sake, which we're committed to not doing, what we end up with is a business that's firing on all cylinders"
About half the market is not the core of what you think about as desktops and notebooks
"There are megatrends around consumer and commercial, this OneLife, millennials, mobility and security"
"So I think across the globe, a lot of very detailed plans at a partner level, down at a customer level"
"And then we marry that together with the marketing work that Antonio [Lucio] and his team are driving, some terrific new marketing campaigns anchored around security, which is really resonating with our Customer Advisory Council and other customers and partners"
"Look, when we think about Personal Systems commodities, there's really three commodities that are under pressure"
"It's memory, which includes random access memory as well as SDD (sic) [SSD]"
And we take a very long-term approach with our supplier base
We do seek to leverage the balance sheet wherever it makes sense economically for us to do that
How long will this last? It's a little bit difficult to completely forecast that
"But I would say from previous experience, it takes a long time to change factory output levels"
"And, for example, what's affecting memory at the moment is the doubling in density across most of the mobile phone market because the mobile phones are selling many more in absolute units, but the fact that they all doubled their density puts pressure on that memory market"
"So these cycles can often last quite some time and it varies by commodity, but that should be the way you should be thinking about it"
"Again, looking through the eyes of a customer, it increases customer satisfaction when there's not enormous price volatility in the market that encourages gray imports and all of the issues associated with that and the frustrations associated with that"
So we've seen the gray marketing activity significantly reduced
"We're seeing much more stable prices in the market, which is a benefit for our customers, channel partners, and our business performance"
We're confident in stabilizing supplies by the end of 2017.
"Growth is the next two to three years, and future is the 3 to 10-year timeframe, and that's how we think about this business"
I thank you all for taking the time out of your busy schedules to tune in today
I think this quarter can best be characterized as relentless execution and innovation that delivered really strong results
Innovation is at the heart of driving the meaningful share gains that we had
"We're the pillar of stability right now in the industry, whether it's on the security dimension or innovation dimension, regardless of the market conditions"
"We have increased confidence in our ability to deliver on the commitments that we laid out at the security analyst meeting, and I remain convinced, as does the rest of our entire organization, that our most innovative days lie ahead of us"
"Before handing the call over to Dion, let me remind you that this call is being webcast"
A replay of the webcast will be made available shortly after the call for approximately one year
"As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today"
HP assumes no obligation and does not intend to update any such forward-looking statements
"We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amount ultimately reported in HP's Form 10-Q for the fiscal quarter ended April 30, 2017 and HP's other SEC filings"
"For financial information that has been expressed on a non-GAAP basis, we’ve included reconciliations to comparable GAAP information"
"Good afternoon, everyone, and thank you for joining us today"
"As a company, we’re performing across our portfolio, our regions and our key financial metrics"
"Over the last six quarters, we've been building momentum, improving our business fundamentals and delivering on what we said we would do"
"Our goal is to consistently deliver on our financial commitments every quarter, while setting the company up for long-term success"
"Through the same year-to-date time period, we’ve returned approximately $1.1 billion to shareholders through share repurchases and dividends"
"Looking at the business segment performance, Personal Systems continued to deliver and demonstrate how playing our game drives strong results"
"This is a great example of how segmenting market opportunities, innovating and executing can yield amazing results"
We achieved 21.7% global market share and regained the number one PC market position globally
"Remember, the market share leadership is an outcome, not an objective"
"Today, security is top of mind for consumers and the boardroom alike"
Just look at the cybersecurity events over the past couple of weeks
"With this backdrop, we continue to deliver the most secure and manageable PCs in the world, with powerful new commercial notebooks and desktops, including EliteBook x360 with HP Sure View and HP Sure Click"
"As part of our world-class security stack, Sure View defends customers from visual hacking, with a built-in electronic privacy screen"
"HP Sure Click protects customers and organizations from Web-based security threats, including malware and other viruses that we are all seeing daily in the news"
"We also announced HP Sure Start, the world’s only integrated browsing solution, which protects our devices from malware"
"In addition to security, mobility is a top priority for our customers and a differentiator for HP"
"This discerning audience took notice, honoring the Pro x2 with several important awards, including a Category Best of Show, Top Pick and Top Innovation"
"While the PC market has been healthier than expected during the past few quarters, the market remains highly competitive and volatile"
"I'm truly proud of what we've achieved in Personal Systems and energized by the focus, energy and talent of our people who know how to combine innovation with incredible execution"
"It's been a long time since we've been able to say that, especially in a single quarter, and we’re excited to be igniting a real renaissance in Printing"
"The overall print hardware market was up slightly in calendar quarter one, a bit better than expected"
"We continue to pull the levers within the four box model; and when combined with our operational progress, both are having a favorable impact on the business"
We also grew consumer enrollment in Instant Ink and continue to expand into new geographies
"At the end of Q2, we began shipping our disruptive portfolio of A3 multifunction printers"
Our journey is just beginning and we are aggressively on-boarding new partners and attacking new opportunities in the $55 billion A3 copier market
"We expect the transaction to close in the second half of 2017, subject to regulatory approval and other customary closing conditions"
"Across the board, we’re building momentum and advancing the entire ecosystem"
"Also, just this past weekend, at the inaugural 3D printing industry awards, HP's Multi Jet Fusion technology was recognized as the innovation of the year"
Disrupting the $12 trillion manufacturing sector and transforming industries is a long-term vision and one that we are making concrete strategic progress on today
"To summarize, Q2 was a breakthrough quarter for us, with strong year-over-year performance across our segments and regions"
"We’re executing, meeting our commitments and capitalizing on our momentum"
"Every single day, we must continue to amaze our customers and partners with the most competitive and disruptive portfolio in our industry and provide them with meaningful value and opportunity"
We know how to operate up and down markets that we will continue to face and are prepared to tackle the opportunities and challenges that lie ahead
"By embracing change, we have an opportunity to accelerate, to innovate, to improve and, ultimately, to reinvent for our customers, partners, employees and shareholders"
I’ll now turn the call over to Cathie to provide more details and our financial outlook
We've continued the momentum from our strong first half and I'm very pleased with our third quarter results
We continue to see broad-based and consistent performance across businesses and geographies
"Regionally, year-over-year, Americas grew 8%, EMEA was up 14%, and APJ grew 15%, all in constant currency"
"However, we remain cautious about the potential negative impact on demand, which could result from higher prices"
"Hardware units were up 1% year-over-year, with consumer units up 1% and commercial units flat"
"In calendar Q2, overall print unit share was roughly flat sequentially and year-over-year"
"In Q3, currency represented less than a point of delta, so supplies grew 10% year-over-year in constant currency"
We are very pleased to have achieved supply stabilization a quarter earlier than expected
"We also expect to consistently operate with supplies channel inventory levels, remaining at or below our ceiling"
"And in Q3, channel inventory levels were below the ceiling"
The year-over-year decline was primarily due to the one-time adjustments I mentioned earlier
"Sequentially, the 10-basis point decline is consistent with normal seasonality"
Cash flow from operations was $1.8 billion in Q3 and approximately $3 billion year-to-date
Free cash flow was $1.7 billion in the quarter and approximately $2.8 billion year-to-date
This incremental volume materially helped near-term working capital including days payable
"Also, we saw positive business linearity in purchasing and other receivables, which supported improved timing of cash flows by couple of hundred million dollars"
Year-to-date cash flow is now ahead of our full-year range provided during last year's security analyst meeting
We are now targeting a higher revised full-year free cash flow outlook of at least $3 billion
"This assumes a cash conversion cycle down sequentially, more-than-normal seasonality, and more in line with the first half performance"
"During the quarter, we had a total capital return of $524 million through share repurchases and cash dividends"
"Year-to-date, we have returned 56% of free cash flow as compared to our full-year target of 50% to 75%"
"For the full year, we still expect to deliver returns towards the higher end of the range"
"Looking ahead, keep the following in mind related to our financial outlook"
We also expect to continue placing units with a positive NPV
"And, Sherri, we'll talk more about FY 2018 specifically at our security analyst meeting in October"
And then the other part is that we are very much focused on high-value units
"As we've talked about before, all units are not created equal in the market"
And where we want to focus all of our energy is really on positive NPV and those typically are really the high usage categories
That's where we want to grow and where we want to gain share
I don't think there is necessarily a normalized free cash flow
"So, the concept of normalized free cash flow is really not one that I can really comment on directly"
"So, it's that it'll grow less quickly than what is typical seasonality, not that it'll decline"
"And then in terms of price sensitivity, we see the greatest impact in the commercial space"
Consumer price increases have taken hold and we continue to perform very well in the consumer space
"That is up both year-over-year and sequentially, a point or a little over a point"
"So, that's one of the metrics you can absolutely see externally and track as we make progress here"
"Just to make sure that we're all communicating well, what I said was that our business in Personal Systems would grow slower than normal seasonality for our business"
"So, Toni, we'll talk a lot more about 2018, obviously, at the security analyst meeting in October"
But I think one of the things that needs to be brought into that analysis is what's going to happen in the market from a pricing perspective
We've now seen in fiscal 2017 pretty significant price increases
"So, first, on the Samsung part of your question, Toni, we don't expect that Samsung is going to close until calendar Q4. So, we do not expect that in our fiscal Q4. And so, I think that's important"
"And then, in terms of kind of the puts and takes of the sequential view, probably, the two biggest things to call out"
But probably the bigger impact is just the opportunity that we see to place more positive NPV units
"And so, that's really what is kind of the biggest impact sequentially on EPS – I’m sorry, relative to normal seasonality"
"What we have talked about is, obviously, our commercial business is bigger because of the usage than our consumer business"
"And, therefore, you'll see a difference in toner and ink as a result of that"
"Although, just to be clear, some of the consumer now has our low-end laser in it"
"So, when we talk about our home print system, it includes low-end laser"
"But, ultimately, what's going to drive the supplies is really the four-box model divers"
"It's not ink or toner, it's really about driving across the four boxes, focusing on placing the right units, the high-quality units, working on your installed base, working on, obviously, our market share – our aftermarket market share, as well as the pricing related to supplies"
"So, I'm not aware of other views that say it's going to be flat"
"We actually think it's going to continue to go up, but at a slower rate"
"And then when you step back and you look at it kind of Q4 versus Q3, in the course of Q3, the commodity prices continue to go up"
"So, of course, that will represent a headwind for us in Q4, but we do expect some additional increases in commodities in Q4 as well"
"Last quarter, we said that the commercial price increases were going to take a while to work their way through and we saw some of that pickup in Q3. Some of that pickup on in Q3. So, I'm not suggesting that commercial customers are completely sitting on the sidelines at all"
"So, what I have is for OI&E last year was a negative $65 million in Q3 and for this year it's a negative $66 million"
"So, I don't see a real big difference there on a year-over-year – are you looking at a full year basis?"
"I don't remember off the top of my head what happened last – can we take that offline and I can look at that? And maybe even while we're talking here, I can look it up"
"And then, on OpEx, OpEx numbers were a little higher than we had modeled"
"So, the big drivers off of normal sequential performance from Q3 to Q4 is basically the units that we expect to be able to place"
That’s the biggest reason for not being in normal sequential
"We are fairly well hedged, in the sense that we have a fair amount of inventory, strategic buy inventory"
I don't really think of the cash conversion cycle as redefining itself
"For this quarter, very pleased with the performance"
"We had a cash conversion cycle of minus 35 days, which was five days better sequentially"
"But as I mentioned, that was really driven by the incredible strength and sequential performance of the Personal Systems business"
"What we expect for this year is that we would do at least $3 billion in free cash flow, so making great progress on free cash flow, and that our cash conversion cycle would likely end the year at a minus 29 days, kind of in line with FY 2016's exit"
And I think of that more as kind of the range that I would be modeling over the longer-term
"Good afternoon, everyone, and thank you for joining us today"
"Our results today echo what you heard from us, HP is strong and getting stronger"
And my message to all of you is we’re just getting started
It’s results like these that give us confidence in the trajectory of our business moving forward
It was just two years ago that we began our reinvention journey
"We did what we said we’d do, and I’m proud of the substantial progress we have made"
"There is more work to do, but we’ve never been more competitive, more fixated on the customer, more innovative, and more focused on operational excellence than we’re today"
"Both, Personal Systems and Printing grew year-over-year, together for the third consecutive quarter"
"We delivered $0.5 billion of free cash flow in the quarter, taking us to $3.3 billion for the full year"
And we returned 69% of our FY17 free cash flow to shareholders through share repurchases and dividends
This team is hitting their stride with truly outstanding performance
We saw year-over-year share gains continuing in each region in both consumer and commercial
"In quarter four, we continue to surprise and delight the market with innovation"
"We announced our biggest premium launch across consumer and commercial, introduced the world’s most powerful and first detachable PC workstation, unleashed our most powerful OMEN X laptop for gaming athletes"
"And as you heard from us at SAM, we are doubling down on security with the world’s most secure and manageable commercial PCs"
"Security is built into our systems from the BIOS level and up, securing at, below, and above the operating system"
We are seeing strong wins by our channel partners and a healthy pipeline for the future
"Hardware units grew both year-over-year and sequentially, driven by consumer"
"Total print unit market share was 40% in calendar quarter three, and we gained share in both our office and home businesses"
"The graphics business continues to grow, even without the positive uplift that we experienced last year from the industry-wide drupa event"
"And as highlighted at the Security Analyst Meeting, we signed the single largest deal in our graphics history with Lightning Source"
"It’s a multimillion dollar, multiyear deal to deploy 24 PageWide digital presses to five printing sites on three continents"
"In A3, we continued to onboard new partners and gain market share, both year-over-year and sequentially"
"This creates a combined team, focused on innovation, acceleration and print excellence"
"As our two teams become one, we will preserve the best, the best talent, the best culture and the best technology to become better, stronger and faster"
"As previously highlighted, we As previously highlighted, we added more than 20 new partners including Henkel, our first worldwide reseller, and announced partnerships with Deloitte and Siemens to digitally transform manufacturing"
"We believe that Multi Jet Fusion will be the only 3D printing technology in the industry that can make mechanically robust, fully functional, color parts"
"Not only, are we leaders in polymers but we’re going to disrupt 3D printing with metals"
Stay tuned for more news about this in the coming year
"Overall, we’ve done what we said we would do"
We’re delivering returns for our shareholders and investing in the future to create long-term value
"I’m very pleased with our Q4 and FY17 results, but we always have more work to do for our customers, partners, employees and investors"
"Our markets remain highly competitive and our year-over-year compares are now much tougher, but we’re ready for it"
I’m optimistic about our future and excited that we’re just getting started
I will now turn the call over to Cathie to provide more details on our performance and our financial outlook
"And Katy just to reiterate the point that Cathie made to Jim’s question, the rate was slightly down this quarter but we did place sequentially many more units than we ordinarily would"
"And of course that bring the razorblade business model, generates returns over time, positive NPV units and a good deal for our investors"
"I think it’s always important to remember, Steve, we’re executing across our entire strategy, which is to cross three pillars of our core business"
"Well, let me start sort of long-term, and Cathie might want to weigh in a little more than that"
"I’d still remind everybody this is still a $333 billion market that one in five machines got an HP logo on it, means four out of five don’t; that represents opportunity for us"
I’ve said consistently that the market is consolidating; the top four grew 3.5%
"So, certainly, the big is getting bigger and we are growing much faster than the big four"
"And that’s really off the back of strong innovation to this lineup, I think we have ever had, we are getting incredibly positive reviews consistently"
"But those share gains, I’ll remind everyone and not an objective but rather an outcome of all of this work"
"There is no single magic pill that was all categories, all regions"
"I think really kudos to the team both regionally within the business units, the supply chains and the functions"
I think we are in a very good position to compete as we go forward in this market
"Why don’t I sort of stop, because I know, we’ve got some new investors that have come into the stock and I think it’s important to reiterate and recall why this transaction was important to us, given that we’ve just closed the transaction, and then Cathie can talk specifically to those numbers"
"First of all, we welcome the Samsung print team to our family"
"And for our new investors, we bought this business for three primary reasons"
"Firstly, the A3 market is a $55 billion market and we are underpenetrated in that market relative to the A4 market where we have very strong market leadership"
"The traditional A3 players operate very complex machines, if you were to break those machines down, they would -- you would see thousands of parts on the ground"
"The Samsung technology really disrupts those traditional copiers with copier level performance but significantly less complex machine, the thousands of parts, when you were to break a Samsung down would be hundreds of parts"
"Now having a very full portfolio, actually opens up A4, new A4 opportunities for us"
"And the third is, we now have incredible thing, we inherited more than a 1,000 top class engineers, industry-leading R&D team in laser space, includes go-to-market capability more than 6,500 patents being added to our core"
And I think this newly combined team is increasingly diverse and industry-leading
And so with that we have a lot of confidence in our ability to attract at least 12 points -- or 12% of A3 market share in the next three years
"And so, as we move more and more into the A3 market and we shift the business from transactional to contractual, that generally comes with the higher supplies attraction"
And so the composition of supplies over time is indeed going to change
"Of course, we were competitors up until that sort of 20 days ago"
"The integration is going incredibly well; the team is incredibly focused on our customers, doing all the right things"
"But, we’re learning every day as we get under the covers of this business"
We would expect that as our team looks at best industry practice that’s got us to the position where we are today that there will indeed be opportunities to capture those synergies
"Well, I think you’ve actually summarized it really well"
We believe we can create significant shareholder value
"As we outlined at the Security Analyst Meeting, we have confidence in our ability to execute and hope that we’ve dropped $1 or $2 in the trust bank over the course of the last couple of years to demonstrate that we can execute"
We’re very disciplined about establishing and hitting the milestones that we lay out
"Same is true for graphics and the very targeted unit placements that Cathie talked about, NPV positive units and print"
And I think there are better sources of data to look at how much share we’ve taken in that particular space
And I wouldn’t want to make our analysts redundant
This is an incredible franchise; it’s a growing franchise; the airier is growing
And there is more people that are tuning in to these battlegrounds than game 7 of the NBA
I think it’s really worth reiterating why we acquired this asset
And I’m being pretty clear about that as is Cathie
We don’t chase share for share’s sake
"More than a 1,000 engineers of very rich portfolio of patents"
It’s all of those reasons that we’ll pay dividends over time that we’re incredibly interested in and why we acquired this asset and we’re just kind of getting started in this space
"So, with that, I want to take the opportunity to thank you all"
"I have been Americanized and I understand, it is a season of Thanksgiving, and we’re between you and a turkey"
"So, I want to thank you for following us through the course of our reinvention journey"
Our results give us real confidence in the trajectory of our business going forward
We’re proud of the results that we’re delivering and proud that we’ve been very open and transparent and dependable
We think it’s been a great year of reinvention and we’re just getting started
2016 was a record year for Intel and 2017 is off to a strong start
We executed on several important milestones in the quarter
We continue to see the worldwide PC supply chain operate at healthy levels
Consistent with our prior guidance the Intel Security transaction closed at the beginning of the second quarter
Let me remind you of our capital allocation priorities and our progress
In the quarter we generated $3.9 billion of cash from operations
"We repurchased $2 billion in capital assets, paid $1.2 billion in dividends, increased the dividend by 5% and repurchased about $1.2 billion of stock"
"In addition, we generated approximately $400 million from the sale of some of our interests in ASML, which generated $235 million of pre-tax gains"
Today we announced an increase in our share buyback authorization by $10 billion
"Currently, we have approximately $15 billion authorization"
We expect to continue to offset dilution from our stock-based programs and opportunistically reduce our outstanding share count over time
"Second, we continued to see strong demand signals in our memory business through the year and our Fab 68 in Dalian ramping to be able to supply higher demand levels"
"Third, the Data Center business has solid momentum with the mid-summer launch of our next-generation Skylake processor"
"And forth, as I indicated earlier, we completed the sale of the Intel Security Group"
We expect to realize a pre-tax gain of approximately $375 million and a tax liability of approximately $850 million
This results in a GAAP tax rate of 39% and a non-GAAP tax rate of 21% in the second quarter
"And last, as Brian talked about earlier, we are committed to increasing efficiency as a company and we are making an important commitment to our owners today"
"We expect EPS to be approximately $0.68, up 15% year over year"
We feel pretty good about where we are 90 days into our three-year journey
"At the same time, we are investing in the future by expanding our TAM from $45 billion to $220 billion"
"So the 30% target is consistent with kind of the three-year plan, and we know that there's opportunities for us to be more efficient as we go forward"
We expect ASPs to improve as we go throughout the year
It bears 7 points impact because of the higher burden of our allocations on the business
So we feel good on where we are for the quarter and where we're positioned for the full year
"Yeah, that's true, and that's reflected in our 40% to 45% and our improvement throughout the course of the year"
John William Pitzer - Credit Suisse Securities (USA) LLC That clarification's helpful
Brian referred to that earlier about the progress we've made on direct spending overall coming down another 1 point plus during the course of the year
"And DCG will get a larger portion of that than it has historically, roughly impacting the business by 7 points because of its bigger size and because of the decision to have it be a beneficiary of Moore's Law sooner than it has historically"
I think the dynamics of more the business is in the second half
"As Brian alluded earlier, we've assumed that ASPs will decline a little for the Client business"
"So I think when we take that altogether through the year, we felt a fairly consistent 63% with all those puts and takes throughout to the course of the year"
"And Q1 was where we expected, Q2 consistent with Q1 and full year"
Q2 was an outstanding quarter in which we set a number of records
Our data-centric businesses were up 16% year over year
Technology and performance leadership are fueling our results
"As we shared in February and reinforced in April, our strategy is to make Intel the driving force of the data revolution across technologies and industries"
"I outlined our top four priorities for the year in support of that strategy: growing the data center and adjacencies, ensuring a strong and healthy PC business, growing IoT and devices and executing flawlessly in memory and FPGAs"
"I'd like to take a few minutes to highlight our progress in Q2. First, DCG"
"Enterprise was down 11%, as workloads continued to migrate to the cloud and memory and solid-state drive constraints impacted server deployments"
In 5G we're demonstrating end to end leadership in client and infrastructure
"And we're on track with our development of IA, FPGA and ASIC silicon platforms based on new radio standards"
"Earlier this month, we launched Xeon Scalable, formerly known as Skylake and with it, the industry's biggest platform advancement in a decade"
"For example, the new AVX-512 instructions double floating point performance, benefiting use cases like HPC, VR and AI"
"In fact, artificial intelligence inference throughput improves by 2.4x gen to gen"
The enthusiasm for Xeon Scalable resulted in our largest early ship program ever
"We delivered more than 500,000 units to over 30 customers who appreciate outright performance leadership"
The data center is central to our strategy and is a remarkable opportunity
"By 2021 we expect the data center to be a $65 billion silicon opportunity, and we're less than 40% of the total available segment today"
"As we build out the adjacencies like Ethernet, Silicon Photonics and 3D XPoint memory and pull them all together with rack scale design, we'll be positioned to deliver even higher levels of performance and efficiency to our customers and increase our percentage of the total TAM"
The Client Computing Group also delivered fantastic results
"We along with our customers and partners in the PC supply chain are driving the evolution of the PC experience, as users seek out high performance and new form factors"
"We launched the powerful new Intel Core X-series processor family including a new Core i9 Extreme Edition processor, extending our performance leadership"
We also began shipping our next generation 4G LTE modem known as the 7480 to customers
"As I mentioned earlier, we're continuing to make great progress with our wireless ecosystem, laying the groundwork for 5G, and starting in 2018, Intel will partner on what is expected to be the first 5G showcase at the Olympic games"
"In our Internet of Things business, we're focused on four key verticals, retail, video, industrial and transportation"
We're specifically excited to see the ramp of our IVI designs with both Jaguar Land Rover and Toyota
We're also about to mark a very important milestone in our transformation
Autonomous driving is a massive compute workload that will disrupt industries and save lives and we are investing to win in this important segment
And we're looking forward to talking with you in more detail about our plans and the progress we're making in this segment later this quarter
Memory and FPGAs round out our priorities for the year
A cornerstone for our strategy in this segment is differentiated technology
"And that differentiation was on display earlier this month when we announced availability of the industry's first, and to date only, 64-layer 3D NAND SSDs"
Our floating gate architecture already enabled industry-leading density at 32 layers
"Our memory factory, Fab 68, continues to exceed expectations, ramping ahead of schedule in terms of both output and yield"
"At their Build Conference in May, Microsoft disclosed a major advancement in the deployment of Intel FPGAs resulting in the industry's fastest public cloud network and new technology for acceleration of deep neural networks"
Audi selected Intel for the Level 3 autonomous driving system in its upcoming A8 where our Cyclone V SoC FPGA technology will perform object and map fusion as well as parking pilot and sensor data pre-processing
We're also seeing strong adoption of our 14-nanometer Stratix 10 FPGAs
That's the reality of the attractive markets in which we participate
We're executing well to our strategy to transform from a PC-centric company to a data-centric company that powers the cloud and billions of smart and connected devices
The PC TAM is down more than 15% versus four years ago
And those businesses together are growing at double-digit rates
So I'll start and Bob can add some comments at the end
What we've projected for the second half is quarters that are pretty much in line
We continue to expect enterprise to continue to decline
It declined a bit more in the second quarter than I think we had really projected
"But if you look at Q1, it declined a little less than we expected at 3%"
But we still expect it to decline in those high single digit numbers
"Cloud though, and grew greater than we what expected at 36%"
"We expect it to be in the mid 20s, probably more likely"
"And then networking and comms, 17% and the adjacencies at 12%"
You see the largest number of prequalification samples sent out to customers
"We try to talk about it's the largest performance improvement in a decade, gen to gen"
So we're seeing a very large ramp in the second half as we move on with the Xeon Scalable
"And so I think that's what's going to fuel second half 2017, and then but it's going to continue on into 2018 as well"
So I think that's how we see the second half playing out
"So let's make sure we clarify, right, so on traditional NAND, we are breakeven this year"
"And we broke even actually this quarter, and we expect to remain there the rest of the year"
"When we talk about for next year, that's inclusive of 3D XPoint"
"I don't want to say that they're going to ""normalize"""
"The trend of – look, enterprise is going to continue to decline"
"We estimate, and again, this is just based on what we get from our customers, talking to the industry"
We've seen quarters higher than the 11% over the last couple years
"So it's going be lumpy as we see this shift, but the overall macro shift of enterprise to cloud or traditional on-prem systems to cloud is going to continue"
Other quarters we've had in the past have been more in line
So I don't think we're talking about something going normalizing
I'd say it's still going to stay relatively lumpy like this
"But if you look at it over the long haul, even when you look at the first half of the year, 11% down this quarter, 3% down last quarter, you take a look at those on average and you get to that high single-digit number"
"This is a traditional performance battle that we're very accustomed to, and we're comfortable in reacting and competing very aggressively in"
And so you see us coming out with our Xeon Scalable
"So I'd tell you that yes, we're seeing increased competitive pressure from a variety of places"
"But that actually will just drive us even harder, make us better in the end"
"Sure, so on 10-nanometers we are sampling, engineering samples to customers currently"
The yields on 10-nanometers are continuing to improve pretty much right in line with the forecasted ramp rates
"It's a new technology, so you always have some problems to get solved but we're pretty comfortable with where we're at right now"
You'll see those start to ship in the first half of next year and you'll see a ramp of SKUs
"We're forecasting mid 20s for the cloud business, the networking and storage business and adjacencies on down"
"What we're having to counter is not only the comps that Bob talked about, but the declining function of the enterprise, right"
"Now, as the enterprise continues to shrink, it will become less and less moving forward"
"But right now, it's still a large enough percentage"
"So we expect the second half of 2017, from an ASP perspective, to be pretty much what you've seen in the past, where ASPs continue to increase on the various platforms of Xeon, right"
"So looking at each one, you'll see ASPs overall increasing"
"What you're seeing on this is a little bit of mix, right, so as you saw, networking and storage grow at 17%, the adjacencies at 12%"
Those are starting to become a little bit more a percentage of that business and those draw down the overall ASPs a little bit
"But if you look within just the Xeon core function, those ASPs continue to increase at about the normal rates that you'd expect, especially as you move into a new architecture like Xeon Scalable"
Pitzer - Credit Suisse Securities (USA) LLC That's helpful
"So I think if you take a look at this, John, what's driven this has not been clever segmentation necessarily"
It's been the ability to segment into specific markets and specific performance
And so things like Core i9 are a good example where you're really targeting performance
And remember those are always somewhat tradeable as you take a look at this
We believe our leadership and performance will continue to allow that trend to continue and continue to allow the trend within CCG to continue as well
And that's part of what drove the forecast for the second half
Pitzer - Credit Suisse Securities (USA) LLC Thank you
"So it's not we're out there going and saying okay, I'm going to charge $10 more for the next Core i7. It's actually the percentage of units that are being bought at those higher units, and we continue to deliver higher performance at the same price with each one of these generations"
"So what you're seeing is actually an overall trend that, yes, units are down"
"We talked about that, both I and Bob, around TAM being down somewhere in that low to mid-single-digit range"
And that's pretty much in line with what I'm seeing third parties here
Some third parties are a little bit better than that
"But for the most part, we're within a couple of percent"
"But yes, we believe that there is room for continued demand, for movement upwards"
"the number of Core i9s, the number of people buying the performance thin and light laptops, those are going to continue"
And you see it in our OEM partners and the type of systems they are producing and the type of systems they're bringing to market
"It is, but don't forget even within that Core mix, Romit, you have the ability to continue to scale up"
"So Core i3 versus Core i5 versus Core i7 and now we've introduced the Core i9, which is even higher performance"
"You're now seeing not only that continue to climb, but you're going to see within Core the amount of Core i7s, Core i9s, Core i5s continue to climb as well"
And that's why we continue to see that there are legs behind this
We don't give out exact percentages by SKU like that
But I can genuinely tell you that it is really just the beginning of the ramp of the Xeon Scalable
"What we're excited about is we talked about the 500,000 units that are out there"
That shows you the demand by the big infrastructure guys around the performance
"And then the number of records we've broken already in performance, we talked about 50 records worldwide already"
Those are laying the groundwork for how this ramp is going look and feel as we move into the second half and into 2018.
So our whole strategy around the memory is that we are focused on differentiation and performance and specifically around supporting the data center
We do sell into client as well but that's not the main focus of this business
So we're not going after commodity SSDs that you're going to see even in high-end workstations necessarily
"Even still, there's not all SSDs and data centers are high-end performance"
So we're comfortable with where we are in a market share
And our real goal is then to move more and more of the business towards the 3D XPoint as we move into next year because that really differentiates us again as we really change the hierarchy between memory and storage as the data center DIMM memory systems come out
Operating income of $5.6 billion was more than $700 million better than our outlook
"Add it all together, and this was a remarkable quarter in what is shaping up to be a remarkable year"
Our strategy is to be the driving force of the data revolution across technologies and industries
"Individually, these businesses provide great value to our customers"
We've built a collection of capabilities that is unmatched
"At the same time, our PC business remains central to our success"
"We've made great progress in both our data-centric and PC-centric businesses over the last few months, and I'll share a few important milestones that illustrate that progress"
"We're going to start with CCG [Client Computing Group], which produced exceptional results despite a declining PC TAM"
"PC market conditions continued to improve, and we achieved record Core i5 plus Core i7 client mix"
"We're especially excited about the launch of our latest 8th Generation Core processor, code named Coffee Lake"
We're on track to ship our first low-volume 10-nanometer part by the end of the year
"We also continue to build momentum in the vehicle infotainment market, winning designs from our competitors at leading automakers"
"Early in the quarter, we closed the Mobileye transaction a full four months ahead of schedule"
"So far this year, Mobileye has won 14 ADAS [Advanced Driver Assistance Systems] designs across 14 automakers, a pace well ahead of the 12 wins they recorded all of last year"
"These designs provide for typical features like automated emergency braking, lane keeping, and adaptive cruise control"
But several also include next-step functionality like highway autonomous driving
"We're also winning marquee designs for Level 3 and higher levels of autonomy, including our strategic partnership with BMW and Fiat Chrysler"
"Most recently, we announced that Waymo's newest vehicles, the self-driving Chrysler Pacifica Hybrid minivans, feature Intel-based technologies for sensor processing, general compute, and connectivity"
"With 3 million miles of real-world driving, Waymo cars with Intel technology inside have already processed more self-driving car miles than any other autonomous fleet on the U.S"
Our progress in just a few short months illustrates the benefits of our combination
"And together, we can deliver the promise of autonomous driving in a safer, collision-free future"
Fab 68 accounted for more than half of our supply in a quarter where more than 70% of the total bits were 3D NAND
Our memory innovation and technology leadership is having an impact
We shipped the industry's first 64-layer data center SSDs and have a strong Optane design win pipeline
"That leadership technology has also resulted in strong customer interest in long-term supply agreements, and we've already signed two such agreements"
"Bob will share more about our approach, but this is an important step that will mitigate the short-term cash flow impact of ramping our memory capacity"
Strength in these segments was partially offset by continued weakness in comms infrastructure
This business is central to our success in artificial intelligence
"In Q3, Microsoft announced that it would use our 14-nanometer Stratix 10 FPGAs for its accelerated deep learning platform that's code named Project Brainwave"
We've made tremendous progress in AI and advanced computing technologies over the last few months
"In addition to our FPGAs and autonomous driving wins, we launched the Movidius Myriad X, the world's first vision processing unit with a dedicated neural compute engine to deliver artificial intelligence capabilities to the edge in a low-power, high-performance package"
"We also achieved new research milestones, as Intel scientists pursue exciting emerging forms of compute"
"We delivered a 17-qubit superconducting test chip for quantum computing to our research partner, QuTech"
And we'll follow that up with a 49-qubit test chip by the end of the year
"We also unveiled the Loihi, a self-learning test chip that mimics the brain's basic mechanics and makes machine learning faster and more efficient"
"Later this quarter, we'll ship the Nervana neural network processor, the industry's first commercially available processor of its kind"
"I also announced last week that Facebook is working in close collaboration with us, sharing their technical insights as we bring this new generation of AI hardware to market"
"Together, these accomplishments reinforce several things for me"
"First, Intel is the leader in AI inference from the core of the data center to autonomous vehicles out to the edge devices where low power is especially critical"
"Second, artificial intelligence takes many forms and will require computing solutions that are tailored for the workload, the environment, and the user, rather than a one-size-fits-all"
"And I'd like to take a moment to remember our former CEO and my friend, Paul Otellini"
"Paul had an enormous impact on the industry and this company, and his Intel family will miss him"
"He would be proud of our growing momentum, and it's an important part of his legacy"
"Wrapping things up, I'm excited about both our progress and our prospects"
"And we're competing aggressively for our $260 billion TAM, the largest opportunity in our history, with lots of room to grow market segment share"
"In some of our segments, we're facing new or resurgent competitors"
We're now well ahead of our commitments we made to you in January
This puts us solidly on track to deliver the best year in the company's history for the second year in a row
"And with that great news, I'd like to hand it over to Bob"
"So, first, we are already seeing the benefits of AI in that"
"Remember, as I said, we lead in inference, which is the actual application of artificial intelligence, and we're continuing to really grow in that space"
"I think AI, if you take a look at it in general, machine learning, it's the smallest segment to a workload if you look at the data center, but the fastest growing"
So you're going to see it continue to become a bigger and bigger portion of our business
"You're seeing the effects in our numbers already around Xeon, Xeon Scalable, the FPGAs; we talked about the Microsoft Brainwave launch that's occurring"
"And also at the lower end, outside the data center, things like Movidius and now Mobileye, you're seeing those hit our P&Ls as well real-time now as we speak"
"If you take a look at Nervana, it actually – we get our first silicon out"
"But as we go through next year and move on beyond that and get the second generation and beyond, that will grow, we believe, quite considerably"
"The part we've put out so far is really a chip for people to begin to use and learn how to program with neuromorphic, which is a very different type of machine learning"
"It lets you learn at hundreds of times faster rates than traditional, I'll say, GPUs and CPUs, especially around visual learning"
Those as well you'll start to see late next year and beyond as people really begin to learn how to program with these
"First, because you've got a couple questions in there, what I would tell you is that the Purley ramp has just really started"
I talked about the 200 design wins or design-ins at customers
"Those are just starting to come out, so we're really early"
So what we said is simply in the past publicly that AI is one of the smallest workloads and in fact one of the fastest growing
"We haven't broken out – beyond just saying here's what cloud is growing at and here's what comms and here's what enterprise, we don't break out by workload"
"The mixture of what – when somebody goes out and builds a rack, what is it going into? How much of its workload is really being used by AI? Anybody who tells you exactly what that number is, is just wrong, to be honest with you"
So it's very hard for us to say with precision that X percent of our units went into AI workloads because it's rare that a rack is purely AI except for rare cases
"But we know that it's small, just by the type of interactions we have, but also fast-growing and one of the biggest areas of interest"
We can talk about it from a unit standpoint and then we can talk about it from how has our business done
"From a unit standpoint, the decline has certainly slowed down"
"If you go back a year or two ago, we were high single digits to low teens declines at times year over year from a unit basis, and that slowed into the low single digits that we're seeing today, but we still are seeing a decline on a unit level"
"So our view is, John, that if you take a long-term view, we see the pattern kind of stabilizing at about where it is"
"I think we'll come in here and there will be quarters when the units are up slightly, and there will be other quarters when the units are down a little more slightly"
"But when we look at it over the long haul, they're probably going to be down those low single digits"
"But we also see segments that are growing, that are very performance focused, which allow us opportunity"
"How long? I'm not going to be that good a prognosticator, but certainly for the near-term future, we don't see this trend shifting very much"
"John William Pitzer - Credit Suisse Securities (USA) LLC And then, Brian, just on the modem side, your prepared comments, I think you said it was up 37% year over year"
What's the sustainability of that business and your ability to continue to grow that business through penetration?
"We, I think, really gotten a team together that is world-class"
"We believe we now are on a yearly cadence of world-class modems, which is really critical"
That's a big hurdle to get that technology to where you can reliably put out on a yearly cadence a world-class modem
So we think we can continue to both drive the technology and continue to grow that business
John William Pitzer - Credit Suisse Securities (USA) LLC Thank you
I don't think we have anything else to say about – it's pretty close right now
"It's not going to be the early part of 10-nanometer, though"
They were already in the hopper when we made that move
"So we mentioned that even out of those 14, many of those continue on up into Level 3, Level 4. The Level 5 work that you see out there is pretty far out there"
And I'd tell you that's there's a lot of just experimental work going on there
"If I take a look at the bigger picture, which is what you're asking, this whole picture that we've been putting together is – I said in the statement that individually these businesses are great"
"But when you put all these together into one package and you're able to walk into a customer with a complete solution, they're truly world-class and something nobody else can deliver"
"And what we're seeing is different OEMs, different customers thinking about those architectures even differently across that spectrum"
"Some are thinking but by Level 5, I think my skills will be up"
So we have a set of solutions we bring to them there
Some of them want to have more FPGAs for how they bring their software down onto the silicon earlier on
"We shipped, and we mentioned it in the release, our first automotive modem"
So we're able to bring automotive modems all the way through 5G
"Most of these car companies are having to build data centers, and not just data centers, centralized data centers, but really a data center architecture that goes all the way out with data and compute at the edge"
"You're going to want to be able to manipulate and transfer mapping, high-precision mapping, to the cars and data back from the cars to change those maps' construction and things like that"
"And then you get out to the car again and we can bring the FPGAs, the Mobileye for sensor fusion or compute"
"And each one of these discussions, they're all a bit different"
"They all have multiple phases as you go through 3, 4, and 5 on the levels"
And what we're able to do is say you don't have to just take this one solution
And that's part of also why we're building out that 100-car fleet
Amnon [Shashua] really has driven a vision that says it's one thing to bring foils to a meeting
It's another thing to bring a car and say now let's go out and drive and show you how all of these fit together
"So all of that is – this package that we have is unique and it's resonating quite well as we walk in to the various car OEMs. And I'm out there with them in various modes almost every week, every other week"
"Thanks, Jerry, and thanks all of you for joining us"
Our second fiscal quarter once again reflected strong momentum across the business
"As a result, we now expect third quarter QBO subscribers to be roughly 2 million, which had been the low-end of our original guidance for the full fiscal year"
"Looking beyond Q3, we now expect to exit the fiscal year with 2.2 million subscribers, which had been the high-end of that range"
"I'll talk more about what's driving these results in a minute, but given its tax season, let's focus there first"
"Despite the slow start to tax season, we remain confident it's simply a shift in timing, with the do-it-yourself software category and TurboTax performing well season-to-date"
This timing shift did lead us to update our outlook for the quarter while reaffirming our full-year guidance
The IRS data released this morning showed total e-filed returns are down 13% with self-prepared e-files down 11% and assisted e-files down 16%
"When you compare these results to the data that we released today, the conclusion we reach is that do-it-yourself category is performing better than assisted and we are performing well within the do-it-yourself category"
So it's helpful to put our season-to-date results into this context
"Now, let me take a minute and remind you the four main drivers for the consumer tax business"
The first is a total number of returns filed with the IRS
The second is the percentage of those returns filed using do-it-yourself software
Total returns filed with the IRS have grown on average 1% per year over the last five years
"Now, we've grown quite a bit faster than that by focusing on growing the do-it-yourself software category and then growing our share within that category"
"So despite the slow start to this season, do-it-yourself software is once again growing faster than other methods and our volumes suggest that we are performing well within the category"
"Now, the question on everybody's mind is what's behind the slow start to the filing season? There could be several reasons"
The IRS suggested in its release that the PATH Act has led some to delay their tax filings
"Now, regardless of the root cause, we remain laser-focused on making sure we have the best offerings and an awesome end-to-end experience for our customers"
Now there's no question this is a fiercely competitive tax season with new entrants joining the completely free category
"Free offerings are not new to the category and they're not new to us, and our strategy to win with free remains unchanged"
Having the best free offer and a delightful end-to-end experience is what sets us apart
"With Absolute Zero, we continue to believe that we have that winning experience"
"In fact, roughly 30 million of these 60 million Americans visit a tax store or a tax professional simply because they have a nagging question"
"In the end, they pay hundreds of dollars to file their taxes"
Now this is simply one of the many innovations that our tax team delivered this season
"Other innovations include improving data import through taking a picture on a smartphone, while continuing to expand available W-2 and 1099 forms for direct download"
We've also been applying machine learning and artificially intelligent algorithms to the data to get maximum deductions in less time
"We're transforming TurboTax from an application to a platform, with our first partner, providing the ability for customers to refinance their student loan at a much lower rate"
And we're delivering a free credit score to all TurboTax customers
"On top of these innovations, we also introduced TurboTax Self-Employed this season"
"This offering includes a 12-month subscription to our QuickBooks Self-Employed accounting solution, connecting our market-leading QuickBooks platform to TurboTax"
"So to put a bow around the tax season to date, we remain confident about the plans we have in place"
"When it's all said and done, we know taxpayers will still need to file by April 18, so we're focused on executing with excellence"
"In fact, both the UK and Canada surpassed 100,000 subscribers in Q2. We introduced several innovations on the QuickBooks Online platform this quarter, including a complete re-imagination of QuickBooks"
"com and the QuickBooks Online first-time use experience; all in an effort to increase awareness, trials, and conversion"
"In addition, we're also building momentum behind QuickBooks Self-Employed"
"Roughly 180,000 of our QuickBooks Online subscribers are using QuickBooks Self-Employed, up from 110,000 subs last quarter and 50,000 subscribers just one year ago"
"In the quarter, we expanded QuickBooks Self-Employed to Canada, adding another major geography to the current distribution that we have in the United States, the UK, and Australia"
"Finally, we launched a new QuickBooks Self-Employed and TurboTax experience as well"
"Our first QuickBooks Connect conference outside the United States will be held in the UK in March, with Australia and Canada soon to follow"
"So with that overview, I'm going to hand it over to Neil to walk you through the financial details"
"To recap, we're pleased with our performance in the first half of fiscal 2017. We're in the heat of another competitive tax season but there's a lot of time left on the season but there's a lot of left on the clock"
"And with that, let's open it up to you to hear what's on your mind"
As you know the FASB standard is anything north of 3 to continue to invest
So I just wanted to add that to the two pieces that Neil just put out there as well
I'm going to have Neil and the team here reconcile it with the table
"A desktop unit has an average of two e-files each, and then a TurboTax unit is one-for-one"
"So what we try to do is since the IRS reports the number of e-files received, we try to then tell you how many have we actually processed"
And what you saw with the IRS data released this morning is that self-prepared e-files were down about 11% year over year through February 17. Our data shows that we're down about 10% through February 18. And so the net-net on that is we're basically holding to slightly up in terms of our share in the category
"Now, looking at the table, is there something in the table that we need to clarify?"
"Yes, so, Scott, right now what the headline is units are down 5%"
"Our e-files, if you translate that into e-files, are down 10%"
"And then the IRS on an apples-to-apples is down roughly 11% for the self-prepared category, which basically says what Dan's quote is, we feel good about how we're performing thus far season to date"
"Actually we have reconciled against the IRS, and the answer is it does not change materially the outcome that we just described, which is we're performing slightly better than the DIY category and certainly better than the overall IRS returns and much better than assisted"
So no real material difference there in that 1-day difference
The answer is we're seeing strength across the board
", you just mentioned the acceleration from 50% last quarter to 61%"
"And that is currently in Canada, the UK, and Australia"
"And we've mentioned to you, we haven't taken our eye off of the ball in India, France, and Brazil"
And we see a springtime window for those to go green and then we'll start to lean in there as well
"So retention continues to look healthy for us even with this influx of new users, we're still looking at that first year cohort of around 70%"
"As they anniversary off that first year, it's pushed out of that high 70s and now it's tickling the 80% range"
ARPU for us is no different than what Neil shared at Investor Day
"When you put them in the mix, it looks like ARPU is coming down a little bit"
"I think, Ross, the first is, this is a competitive season but it was not unanticipated"
"I mean, many of us were talking in the off-season and we knew that everyone was going to be coming after the market aggressive"
"But as I shared in my opening comments, free offerings are not new to the category and certainly not new to us"
So SmartLook right now is focused on those customers who've historically paid hundreds of dollars to go to an assisted method and we're bringing them into our category
The other thing is TurboTax Self-Employed right now is at an $89 price point
"And by hooking that up with QuickBooks Self-Employed, we're getting more of those kinds of customers as well"
"So I think you're going to see price realization continue to be a little healthier, if we continue to bring these higher value customers into the category while we remain competitive on free on the low end"
"So at the end of the season, we'll have a better read on that"
"But that's our strategy going in is winning more share of dollars, while also continuing to extend our lead in share of units and that's our multi-pronged approach"
"In fact, they prioritized really making the first-time use experience from new-to-the-franchise customers amazing"
They've had goals they put in place to get to a first P&L in five minutes or less; the ability to send an invoice quickly
They've spent a lot of time looking at what the best indicators are to someone who'll turn into an active user
It has not been increased promotions or anything else
"Yeah, actually, Chris, we have a relationship with Uber already in the United States and we simply expanded it into Canada"
"and obviously, you mentioned the one in Canada as well"
And we look to continue to expand that and many other relationships as we focus on the Self-Employed segment
"Christopher Rochester - Credit Suisse Securities (USA) LLC Great, that's helpful"
"Just to clarify also, a quick follow-up maybe on the SE number"
Is there any chance you could split that out between U.S
"and international, just to get a cleaner sort of QBO U.S"
I think everyone continues to lean in and put their best game on the field and that's good for the category
"It's going to get more people into the do-it-yourself category, and then it comes down to who has the best offering"
"But right now, of course, you've seen H&R Block, a really worthy competitor, someone we have respect for out there, and they've been aggressive this year"
"and of course, we've been out there banging the drum as well"
"So I think net – we're getting a lot of people excited about the do-it-yourself category, which is good news for the long term"
We may have shared – we'll have to go back and see
"I'm trying to go from memory, if we actually sized that in our Investor Day materials"
"I'm thinking it's somewhere in the two hundred and some thousand, but did we size that?"
Let's get that answer and then we'll make sure we get that out to everybody
But I thought in Cece's section that she had sized it in the ProConnect update
So the principles are the four main drivers are the number of units or the number of returns filed with the IRS and then what percent of those are actually going into the do-it-yourself category
"Now, what we did this year in addition to that – so nothing has changed in our strategy"
What we've done in addition to that is we've leaned into higher value opportunities
"So SmartLook is trying to get these higher paying customers out of the assisted method, and we've also leaned in TurboTax Self-Employed"
"We're getting a lot of good learning, and this is the first of a platform strategy you saw play out in QuickBooks that we're now bringing to TurboTax"
"So I think it's going to be fairly immaterial this year, but I think we're going to leave here with a wiser set of ideas and thoughts as we enter into next season, and we're playing that one for the long game"
So I'd say it'll be relatively immaterial this year
"As I mentioned a few minutes ago, everyone out there is being aggressive"
Let me talk specifically to IBM Watson that you referred to
We've been talking about machine learning and artificial intelligence for some time
"In fact, it's not new, and we've been leaning into it aggressively since 2010. To give you a couple of stats, we have over 100 patents pending right now on machine learning and artificial intelligence technologies"
These are machine learning capabilities that do things like helping somebody in TurboTax understand quickly whether they should just go with the standardized deduction or do itemized deductions
And that could save as much as 40% of the time it takes to do the return
And there's a whole host of other things that we're doing with artificial intelligence
"So we are excited about the capabilities, we're always leaning into the future"
"And for us, this isn't a new announcement, we've been talking about it for some time"
"Right now, we haven't broken down our funnel metrics"
We'll do that and we always do that pretty transparently at Investor Day
But you heard us reaffirm our confidence for the full year
"So that gives you some insight into how we're feeling about her funnel metrics, which include conversion and retention"
"I think beyond that, at this point, we need to see how the full season plays out"
I think the solace that we all take some comfort in is that everyone has till April 18 to file
"So whether they've jump in right now and it's coming back at the pace we hope, or they're going to wait until April 13, April 14, April 15 and dive across the finish line"
"We're out there, as Neil said, making sure that our message is out there today as they're making decisions"
But we're going to stay in the game all the way to April 18. I think there's a lot of pace that's going to have to pick up between where we sit today and April 18. But that deadline is coming and so I think it's just a matter of when
I was going to say we came in anticipating pretty aggressive season and we knew that there were going to be players that were going to mirror our Absolute Zero
"As Neil did suggest though, we did start to make some adjustments to how we get our marketing message out there since the season got started a little later than we had anticipate"
"But we've been able to reallocate resources and kind of self-fund that, so that's really been the adjustment"
"Now, you might imagine we have a lot of contingency plans in place, if-then scenarios and those are sort of still on our back pocket"
"I did have one – I realized, Michael, I did not mean to not answer one of your questions"
I think that we talked about this in the past that we exited that refund advance or refund anticipation loan business about a decade ago
We didn't feel that that was the right approach for families who were looking to get money in their pocket
"And so ultimately, we haven't had that offering for some time and during that period of time, the do-it-yourself category has grown and we've gained market share"
So we don't feel we're at a disadvantage this year any different than we have been for the last decade
We think the category is still going to grow and we're still going to gain share
"First of all, we want to thank everybody for your questions today"
"Obviously, we're still on the midst of this peak season and we do like the momentum, we're continuing to build in Small Business and you heard us reiterate our confidence in the game plan for tax"
We all know there's a lot of time left on the clock and your questions suggest there's still a lot of time for people to get their tax filing in
We know that's going to have to happen between now and April 18. So we're looking forward to staying laser-focused and executing and we'll catch up with you on the after calls as well as talk again at the end of tax season
"Thanks, Jerry and thanks to all of you for joining us"
We're pleased with our performance in our third fiscal quarter
"As you know, this is our largest quarter of the year and we successfully delivered strong financial results in a complicated tax season"
"As a result, we're raising our outlook for QBO subscribers to $2.3 million"
"All in all, we're on track to deliver another good year"
"With that overview, let me click down into the drivers of our performance in the third quarter, beginning with our tax results"
"This tax season proved to be eventful from beginning to end, but with the late start to the tax filing compared to prior years, a renewed competitive environment and a free category, a new IRS requirement designed to reduce fraud"
The combination of these factors were reflected in the 4 drivers of the tax business that we discussed with you on a regular basis
"To-date, DIY category share has grown about 0.2 points, less than the 1.2 points that we expected"
The third driver is TurboTax's share within the do-it-yourself category
"After strong share gains the past several years, our share with DIY e-file this season was flat"
"So while the drivers of our tax results played out differently than expected, I am proud of the agile execution and innovation the team delivered this season"
"If you recall the game plan that we shared at our Investor Day in the fall, we outlined the plan to extend our leadership in do-it-yourself tax, began transforming the assisted tax category and ran experiments to evolve beyond tax through a tested open platform"
"This season, we made progress across several fronts"
"We also began driving value to the broader Intuit ecosystem, leveraging the credit score functionality in Mint to provide more than 1.3 million free credit scores to TurboTax customers this season"
"And we introduced the Self-Employed bundle of QuickBooks and TurboTax, targeting the freelancer and gig economy, driving strong results which I'll discuss in greater detail in a minute"
"Putting the bill around Consumer Tax, we're exiting this season with strong financial results, although generated in ways that were different than what we'd expected"
We'll learn from our experience this season and continue to invest in our multiyear strategy to deliver against the long term objectives that we set for ourselves
We'll share more details on our results and our long term strategy at our Annual Investor Day in the fall
"With that overview on Consumer Tax, let's shift to the assisted tax result and ProConnect"
ProConnect plays an important role across our ecosystem with approximately 60% of the TurboTax SmartLook agent being passed by our ProConnect tax experts in this season
"With that overview on tax, let me now shift to Small Business"
We've also increased our marketing effectiveness and expanded our addressable footprint internationally in the self-employed segment
", our subscriber base grew 70% year-over-year to 433,000 subscribers"
"During Q3, we launched QuickBooks Self-Employed in Singapore, adding another geography to our lineup and we expect to launch in Hong Kong and South Africa soon"
"Finally, our TurboTax Self-Employed offering has contributed approximately 160,000 subscribers to the QuickBooks Self-Employed total so far this year"
Our tax customer base is proving to be a great channel for reaching the self-employed and we know nearly 4 million TurboTax customers are self-employed tax filers
This playbook should sound familiar because it served us well for decades in the QuickBooks Desktop franchises
"Putting it all together, our strategy of a vibrant One Intuit Ecosystem is gaining real momentum"
"Whether it's TurboTax driving self-employed customers for QuickBooks, it's ProConnect accountants serving TurboTax customers through SmartLook or the Mint credit scores being delivered to TurboTax customers, we're unleashing the power of the many for the prosperity of one"
You will hear more from us on this front in the coming months
"But with that overview, I'm going to hand it over to Neil to walk you through the financial details"
"Collectively, we're driving strong progress for the One Intuit Ecosystem strategy, creating greater value for our customers and building new sources of competitive advantage"
"So with that overview and summary, Brian, let's hand it back to you to hear what's on everybody's mind"
I love your optimism and your positive view on the business
We feel the same way about the opportunity with self-employed
We know that this is a secular trend that continues to build momentum around the globe
"And we discovered in TurboTax, we do indeed have a channel with 4 million of those tax filers being self-employed and we discovered, now with the bundle, that this year was really the first full year having in that season that we know how to optimize that conversion and get more of those customers in the funnel"
Let me start by saying that we do believe that we left opportunity on the table
"But I would also tell you that, that doesn't mean next year is not going to be a good year for us"
"If you go back to 2013, that was a year where we grew our units at about 3%"
"And I can assure you, we've got a highly motivated team"
"And as Neil would say, bad batch, not a bad recipe"
So we're back to the cooking table and we're ready to do it again
"And I'll break it into a 60, 20 and 20 sort of bucketing for you"
"60% of that effect was the fact that we did not get as many free, free customers as we set out to do every year"
"And as I just mentioned in my prior response, we're going to sharpen our pencils and get back at that next year because we want to continue to grow the category and we want to continue to grow share"
And that 20% is we have continued to get more sophisticated in finding ways to add value to customers that they're willing to pay for
"So when you put that all together, it was fewer free, free which we actually view as an execution opportunity"
"First of all, I would say that we don't need to sell anything else to a self-employed customer for that to be a great business"
There's hundreds of millions of these prospects around the world
"So with that said, we're discovering already they have additional problems to be solved that they're willing to pay us for if we solve them well"
A great example is we added invoicing functionality into self-employed and that connects to payments
And the ability for us to have them actually send an invoice and get paid in a matter of 8 days versus 28 days is a real opportunity for us to have razor blade
Another example is the one we talked about earlier in the opening comments which is tax returns
"The ability to have them do their self-employed, separating personal from business, management throughout the year and then come tax time, press a button and have it go into TurboTax or go to one of our accountants to do a credit return, that's also another razor blade"
"And we'll stay focused on other opportunities down the road, but by and large, the opportunity is getting more of these units and then solving additional problems, whether it's getting paid faster with an invoice or doing a tax return, those are the razor blades that are already emerging"
"Obviously, the 3 countries that drove the bulk of that were Canada and the U.K"
France is right on its heels and we're still in the investigator phase on how to really figure out India
The good news is there's changes in India with GST which is basically a new tax legislation that will drive more compliance
And so our teams are really rolling up their sleeves to take advantage of that
"In terms of additional countries, we're leading now with QuickBooks Self-Employed"
"We have found that to be the fastest, lightweight, easy to get into market and solve a problem and build a base"
So I just mentioned that we introduced QuickBooks Self-Employed in Singapore in the last quarter and we're going to be introducing it in Hong Kong and South Africa soon
"And then, from there, we'll talk about, in the fall, whether we see other countries that we'll take QBO to"
"But right now, self-employed will be the point of the sphere"
"Behind the scenes, you might imagine, is a lot of scenario planning and a lot of adjusting on the fly"
I think we talked about it a little bit just on our last call
"And then, when we saw the delays to the tax filing, we had to go ahead and belly up to the bar and put a little more money into what we would typically think of as the trough which is after the season gets started, there's a little bit of a lull before the back half procrastinators jump in"
But we advertised through the trough this year because we simply were going to have to come at some point and that paid off for us
"We're telling you now, we know there are things we could have done differently and better"
And the neat thing about this business is we'll step back and we'll sharpen our pencils there and we'll lay out our game plan and we'll be ready for next year
"And I anticipate another very competitive season next year, but I think this year demonstrates we have the ability to adjust, make the right calls and deliver the results that we're promising"
"It's a little bit faster, but let me give you some context"
"I am excited to tell you now that if customers that are coming in to the QBO franchise, QuickBooks Online, if you throw in self-employed, it's now over 90% are new to the Intuit franchise"
"And then, if you look at the desktop, we have, through 3 quarters now, 132,000 people who've migrated from desktop to QBO"
90% of these customers are new to the franchise which is exactly what we wanted
That's driving our overall active base and it's enabling us to capitalize on this TAM
"I would say, first of all, we take the responsibility, as the champion of the do-it-yourself category, to grow the category"
"There was a little bit of funkiness in the overall tax season that everyone is still seeking to explain and no one yet has answers, including the IRS"
"And then, this year, we definitely leaned our advertising and marketing more into the transform-assisted strategy which is showing people they would never be alone"
"And with SmartLook, you would have access to an expert"
"And that certainly played out well for what we wanted to do, but I'm not sure that, that succeeded in helping us expand the DIY category at large"
"Yes, Kartik, I think it will actually tie to your prior question"
So I believe you saw the early days of what hopefully is going to be a continuing advertising and marketing message that says there is a much better way to get your taxes done
So let me start with the first one on the number of small businesses that are still not in the accounting software category
"They're using spreadsheets, shoeboxes, ink pens and checks and that number is still, believe it or not, 42%"
"And it is equal to not only those that are self-employed, but those that clearly could be in QuickBooks Online"
", the number of people who are ripe for QuickBooks Online are about 20 million and we have 1.8 million of them today"
So there's a huge opportunity for us to show that there's a better way and that's why we're starting to lean in with more advertising and more category awareness in addition to working with accountants
"So still a lot of greenfield and that represents itself, not only in the U.S"
", but all the countries we're going through around the globe"
We really did not have any material changes in pricing or even the timing of pricing that would have affected the results the way that we're talking about here
"Those value-added bundles, they were ways that we were able to basically continue to help customers see value and pay for it"
"But there wasn't anything that jumped out that was meaningfully different than any prior year trends, to be honest with you"
"Yes, Scott, I would say what we saw was incredibly encouraging"
"The industry once again locked arms, not only the do-it-yourself industry, the professional tax preparers and the banking industry as well as the IRS in the federal and then the state level too"
And I think we all feel like we continue to push the ball forward in terms of getting the bad guys out of the system
"We won't know the dimensions of how much we were able to do until the IRS comes out and reports that out in late summer, early fall"
But everyone of us collectively believe that we continue to advance the cause and we're going to stay at this
It's going to be a multiyear ongoing effort until we get every cybercriminal out of the system that we can
"So that's sort of bucket 1. Now what are the impacts to next year? There are a lot of things this season that everyone's still processing, things that we ended up requiring tax filers to do"
"Next year, we hope to be able to do with less friction and one of them was the one that Neil mentioned in his opening comments which is in an effort to try to ensure we got cybercriminals out, if you did not know your prior year adjusted gross income or you didn't know you tax filing PIN, then you were able to process your return using our software, but then you had to print it out and mail it"
You could not e-file it without those 2 pieces of information
"And that ended up, in our case, with about 500,000 people who were able to do their taxes in TurboTax but had to put it in an envelope and send it into the IRS"
"So I think next year, industry and the IRS in the States will say is that the experience we want to continue or is there something we can do that's just as equally protective but less friction for the taxpayer"
"But right now, it's too early to know what those are"
We'll work those over the summer and talk to you about them in the fall when we do our Investor Day
We had aspirations that we thought would be very positive
I've got to tell you that we were delighted and surprised that we saw the strength in the TurboTax channel feeding QuickBooks Self-Employed which gives us even more reason to lean in more aggressively next year
"And so I would say that we did not have 11 points modeled in, at the same time, we'll take it and we're going to say how do we blow on that ember and turn it into a raging fire as we look at next year"
So we'll have the ability to pass into that channel that way
"And as a result, accountants will recommend QuickBooks Self-Employed to get more tax customers"
So think about this being a strategy that works everywhere
It just may not go into TurboTax like it does in the U.S
"We can go back to 2013, where the industry really lined up and everyone got aggressive and we were all trying to get security beefed up and kind of get cybercriminals out"
"And in 2014, we actually saw the IRS return to grow over 1%"
"So even though we took a big bite of the apple then, it didn't slow down total tax returns"
Now we continue to get better and better each year
So I really can't tell you and we're trying to hesitate to put out other hypotheses because I probably heard a half a dozen myself just having conversations
I think we'll have to wait and see what the IRS comes out with and then we'll be able to compare their data with ours and we will be as transparent as possible at Investor Day of what we think ultimately led to this very unusual tax filing season with the IRS
"Coming from where I come from, that's exactly the way we calculated it too"
So let me take this one then and then we'll get back to your other ones
"But then when they showed up at the IRS, the IRS counted them as paper because they showed up in an envelope and not coming through on e-file"
"Yes, we're talking two different things here, Michael"
"I'm sorry, we're talking units which we said were up 2%"
"E-files which are ultimately the IRS when you receive those and then they count those as were those paper or software, that's where the numbers get a little bit out of sorts"
"So let me try to parse that and I'll say that I think it was the collective competitive environment with all the names that you mentioned, including us, that led to a little more of an even distribution of who got the free, free customers"
"And over the last several years, we were out there pretty much alone with the Absolute Zero program"
"And this year, everyone dove in and decided they wanted a piece of that pie"
"Now it happened to coincide with the fact that after 3 years of that being our main message, we chose to pivot our broadcast, our TV advertising to more SmartLook which was the assisted -- transform assisted"
So we sort of went dark in terms of broadcast media
"And so I think that's why we allowed ourselves to kind of let some of this free, free customers to go elsewhere"
"And suffice it to say, regardless of whether it was the competitors you named or others, we don't plan to play the game the same way next year"
"First of all, there's just a secular trend of the gig economy"
"And so ultimately, when you put that together, you say there's a lot more of them"
"We've been signing partnerships with Uber, Lyft, TaskRabbit, DoorDash, you name it, we've got all kinds of partnerships out there"
"And we've been working aggressively with the accountant channel because for the accountants, these are some of the hardest customers to serve because they don't have their steps sorted out, they come in at tax time and it's really laborious for the accountant to get the stuff all separated"
So the accountants and the partnerships have been driving it
And then the second thing is we have 60 million people who come to QuickBooks Online and QuickBooks
"com which added 160,000 QuickBooks Self-Employed units in the last quarter"
"And the other was new geographies, where we just introduced it in Singapore and we'll be opening up to other countries as well"
"So I'll put a bow around it and say, secular trends, we have channels with accountants and our own web marketing and partnerships like with Uber that are growing the core business"
I was even going to add it to my closing comments if no one asked
"So over the last several quarters, actually, for the last couple of years, we've been talking about what percent of customers are new to the franchise coming into QuickBooks and then what percent of new customers are choosing an online version versus desktop"
We used to say 80% of all the customers coming into QBO were new to the franchise
That was 70% just a quarter ago and it was just in the 60s 12 months ago
So it is expanding the category with some pretty exciting opportunities ahead of us
"The second point I would say is, our emphasis right now is razors, not blades"
"Whether it's self-employed going after the hundreds of millions around the world at the point of the spear or it's QuickBooks Online, where we're trying to continue to accelerate and get new customers into the franchise and out of spreadsheets, that is our absolute top priority"
"And every country has a target and as you know, we've collectively been driving our LTV to CAC"
"If you look at QBO across the globe, it's around 5.5. 5.5. And if you throw in desktop, it's about 6.9. So we're maintaining that discipline"
"But we're focused on the razors, whether it's self-employed or it's QBO"
"Well, we want to thank everybody for the questions today"
"More importantly, we feel like we have momentum that we're building as we enter the fourth quarter and we have some important lessons learned that will sharpen our thinking as we look ahead to next year"
"Before I begin my comments on the quarter, I would like to make a few opening remarks"
"First, I would like to welcome Jim Hillier, our new Vice President of Investor Relations"
"Quite a few of you have met Jim already, and we believe he will be a valuable addition to the IPG team"
The Excel-based model contains IPG historic financial results and key metrics over the last 10 years
We hope you find this to be a valuable resource as you update or build your financial models on IPG
"Because much of the data we typically review in our prepared comments can be found in this model, I will focus our prepared comments on the key highlights and significant changes during the period"
"A key element of our strategy is to drive an increase in demand for high power lasers in new and existing applications, which we believe will expand the total market for our fiber lasers over time"
The tax rate in Q1 2017 was lower due to the adoption of the revised accounting guidance whereby the excess tax benefit arising from equity grants is now recognized in net income
"This benefit was $4 million in Q1, and benefited the tax rate by 4 percentage points"
"In Q2 we expect the tax rate to be approximately 30%, excluding any effects relating to equity grants"
Net income for the first quarter increased by 51.9% to $75 million
"On a diluted per share basis, we reported $1.38 for the first quarter compared with $0.92 a year ago"
"Our current level of inventory on hand amounts to approximately 183 days, which is just slightly above our target range of two turns, or approximately 180 days and above the 2016 year-end level of 176 days"
Cash provided by operations during the quarter was $51 million
"The $14 million decrease in operating cash flow versus Q1 2016 primarily stems from a $31 million increase in cash used for receivables, and a $19 million increase in cash taxes paid"
Cash taxes can also fluctuate depending on the timing and amount of estimated tax payments
It's also worth noting that Q1 operating cash flow tends to be below the annual run rate due to the payment of cash bonuses during the quarter
We expect to see a significant increase in operating cash flow during the remainder of the year
"During the quarter, we purchased 108,000 shares for $13 million as part of our share repurchase program to mitigate the dilutive impact of shares issued under our various employee and director equity compensation and employee stock purchase plans"
"We have now repurchased 210,000 total shares for $21 million since the program began last July"
"However, it should not be used at this time as an assumption for outperformance in the second half of the year"
"While order flow remains strong, our visibility into the back half of the year particularly Q4 remains somewhat limited"
"As a reminder, we do not attempt to forecast changes in foreign exchange rates"
"With that, Valentin and I will be happy to take your questions"
When we look at that we're looking at the midpoint of the guidance range we gave at the beginning of the year and adding the outperformance in
"If you went to 25%, Patrick, you'd be factoring-in continued outperformance in the second half of the year which at this point in time we're not providing guidance around"
I think one of the challenges as well is you had an exceptionally strong Q4 a year ago when the momentum that we're seeing now really started to pick-up
"That started in Q3, accelerated into Q4. So we're bearing in mind that we actually have a pretty difficult comparison in Q4. Nonetheless, the thing that we do want to call out is that order flow right now remains very strong through April and that's reflected in the Q2 guidance and the strength of order flow through Q1 is reflected in that as well"
"I think I've given enough color around that, but if you add the amount that we estimate should be added to the midpoint of the original guidance, it's quite a bit below that 25% number"
So you've got a couple of trends that we're seeing there
"First of all, yes, some degradation in ASPs particularly compared to Q1 a year ago"
"The ASP situation has been much more stable recently, but within that trend you've also got a couple of interesting things"
"First of all, ASPs can be impacted because the actual increase in 6 kilowatt and 10 kilowatt lasers, the ASP per kilowatt on those is slightly lower"
We've also seen unit volume increases in the 1 kilowatt and 2 kilowatts driven by some of the fine processing cutting customers in China and particularly moving up from 500 watts and 700 watts to our compact YLR 1 kilowatt and 1.5 kilowatt lasers and we've also seen in the 3D printing and additive business a transition from some of the medium power to the 1 kilowatt and 1.5 kilowatt lasers for that
So those would also contribute to the increase in unit volumes at the lower power levels
So there's a number of different dynamics that are happening there
I'd say the really pleasing aspect of that is the general move up in power across several different applications and then the real acceleration that we're seeing in the 6 kilowatts to 10 kilowatts and now with customers demonstrating 12 kilowatts cutting systems
So the color we've given around this is that order flow remains very strong
"We're choosing at this point in time to not give guidance on Q3, but state that the outperformance in the first half of the year should be added to the initial guidance that we gave"
"If order flow remains where it is, we're going to have – just talking about this in a qualitative manner, a good strong Q3 performance as well"
I mentioned that order flow through April was in no way diminished from what we saw in the first three months of the year
"And, so the overall trends behind the business are very strong"
We're choosing to give the guidance on Q2 rather than get drawn into the second half of the year at the moment
"When we get to having that visibility in the second half of the year, if necessary, we'll provide an updated range to annual guidance"
"I'd say, overall the tone of the business is as good as I've seen it, even though we've performed very well over the last couple of years"
"Do you want to talk to that, Valentin, a bit more?"
"That was a few units, but it was good to see that happen so it was a very small contribution"
"There's some acceleration in the telecom business which is helping a little bit, but that's more I'd say a thin layer of icing on a large cake at the moment"
"So there's still – you know the great thing is, there's still not much contribution from those"
All of those things put us in a pretty enviable position
"I think in terms of applications, a couple of the highlights are the welding, whilst it can be a bit uneven, quarter-to-quarter depends a bit more on projects"
They're starting to get some more momentum into it
And it's not just the consumer electronic cycle spend this year
"We talked about some of the automotive and other areas, for example pipe welding"
You should look at how deeply penetrated fiber is into the installed base
"And there are different numbers in terms of total in store base of cutting systems, 60,000-plus of them around the world"
Fiber a year ago was probably less than 30% of that installed base
"We think there's an acceleration of the replacement of some of the older CO2 lasers, because job shops just cannot be competitive with that technology as more and more fiber lasers are deployed in the field"
Right? So they're increasing against job shops that have a fiber laser
And we've seen that commentary coming out of a couple of surveys that we've seen
So it's a number of different things across different applications
"Then you've got some of the other applications in ablation, the cleaning, the hole-drilling was a good contributor on the QCW"
"And the one thing that's just – is always a two-year cycle is the consumer electronics stuff, but certainly the outperformance that we're showing in the first half of the year isn't just driven by that"
That's really no – a relatively even small part of it
"Of course, that's probably a bit of a thicker layer of icing on the cake than the newer applications, but it's not just that"
"It is the cutting and the welding, those ablative processes, the drilling, which is a shift that you're seeing across a variety of different industries"
"So it's difficult to call it out for next year yet, but we think we're in an exceptionally strong position relative to the other technologies and even non-laser technologies at this point in time"
"We continue to remain in that range of 50% to 55% and are very, very pleased with executing at the top end of that range"
Valentin mentioned that we've got a tremendous uptick in unit and kilowatts of power that we have to keep up with
"Of course, some company's manufacturing is below that"
Our bill of material fully loaded on a large part of our kilowatt lasers is now at less than the market price
"So if nothing else, that should be taken as a point to tremendous advantage to the company"
"As usual, the sort of strength on order flow is really reflected in the guidance number"
"You'll see a pick-up in Japan in Q2. Less meaningful, but good backlog in Korea and Russia"
"So there's no fundamental change, it's just a continuation of the overall trends"
"I think it's just waiting for the overall trends on order flow through end of Q2 and into the beginning of Q3, seeing how those are going to materialize"
"But, we watch everything, Bobby, in terms of the different geographies and applications"
"So automotive, I think, is strong, and it's certainly strong and weaker, stronger in some areas and weaker in others"
"So, the real strength on automotive at the moment is North America and China, in particular"
"But, you're right, we don't have – it's not like the traditional OEM business where you can rank your predictive visibility more fundamentally"
"The welding is about 20%, and then marking and engraving will be the next biggest application after that"
"The two main ones, cutting and welding at those levels"
"Clearly, the welding market is one that we have called out"
"We see that over a three-year horizon as being a fundamental area, where we want to execute not just on high-power but on QCW as well"
"In terms of like a three to five-year time horizon welding, the welding market we're targeting and growing substantially by displacing not only existing laser, but non-laser welding technology as well"
"I think that's part of it to continue to gain traction with those relationships, continuing to compete fiercely against even the local companies like Raycus and other competitors there"
"You've actually seen also a rebound in the business with our largest OEM there this year, and that's benefiting from recovery in their cutting markets"
"So, that customer continues to be very much sourcing their fiber laser technology at high-power and QCW from IPG"
"So there's different end market dynamics there, so you've got the welding market for EV, electronic vehicles, for batteries and other applications continues to be a driver too"
"There's clearly a surprise with the strength with which China started at, because you always think that in January, China orders are going to be slow before China New Year"
"And that order flow is very strong, and then it carried on through February and March"
"So yeah, it's difficult to quantify like clearly relative to guidance and the outperformance, you can see how much of a surprise that has been to us"
"I think sometimes the inflection points on the upside, Jim, are some of the most difficult things to forecast, regardless of how good your relationships are with the OEMs. I think the OEMs themselves find it very difficult to forecast sometimes the adoption curve that they see on some of the applications"
"And that's not just in China, it's even in Europe as well"
"So relatively speaking, a little bit more of a concentration there, but also as Valentin mentioned, many new OEMs across a variety of applications as well"
You're seeing overall I think global PMIs are at or close to five-year highs
They're at that level coming into the end of the year and through Q1. You continue to see some improvement in the European economic environment
We believe we are benefiting from our diversification strategy and I'm pleased with our overall performance
We believe the biggest trend that is driving our industry and our strategy as a company today is the cloud
"As the industry evolves, cloud architectures are no longer the exclusive domain of the cloud providers"
"In the quarter, we continued to deliver on our innovation roadmap and announced two new solutions for the data center"
"In January, we announced Juniper Networks Unite Cloud, a transformative data center solution that gives enterprises a simplified way to create and manage hybrid multi-cloud environments"
"At the OFC conference in March, we introduced our data center interconnect solution, Open Cloud Interconnect"
"Earlier this year, we were delighted and honored to receive Vodafone Group's most prestigious award for Supplier of the Year"
"Juniper is a strategic provider of IP routing and security technology for Vodafone, specifically for next-generation data centers, IP/MPLS (sic) [IP/MLPS] (05:06) backbone and mobile backhaul domains"
"We believe that our continued strategy to lead in network innovation in key areas such as automation, software-defined networks, and network function virtualization will continue to enable our Telco customers to build new and innovative business models going forward"
"Now, I'd like to summarize highlights across switching, routing and security"
Juniper's differentiated SDSN strategy has been received very well by industry analysts and customers for its ability to detect and stop threats in a highly automated way
"At RSA, we announced new technology alliance partnerships with leading security providers that simplify deployment of Juniper's security solutions across several customer use cases"
Our focus this year in security is on building confidence and momentum with our partners and customers
"The cloud is a massive paradigm shift that is reshaping all industries, and I'm excited about the opportunity we have in front of us"
"I want to thank our customers, partners and shareholders for their continued support and confidence in Juniper"
"I also want to extend a very big thank you to our employees for their commitment and hard work, which plays a significant role in successfully executing to our strategy and creating value for all of our stakeholders"
"With that said, I will turn the call over to Ken, who will review our quarterly financial results in more detail"
"On the switching side, certainly, we're very pleased with the performance we saw in Q1. A big driver of that performance is in the data center and has a lot to do with the deliberate focused strategy that we've had on the data center, which certainly applies to the large cloud providers, but also other verticals as I mentioned in my prepared remarks"
Pretty much every one of our customer verticals now has a set of customers that's moving towards cloud architecture
"We've always had a solution, but I would say that we've never had a solution that is this strong and that has the breadth of capabilities, both from a software standpoint, but also from an entire portfolio standpoint, the spine switches with the QFX10000 as well as the top-of-racks with the 5100, 5200s, et cetera"
"And although the focus has been on the data center, we're really not taking our eye off the ball in the campus side"
"Think of our fabric technologies in innovative ways for the campus, and that is actually starting to help us provide some differentiation to our customers for larger campus environments"
"And for that reason, we actually saw some pretty good momentum in the EX business, which helped overall switching in the Q1 timeframe"
I will start with the follow up on routing and switching
"So our routing businesses always depended on large deals, large customers across the Telco vertical and the Cloud vertical, and for that reason, it's always been lumpy and I think we're seeing some of that dynamic more broadly"
"Routing, as we all know now, as we have been talking about, we've sort of been predicting, is essentially a flattish type of overall market opportunity for Juniper and for our peers in this industry"
"That's true for Telco, for the Enterprise, for Cloud, for Cable and all of our strategic verticals"
And we're clearly taking more than our fair share there
"I think the question underlying the question that you're asking is, is there some sort of a transition that's happening where architectures are moving from routing to switching and so on"
But those sweet spots continue to be very important and something that our customers largely respect
"There will always be some level of cannibalization, but for the most part, I think the opportunity, in aggregate, with these three technologies under our belt is a growing opportunity"
Let me start and I'll start with the security question
And then I'll pass it on to Ken to talk a little bit about dividends and the dividend strategy
"The feedback from our partners, our customers is positive"
"So eventually, I think the math starts to work in our favor"
"I will just point out that the big part of the focused effort right now is on rebuilding confidence, rebuilding the channel and of course, one win at a time, including new logos that we have just gotten in the Q1 timeframe"
"First of all, I think the most important thing here is diversification"
"It's not just about Cloud, it's not just about Telco"
"It's really about broadening and making sure that we are diversified really along three dimensions: first is in the technologies, so it's Routing, Switching, Security; second is in the Telcos and – sorry, the verticals; Telcos and Cloud and so forth; and then also it's about geo"
"So, for example, we're starting to see good momentum or early momentum with the cloud providers in Europe"
We're starting to see also early momentum with the cloud providers in Asia Pacific
So that diversification strategy has paid off well for us in the last couple of years and I expect it to continue to pay off well for us
"Right? I just mentioned, for example, Routing has always been somewhat lumpy as it pertains to the Cloud vertical or the Telco vertical, and I would expect that to remain the same going forward"
"As far as overachievement or underachievement, clearly we're seeing a lot of strength in the cloud space as well as in the switching business"
"And we're running the business, as Ken just mentioned, with the assumptions that current levels are going to be here for a while, just in case"
So that's I think the way that you should think about how we're running the business and the dynamics of the industry that we operate in right now and our strategy as it pertains to those dynamics
"Yes, Rod, let me start, and I'll start with the second question, and then Ken can talk a little bit about the baseline"
"I know because we've now just re-categorized how we're reporting our numbers, so a little bit of expectation will probably be helpful"
"The fact that we are now in both Routing and Switching in any one vertical, Security to a lesser extent, but Routing and Switching, helps to offset some of that lumpiness"
But I expect that the lumpiness will exist and will remain in effect
The good news is I still feel very good about our ability to compete in the Cloud vertical
"How close we are to our customers in the Cloud vertical, our ability to understand their requirements, their architecture, and the kinds of innovation that we need to put in place to participate in the Cloud vertical, and on all those counts I feel very good"
And I think we're seeing very good momentum specifically in the newer technologies and solutions we've introduced into the market
"I mentioned the fact that there is a concerted effort right now in terms of go-to-market, marketing, rebuilding our channels, and rebuilding confidence in our customers and our partners' mind where we have quite frankly lost some of that confidence"
The only additional thing I will say is that there are really strong synergies between Security and the rest of our portfolio
"If you think about what our SDSN, software-defined secure network, strategy is all about, it's about enabling our customers to use their network infrastructure in an intelligent way to provide a secure fabric, a very secure fabric to prevent essentially their infrastructure, their data, their workloads from being compromised"
That is essentially enabling us to sell Security along with Routing and Switching in the data center or in the campus
So I mean that's the other really important element of how we're approaching Security that I think is important for you to understand
So I think that we're in the process of stabilizing right now
"Well, Vijay, I mean I'll just say that we understand that we operate in a competitive environment"
"They're growing nicely across our key verticals, and that's what you can expect more from us in the future"
I think there was a second part of the question that I've now forgotten
"I would just say that as it pertains to Security, which is I think what your question is about, the focus at this period of time is on turning around this business"
"The data points that we're getting from our customers, our partners are all very positive at this point, and the synergies are really good"
So you have to factor that in as you start thinking about the rest of the year
"Let me start with that and then I'll pass it on to you, Ken"
"The high-end SRX it addresses a market opportunity that's primarily geared towards telecom providers, especially in the mobile space"
And that part of the business is just going to be lumpy
"The other thing is we have not yet refreshed that part of our portfolio for some time, but we're working on a roadmap to do so that I think will eventually contribute to that business"
"The virtual SRX, I mean that's a that's an example of how we think about our strategy on a couple of different time horizons"
There is the here and now and how our customers are typically building out their security posture today
"Clearly, as the perimeter around the enterprise disappears, as workloads and applications moves to the cloud, the security architectures evolve and virtual security offerings become far more important"
"And we actually have a really differentiated virtual security solution – the virtual SRX that is in the market, that is gaining good traction, but it's still a small market opportunity for this period of time"
"It's an example of innovation that, we believe, will help us in the second horizon of our strategy in the sort of two, three, four, five year timeframe"
"Well, let me start with the second one, and Ken, you might need to help me with this one"
"Now we know that, like I have mentioned I think a couple of times on this call, the business is going to be lumpy"
And it's going to be lumpy both in Switching and in Routing
"But in the past, there were quarters were it has actually come in more in the Routing"
"In terms of mix, I don't know if we provided that detail"
"It's honestly very difficult to answer the question, just because the volume of customers that we now have that are buying QFXs from us across all verticals is very large"
And I don't know if you can really put any patterns to it
The one pattern sort of out there is just the 100-gig option
"Where there are large data center deployments that require 100-gig connectivity, that's where Juniper just differentiates even more"
"Now if you narrow your analysis and you look specifically on market share in the over 10-gig connectivity space, there we're taking market share even faster"
"And that's just again because of the fact that where there are high-performance networking problems to be solved, we tend to just stand out among our peers in the industry"
I don't think I would view this from the standpoint of it being specific to any one vertical
"I just reached the conclusion that having a flatter organization will result in an ability to execute with more consistency, to move faster with fewer layers in the organization to address what is a very dynamic market opportunity"
"As it pertains to the cloud providers themselves, we have sort of understood the recipe for how to succeed there for quite a long period of time, where it really has to be an engagement model that is at the engineer-to-engineer level"
We are connected with them on a first name basis down throughout the entire organization
And that's really what's required to achieve the necessary understanding of the direction of their architecture and what has enabled us to be successful
"Your voice was kind of choppy, so I hope that I got the questions all correctly"
"First in the virtual routing, and I'll extend that to include virtual routing, virtual security"
There is certainly an element of the networking industry all up that can be addressed with virtual technologies as opposed to just hardware
And that obviously is where Juniper has excelled historically
It's where our differentiation mostly has existed in the past
"Now as the industry transitions to a virtual equivalent model to the CPE space, we view this in fact as a great opportunity for us to go and to participate in"
So we're not looking at this to get into adjacent markets
We want to look at this from the standpoint of really accelerating a strategy that we are operating in today
"And then last, but not least, is on the operational expenditures, Ken, I'll let you close on that"
I'm pleased with our overall performance as we continued to benefit from our diversification strategy
"We're executing on our strategy to lead the transformation to the cloud, and I'm happy with the continued strength in our cloud-oriented solution across our key focus verticals"
Enterprises continued towards digital transformation by adopting hybrid cloud and SaaS models
Top of mind for many of our customers are security and visibility of data and workloads in a multi-cloud environment
"In the quarter, we unveiled Cloud-Grade Networking to accelerate agility and innovation in the cloud era"
"Cloud-Grade Networking builds on carrier-grade reach and reliability and enterprise-grade control and usability, bringing cloud-level agility and operational scale to networks everywhere"
"Junos Node Slicing is a critical technology in the transition to Cloud-Grade Networking and in particular, the movement to disaggregated networking at the edge"
"Universal Chassis is a breakthrough system allowing customers to standardize on a hardware platform across their data center, core and network edge"
It is designed to provide customers with the ability to adapt to ever changing business requirements with a common hardware platform that supports a continuum of optimized switching and routing use cases across their network
"Now, I would like to summarize the highlights across Switching, Routing and Security"
"In Security, we announced enhancements to our Software-Defined Secure Networks platform and expanded our public cloud offering with the introduction of virtual SRX 4.0. Our SDSN enhancements deliver pervasive security across multivendor environments, public clouds and private cloud"
"In addition, we continue to add new logos to our Sky ATP customer portfolio"
"In the quarter, we continued to see momentum with Contrail and had several new customer wins, including a large Strategic Enterprise customer in APAC and a large telecom customer in EMEA"
AppFormix and Contrail have been integrated for seamless operations management of Juniper's hardware and software
"To summarize, I'm pleased with our execution and the continued momentum we are seeing in our Cloud vertical and our Switching business"
"I would like to extend my thanks to our customers, partners and shareholders for their continued support and confidence in Juniper"
I also wanted to thank our employees for their continued hard work and dedication to successfully execute on our strategy and create value for all of our stakeholders
"I will now turn the call over to Ken, who will discuss our quarterly financial results in more detail"
"Having said that, with respect to the specific verticals, remain optimistic about Cloud vertical"
A lot of focus inside the company at maintaining the momentum in the Cloud
"However, we've always said that the Cloud vertical is going to have some lumpiness"
There's going to be a timing of deployment factor that we need to weigh into our overall outlook on a quarter-over-quarter basis
I think nothing really changes all that much either in the positive or the negative direction
The engagement level with our telco customers is very high
So we're not expecting anything materially different in the short term
"Enterprise, there actually in Q2, we saw some good momentum with the exception of the federal government"
"And there, we have to see how the federal government spending plays out for the rest of the year"
"But generally speaking, we've done a good job in compensating for weakness in federal government with the broader enterprise"
And then we'll address the first question or the point of clarification you're asking about
The routing market is largely driven by the Telco vertical and the Cloud vertical
"That's somewhat offset by weakness in the Telco vertical, all up, which is obviously significant factor in Routing"
"But that said, we're doing everything we can right now to participate in those new modes of spend when they become a reality in the market"
The last thing I would say about Routing is there is a big geographic component to this
China is a country that's still investing quite heavily in routing today
"And in order for us to participate effectively in that market beyond the level that we are today, we need partnerships"
"And there is a, as you know, quite a bit of focus right now by the company on creating partnerships such as the one that we have with Lenovo today, that will enable us to tap into that market as effectively as possible"
"And just to add some color on the first question, Simona, I appreciate the question"
"Juniper has always been a company that has derived much of its success by focusing on those that operate the world's largest, most scalable networks"
"So, in some sense, due to reasons of strategy where we're focusing as a company, where our strengths lie, and the concentration of where spend is happening in our industry, concentration in our business is not new"
I think the timing of deployments just so happened that resulted in a little bit more concentration than usual in the Q3 timeframe
I'm not prepared at this point to provide any additional details just for reasons of confidentiality about the specific customer though however
Part of that had to do with sort of just timing of deployments of big projects that we have been working on
"And also our vertical focus, so the Cloud vertical continues to be a really important vertical for us"
I don't think that there's going to be any material slowdown in terms of their need to invest in their networks to keep ahead of the traffic that they are seeing on a yearly basis
But we just have to factor into all of this the timing of those deployments and the timing of the projects
Obviously very happy with the Switching performance that we have demonstrated well ahead of our long-term model
"I think we've said in the past, and I'll say it again just now, that expecting that level of ongoing outperformance at Switching is probably unrealistic only because the numbers start to get big"
"The feedback that we're getting from our customers and our partners is also very, very encouraging and there is a lot more room for us to grow and take market share in the Switching business"
I expect that to continue with the comment I just mentioned around the fact that expecting these levels of outperformance relative to our long-term model in Switching to – at some point they're going to moderate
"All of that I would say is working really, really well for us right now"
So it's as expected and we're very pleased with the momentum thus far
One of them is really around this concept of a Universal Chassis
Ken just talked about how we as a company are operating and executing with far more efficiency
"It's true in our engineering group, it's true in other parts of our organization as well"
This concept of a Universal Chassis has the ability to address a number of routing or switching use cases
"The Universal Chassis, the first iteration of it is in the market today"
"And of course, the innovation engine continues to crank"
"First on the appointment of Bikash Koley as CTO, very, very happy with this hire"
"Just as a reminder, Bikash hasn't actually joined us yet, but we anticipate that he will in the next month"
"What he brings to the table are a number of different things, but I'll just sort of summarize it in a couple of different ways"
"First and foremost, you know that we have over the last couple of years, really honed in our strategy on what we believe is the biggest trend that is impacting our industry"
It's by no means saying that this means that it's just around the hyperscalers or the cloud operators
Cloud is in fact an architectural evolution that's becoming a way of life across every vertical that we participate in today
"And of course, Bikash has been a part of that at his current employer, Google"
"I mean, he has now spent a number of years running what is a large network"
"And that knowhow helps us in developing better solutions, I think, for all of our customer base"
"We are getting positive data points from customers, from partners"
"We're seeing some geo specific momentum so, whereas, EMEA was a bit of a challenge for us in the Q2 timeframe"
"Actually there was momentum in Security in EMEA, which gives us some confidence that we're innovating in the right way"
"And very importantly, Security has become a critical element of some of these future modes of engagements with our customers"
"So as we talk to our customers around SD-WAN, for example, one of the really differentiating attributes of our SD-WAN solution is that it has Security embedded"
"But we're taking a deliberate, methodical approach right now to this part of our business"
"And then the last one was a company called AppFormix, which is around automation, in particular, in the cloud data center, but has much broader applicability than that"
And that would be sort of indicative of what you might expect in the future as well
"New mode is around enabling customers to migrate to public clouds or to hybrid cloud offerings without compromising their data, their users, their workloads"
"I think, there's quite a bit of innovation right now in the industry in that domain and that would be an area that we would consider as well"
"Mark, first, I want to understand a little bit more about your first question"
"When you say dual sourcing, are you talking about the intent of cloud providers to dual source their"
"I mean, the Cloud vertical for us is not a new vertical"
"I mean, we have been in this vertical now for as long as I can remember"
"And we have been, sort of, intimately tied down at the engineering level with our cloud customers now for a number of years"
And it's always been a very competitive environment
"So, by no means do I ever feel like there – that we don't need to be on our toes"
"We're always having to demonstrate to them how we're innovating in ways that are very, very specific to the kinds of network that they're building out, the operational models that they want to deploy, the telemetry capabilities that they want, et cetera, et cetera"
"And yeah, some of them do have sort of an internal strategy to go to dual vendor – dual vendors to procure that technology"
"But even in those circumstances, our goal is to always get the lion's share by demonstrating that we can perform better or innovate in a more appropriate way for their business"
"And that certainly is the case, but I will say that different cloud providers have very different security requirements and security models that they deploy inside of their networks"
"In some cases, they believe in the big iron that sits at the edge of their data centers, for example, and secures traffic going in and out of those data centers"
But that business will be very lumpy from quarter-to-quarter depending on where the deployments are
"In other cases, it's really more around securing through micro segmentation inside of the cloud network"
"And that's really more around a software approach to security, and that's more of an emerging opportunity for us at Juniper"
"First, there is opportunity when it comes to value engineering"
"Secondarily, I mean, Ken has mentioned how we've gone after strategic customer insertions in particular in APAC, and we need those to pay off over time"
"And last but not least, it's around business models and it's around software"
"It's around selling the value through Contrail, virtual security, SD-WAN"
But they're largely going to be gated by how fast the industry moves
"Now, we're out there sort of really selling the value to our customers"
"We're encouraged by the wins that we're getting, but it's sort of the timing of the benefit is not 100% clear at this point"
"Jim, let me start with the Security question first"
I also provided some of the data points that we are now picking up on that give us some confidence that the work that we are putting in is going to pay off for us
So that's how I view the opportunity right now in Security and how we are expecting the rest of year to pan out
"Paul, let me start with the second one, the Tier 1 versus broader Cloud"
"We don't break it out, first of all, but I will say the following"
Our penetration in the Tier 1s from a Routing standpoint is one that has been in place now for a number of years
So we've certainly had way more runway and way more of an ability to achieve the kinds of penetration across our Tier 1 Cloud customers in the Routing space more so than we've had on the Switching side of things
"In Switching, we view it as more of an opportunity"
"We certainly have a strong Tier 1 presence in Switching, but we have less market share and penetration than we do in Routing"
"In the meantime, I think what I have said on this call in the past is that there is a broader opportunity in the cloud space, not necessarily with the hyperscalers, but the broader cloud market when you look at SaaS providers, regional cloud providers, telco cloud that's here now that we are benefiting from"
"I mean, a lot of our business momentum in fact is from that tier of cloud provider"
"Price erosion, again, is not something that is easy to describe without a whiteboard and some slides"
We can certainly do something like that maybe at our next Analyst Day
But it's the nature of this business that we're in
So that would give you an idea of the price erosion that we're seeing in that market space
"In the data center switching side, there of course, there is price erosion just as there is everywhere"
"However, I think that market is growing at a faster clip than in the data center and that's why we are so focused on data center switching as part of our strategy"
"First from the standpoint of hyperscalers, I think we acknowledge that this is a competitive market and especially as we demonstrate the momentum and the success, we can expect that the competitive levels to only intensify"
"Having said that, I think it really is just a matter of execution for us, execution from the standpoint of how we engage with them, execution from the standpoint of our innovations and on all fronts, I feel good about where we are and where we're going relative to the hyperscaler opportunity, in addition to the broad Cloud opportunity that is before us"
"And as far as Cisco's announcement, I have been now for two or three years talking about automation as being the next big thing in networking"
"And for that reason, we've always had a lot of automation capabilities across our platforms, whether it be the automation capabilities of our systems themselves, the API driven nature of those systems, Contrail has a way of automating Cloud operation, AppFormix has an ability to provide machine learning capabilities to create visibility inside of a Cloud data center, our NorthStar Controller is essentially an automation platform for our wide area"
"So I think it's good to see our peers in the industry recognize the importance of this trend, and it has been and will continue to be a huge area of focus for us"
"In Switching, this is pretty consistent with what we've done historically"
"And we didn't do that for QFX in Q2. However, I think it's safe to say that we would not be able to post this type of overall Switching momentum without strong QFX performance"
"It's a result of a deliberate strategy and some really solid execution by the team, which I am very proud of"
And we saw good momentum there in the Q2 timeframe as well
"Our primary strategy is on the data center, the Cloud, and these larger enterprises that are building out their campuses as on ramps to the Cloud"
We ended the calendar year was strong performance for the December quarter exceeding the midpoint of our guidance and all financial metrics
"So we dive more deeply in December quarter, momentum in our shipments continued totaling $1,923 million, which was up approximately 13% compared to the September quarter and was at the high end of our guided range"
"Shipments for the combined memory segment came in at 61% of system shipments, which was up from 56% in the September quarter"
"Non-volatile memory shipments made up 37% of the system shipments, which was down a little bit from 43% in the prior quarter"
"We’re pleased with our leadership in 3D NAND, in particular with our strong position in the most critical applications like the channel whole edge, the mold stack and the word line fill"
DRAM shipments grew 24% of total system shipments compared to 13% in the prior quarter
"The foundry segment remained strong at 31% of system shipments in the December quarter, which was down slightly in absolute dollars from the record level we saw in the September quarter"
Foundry spend was focused primarily on 10 nanometer
"As Martin mentioned, we’ve made some significant market share gains in the foundry and logic space as our customers are migrating to smaller geometries and implementing more challenging architectures"
"And finally, the logic and other segment contributed 8% of system shipments, which was flat with the September quarter"
"And I remind you that our financial model continues to be the right tool for you to use to build your own models, and to think about our ongoing financial performance"
"Spending allocated R&D was about 64% of total spending in the December quarter, up from 63% in September"
"The December quarter tax rate came in at about 15%, which was higher than roughly 12% rate last quarter and in line with our expectations"
"And I just remind you, dilution schedules for the remaining convertible notes are available on our Investor Relations website for your reference"
We returned $0.30 per share for a total of $48 million in dividend distributions to our shareholders in the quarter
"At our analyst meeting in November, we announced an increase in the dividend level to $0.45 per share"
The first distribution at the new level was paid out earlier in the month of January
"In addition, we initiated purchases under our $1 billion board authorized share repurchase program, which was also announced at our analyst event"
"In the December quarter, we spent $65 million and took delivery of approximately 619,000 shares at an average share price of $105 per share"
We ended the quarter with $6.089 billion in cash and cash equivalents on the balance sheet
The cash remains approximately 40% onshore and 60% offshore
"During the quarter, we redeemed the $600 million 2023 senior notes and the $1 billion 2026 senior notes under the special mandatory redemption provision of those notes"
Cash generation for the company continues to be healthy
"In the December quarter, we generated $404 million in cash from operations"
Inventory turns also improved from 3.9 to 4.1 times
That number excludes approximately $129 million from shipments to customers in Japan
"Capital expenditures were $37 million, which is down a little bit from the $42 million that we spent in the September quarter"
"We exited the quarter with approximately 8,200 regular full-time employees"
Headcount additions were targeted at supporting increased business levels and customer ramps
Let me now turn to our outlook for the March quarter
I’d like to provide with our non-GAAP guidance
We’re expecting record shipments of $2.350 billion plus or minus $75 million
"So in closing, we’re very pleased with our performance in the December quarter, as well as calendar year 2016 and the milestones we achieved throughout the year"
"Also, as we sit here today relative to the June quarter, we’re expecting June shipments that are roughly in line with what we’re seeing for March"
"Operator, Martin and I would now like to open up the call for questions"
"Yes, it might, Tim, but as always remind you, keep in mind the financial model when you model things"
But we’re kind of where we should be is how I think about it
There’ll always be puts and takes around it as you’ve seen over the last couple of years
"I’m not going to give you a dollar number, C"
"Over time it all normalizes and it’s going to be the same numbers, right? It’s just a matter of the rate of change, a second derivative if you will of what’s going on there"
"You think about all time, Farhan, I mean the practical reality of it is until there is a definitive law out there that you can understand exactly what it requires and what are the laws you do, it’s hard to specifically answer the question"
"Obviously, if we get accessibility to worldwide cash without having tax penalty that creates a whole lot more flexibility for us to access the cash to do a variety of different things"
"We haven’t had any definitive conversation, because just too early right now and too much uncertainty"
"But stay tuned, we’re paying very close attention to it"
"Farhan, you heard Martin described kind of more first half weighted overall both WFE and shipments, and also describe NAND is maybe more first half weighted than the other stuff, so that’s a data point for you"
"When we look at March as well as June, everything is pretty strong"
"Yes, Harlan, I mean, it grew consistent with our expectations"
I can’t remember off the top of my head whether it grew a little bit more in the equipment business or not
It’s still roughly a quarter of the company’s overall business
"That’s probably a reasonable assumption, Toshiya, yeah, it’s - that’s not unreasonable"
"Okay, operator, that’s going to be our last question"
The March quarter represented a solid start to the calendar year
Each of these metrics grew double digits quarter over quarter
Shipments for the quarter were strong at $2.413 billion which was up 25% sequentially and again above the midpoint of the guided range
"Our customers are investing in new 3D wafers, they're converting planar to 3D and they're also embarking on 3D technology conversions to increase layer count"
The combined memory segment represented 73% of total system level shipments and that compares with 61% in the prior quarter
"Memory shipments were weighted heavily towards - excuse me, the nonvolatile segment which represented 50% of shipments in the March quarter compared with 37% in the prior quarter"
DRAM shipments grew 24% sequentially in dollar terms and made up 23% of system shipments
DRAM shipments comprise 24% of system shipments in the December quarter
DRAM spending is largely focused on conversions with the majority being conversions to the 1x nanometer node
The foundry segment was flattish sequentially in dollar terms accounting for 24% of system shipments
And finally the logic and other segment contributed 3% of system shipments
This compares to $384 million in the December quarter
"And as Martin pointed out, the majority of our OpEx spending continues to be allocated to funding our critical R&D programs"
Operating income in the March quarter came in at $578 million and that compares to $490 million in the prior quarter
The tax rate for the quarter was 12% compared with 15% last quarter
The tax rate in the March quarter was favorably impacted by the release of tax liabilities from the conclusion of certain tax matters
"This share count includes dilution on a non-GAAP basis from both the 2018 and 2041 convertible notes, with a total dilutive impact of about 16 million shares"
And I’ll remind you that dilution schedules for the 2018 and 2041 convertible notes are available on our Investor Relations website for your reference
"This quarter we returned $213 million to our shareholders, $73 million in dividend distributions and $140 million in share repurchases"
We took delivery of 1.2 million shares at an average price of $114.30. We’ve completed approximately 20% of our current $1 billion share repurchase authorization and I'll let you know that we plan to initiate a $500 million accelerated share repurchase program in the June quarter
We continue to have both a solid cash position and healthy cash generation
Cash from operations was $423 million and that compares to $404 million in December
"DSO held steady at 69 days in the March quarter, the same level as in December"
Inventory turns were 4.2 which was up slightly from 4.1 in the prior quarter
This turns number is the highest we've achieved since we've combined LAM with Novellus
These Japanese shipments are up from $129 million in the December quarter
I'd like to point out that this combined deferred shipment bucket now stands at $1.1 billion and it grew 37% in the March quarter
Capital expenditures were $44 million which was up from $37 million in the December quarter
"We ended the quarter with approximately 8,600 regular full-time employees, which was up about 400 from the end of the December quarter"
The increase in headcount was in support of our growing business levels primarily in the operations and field organizations
"Additionally, we're bringing on board the talent required to execute on our forward looking R&D programs"
"Now looking ahead, I’d like to provide you our guidance - for non-GAAP guidance for the June quarter"
We're expecting another record shipment of $2.500 billion plus or minus $100 million
We're obviously pleased with our performance this quarter and with the guidance we've just shared for the June quarter
Our business has never been stronger financially and we're continuing to execute extremely well
"Operator that concludes my prepared remarks, Martin and I would now like open up the call for questions"
"I'm not going to guide the third calendar quarter or the fourth, but I think we've given you enough to model it pretty closely"
"In any one quarter and you don't get to see this unfortunately, but the specific scheduling of shipments in any one week or any one day of any one month, I mean, that kind of jerks the ratios around"
So there's is no real story here in terms of kind of changing dynamic of timeline
"I mean it’s continued focus on just managing our remote factories, managing our own internal facilities, anticipating what we were going to need to be able to support at this point months and months ago and communicating that to our supply chain partners, Patrick"
"I mean it's operational excellence, the way Lam has always executed, just at a different scale here"
"I mean, any time you're doing more this year than you did last year you need more people to execute that, that's the statement around R&D"
So I’d encourage you to go back and have a look at what we shared with you in November there
"I think March is probably the low point in terms of what the calendar year looks like from a system shipment standpoint in the logic and other, it’s going to strengthen through the back half of the year"
"Romit with all due respect, 27 and 26 isn’t wildly different"
So me guiding you back the model is a place that you ought to gravitate towards
You've seen it from us as we've grown and I would expect that you would continue to see it if we were to grow beyond the high end of what I have out there right now
"When we announced the buyback, it was $1 billion program, $1 billion buyback over a 12 to 18 month timeframe"
"As we executed through it, I felt like getting into the June quarter, we needed to step up the pace a little bit to execute to what we said we're going to do and that's what we're doing and why we're doing a little bit more in June"
"And yet Romit, I wish I'd done it a quarter ago when the share price was lower, but hindsight's always 2020 with stuff like that"
"Mehdi, we finished last quarter, I think it was probably about -- maybe a little bit about 30% onshore, so about 70% offshore"
"Whole question around tax reform and when or if or what have you obviously is very topical and feels like every day, it's a little bit different"
"We're very much taking a wait and see approach, now whether or not to be any tax reform, there's a variety of different ways you navigate through that"
But I'm more encouraged today than ever that we're actually going to get something done
And this is Warren's first call and as you noticed in his first call he's made the first change of changing nomenclature from processed to switch
We're very pleased to have delivered a strong result for the year driven by solid execution of our strategy
We continue to see bright spots as well as some areas of concern in the global economy in the US
"Consumer confidence, unemployment, wages all seem to be holding steady"
It's still too early to tell what impact any new policy proposals might have on the US or other economies
"But like all of you, we're expecting to see initiatives around taxation, regulation, infrastructure spending and trade"
"And in fact on regulation, you've all seen the recent executive order talking about taking out two regulations for every one proposed"
"Turning to Europe, the economic recovery is persistent in many markets throughout the prior year, throughout 2016, led by Germany"
And the prospects for this coming year of 2017 seem encouraging as economic sentiment and unemployment continue to improve
"So, we remain watchful of the implications of that on the UK and broadly on the EU. In Asia, we remain cautious, largely as a result of the prolonged slowdown in China"
"In India, the government has recently implemented a plan to address its parallel economy and to help drive the shift from cash to electronic forms of payment"
"In Australia, both consumer and business confidence remain weak"
While Brazil's economy appears to be emerging slowly from a deep recession
"The road to recovery for Brazil is expected to be long, as there is still political uncertainty"
"So with that as the backdrop, what are we doing is to continue to focus on executing our strategy and growing our business"
"On the legal front, we received positive news yesterday regarding the judgment on our case for ten retailers in the United Kingdom representing approximately 40% of our existing damages exposure"
And we're now looking forward to working with the regulator for final approval of that solution
"We expect to close the transaction sometime in the spring of 2017. So now, let's move on to a few highlights from 2016 and some of our recent business activity"
"In addition, we've given you several examples in the past as to how we've been extending our capabilities beyond switching into processing, back to Warren's clarification, enabling us to drive more deals and touch more transactions"
"Outside of the US, we're continuing to make significant progress as well"
"In Europe – I'm just giving you a few examples by the way – in Europe, we signed Amazon for their credit co-brand business in the UK, renewed our debit agreement with ABN AMRO, one of the largest banks in the Netherlands"
"Additionally, we renewed agreements with Bancolombia for credit and debit with a focus on affluent, as well as with Santander in Mexico for credit, debit and commercial, and a flip of their commercial business in Brazil, while in Asia we renewed our agreement with the Commonwealth Bank of Australia, the largest bank in that country"
"Finally, while discussing these, let me touch on the domestic opportunity for China"
"We continue to speak with the regulators there to better understand the entry requirements, and to clarify our options and how best to approach that market"
"In the meanwhile, what we're doing is focusing on driving single branded card issuance"
"We're pleased to add Bank of China this quarter, bringing the total number of programs for single branded card issuance launched in 2016 to 44, with more than 10 banks"
All of these are aimed at driving cross-border spend with the country's growing affluent segment
"As we've often said, that this is a marathon not a sprint"
"But I believe we are executing well against our strategy, and have made some good progress in 2016, and starting at Masterpass, where we continue to focus on driving both user adoption and acceptance"
"We've talked to you about our Digital by Default strategy, which basically enables issuers to auto-enroll cardholders through their online banking app, and helps to drive scale, but at the same time keeps the issuer at the center of their consumer relationship"
"So from an acceptance standpoint, we've added roughly 80,000 new merchants, bringing the total to about 340,000 for online and in-app purchases, as well as more than 6 million locations in about 80 countries that allow contactless payments"
"This quarter, we're pleased to announce partnerships with Dunkin' Donuts, Walgreens, Gulf Oil, Wyndham Hotels, and so on"
"Last quarter, we highlighted our agreement with the Ecobank Group to roll out Masterpass QR"
"This past year, we highlighted our partnership with Green Dot and Uber, Stripe and Lyft as well as Allstate, and how they are using the platform to make convenient and secure payments to drivers, delivery people, and claimants, among others"
So let's keep going a little bit with the partnerships in digital
"This past year, we helped Apple Pay, Android Pay, Samsung Pay and Microsoft Wallet to expand to several new countries"
"We also enabled several of them to allow their consumers to shop online, in-app, and check out using their same MDES tokenized login credentials at the hundreds of thousands of merchants around the world where Masterpass is accepted"
"Finally, as part of the innovation agenda, we've been looking at ways to combine digital payments with artificial intelligence to create better and more personalized experiences for consumers"
I think we've made significant progress in this area in the prior year
"Still, let me quickly run through a few examples, starting with safety and security, which has been a key area of focus for us this past year"
We've added more than 60 organizations who have subscribed to the APT platform in recurring subscription-based contracts
"So in addition to McDonald's, which we mentioned in the past, we got JCPenney and Duracell in the US, Asahi Breweries in Japan, Thomas Cook in the UK"
"In fact, there were 28 deals in total that were additive to APT's business as usual efforts"
"So with assets like these, we not only deliver great insight, we're actually building even stronger relationships with our merchant partners as well"
"So with that, I'm going to turn the call over to Martina for an update on our financial results and operational metrics"
"Remember that in the retail business alone, the consumer to retail payments, 85% of the world's retail payments are still cash and check"
"So, I think that it's early days to talk in great depth about what all could happen, but I'll tell you my views that are on the positive side of this, and then you can see, obviously, through the news that there are people who are concerned as well about the negative side of it"
"The positive side of it to me, his regulatory announcement, the fact that he seems genuinely concerned about the manner in which regulations enacted are creating millstones for business, both small and large, to grow in the U.S"
"Now, what that means specifically for a company like ours, or for merchants or for banks who are in our ecosystem, I don't yet know, because you'll only get to know that over a period of time"
"My general belief is that, certainly, it'll help both of the other parties, the merchants and the banks, in the ecosystem in different ways"
"I don't yet know, specifically, how it will impact our company or those in our immediate ecosystem"
I believe that will only increase the velocity of money in the country
"That will be helpful for a company like ours, both in retail and commercial payments"
"The aspects of taxes, there's all kinds of discussions floating around about what kind of tax rate"
"What kind of corporate tax rates could come to if it comes down from the current level that we're paying, which as Martina told you, 28%, 29%"
You can put your own probability factor on which one
"I think there's lots of things to be worked out about how you pay for that reduction in taxes and what impact that has, border taxes, adjustments of import and export circumstances"
All of these have implications for us as a company
"We do have stuff in Dublin and Europe, but net, I think you will find us to be a net exporter rather than a net importer"
"So I guess on all of those aspects on taxes to regulatory to infrastructure, I can find ourselves finding this to be net positive for our company over the next four to five years"
"The aspects of trade, Tien-Tsin, as you know, my normal approach to trade is that I continue to believe that the United States is way too large a marketplace for companies and businesses to feel that they shouldn't be involved with having on-soil presence and on-soil activity and frequent travel in and out by business executives alike"
"So, I consider the US to be too attractive for that to change dramatically"
"I do believe like everybody else that in the corporate world, there are a lot of us have built our business on the freer flow of cross-border trade, data and people"
"If that were to change over time, that would be a problem, but I don't believe that that's what the administration wants to do"
The economy is not going to grow without the right inputs in the right places
"It may change specifics of the way trade gets enacted, but I continue to be relatively bullish on where this economy could go over the next four to five years"
"So, the interchange changes have already gone, and as you know, some time back, and so have all the other rules that went with it, including the co-badging"
And that's why there's an Article 8 and Article 7 implications
There is obviously an impact on bank P&Ls caused by the lower interchange rates
"Every bank, as you know, is working on other ways to find ways to get to their P&L again"
It includes an emphasis on commercial in some cases
There's a whole series of actions that banks in different countries across Europe have been taking to try and find a way to put some energy back into their P&L
"My sense on the other aspects, PSD2, as you know, it's still two or three years away from fully being implemented"
But there's a lot of energy and a lot of passion going into preparing for it
I actually believe that VocaLink could play a very instrumental role for banks in the EU to help them actually find a way to navigate through PSD2 and to maintain scheme-like look and feel to the ability to create payments in a way that they can manage through their customer relationships and their chargebacks and their fraud management and the like
"So, I believe that to be an essential part of our strategy for Europe"
"On the Visa, Visa European competitive environment, honestly, it's still very early days"
"So, there's safety and security, there's Advisors in the consulting business"
"Safety and security happens to be one of the fastest growing, along with information and data analytics"
"That's because one, they're intertwined, but two, that's a very important topic right now for consumers, merchants and banks"
"Our processing grows when we win deals, but processing, and when we get into more footprints, processing tends to be a very local business"
"It has some global transferability, but it tends to be quite local"
We also tend to make more money out of the transactions we see rather than in the processing business itself
We started with a relatively good platform in MasterCard Rewards
We've added to it over the years with merchant funded rewards by buying into Truaxis in California and buying into Pinpoint in Australia
"Do I see this changing dramatically over the next couple of years? No, but beyond that, we'll see"
"And those PIN transactions go up and down, as we've told you a few times"
There's months and quarters when they are growing faster
"That tends to be a more, it's almost a weekly and daily issue that we deal with"
"But, if you're talking about generally long-term trends, you should expect that the two will grow faster than the other two"
That reflects the secular change as well as all the day-to-day activities that Martina just referred to
"Well, there have been for years in the industry these alternative payment schemes to the global networks"
"And of course, it's not just cash that we've been talking about for a while, but it's also these local payment schemes country by country"
Russia now has it post the sanctions in the Crimean circumstances
"China's always had one, called China UnionPay, which kind of most people know lots about"
"And so, in every marketplace there have been these schemes"
"These schemes are either owned by the local banks or by governments in some cases, so CUP is owned by the Chinese government, whereas a lot of the other schemes are owned by local bank associations"
"Cartes Bancaires in France, for example, is owned by the French banks"
They play roles where they will look at all the debit transactions locally
"Others, like CUP, all domestic transactions are mandated to go through them, and so on"
And we've had different degrees of success over the years
"The European Union, as you know, through its directives over the years in PSD and – what is it called, the other one? The European Special?"
"I get mixed up between SEPA and SIPA (51:07); but, SEPA"
Those have created opening up of these schemes for people like us to be able to play
And the fact that we see global transactions and they tend to see localized transactions adds a long-term value differentiator between what we can provide and what a local scheme can provide
It's the same with the RuPays of the world or others
"We're always looking for ways to cooperate with them, in some cases successfully, in others not so"
I'm sorry it's not a clear answer because this is not a clear space
It's a space that evolves and breathes and lives every day and week depending on the circumstances of a marketplace
"And you should just know that our country managers on the ground have this as one of the major objectives in their evaluations, and the decisions in how they get paid"
"Well, in China right now there's nothing to say because we are still waiting for clarity on how we could be partners domestically in China"
"Some of it, it depends on the energy on both sides of the partnership to implement that"
"I consider different forms of payment to all be competitive, but also conducive to the bigger challenge of fighting the 85% that is still cash and check in retail payments; and that's always been my stance and I haven't changed"
"I have the same view of all of these, that I think there's enough place in this market for all of us to play, and there's enough, let's say, challenges in the marketplace for all of us to put our shoulders to it"
"So, India has only 1.4 million terminals actually at the point of sale, and it tends to be a very cash dominated market"
I'd say 95%-plus of the transactions in retail are cash
"When the demonetization happened, the two biggest currency notes were taken out of circulation, the INR 500 and the INR 1,000 notes constituted 86% of the currency notes in circulation"
That's the shock that is referred to as what could lower consumer spending for a couple of quarters
We saw that because restrictions in cash withdrawal from banks and from ATMs were instituted as the government tried to catch up with the demand for cash
"With the new notes, they were printing, those notes had to be put into the market"
"Or you can just imagine the level of work in a country where the largest public sector bank has 18,000 branches, and is spread across a relatively large country"
"Their point of sale payments can take this, but behavior habits that used those terminals very infrequently"
"That work is being done by the acquirers, the banks, the networks, us, Visa, others, but also by the government actively pushing that logic"
"Second, there's a great deal of partnership with merchant organizations on the ground"
The Confederation of All India Traders estimates that there's as many as 60 million casual and regular merchants in India
"Even if you were to go from 1.4 million terminals to 5 million acceptance points in the next two years, we're talking 5 million out 60 million"
"So, there's a long way to go before we get to a ubiquitous terminal acceptance model"
There's a lot of work going on on cheaper terminals
You heard that in my prepared remarks with the Government of India and with RBL and others of that type
"We're working actively with issuers, acquirers and the government in short on this topic, but don't expect this to change in a quarter or a month"
"It is a long fight, and I think the Prime Minister is to be credited for his willingness to take it on, because in the medium to long term, this could be transformative for the way India's economy operates in the recognizable formal economy, as compared to the informal economy, where it's denied taxation and denied credit and denied insurance"
I think he's really trying to do something pretty brave here
That's because of what happened to the pound versus other currencies
"Thank you all for your questions, and Tien-Tsin, special thanks to you, buddy"
The actions taken there has the potential to be transformative
"We're going to shape the payments landscape through innovation and expand into new payment flows, hence the interest in VocaLink and other such efforts, to ensure that we are well positioned for success for many more years to come"
"So, we appreciate the continued support of the company and thank you for joining us today"
So we continue to execute well against our strategy
You can see that in our strong second quarter financial and operational performance
"In terms of the global economic environment, not much has changed since the last quarter"
"In Europe, real GDV is expected to grow by about 2% this year, in 2017. Consumer confidence is continuing to improve and that's primarily driven by Germany and Spain"
"But, of course, unemployment does remain relatively high in some of the EU countries"
"In Latin America, despite all the recent political turmoil and sustained high unemployment, Brazil is showing both consumer and business confidence improving"
"Venezuela, of course, continues to deteriorate, triple digit inflation, high foreign exchange volatility"
We're just pleased that we now have the ability to offer both card and bank account-based payment solutions to our customers
"If you look at the payment flows in the top 50 countries around the world, a significant portion of the payments are being made via ACH"
"With Fast ACH, in particular, we have the ability to now enable payments to and from any bank account in real time"
"And that expands our reach to more end points, including businesses, governments and consumers, who may only have a bank account and not a card"
"And as you can imagine, for consumers, that's not that infrequent in many markets around the world"
"Further, VocaLink's Fast ACH is well suited for certain use cases and why is that? That's because of its enhanced data and messaging capabilities"
"So, for instance, it can connect to ERP systems to facilitate B2B payables and receivable management, but it can also support bill pay through its Request to Pay messaging capability"
"As of now, over 25 countries are actively pursuing Fast ACH networks, a number of which have already launched"
"VocaLink currently provides those capabilities to the UK, Sweden, Singapore, Thailand and, of course, in the United States, with the clearinghouse, and it's also engaged in many other such opportunities"
"What that does is it facilitates the delivery of funds in near real-time, not real-time, to virtually all debit card accounts in the United States"
"In addition, by leveraging the exclusive capabilities from what we have with our HomeSend JV, we can enable cross-border payments to over 85 markets, now by connecting into cash in and cash-out locations, by connecting into mobile wallets and bank accounts"
"And through that process, capture an even greater set of new payment flows"
"What we will have is card rails, which we've had for years"
"With this, Mastercard can become a one-stop shop for our customers, banks, merchants and governments"
We're looking forward to talking to you more about our strategy around Fast ACH and our other network capabilities during our upcoming Investor Day
"So, with that, I'm going to move on to some of our recent deal activity"
", we continue to have success in the co-brand space"
"This quarter, we're pleased to announce Kroger, the largest grocery chain in the world, will be converting their credit portfolio with U.S"
"In addition, we won a new co-brand program with Belk, a department store chain with about 300 locations throughout the United States and renewed our credit co-brand agreement with Toys ""R"" Us"
"last year, we're pleased to extend our partnership with PayPal into Asia-Pacific, which brings similar features and benefits to this region"
"In fact, we've just announced and signed that in the last 24 hours"
"We've been working with PayPal around the world for a long time, as most of their co-brand cards globally are Mastercard-branded"
"And just for an example, in Europe, we have multiple co-brands with them, including a prepaid program in Italy, commercial debit in the UK and, by the way, they've also been a licensed issuer in the region since 2011. Now talking about Europe, we continue to drive strong performance and win new deals there"
We're also pleased with some recent progress in the UK debit space
"This quarter, we announced a deal with TSB to flip their entire debit portfolio to Mastercard, building on our existing relationship with them in credit"
"Now, this is a significant win for us because TSB's customers represent over 4% of all debit customers in the United Kingdom"
"China, as you know, we've been deeply engaged in navigating the potential opening of their domestic payments market"
"Back in March of this year, we actually submitted a draft application for a domestic bank card clearing institution"
That early draft was informed by active considerations and conversations with the People's Bank of China and actually a number of potential partners as well in the market over the last two years
"Now, more recent set of regulations got published, as you know, on June 30, so we're now finalizing our next application based on that new set of regulations"
We're working through all our options for either a 100% Mastercard application or for a joint venture
We're going to make a decision on this and then file our next application
"Obviously, what's really important here is to get it right out of the gate"
"Because, remember, this is just another step in the process that will likely play out over the next 12 to 18 months as there are several review cycles from the Chinese regulators between now and that point of time"
"At the same time, we've also been working on developing our technology network solution for China, which considers both national and cyber security standards and we're progressing well in that regard"
"Now, in the meanwhile, what we are doing is continuing to make progress with single-branded cards and we've nearly quadrupled year-over-year single-brand card issuance, launched a total of 18 new programs in the first half of this year, including the first single-branded EMV Debit card in China with Bank of China, and a World card with ICBC, which is targeted at their affluent customer base"
"As you know, more than 50% of all B2B payments in the U.S"
"And in terms of new commercial payment deals in this space, we are pleased to have renewed and expanded our agreement with Citibank in the UAE for their commercial business"
I think that win was basically driven by our virtual card platform as well as our ability to help drive B2B acceptance in the market
"We're also expanding our global partnership with Amadeus, which I spoke about last quarter, to the United States, with U.S"
"Bank as their exclusive issuer, as we continue to pursue the more than $300 billion in annual global payments that travel agencies make to airlines, hotels, and other travel providers, which by the way today are largely made via bank transfers and checks"
"So turning to digital, we're making good progress with the execution of our Digital by Default strategy with issuers"
We now have over 90 million enabled accounts and we're actually pleased to have partnered on the launch last week of Citi Pay in the U.S
We are continuing our momentum on the digital acceptance side
"We now have more than 340,000 online merchants across 38 markets in addition to the 6 million contactless locations in 96 countries, where Masterpass can be used"
"And, finally, a good example of our thought leadership in driving the convergence from physical to digital can be seen in our partnership with EMVCo and other industry participants to enable greater choice in retail payments by creating a new global standard to ensure consistency, industry consistency in QR codes"
And this builds on our momentum with the rollout of QR technology in Africa and India
"In addition to the launch of BharatQR in India, which is now live with four large banks in the country, we've partnered with the Bank of Thailand and the Government of Thailand in support of their goal of creating a cashless society"
"So, with that, I'm going to turn the call back to Martina for an update on our financial results and operational metrics"
"So, I think that Mastercard Send is similar in a way to other offerings in the marketplace"
"We could have taken that, combined it with our HomeSend JV, extended its reach to mobile wallets and cash-in and cash-out points around the world"
There would be some challenges still left with that to really enable that to compete the way Fast ACH is growing around the world
Those challenges are actually quite interesting and require a real solution to solve for
"I just think that's more expensive and a longer solution with less credibility of working than if you pick up a unit like VocaLink with its enormous reputation in the UK where it operates the payments infrastructure, but also its ability in multiple countries around the world"
VocaLink is one of the only players in the world that has demonstrated the ability to take its software and apply it in markets as diverse as Sweden and the UK and the United States and Singapore and Thailand and so on
"I think the second point is the nature of the data flows; now this is a little bit more in the commercial B2B payment space, the nature of the data flows that come back-and-forth over VocaLink's B2B payment enabled system is such that you get their ISO 20022 dealer standard"
"So what they get is far more information that allows them to integrate seamlessly with B2B ERP systems, with e-commerce systems and cross-border payments are also built in there, as standard"
"They have directories which combines the VocaLink IPS system with these directories, simplifies the flow of payments, simplifies payment requests"
"So, the aspects in the B2B space that I think with the richer data set and the better connectivity of VocaLink Fast ACH that I think are actually quite important to be able to play a good role in that space"
So the combination of these two is kind of what prompted us sometime back doing a scan across the world of the opportunity to enter Fast ACH
"But as it so turned out, the opportunity with VocaLink came along and we were trying our best to leap on it and take it and move forward"
"Well, I'll tell you this much, that what we are looking at is the fact that all the new regulations that went in, the one part of them were the routing regulations; another part was the actual, as you know, a level of interchange"
There were other parts of our co-branding and co-badging and separational switch and scheme
"As you can see, even in Germany, where Martina hails from, even in Germany, and I'm not holding it against her, but that's where she hails from"
Even the Germans are beginning to use these payment systems in these stores which earlier they did not
They basically paid through the giro through their bank accounts
"You can see a change coming from the merchant community as well as the consumers, which I think is a function not just of one aspect of the regulation, but of the totality, which I think is what the EC (30:06) wanted to do"
"But I would say – you remember even that Visa is still sorting through it, as they themselves said, all their agreements with their customers"
"So, you've got to let this play out for a little while"
"But, we are seeing progress, we are winning deals, and I'm just giving you a couple of examples, I'm trying not to give you a list"
"This will become, as I said over time, you should get past this couple of years and then think about this as settling into a regular competitive marketplace, where one of two or three things will happen"
"Either the yields of that market, which tend to be lower than global yields, will begin to come up a little bit, maybe, maybe not; we'll see"
"Or, the opportunity to win more deals and volume will present itself"
"Right now, it feels more of the latter than the former"
"First of all, the last part, to me Masterpass and bank wallets are one and the same thing"
I'm not into building Masterpass as I've said as a B2C solution
"Banks can take a wallet container from us or build their own and then ride our rails, which is what a number of them are doing"
Someone like CitiPay uses Masterpass more extensively than others
"It's a open, engagement model with banks and others who are authorized to have financial accounts so that we can enable the path through digitization as compared to trying to build our own wallet"
"So you take in Africa, you take parts of India or you take Pakistan or other such markets, or even parts of China, at the end of the day, QR codes represent a real opportunity to enable electronic payments in smaller and more remote shops"
"What essentially you are doing, you can pull or you can push the payment, meaning you can have a QR code that is unique to the merchant, in which case a consumer who walks in using a phone with a camera can actually focus on that QR code and enable the money to be transferred to that merchant for the potatoes and onions and bicycle tires they bought"
"Or, it could be the other way around, where the consumer carries around a QR code, which is unique to them, and it can connect into the merchants system to enable the money to be sent from the consumers account to the merchants account"
"Both are possible, both are feasible, both have been tried in different markets in the world"
"The idea of standardizing them across EMVCo is to ensure that banks and merchants don't end up with complicated multiple standards between us and the other participants in EMVCo, which include Visa and AMEX and the others"
So that's the purpose of what we're trying to get done
We've actually done that and issued standardized guidelines so that the acquirers and the merchants and the banks can find a simpler way to connect to what I think could be a transformative way of growing acceptance in a number of these markets
There are days when Warren and Martina are worried about what I might say compared to the prepared remarks
Kroger was a co-brand that many years ago actually used to be with Mastercard
"I think it flipped out of Mastercard either the year before I joined, or two years; I actually don't remember correctly"
"But, I know about 8, 9,10 years ago it moved away, and it was with our competitor, largest competitor, with Visa"
Bank is their issuer and their primary banking relationship
Kroger went through a relatively detailed process of figuring out how to renew and what to renew
And we all went through and made our usual pitches for it and it ended up with U.S
Bank and us as being the partners for their co-brand platform going forward
We haven't yet finalized the dates of the migration of the portfolio
That work is happening as we scope out the different aspects of this
"Over the next few months, I'm pretty certain we will be able to give you a better date and a better guideline"
"You've got to remember, we've got a good presence in commercial credit as well"
And we look at both as part of our credit business in the United States
"In consumer, which is I think where your question was coming from compared to the commercial side, in consumer, within the market, as I said, are looking for opportunities to grow"
"Those opportunities have, over the last few years, largely been through merchant driven co-brand decisions and we win some and we don't win some"
"This quarter, we've got a couple we told you about that we won"
There are a couple of others that we won that we won't announce for another year or so till the deals become visible in the marketplace
And so there are deals we'll win and there are deals we'll not win
"One of our biggest partners, as you know, is Citibank"
And you know that Citibank has begun to reinvest very wisely in their credit business over the last few quarters
"And, honestly, their own performance, as a result, is improving"
"And their performance, which is improving, is driving our improvement, because they're one of our best partners"
"Yeah, well, the TSB conversation honestly had started before the Visa European transition"
It so happened that the Visa Europe transition happened in between
"But is there pipeline in the marketplace from large, medium and small sized banks that we are pursuing? Absolutely"
"Craig, it's very tiny yet and you're correct that it's early days"
It's a couple of banks and I'm actually looking at Martina to try to figure out whether it's two or three banks
But I'll tell you a different picture about it which I think you'll be more interested in
My view is that a consumer must get choice at the front end of their decision of how to pay and that choice should be connected back to where their bank relationship comes from
"And if that choice is to pay by direct debit to their bank account or by the inward receipt of a remittance through a friend, a relative or a government disbursement or with a debit card or a prepaid card or a credit card, that concept of choice is what we're trying to put together when I was describing the opportunity with Fast ACH as well as what we have, which is Mastercard Send and HomeSend and our card rails"
"Whether you – pay by bank has only one way of choosing right now, which is from your bank account"
I visualize that as being important and an interesting application not just in the UK but in other markets as well
I continue to believe that the opportunity in B2B for ACH and therefore VocaLink type of Fast ACH payments is enormous
It's way beyond what a Mastercard Send or card rails can address
Why is that? Card rails requires you to have card acceptance with all these merchants on both side or the businesses on both sides of a B2B transaction
"And while you can attempt to build that acceptance and we have built it over the years, we're actually building in a number of markets around the world"
"But I would say while that addresses a portion of the opportunity, there is a much bigger opportunity that lies outside of that portion"
That outside of that portion opportunity you can address a part of it through the tools of a Mastercard Send combined with a HomeSend because you've got multiple distribution points you could reach
But even now you don't have the right data and connectivity to the ERP systems of these B2B businesses that you can get with an ISO 20022 certified data standard system like VocaLink
There's a little more I can do than most other people there by adding on the HomeSend capability
"But, boy, what I really love is the capability with Fast ACH"
"In the UK alone, VocaLink's domestic real-time platform carries over last year about 1.4 billion transactions per annum and the combined value of that is $1.5 trillion"
Whatever you can look at addressing through card rails and through the equivalent of Mastercard Send rails would be a fraction of that number
Please don't assume that by next quarter I'm going to have the worlds answer to B2B payments
"Just keep this in mind, it's about choice, both commercial enterprises as well as for consumers and all I'm trying to do is to have the repertoire that allows us to do that in a sensible, practical way"
"So, Martina, didn't send you an email on the side asking you to ask me an India question because of my poking her on Germany, right? I'm just guessing"
"But the India opportunity, so there are close to 850 million debit cards in that market"
"A large number of them, by the way, are still used essentially for taking cash out from an ATM"
"It's only a smaller number of them that are used at the point-of-sale and credit cards are way smaller than the debit cards, we're talking about a fraction of those"
"There's little cash take out on those, although there is some"
"And when you put that together, you get a market that has lots of cards, more than they ever had, but still with a huge opportunity in the front of it"
The second side of it is the acceptance methodology
"Whether it's card payment or pay by a QR code or pay by a phone or a fingerprint and all those options are being developed by different players in India, including us"
I think what you'll find is that this is only as good as how the acceptance market in India evolves
"But it comes to 2.5 million, 2.6 million merchants, depending on who you're counting"
"If you look at the total number of merchants in India, the Confederation of All India Traders with whom we have a very deep partnership, estimates there are 60 million merchants"
"Now, a large number of those are going to be fruit sellers and casual merchants who I don't yet know how we will get to create electronification, although we probably could over time"
"Now, the acquiring community in India is actually pretty good at growing the acceptance"
"For the last few months now, since the demonetization, there has been a dispute going on about the level of MDR that the banks will make out of the system"
"If you don't clarify that, you're going to find a lack of appetite on the part of the players there to grow acceptance"
It's got nothing to do with Visa and Mastercard going into the market acquiring or not
That pricing model was supposed to have been clarified a couple of months back
I think there have been recommendations made by the Reserve Bank of India to the Indian government
I raised that recently in a public meeting with the Prime Minister as well
I know they're working through a number of puts and takes to figure it out
"And people like us and our competitors, we can focus on enabling banks and merchants to make sense out of this opportunity"
"That GST has levels and slabs, but most commodities are at 28%"
People will be paying that 28% when they receive goods in a merchant shop
A merchant is no longer incented to help a consumer not pay taxes because they are most likely to have paid a relatively high tax rate on receiving those goods from their supplier
And therefore subsidizing that to a consumer by helping to avoid taxes is probably something that we should see reducing over the next few years
"And that, to me, is the real change in the (59:02) in this place"
And I'm going to leave you with a couple of closing thoughts
I believe we are executing well against our strategy
"With Fast ACH, we now have the ability to offer even greater choice for our customers with both cards and bank account based payment solutions"
"With the Mastercard B2B Hub, we think we're continuing to deliver innovative solutions to help companies manage their businesses more efficiently"
"And with Brighterion, another company we acquired this quarter, we're extending our capabilities in artificial intelligence to create an even better and safer payment experience for consumers"
So I'm looking forward to having a number of you join us at our upcoming Investor Day in New York
"You'll have an opportunity to hear about our strategic areas of focus, and you can get a chance to touch and feel and experience the various ways that we are working to capture new payment flows and help to shape the future of where payments are going"
"Thank you for your support, and thank you for joining us today"
"PC was in the low 20% range, down from the prior quarter"
"Server represented approximately 30%, up from 25% the prior quarter, and specialty DRAM, which includes networking, graphics, automotive and other embedded technologies, was in the mid 20% range"
"Mobile, which includes managed NAND discrete solutions and the majority of our MCPs, was in the mid-teens percent range"
"SSDs were in the mid 20% range, up slightly from last quarter, and automotive, industrial and other embedded applications were in the high-teens percent range"
Both segments also benefited from the current pricing environment
We also continue to see strong interest in our high-performance memory portfolio
This strength was primarily evident in data center networking equipment
"The results were driven by strong bit demand and increased average selling prices of DRAM, combined with record shipments of SLC and MLC NAND in the consumer and connected home segments and record shipments of DRAM and eMMC NAND into the industrial and automotive segments respectively"
Non-GAAP net income was $1.9 billion or $1.62 per share
The company generated operating cash flow of $2.4 billion in fiscal Q3 compared to $389 million in the year ago period
"EPS will range between $1.73 and $1.87 per share, based on 1,179 billion [ph] diluted shares"
We've been reporting our incremental progress each quarter
"In addition, we continue to improve our competitiveness by successfully delivering solutions to deliver higher value-add opportunities"
"Our ability to deliver these results has enhanced our energy and excitement to make further progress, and we look forward to sharing that with you"
"But relative to the gigs shift or volume shift into the PC segment, as we said in our prepared remarks, we did have a slight decline in unit volume"
"It wasn't very significant at all, but that was part of our plan to address higher value-added markets"
"I don't think it was reflective of a decreased demand environment in any way, shape or form"
"We don't typically comment on the going forward pricing environment, other than the general statement that we see fairly good balance between supply and demand"
"I think we're thinking that that segment would somewhere be in the range of plus low to mid-single digits in aggregate for us in fiscal '17 and I think that that addresses the three points you raised but if not, please let us know"
So we just want to make sure that we focus on our priorities
"As we look forward, we're considering OpEx as part of our fiscal year 2018 planning process and we're not quite through that"
So I think we'll be in a position to share a little bit more color on that with you on the next call
"So, despite the fact that we have been, to some degree, mindful of in the context of the cash flow of the company in the past, we’re going to continue to do the right thing and be prudent and disciplined in that regard"
So I appreciate your thinking we're flush with cash
"So consistent with our prepared remarks, those are the two things we're focused on"
And you will continue to see us be very thoughtful in how we pursue both of those here as we enter our fiscal year 2018.
"We certainly do think that that will, as it gets launched it will be driving greater demand, certainly for bits, yes"
"I think it's important to remember that was a long-term target, and that there are years where we've been below, there are other years where we've been above"
And so I don't know that relative to a long-term target that we would be prepared to be making any changes at this point
"But by the same token - and if we do, certainly as we did earlier last year, will share that with you"
"Well, I think as we noted, we are making progress every single quarter with penetrating higher value-added solutions"
"But we also used the words at or slightly below, not materially below"
I wouldn't expect that we were going to be dramatically different or so underperforming the industry that it would disadvantage the company
So that might be helpful to you as well as you think about that
We think that the channel inventories are well within the range that we would considered to be normal
"Certainly, they have improved from a quantity point of view over the first part of this year when they were extremely, extremely short"
"But in aggregate, I think that - we think that channel inventory levels are still within healthy ranges"
So maybe add a couple of percentage points to either end of the range
We've said we have meaningful output by end of fiscal year
We're clearly on track to do that and we'll provide more perspective on that as we more fully describe our 2018 plans
"So just to make sure we're on the same page, we have given a range this year of $4.8 billion to $5.2 billion"
And we said we were trending toward that $5.2 billion range
And I would say that really there is no specific area that I would point you toward
It's just doing what we need to do to make sure we are well set up here as we exit the end of the fiscal year
Our fourth quarter results accentuate an unprecedented year for the company
I thank the Micron global team for maintaining intense focus on our key priorities and delivering outstanding results
"Now, I will share details from each of our business units, followed by our perspectives on industry dynamics and an outline of our corporate strategy"
"Our results were driven by strong demand in Cloud and Graphics, complemented by a healthy pricing environment"
"In Graphics, we continue to leverage our industry leading GDDR5 and GDDR5X performance to address strong demand, primarily from gaming"
We believe that increased DRAM and Flash capacities in flagship smartphones will continue due in part to new applications such as augmented reality in mobile devices
"Our roadmap of new LPDRAM, discrete managed NAND and eMCP offerings position us well to address these market requirements"
"In fiscal Q4, we achieved our first 1X LPDRAM qualification at a major Mobile OEM and have several others underway"
"Demand for our client SSDs is also strong, with Micron shipping solutions to most leading PC OEMs. We see healthy demand trends for SSDs moving forward"
We made substantial progress in growing our relationships and our business with cloud and hyperscale customers in fiscal 2017. Cloud data center customers are seeking innovative memory and storage solutions tailored to their workloads
"Micron’s unique capabilities and expertise in DRAM, 3D NAND and emerging memory technologies make us a compelling partner for these customers"
Automotive applications continue to require leading edge performance
"As a result, we have seen significant ramp of our 20-nanometer DDR and LPDDR technologies this quarter and began sampling automotive-grade 1X DRAM to meet these needs"
We have made significant progress in our technology development and volume ramp execution
"Moving on to the demand and supply fundamentals, we expect the industry to remain moderately undersupplied for the rest of 2017 for both DRAM and NAND"
"At these levels, supply remains below demand, which has created a constrained environment"
"In fiscal Q4, 64-layer NAND represented mid-teens percent of our trade NAND bit output and we expect to achieve bit output crossover during the second half of our fiscal 2018. The dynamic industry transition to 3D NAND is taking place in the context of a NAND market that has consistently exhibited demand elasticity"
"We expect this behavior to continue for the foreseeable future as higher-density SSD solutions increasingly displace HDDs in client computing, cloud data centers and enterprise environments and as average capacities continue to grow with more performance-sensitive, storage-hungry devices and applications in mobile and other end markets"
"These trends support our view that NAND demand drivers will remain healthy into 2018. As I begin my first new fiscal year as CEO, I would like to outline our strategic priorities"
"Third, we will accelerate our transition to high value solutions"
We intend to lead the industry in deploying disruptive memory and storage solutions
"And finally, we are strengthening our focus on our teams, investing in the best talent and driving a winning culture"
We believe our diligent emphasis on the speed and urgency with which we execute these strategic priorities will have a transformative effect on our market competitiveness and financial performance
I look forward to sharing the results of our progress with you in the year ahead
"I will now turn it over to Ernie, who will walk through the specifics of our financial performance this quarter"
"As part of our strategic planning process, Micron developed a new vision statement that embodies how we see the opportunities in front of us"
"As we close out 1 year and look to the next, I would like to now share it with you"
"Our vision, transforming how the world uses information to enrich life, captures the tremendous potential Micron possesses"
New technologies like artificial intelligence will change the world in ways we can barely imagine today
"Fast data access and high-performance data analytics will be at the heart of those transformations, making memory and storage core to the data-centric world that is taking shape in front of our eyes"
"Fiscal 2017 was a record year for us, but I am confident that the best is yet to come for Micron"
"In terms of the market environment, we are certainly excited about the demand requirements for DRAM as well as for NAND"
"So, we remain very bullish about the DRAM market environment through the 2017. We think it will be undersupplied"
"And given the demand trends, we think we will have healthy demand supply balance in DRAM throughout 2018 timeframe as well"
"And in terms of NAND as it’s well-known that average capacities are increasing certainly in mobile devices, but even more importantly, SSDs are displacing HDDs at the rapid pace with the attach rates continuing to be projected to be going up over the course of next several quarters"
"And of course, there is a strong value proposition for SSDs in the cloud and hyperscale data center environment as well given all the trends of artificial intelligence, machine learning, all of this is driving big data analytics"
"I mean, if they look at DRAM as well as NAND even in autonomous vehicle, the demand requirements for flash, I mean data is being generated"
So much data is being generated by autonomous vehicles that it requires fast processing both within the vehicle as well as on the cloud
"So, I think demand trends for the foreseeable future continued to be strong and that bodes well for our industry"
"In terms of your question regarding customers and some of the customers wanting to engage in longer term requirements, yes, that is absolutely happening and we do consider that based on various customers"
"I mean, it depends on the nature of the customer’s requirements, really cannot get into the details of that here in this call, but certainly, our business includes customers that are more transactional in nature that have business more on a monthly transaction basis, some that are more on a quarterly basis and certainly certain customers that are also involved in longer term trends"
I think customers are just seeing increasing value of memory and storage
"I mean, this DRAM and flash is becoming strategic to our customers and our customers are seeing Micron as being uniquely positioned with having a strong portfolio of DRAM as well as flash and being the only company in the Western Hemisphere with those capabilities and that is definitely making us an attractive and valued partner to our customers"
"So, in terms of going in to 2018, we see healthy industry demand and supply balance for NAND"
"And when we look at the demand trends, those demand tends continue to be strong as I just pointed out related to SSDs as well as increasing average capacities of flash in mobile devices and all kinds of other devices"
We see healthy trends in that regard in 2018 timeframe
"Certainly, the diversification of the end markets for DRAM absolutely bodes well for the future health of our business"
Calendar year 2017 as you noted is a great example
"So, this really bodes well, plays very well to the strength of Micron"
It has really for long time enjoyed diversified set of global customers and great presence in channels and that is coming into full play as the demand requirements for DRAM continue to grow nicely and into multiple mega-markets
"With respect to NAND in terms of our third-generation 3D NAND, we are not yet disclosing the number of layers in that technology"
"As I said in my prepared remarks, we are continuing to make good progress with that and we plan to be introducing that technology in the 2018 – calendar 2018 timeframe and continuing to deploy CMOS under the array technology that continues to provide Micron a die-sized leadership position, which is usually attractive to us [indiscernible] point of view"
"And with respect to DRAM in terms of 1Y node, we will be introducing that node also in calendar 2018 timeframe"
"And beyond that, we are not providing any specific details for our technology related to competitive basis"
"And your question regarding floating gate, we have a strong roadmap of future technologies related to floating gate"
I fully expect us to make – continue to make good progress in fiscal year 2018 as well
That attach rate over the course of next few years continues to grow to around 50% in 2018 and by 2020 timeframe expect it to go to around 75%
"It’s the same thing on the enterprise side, again on the cloud side that the attach rate of SSDs as well as the average capacity requirements on our per-server basis continued to go up as well"
"So, these are really very solid secular trends here that are long-term in nature and of course the trends of mobile devices adding new rich features such as augmented reality, such as rich displays, all of these are trends that also continue to drive higher average capacities in mobile devices"
"So, I feel very good about the demand trends on the NAND side"
"So, I think as has been the case for a few quarters now, there is actually a fair amount of tightness across those three channels that you mentioned"
"So, it would be hard to distinguish one from the other relative to any nuances there"
"You do get a bit of a different perspective on inventory as reported by a variety of customers and channel partners in those areas, but the environment continues to be strong"
The supply demand circumstances continue to be fairly tight and we are working very closely with our customers to make sure that we stay in close sync with them as they think about their plans going forward
"And of course, if and when, we were to engage in M&, our focus would, of course we to try to strengthen our future opportunity and make it an opportunity that’s absolutely provides a strong ROI, beyond that I would not speculate in this matter"
"I mean, we are definitely seeing strong demand trends from – the entire spectrum of our customers a large what you would call Tier 1 or Tier 2 as you termed, although all customers are important to us and we do engage meaningfully with them and we work closely with them to understand their demand requirement and we apply our own judgment to their demand requirements as well in terms of assessing that overall industry demand trends"
"And based on those demand understanding of our – on behalf of our customers, we project healthy industry supply environment in DRAM and NAND"
And both are roughly about the same in both of those categories
"Beyond that, we don’t provide further breakdown"
"In general, the technology complexity increases where subsequent technology generations both in DRAM and NAND and also given the increased technology complexity, gigabytes or gigabits that you gain in NAND as well as DRAM on a per wafer basis tends to decline with advanced technology nodes"
"Now, specific to your second question regarding the attach rates in enterprise and server markets, so SSD attach rate is around 50% there in terms of on a SSD per unit basis and opportunity there is greater"
Average capacities are definitely moving fairly fast
Average capacities in enterprise and data center for SSDs are over 3 terabyte
That’s average capacity and that trend continues to increase by some projections tripling almost to 9 terabyte by 2020 timeframe
"So as I was saying earlier, I mean, these demand trends for increasing attach rate of SSDs in client and data center cloud computing applications as well as the increases in average capacities are secular trends"
"So, certainly the statement about no new wafer capacity in fiscal year ‘18 applies equally to both DRAM and NAND"
"I think in the flagship models, to answer your specific question, the demand for DRAM as well as for NAND, average capacities continues to go up"
"And specifically to DRAM, average capacities of DRAM in high-end smartphones going from somewhere over 3 gigabyte in 2017 projected to go up to over 5 gigabyte closer to 6 gigabyte by 2020 timeframe"
"And specifically to NAND, average capacities of NAND in high-end smartphones in 2017 is somewhere around 70 gigabyte, let’s say, projected to double – or more than doubled by 2020 timeframe as well"
"So, again, the average capacity increased trends in smartphones continues to be solid, not only actually in high-end smartphones, but in value segment of the smartphone market as well"
I want to reiterate that my commentary reflects our performance inclusive of approximately three weeks of LinkedIn results
"For this quarter only, I will comment on our results excluding LinkedIn for consistency with the guidance provided last quarter"
Operating income grew 5% or 8% in constant currency
Operating income grew 8% and 11% in constant currency
"And our EPS was $0.84, increasing 11% and 15% in constant currency"
"From a geographic perspective, our results were largely in line with macroeconomic trends, with additional benefit from a healthier PC market, particularly in the commercial segment"
Commercial bookings increased 7% or 12% in constant currency
"And our contracted-not-billed balance reached an all-time high, exceeding $28 billion"
"And in More Personal Computing, FX had a 1-point impact, in line with expectations"
"We also continued to see higher than expected results from our transactional business, in part due to an improving commercial PC market"
"Our Dynamics business grew 7%, up 9% in constant currency, and our Dynamics 365 install base more than doubled"
Operating income declined slightly but was up 1% in constant currency and up 7% in constant currency excluding LinkedIn
Operating income declined 7% and 4% in constant currency
This marks our first $1 billion quarter of digital transactions for our gaming business through our Universal Store across Windows 10 and Xbox One
"We returned $6.5 billion to shareholders through stock repurchases and dividends, completing our prior $40 billion share repurchase program this quarter, as we committed"
"We had originally expected FX rates to lessen going into H2. However, given current rates, we expect continued currency headwinds for the rest of the year"
We continue to expect some volatility in our transactional business due to macroeconomic conditions and the ongoing shift to the cloud
"With the addition of LinkedIn, we expect our capital expenditures, including capital leases, to grow sequentially to support a broader portfolio"
Let's turn to our outlook for the individual segments
Our OEM non-Pro performance should grow ahead of the market due to strength in the premium device category
"And in Gaming, we expect normal post-holiday trends, with declines in hardware console volumes and pricing balanced by higher engagement, usage, and transaction volume"
LinkedIn COGS include approximately $220 million of amortization of acquired intangible assets
"Before moving to Q&A, I'd like to announce that we will hold a financial analyst briefing for the investor community in conjunction with our BUILD Developer Conference in May here in Seattle"
We will share more details as we get closer to the date
We'll take care to give you insight into those so that you can continue to hold us against the goals we set for ourselves
"And I think, Brent, in terms of there being a date, a very particular date, this is something, to Satya's point, we've been doing in a step function improvement over time for the past couple years, and we'll continue to do it"
And the guidance certainly doesn't imply any type of slowdown in the commercial business
"In fact, in some ways, it actually includes an acceleration in certain areas"
"Let me start by saying we really do think about and talk about our cloud as containing all of the components, from the IaaS layer to the platform layer to the SaaS layer"
But I tend to think you will consistently hear both Satya and I refer to our cloud in its entirety
"But I do respect people always wonder, so I did comment that we saw material improvement in Azure specifically"
"And even inclusive of LinkedIn, I continue to believe it's about a point"
"So in some ways, I guess you could say it implies slightly better at the company level, if that's how you're thinking about it"
And I mean that not just in our OEM business but also across the commercial business for Windows
"So all of those can impact it, Karl, as we look through the rest of the year"
"But in general, inclusive of LinkedIn, I'm still around 100 bps"
"But let me talk a little bit about what impacted the transactional business this quarter, and then we can talk about how to think about it in Q3 and maybe going forward"
"We did and we're encouraged by the customer reaction, even our transactional customers, to the security and management value prop as well as the hybrid nature of our SQL and Windows Server 2016 releases that have taken place this year"
And so I do think that can have an impact in H2. You heard me talk a little bit about it
"With the major currency changes we saw in Q2, we've also done some price adjustments between certain geos for us"
But I would reiterate the biggest driver of the transactional performance this quarter was really the value prop people saw
But the heart of your question is really about the MPC transition and IC
"The way I think about it, we really – Satya and I and the leadership team decided, gosh, about 18 months ago – it's been a little longer than that now, to over-index on investing because of the TAM we saw in the Intelligent Cloud"
We have been working and continuing to reinvest and save through the year as we look to get everything here more efficient
And so I actually am confident you'll start to see that transition land
"And, Mark, I'm not sure I want to get into our pricing theory on the call on a go-forward basis in terms of whether or not we match competitors"
But what I would say is really fundamentally related to Satya's point around differentiation of the entire stack and what customers are doing in their digital estate
"But certainly at the SaaS end, I understand where you get that benchmark from"
"And to your point on where we are and what's driving that delta and its consistency, frankly, over time, actually still the biggest impact is from the transition to E3. Transitions take time"
"And so you're just starting to see some of the impact from E5. We're excited about all the customers in trial and are already starting to use the value, whether it's security, increasingly analytics, and ultimately voice"
"And of course, the answer to that is we do believe that, but it certainly comes over a period of time and run through our annuity base over that pace"
Let me first comment on that I've said it will be lower than it was previously
"I certainly would help you in that number and say a little lower, just so that you're getting into something closer"
"I would also say that it does tend to be lumpy, and it's why I don't give very specific guidance every single quarter, and it was not at all impacted by LinkedIn"
"But in the short term, the most important thing is they continue to add value and usage and great experience for their members"
And so I have really no intention of messing with that in terms of capital expenditures in the short and next six months for sure
"So I think what you're seeing in terms of year over year and what does it mean for next year, this next quarter, it will be a sequential increase, but again, it is a bit lumpy"
"From a geographic perspective, our results were mostly in line with macroeconomic trends"
"Our performance in Japan was better than expected, driven by increased public sector spending and improved market conditions"
Commercial bookings increased 12% or 11% in constant currency
And our contracted-not-billed balance increased to more than $27.5 billion
"As a reminder, our commercial cloud includes Office 365, Azure, Dynamics 365, and other cloud properties, but does not include LinkedIn"
"As such, we had 1 point less FX impact across our individual reporting segments, even though overall company impact was still approximately 1 point as guided"
"Our transactional results came in higher than expected, mostly from performance in large markets like Japan and Western Europe"
"Operating income declined 7% and 4% in constant currency, with 13 points of impact from LinkedIn"
Our Windows Server and SQL Server transactional business continued to perform well; with better than expected results mainly from Japan and continuing post-launch demand
Operating income was flat and up 3% in constant currency
Commercial end customer demand signals remain consistent and positive
"Overall, inventory levels remain in the normal range"
Operating income grew 20% in 23% in constant currency
Our non-GAAP effective tax rate was approximately 23%
"We returned $4.6 billion to shareholders, continuing our balanced approach to capital allocation through share repurchase and dividends"
"After a period of accelerated buyback, we've resumed a buyback pace consistent with our historical trends"
"Given current rates, we now expect less FX headwinds in our fourth quarter"
"Similar to Q3, we anticipate that LinkedIn, excluding amortization, will have minimal impact on segment operating income, and we continue to expect it to be minimally dilutive to non-GAAP EPS this fiscal year"
"With Surface, we expect a more moderate rate of decline given the prior-year comparable and current market dynamics"
"This includes approximately $420 million of LinkedIn COGS, of which $220 million is related to amortization"
"And for tax, we expect the full fiscal year non-GAAP effective tax rate to be approximately 21% plus or minus 1 point"
"Finally, we encourage you to watch a few upcoming events, our Education event on May 2, our Dynamics 365 event on May 3, and the upcoming keynote from Bill to learn more about our ambitious plans leading into FY 2018. We will also host our financial analyst briefing on May 10. The webcast will be available our Investor Relations website"
"And I think, Karl, to your question about how that shows up, it's why you hear us focus more on the all-up KPI between Azure and this transactional or on-premise number, because the line between them, both strategically and literally, is more important to be blurred and going in that direction"
"And so this quarter, you saw a little bit healthier than we had thought, I pointed out"
"It tends to be – in this instance, Japan was a little better"
"But whether or not you see that in transactional, the Uber trend of being able to see it through the all-up KPI, the dynamic Satya has talked about, you're going to hear us talk more and more about, whether it's a quote-unquote, on-prem server launch or an Azure feature, about the integration of the two"
"And to your specific question, Heather, on FY 2018 and OpEx, I did not because we're going to see each other and have more time on May 10 at the analyst briefing, and that's where I'll take some more time to walk through FY 2018."
"In the more temporal bucket this quarter as well as last you saw a bit of it, some geo help in certain geos that may see and be more transactional in nature"
"And then we are still seeing some post-launch impact, specifically on the Windows Server side and selling higher-end SKUs post-launch, which has to do with some of the value inherent"
"On ASC 606, we will talk about it in detail actually on May 10 in terms of the timing and what you can expect"
"You will also note in the 10-Q this quarter, we do give a look at the initial impact on an annual basis, using last year as an example"
The biggest difference on an annual basis with the adoption of ASC 606 will really just be the change from Windows OEM
Now what we will talk about in more detail is that the quarter-to-quarter results in any given year will be a little bit more volatile
And so what you'll continue to see is that would normalize
"Even though we saw some high-end SKUs this quarter do well, I would expect in Q4 to have the normal breadth of those SKUs and revert back to looking much more like the commercial PC market itself"
"Let me separate your first question because I think you're really asking two that I probably don't relate as directly, and I should do that for you"
"We've been a longtime advocate of structural tax reform, and so we'll just wait and see how things play out"
"And as decisions get made and proposals clarified, we'll share more about what that means for us"
"Next, in terms of how we thought about that impacting capital return, as you know, I think we've been and executed a significant capital return program over the past couple years, including accelerating the buyback program that I think I feel very good about at the corporate level in terms of the value it's created"
And so I wouldn't say that I view those two things as waiting for one to do the other
"We've in fact continued to do what we thought created the most value for shareholders, which is to invest in ourselves, acquire companies that help us expand our TAM and grow, return dividends, as well as repurchase shares"
And we've continued to do that this quarter as well
"I think you'll continue to see us take a balanced approach, but I don't think of those as being related"
"The last question on OpEx, I think over the past couple of years, we've continued to make decisions that said every dollar we spend, are we putting it in the right place for the long term, whether that's reallocating or adding new"
"And what we expect is to grow new markets and perform really well in them with every dollar that we invest, whether, frankly, Brad, it's in OpEx or in COGS"
"So in terms of our ability to continue to do that, of course there are opportunities"
"We learn, frankly, I think every week where we can do better and where we can continue to invest to accelerate"
"That being said, I don't view any OpEx number as a constraint"
And so I tend to take that approach as opposed to solving for any one number
And all that does is build more confidence that both we've picked a good market and we're investing in the right type of people to make sure we land that opportunity at customers
"And especially in this market, a generational move here really means, especially for many of the workloads being moved, these pay off every year for the next 10."
"And I think your question about is it really budgets, I think you used the phrase opening up"
"What I think is really interesting is, I don't know, I read probably the same CIO surveys you all do"
"Frankly, the numbers in those in terms of IT spend or intent to spend, they aren't much different than we've seen"
"For me, what I think is missing in that question is really – it's not about any one customer saying wait, I'm going to spend 2% more or 3% more"
"These are companies actually deciding that the change is required, not from an infrastructure perspective, but to change how they're running their business itself"
"And so I don't really associate it probably as much with a quote-unquote, budget that sits in IT very narrowly"
"This is really about every budget that sits not just in IT, but under every functional leader of a company being spent differently and being spent on our technology"
"Now to your specific question on can you expect it every quarter sequentially, the answer is not really"
"And for simplicity, I generally would think about all the delta from Q3. I would encourage you just to move it into Q4 as you think about what to expect"
"And most of the ARPU improvement that we've seen has been, in fact still due to the E3 transition, not due to the E5 transition"
We've been in this business a bit longer and it's more mature
Operating income increased 13% and 16% in constant currency
"From a geographic perspective, our results were mostly in line with macroeconomic trends, though large markets like the US, Germany, and Japan performed better than we expected"
We increased commitment to our commercial cloud and healthy renewals on a record volume of expirations
Our contracted not billed balance increased to more than $31.5 billion
"Our Dynamics business grew 7% and 9% in constant currency, and Dynamics 365 grew 74% and 75% in constant currency"
"Operating income declined 8% and 5% in constant currency, with 12 points of impact from LinkedIn"
"Operating income increased 15%, up 18% in constant currency"
"Our OEM business grew 1% this quarter, as both our commercial and consumer OEM businesses were slightly ahead of the PC market"
Windows 10 deployment cycles continue to drive commercial customer hardware demand
Our gaming business grew 3% and 4% in constant currency
"And our engaged user base grew 8% to 53 million monthly active users across console, mobile and Windows 10 platforms"
"As a result, operating income grew 68% and 72% in constant currency"
"This quarter, we invested approximately $3.3 billion in capital expenditures, including capital leases, up sequentially in part due to the planned Q3 datacenter spend pushed into this Q4. This includes approximately $2.3 billion of cash paid for property and equipment, which was down year-over-year as we utilized more capital leases"
"Excluding this item, our non-GAAP effective tax rate was 19% this quarter and 20% for the full year"
"This quarter, we returned $4.6 billion to shareholders through share repurchases and dividends"
The key trends for FY 2018 from the Financial Analyst Briefing remain largely unchanged
"For the full year, we expect about 1 point of negative FX impact assuming current rates remain stable"
Our commercial transactional business will continue to decline driven by the transition to the cloud
"Cloud migrations, deployments and new scenarios are driving greater customer usage"
"With quarterly variability based on these factors, we anticipate our full year non-GAAP tax rate to be 23%, plus or minus 2 points"
"And finally, we expect LinkedIn, ex-purchase accounting, to be non-dilutive in FY 2018, as it was in Q4. Now, to the outlook for next quarter"
"We expect COGS between $8.2 billion and $8.3 billion, including approximately $400 million from LinkedIn"
LinkedIn COGS include about $220 million of amortization
"Given the volume of equity vests that occur in our first quarter and based on today’s stock value, we expect our first quarter non-GAAP effective tax rate to be approximately 4 points lower than the estimated full year tax rate"
Let me break down the question in a couple of ways
"Overall, when you think about COGS and the pacing, the depreciation rates of our servers don't change"
"It’s generally over a three-year period and there is other pieces of equipment that have a longer, shorter depreciation life"
So that piece of depreciation doesn't change per se
"All of those things I think, it’s not really about the pace, it is much about the progress and demand and meeting those things as closely as we can and I feel really good about the team's execution"
You are seeing it even in our intelligent cloud results for the last quarter and this quarter
"There was no change in any way to invoicing people paying earlier, paying more upfront, that’s definitely not an impact on that number"
"And so overall, I think while it is certainly aided by the large expiry base because it tends to impact the CNB balance the most, it is really I think to your point; it is clearly encouraging because it gives us a very good base of support going into FY 2018 to come in to the GAAP reporting numbers"
"So we are starting to get to that point Mark where you have a big base, which is still growing at a fast rate, and so especially ARR numbers can see big jumps in the one that you saw this quarter, and your right, Q4 is also historically quite a big quarter and this one certainly was as well"
"Let me start by saying, first I feel very good about meeting our stated goal of $20 billion in commercial cloud ARR"
It is a modern workplace that includes up-to-date Office 365 and it includes EMS
"So I don't really think it’s about a percentage, but it’s about each of them continuing to make progress"
"You are right, in terms of Office commercial 365 the primary driver is still installed base, both the transition as well as new"
"When we mentioned E5, I think that’s frankly encouraging for us because all of these premium offers do best when you start the deployment motion"
"People start using E1 then they use E3 and then you start to see the momentum in E5, and we did see that"
"However, in terms of ARPU impact very, very small in quarter"
So that’s something that over time you will continue to see improvement in terms of impact on ARPU.
"Let me go through the bookings, again with that 30% the first and best contributor to that is the strong performance on the renewals in quarter"
"It was a reasonably consistent Kash, there was not a geo in particular that I would say was a massive outlier although in two of our largest geos, the U.S"
"I think we felt very good, those as well, I think we’re pretty broad-based across industry"
It is the place you will look and see that number and outside of that I mean those really are the biggest contributors
"Okay, you are right, Mark it’s not exactly if I said is the Q3 from three years ago exactly the expiry base it is not exactly, but it is directionally"
"And so that’s a good example to say, every three years tends to be the length of our agreements and so you to tend to see that repeated, and that’s what we mean by sort of the record or the largest expiry base and that is the pattern"
In terms of LinkedIn having any impact? It did not
So that is the cleanest way to think about that number
"I know both of them will matter and both of them are important, and so that’s why I tend to focus on that all up server KPI combination of the progress in the cloud, Azure, as well as the edge which is the on-prem"
"And I apologize, I didn't answer Marks last component, so let me just go back and I had forgotten, which was, was there anything unique in the expiry base for Q1, the answer is, it is up a little year-over-year, but in certainly not through the same type of Q4 comparable"
"When we tend to have these, we tried to call them out like we did in Q3 leading into Q4. So, Q1 I would say is just up a little"
The difference between core compute in-store versus the premium layers can be significant and we’ve had improvements across all of them
"For the remainder of the call, we'll reference non-GAAP financial results including those in our outlook, unless otherwise noted"
"Total OpEx was $352 million, a decrease of $3 million from the year-ago quarter"
"Free cash flow was $74 million, an increase of $112 million from last year"
"We expect Q2 non-GAAP EPS between $0.98 and $1.03, including $0.05 of Airwave currency headwinds"
"Inclusive of Q1 results, the first half of 2017 is slightly above our prior expectations"
"Asia Pac was flat versus last year, with Australia continuing to be an area of strength for some of our most advanced public safety solutions"
"Finally, I'll end with some notable segment highlights"
"WAVE OnCloud customers can integrate their radio systems with broadband networks, extending their reach to mobile users across various devices and networks"
"We also won several notable deals that included an $80 million award from a country in Europe to upgrade and manage its nationwide TETRA network, a $34 million reward to upgrade an existing P25 network in Northern California, and two P25 wins in Argentina totaling $10 million"
"We also grew double digits in our Command Center software business, driven by the demand for our Spillman, Emergency CallWorks and PremierOne solutions"
"This contract will allow us to administer a full spectrum of solutions including hardware, software and purpose-built applications on multiple networks"
"So, in Q2, we mentioned in the prepared comments that part of it is the FX impact year-over-year of Airwave"
"On the last call, we guided to approximately $20 million to $25 million"
"I mean, you've had some larger projects over the past two years, LA-RICS, Nødnett in Norway"
The impact of Interexport is approximately $50 million for the full year and the non-GAAP EPS impact is approximately $0.03 for 2017. Unknown Speaker Okay
"And Tavis, with respect to operating cash flow, the guidance for the full year was approximately $1.225 billion"
We continue to expect that to be our operating cash flow number for the full year
"We don't give forward guidance on the quarters as that moves around a little bit, but we continue to expect $1.225 billion for the full year"
Nothing really to comment on in Q1 with respect to systems integration
"Non-GAAP EPS was $1.12, up 9% from $1.03 last year"
"Ending backlog was $8.5 billion, up $265 million from last year"
"Additionally, aged backlog for the remainder of the year is higher than at this point last year"
"For the remainder of the call, we will refer to non-GAAP financial results, including those in our outlook, unless otherwise noted"
"Total OpEx was $367 million, up $4 million from the year-ago quarter"
"Q2 operating cash flow was $173 million, a decrease of $190 million from last year, primarily due to working capital timing associated with the ERP implementation"
"Free cash flow was $120 million, a decrease of $81 million from last year"
"During the quarter, we repurchased $80 million of stock at an average price of $83.59 and we paid $77 million in dividends"
We also announced our intent to acquire the Airbus PlantCML business
"During the quarter, we signed the FirstNet partnership agreement with AT&T, and we are encouraged that all states that have made a decision to-date have opted into the plan network"
"Additionally, during Q2, AT&T certified our LEX F10 FirstNet device, making us the only vendor with both a handheld device and a vehicular modem that is FirstNet ready"
"city; a $40 million P25 system in Broward County, Florida; and a $10 million P25 devices order in Australia"
"So we cut over in April and we experienced some typical issues, we plan for them"
"Inventory, specifically inventory, ended higher and a little bit in receivables"
The inventory – the ending inventory was driven by some difficulties in our planning module in the ERP implementation system
"And from a receivables perspective, we had some invoices that went out later and were outside of the terms and moved into Q3. We expect the implementation to be largely complete by the end of Q3. And the implications are contemplated in our outlook"
"As I said in my prepared remarks, our expectation remains unchanged for operating cash flow for the full year"
"It could, to your point, include software and mobile applications"
"It could include the deployment of software we've developed, which interoperates and links, land mobile radio P25 with LTE networks"
"It becomes more and more difficult for our customers to manage their own systems, and many of them look for us to manage the systems for them"
First comment being $700 million reduction in OpEx is a little bit more than incremental
"Inclusive of that $45 million, our expectation is to be down $10 million to $15 million"
"Garcha - Credit Suisse Securities (USA) LLC (Broker) Okay, great"
"Maybe we'll go through the model and your math, Andrew"
"in 2017? About $50 million, $50 million to $60 million for the full year"
"Non-GAAP EPS was $1.53, up 12% from $1.37 last year"
"Ending backlog was $8.9 billion, up $768 million from last year"
"For the remainder of the call, we'll reference non-GAAP financial results including those in our outlook unless otherwise noted"
"Turning to cash flow; Q3 operating cash flow was $270 million, a decrease of $78 million from last year, driven by higher working capital associated with the ERP implementation and higher tax payments"
"Free cash flow was $185 million, a decrease of $95 million from last year"
"From a trailing 12-month perspective, free cash flow was up $20 million"
"During the quarter, we repurchased $100 million of stock at an average price of $87.54 and we paid dividends of $76 million"
"Today, we also announced an increase to our quarterly dividend of 11% to $0.52 per share"
Turning to our outlook; we are raising our Q4 and full-year guidance
"Non-GAAP EPS is expected to be $5.35 to $5.40, an increase from the prior outlook of $5.20 to $5.30. This assumes a weighted average diluted share count of approximately 169 million shares"
We expect the full-year 2017 effective tax rate to be approximately 32% and operating cash flow is expected to be approximately $1.2 billion for the year
"Backlog is also up more than $1.2 billion year-over-year and up more than $500 million sequentially, as customers continue to invest in LMR solutions for the long term"
"Finally, I'd like to end with some notable segment highlights"
"Additionally, from a technology perspective, we introduced the PSX Application Suite, providing push-to-talk, messaging and mapping applications designed specifically for public safety LTE users"
"We announced responder alert, technology that triggers automatic alerts to the command center for events such as weapon drawn or fired"
The Motorola Public Safety LTE LEX F10 handset and the VML 750 vehicular modem were added to the FirstNet
It's a push for the quarter based on rates right now approximately $20 million to $25 million in the Q4 – in our Q4 number
"From a Q4 perspective, aged entering into the quarter, we are better aged entering Q4 than we were last year at the end of Q3. And you started the comment with Q4 not being the largest quarter"
"And if you look at it from a percentage perspective, from a linearity perspective, it's within a point or so of the normal linearity that we would experience during any particular year"
"Good afternoon, everyone, and thank you for joining us"
"In the quarter, we strengthened our industry-leading portfolio with the introduction of new all-flash arrays and hybrid cloud solutions, positioning us to address a growing set of customer use cases"
"With focus and disciplined execution, we are successfully innovating to meet the evolving needs of our growing customer base while at the same time streamlining our business"
"First, our Data Fabric platform and the strategic solutions that are built for the opportunities of a data-centric world"
Our strategic solutions position us to lead in the new era of IT
"These flash-enabled, cloud-integrated offerings provide customers with the future proof solutions required for success in a data-centric world"
"Clustered ONTAP allows customers to modernize their infrastructure by replacing stand-alone silos of storage and monolithic frame arrays with a scale-out, software-defined shared storage platform"
"Uniquely in the storage industry, Clustered ONTAP enables seamless enterprise data management across flash, disk and public and private cloud footprints for enterprise applications with the ability to consolidate multiple workloads into a single repository for improved efficiency"
"We are gaining new customers, expanding our footprint with existing customers and successfully migrating our install base"
"In Q3, Clustered ONTAP was deployed on over 90% of FAS systems shipped"
"Unit shipments of Clustered ONTAP systems grew 24% year-over-year, and the install base of FAS systems continues to grow"
And Clustered ONTAP is now running on approximately 40% of systems in that large and growing install base
"Additionally, we reached an exciting milestone this quarter which underscores the momentum we've had with Clustered ONTAP"
Clustered ONTAP now manages over 50% of the FAS system capacity in our install base
"NetApp leads the industry in the transition to flash with cloud-integrated solutions that provide unrivaled efficiency, speed, scale and data management"
"Per IDC's calendar Q4, all-flash array market data, we strengthened our number two position"
"Although NAND supply is tight, we are confident in our ability to meet demand and we expect our share gains to continue"
"The majority of our all-flash array business is driven by Clustered ONTAP, deployed at both FAS engineered systems and FlexPod converged infrastructure solutions"
"The A-Series all-flash systems deliver industry-leading performance, capacity, scalability, security and network connectivity in dense form factors"
"In Q3, we introduced a new entry-level system which extends enterprise-grade flash to midsize businesses"
"At the start of Q4, we announced a new high-end system which continues NetApp's track record for innovation with an NVMe fabric-ready clustered architecture"
We also enhanced our storage efficiency capabilities and introduced an industry-leading workload-specific guarantee that scales to a 5-to-1 data reduction ratio
"We are growing the SolidFire business through the expanded reach of NetApp, acquiring new customers, introducing SolidFire into existing NetApp accounts and bringing NetApp solutions to SolidFire customers"
"We will do what has not yet been done by the immature first generation of hyper-converged solutions, bringing hyper-converged infrastructure to the enterprise by allowing customers the flexibility to run multiple workloads without compromising performance, scale or efficiency"
"With this innovation, we further broaden our industry-leading portfolio with cloud-integrated solutions available in stand-alone, converged, hyper-converged and software-defined offerings"
"We will have more information on the development of this exciting new solution for you in the first quarter of fiscal year 2018. The NetApp data fabric enables data management that seamlessly connects disparate systems, software stacks, clouds and data centers"
IT organizations can be more responsive to the needs of the business by leveraging the scale of on-demand cloud capabilities while maintaining data visibility with a single consistent view of data and infrastructure across clouds and on-premises resources
"By providing data portability and cloud integration, we are increasing our strategic relevance and expanding our opportunity"
#NAME?
"A large North American-based retailer selected NetApp all-flash FAS to replace its legacy EMC SAN infrastructure because we solved their current application integration, replication and management challenges with a compelling path to hybrid cloud"
Our cloud integration and the ability to scale with their business were key factors in the customer's decision for NetApp
"We're helping customers transform their businesses for success in the data-powered digital era by enabling their efforts to modernize their infrastructure, build next-generation data centers and harness the power of the hybrid cloud"
"With our powerful portfolio of innovative solutions and data fabric strategy, we have enormous opportunity to lead in this next year of IT"
I remain extremely confident in our ability to successfully execute against this opportunity
The transformation of NetApp is yielding results and has changed the trajectory of our business
We've improved our agility and are delivering innovation at an accelerated pace
"We will hold an Investor Day in New York on April 5, where we will share more detail on the evolution of NetApp to lead in the data-powered digital era, as well as our multi-year business outlook"
I'll now turn the call over to Ron to walk through our Q3 financial performance and expectations for Q4. Ron?
"We have net new customers, we have new workloads within our existing customers, and upgrades within our install base"
"I would tell you that the net new customers and new workloads are materially bigger as a percentage of our all-flash business, reflected, for example, in the market share gains we're seeing in the SAN business, rather than our traditional install base"
"As percentage of our install base, all-flash FAS is a very small percentage"
"As we have noted, the all-flash market is now going from early adopter to the mainstream market where customers are moving entire disk-based estates over to solid-state and therefore require the full range of features in their all-flash arrays from a business process, from a data management protection and availability perspective"
"Both all-flash FAS, as well as SolidFire give customers a compellingly differentiated platform; and the EF-Series is the fastest performing box in the industry"
"I think, in addition, we are clearly seeing disarray at our competitors"
"And customers are looking to NetApp to give them a path forward for their all-flash estates, as well as to the hybrid cloud"
"I think, first of all, in the competitive landscape, things have not changed substantially"
"As we said, the major competitor that we go up for the majority of the deals are the large system manufacturers, most notably EMC and the other high-end SAN arrays that we are displacing with all-flash FAS"
"And the startups are increasingly challenged to differentiate themselves, and so you see evidence of desperation from various different smaller startup players"
"Some customers, for their workloads, choose all-flash solutions and some customers choose hybrid solutions"
We have a unique advantage in the market that we are able to offer customers choice with the same set of data management capabilities
"So if the price of NAND rises unexpectedly, we can always offer them a hybrid solution which no one else in the market can offer"
"We have NVMe support in the flash arrays that we introduced to market, so the flat FAS9000, the 8200, 2600 series all have NVMe integrated onboard for a low latency cash"
We also have in the A700s a NVMe over fabric ready architecture
It'll take time to get adopted and become deployable widely at customers as a true storage solution
"We're working with the industry to make that available, and it will become part of every platform"
I don't think there is meaningful differentiation from NVMe
"I think, as I've said continuously, proven data management capabilities, integration in the application domain, and delivering business value will be the composition with customers"
"NVMe will become a check box that all of us will have, us included"
So we're substantially better in terms of the way we build systems and hardware
"There's continuing work to be done to complete that transition, but that offers promise of not only savings for this year, but in years to come by being much more efficient"
One of the meaningful areas that we've invested in is SolidFire
I think the install base of units is growing at a faster rate now
"Let me take the first one, and Ron will take the second"
I think the caution is really reflecting the dynamic nature of SSD availability and pricing
"As we noted, we've put in place the capability to meet a short supply"
"We're wanting to guarantee a short supply to our end customers, and that has been a priority ahead of specific pricing agreements"
"From a channel program perspective, we've started to see the beginnings of an integrated channel program from EMC"
I'll just tell you that incentives are just a small part of the total value proposition that a channel partner looks for from their supplier
"So we're going to continue to attack with the full breadth of our channel, and we are making progress as our results note"
"I would just tell you our book of business is affected by GDP outlook, as well as the competitiveness of our portfolio and execution against those opportunities"
We didn't notice any specific change in pattern through the course of the quarter across the broad base of geographies that we serve
"I think through the course of the quarter, we saw a strong year-end budget flush"
"We saw January return to fairly normal patterns of uncertainty across the geographies that we serve and saw linearity similar to normal sort of back end loaded quarters, right? I think in terms of the segments of the market that we serve, I think our pivot is targeting the faster growing parts of the market"
"So there's a lot more interest as a share of wallet for the technologies that we're offering today, like solid-state, next-generation data centers, object storage, as well as what we're thinking about delivering to market in the hyper-converged space"
"I think in terms of traditional environments, you continue to see people sweat assets trying to get longer lifecycles out of that"
We're benefiting from the fact that we've got a differentiated portfolio
We're benefiting from the fact that the portfolio is targeting the places where customers are spending
We can go in there at an order of magnitude greater efficiency and enable lots more software features than they've historically had
We'll give you more details of the long-term outlook at our Analyst Conference
I can just tell you that we are increasingly seeing wins where people are using NetApp Private Storage solutions connected to public cloud providers
"I think if you look at our results today, we are gaining share in the markets that we serve"
"In the all-flash array market, there's no question we're growing faster than competitors, big and small"
"I think if you look at the storage and device management market, we took over the number one position from EMC in that market"
"As we indicated on the call, we are working on a next-generation hyper-converged solution which we think will allow us to do to the hyper-converged market what we did to the all-flash array market: serve the needs of mainstream customers with a platform that's differentiated with performance, enterprise data management capabilities, and hybrid cloud integration"
"And we're focused and going to be delivering that, and you'll see us make some exciting announcements early next fiscal year"
It will allow us to serve the system or virtualization administrator at customers rather than the storage administrators
The hyper-converged market today is sort of a first-generation solution
The solutions don't have enterprise data management features
"They have challenges with performance consistency, which requires them to become a single workload configuration and are, therefore, addressing the low-end market, the departmental market"
There are few solutions that can really serve anything broader than that market
"What we're trying to bring to customers, just like we did in the all-flash array market, is a solution that allows customers the benefits of ease of administration, but with the unique benefits of performance and scalability, enterprise data management and hybrid cloud integration, which really gives us a net new market to address"
"If you look at the recent A700s flash-optimized, NVMe fabric ready architecture, it was sourced by – off the – an ODM model, right? So we are expanding the range of usage of off the line platforms across the range of our business, both in SolidFire as well as in our traditional FAS business"
"Could you speak up a little bit, please? Kulbinder S"
Garcha - Credit Suisse Securities (USA) LLC I'm sorry
We've had also been running promotions to get our customer base transitioned from 7-Mode to Clustered ONTAP
"As we announced this quarter, those promotions – we've transitioned 50% of the capacity in our install base to Clustered ONTAP, and so we're seriously evaluating whether we need to continue those promotions"
"I think in both of those cases, our perspective is the long-term winner, as we have demonstrated in the all-flash array market, is the one that can take an architecture and serve the mainstream customer segment"
There have been lots of companies that have gone after the early-adopter segment with a subset of the features that enterprise customers really want and have failed in the long run
"And so, first to market doesn't necessarily mean the big winner, right? I think what we are trying to do with the hyper-converged segment is the same track record that we've demonstrated with the all-flash array segment, which is customers want mature enterprise data management features"
"They want performance consistency and scalability, so that they don't have to have operationally a siloed environment"
"And hybrid cloud is really the architecture of the data center going forward, and they want true hybrid cloud integration"
"And so, we think that by offering those capabilities to customers, we will redefine the hyper-converged market just like we did to the all-flash array market"
We're expanding our opportunity by addressing an increasing range of strategic customer use cases
All of this underpins our growing confidence in the future
We hope to see you in April at our investor event where we will talk more about the evolution of NetApp to lead in the next era of IT
We saw a solid demand environment in all geographies and strong customer interest in our industry-leading solutions
Our strong performance reflects our customers' commitment to NetApp and their clear and growing preference for the value of our Data Fabric strategy
"In the new era of IT, driven by digital transformation and defined by the ubiquitous hybrid clouds, IoT and machine learning, NetApp is uniquely positioned as the leader in helping organizations liberate and unleash their data for maximum business impact"
"Unlike competitors' approaches, which are siloed and do not embrace the cloud, we help organizations unify their data across the widest range of cloud and on-premises environments to realize its full value for competitive advantage"
"Data is at the heart of company's digital transformation, and we are winning because we are enabling customers' success through data"
"No one matches our expertise in data management, our leadership in growing market segments and our open ecosystem approach"
"Our advantage is the result of decades of software-based innovation, strategic focus and the ability to partner effectively"
"Before giving you an update on the set of strategic solutions that are tightly aligned to customers' IT imperatives, I want to give a brief update on the dynamics in our mature solutions"
"Consistent with our plan, the headwinds for mature solutions continue to lessen"
The transition from 7-mode to Clustered ONTAP is behind us
"Our add-on hardware business is growing, and we have a renewed focus on hardware and software OEM opportunities"
"As a part of our transformation, we have aligned tightly to our customers' IT imperatives as they harness the power of cloud, build next-generation data centers and modernize their existing storage infrastructure"
And we continue to bring innovative solutions to more customers in more ways
"As I noted last quarter, we have already transitioned our business away from the declining segments to the data-driven high-growth segments of all-flash arrays, converged and hyper-converged infrastructure and hybrid cloud"
This shift creates enormous new opportunity for us as we penetrate our installed base and displace competitors' equipment with our cloud-integrated all-flash solution
Our strength in flash is also driving our success in SAN and converged infrastructure markets
"In Q2, we delivered new innovations that further strengthened our leadership position in the all-flash array market"
"The latest version of ONTAP offers 40% increased performance over earlier versions, helps companies increase capacity savings by 30% and offers stronger security and new compliance capabilities"
This expands upon the performance leadership of the world-record SPEC SFS performance benchmark that we set earlier in the quarter
"The new EF570 all-flash array designed specifically for performance-intensive workloads such as big data analytics, technical computing and video surveillance, leads both the SPC-1 and SPC-2 benchmarks for price performance and is the first enterprise all-flash array to support NVMe over InfiniBand for ultra-low-latency applications"
NetApp's SnapMirror integration supports data movement from Element OS systems to ONTAP systems across the Data Fabric
Customers are excited that we are delivering on all of the promises of HCI and we are seeing strong demand for this offering
Our recent industry-first announcement with Microsoft Azure is clear evidence of the strength of this strategy
NetApp is unique in its approach to collaborating with the hyperscalers and has defined the best-in-class model for helping our joint customers deploy hybrid cloud
"We have partnerships with all the leading hyperscalers, which enable us to deliver NetApp enterprise value through their massive cloud infrastructures"
These relationships allow us to monetize customers' use of the cloud and increase our opportunity to expand our market share in the on-premises market
I could not be more excited about the possibilities created by this part of our business
We are aligning to the high-growth areas of the market and reaching more customers in more ways
Our second quarter results are a strong indicator that the transformation of NetApp remains on track and is accelerating our success with customers
It's clear that our strong execution and Data Fabric strategy are enabling us to build deeper and more strategic relationships with companies around the world
"At our recent Insight User Conference, thousands of customers and partners shared their excitement for our strategic direction and long-term vision"
We expect our improved momentum to continue throughout the year
"We are the data authority for the hybrid cloud, planning for the future, leveraging our technologies and scale to create new businesses, expanding our total available market and creating shareholder value"
"Before turning it over to Ron, I'd like to thank the NetApp team for your focus, commitment to transformation and the exceptional results that we are delivering together"
We saw exceptional execution across all of the different geographies and all of the different segments of the business
"And we are extraordinarily – see very, very good momentum"
We have strength in all of our different channels of distribution
Our Data Fabric strategy is resonating with customers and the sharp focus of our field organization gives us extraordinary confidence in the business looking forward
We introduced the hyper-converged platform in October just this past month
We also booked some orders and we're focused on converting the rest of our pipeline this quarter
"We have a differentiated offering, delivering on the promise that hyper-converged gave customers with an enterprise-grade solution"
One of our competitive programs has seen continued increases in the number of competitive displacements per day
"This quarter, we saw more than two competitive displacements per day, which is up substantially from the numbers we reported the last quarter"
We are still in the early innings of flash adoption in our customer base
"We have an extraordinarily differentiated flash portfolio, as I mentioned in my comments"
"We have several world-record performance benchmarks, a deeply differentiated software portfolio, and we continue to see strong momentum going forward"
"We're not providing guidance for fiscal 2019. As Ron mentioned in his prepared remarks, we are raising the guidance for the second half of the year"
"So, as we see continued acceleration in the business and, for the full year, as we said, we would guide to mid-single digits, up from low-single digits"
I'll just say it's part of that up-leveling of the number
And we feel very good about the offering we have in the market and the momentum we're seeing
It's in private preview next month and will be generally available for customer adoption next fiscal year
"So, this year, we're not counting that in the materiality of our business"
We will give you more color in our next Analyst Day in spring
"We have a differentiated strategy for customers, the Data Fabric strategy, which is very, very difficult for people to replicate"
"As you know, we've been working on this for five years"
"So we feel we have a lot of headroom to continue to take the business, and we are going to double down on it"
And we see strong momentum heading into the second half of the year
"The book of business, as you know, we have a broad-based book of business because we are the unquestioned market leader in the public sector market"
It reflects the spending priorities of the administration
"So, defense and intelligence were strong, reflecting the budget allocations that they received"
"But we were – overall, we feel confident that we gained share"
We saw the normal year-end budget flush across all of the different segments in public sector
Our enterprise book of business was also very good
"We saw strength in – particular strength in the Americas and in Asia Pacific, but good balanced book of business across the board"
"And we see that this is exactly the trend that enables people to get the benefits of shared storage, efficiency, single point of management, consolidation of footprint while getting the benefits of low latency and host connectivity"
"And so we do see that over time, as NVMe becomes more mature, it will become a big enabler"
It will be a good enabler to network storage like you mentioned
Cisco continues to be a really strong partner of NetApp
"As you noticed, 20% in the converged infrastructure business is substantially ahead of any other full stack vendor in the market"
And so we are gaining share from competitors of both of our companies
"Fujitsu and NetApp have had a long-standing relationship of more than 20 years of joint engineering, as well as we have gone to market together in many parts of Europe together"
The NFLEX solution with a simple converged infrastructure solution that combines compute from Fujitsu with storage from NetApp and is targeted at the EMEA market
"It is for customers who are looking for a simple preconfigured factory-built solution, which is different than what we have with FlexPod, which is much more flexible and customizable"
And it's targeting places where Fujitsu has built customer relationships and loyalty
So it expands our reach and it provides us with another opportunity to compete more broadly in parts of the world that we didn't address as successfully before
We continue to see that broad portfolio continuing to see accelerate
"Mature is almost flat now year-on-year, just down 3%, so the headwind for mature is going to decline"
We continue to see gains in SAN and we have hyper-converged
So we feel very good about our portfolio and our execution in the marketplace
So we see continued acceleration of our business through the second half of this year
"With regard to our portfolio of innovation, we are winning both on-premises deployments as well as net new customer logos because of our Data Fabric strategy"
You can start with us on premises and take your data with you seamlessly to wherever you want to go
"So, the overall value proposition that we've spent years developing is clearly resonating as customers deploy the hybrid cloud"
"In addition, our individual solutions that underpin the Data Fabric are also very strong"
The converged infrastructure portfolio is really strong and expanding with both Fujitsu and the hyper-converged
And our portfolio of hybrid cloud solutions continues to expand with the hyperscalers
So we feel very good about our position in the market and we're going to double down on it
"We have a portfolio of both all-flash and hybrid flash solutions, and one of the things we have noticed is that some customers are choosing hybrid flash since the price increases in solid-state"
And so our unique approach where we have a single software architecture that can span both gives us a differentiated competitive position as well
And so we've been using that to be disciplined in the marketplace
The percentage of our installed base that is on solid-state is just about 10% now
And so we have a long base of footprint to go upgrade
"And as you know, with our Clustered operating system, the process to upgrade our installed base to solid-state is pretty seamless"
You can move from disk to flash in a seamless mechanism
And so we have a good opportunity ahead of us as flash continues to become more and more affordable relative to disk
"We are seeing that today in the use cases for hyper-converged as opposed to converged system like FlexPod, they are different"
We'll tell you more as we get more into the hyper-converged market
Our Data Fabric strategy is clearly resonating with customers
I am more confident than ever in our future and look forward to talking with you again next quarter
"Growth remained broad-based, with year-on-year gains in each of our four platforms, gaming, professional visualization, data center, and automotive"
"Gamers continue to show great interest in the Pascal-based GPUs, including gaming notebooks"
"Demand remained healthy for our enthusiast class GeForce GTX 1080 GPU, introduced nearly a year ago"
"It was complemented this past quarter with the GTX 1080 Ti, which runs 35% faster and was launched at the annual Game Developers Conference in San Francisco"
The GTX 1080 Ti is designed to handle the demands of 4K gaming and high-end VR experiences
"Typical of many supportive reviews, Ars Technica stated it is undoubtedly a fantastic piece of engineering, cool, quiet, and without rival"
Those that demand the absolute very best in cutting-edge graphics need look no further
"The newest title, Overwatch, added 30 million gamers in its first year"
"With apologies to the start of the baseball season, e-sports is now as popular among U.S"
"More people watch gaming than HBO, Netflix, ESPN, and Hulu combined"
"In the months ahead, we'll see a series of highly anticipated blockbuster titles"
"Among them are Destiny 2 coming to the PC for the first time, Star Wars Battlefront II, Shadow of War, and the next installment of the Call of Duty franchise, World War II"
We are excited to be working within Nintendo on its acclaimed Switch gaming system
Great reviews and reports of the system selling out in many geographies are a strong part of this platform
"We are seeing significant increase in professional VR solutions, driven by Quadro P6000 GPUs"
Lockheed Martin is deploying Quadro to create realistic VR walk-throughs of the U.S
The Marines utilize VR to train air crew personnel
"And IKEA is rolling out VR to many of its stores, helping consumers configure their kitchens from a huge array of options, which they can visualize in sharp detail"
The 38% rise from Q4 marked its seventh consecutive quarter of sequential improvement
"AI has quickly emerged as the single most powerful force in technology, and at the center of AI are NVIDIA GPUs"
We also announced that Microsoft is bringing NVIDIA Tesla P100 and P40 GPUs to its Azure cloud
"Organizations are increasingly building out AI-enabled applications using training clusters, evident in part by growing demand for DGX-1. We are seeing a number of significant deals"
"Among them are Fujitsu's installment of 24 systems integrated into an AI supercomputer for RIKEN, Japan's largest research center, as well as new supercomputers at Oxford University, GE, and Audi"
"Working with Facebook, we announced the launch of the Caffe2 deep learning framework as well as Big Basin servers with Tesla P100 GPUs"
"To help meet huge demand for expertise in the field of AI, we announced earlier today plans to train 100 people this year through the NVIDIA Deep Learning Institute, representing a 10x increase from last year"
"Through onsite training, public events, and online courses, DLI provides practical training on the tools of AI to developers, data scientists, and researchers"
"Our HPC business doubled year on year, driven by the adoption of Tesla GPUs into supercomputing centers worldwide"
"The use of AI and accelerated computing in HPC is driving additional demand in governance intelligence, higher education research, and finance"
Intuit's latest TurboTax release deploys GRID to connect tax filers seeking real-time advice with CPAs
And Honda is using GRID to bring together engineering and design teams based in different countries
We are continuing to expand our partnerships with companies using AI to address the complex problems of autonomous driving
"Since our DRIVE PX 2 AI car platform began shipping just one year ago, more than 225 car and truck makers, suppliers, research organizations, and startups have begun developing with it"
"That number has grown by more than 50% in the past quarter alone, the result of the platform's enhanced processing power and the introduction of Tensor RT for its in-vehicle AI inferencing"
"This quarter, we announced two important partnerships"
"Bosch, the world's largest auto supplier, which does business all over the world's carmakers, is working to create a new AI self-driving car computer based on our Xavier platform"
"And PACCAR, one of the largest truck makers, is developing self-driving solutions for Peterbilt, Kenworth, and DAF"
We continue to view AI as the only solution for autonomous driving
"The nearly infinite range of road conditions, traffic patterns, and unexpected events are impossible to anticipate with hand-coded software or computer vision alone"
"GAAP operating income was $554 million and non-GAAP operating income was $637 million, nearly doubling from a year ago"
"For the first quarter, GAAP net income was $507 million"
"For fiscal 2018, we intend to return approximately $1.25 billion to shareholders through share repurchases and quarterly cash dividends"
"In Q1, we issued $82 million in quarterly cash dividends"
These reflect approximately a 100 basis points impact from the expiry of the Intel licensing agreement
"GAAP and non-GAAP tax rates for the second quarter of fiscal 2018 are both expected to be 17% plus or minus 1%, excluding discrete items"
Further financial details are included in the CFO commentary and other information available on our IR website
"Finally, this week we are sponsoring our annual GPU Technology Conference here in Silicon Valley"
"Reflecting the surging importance of accelerating computing, GTC has grown to more than 7,000 attendees from 60 countries, up from 1,000 when we started eight years ago"
"Among its highlights, Jen-Hsun will deliver a news-filled keynote tomorrow morning"
Developers will have access to 70 labs and workshops to learn about deep learning and GPU computing
"And we will award a total of $1.5 million to the six most promising companies among the 1,300 in our Inception program for AI startups"
We will be hosting our annual Investor Day tomorrow and hope to see many of you there
"Operator, will you please poll for the questions? Question-and-Answer Session"
We feel good about the guidance that we're providing for Q2. We wanted to make sure that it was understood the impact of Intel that's incorporated in there
"It's still too early, given that it's – to say about the same size of what we just finished in Q1 to make comments specifically exactly where we think each one of those businesses will end up"
"But again, we do believe data center is a super-great opportunity for us"
"But we don't have any more additional details on our guidance, but we feel good about the guidance that we gave"
I’m pleased to report that PayPal ended 2016 with another solid quarter of financial results
"I’m proud of all the accomplishments that the PayPal team delivered, yet in so many ways we were just scratching the surface of the market opportunities in front of us"
"And with the world wide adoption of smart phone consumers have all the power of a bank branch in the palm of their hands, which will no doubt transform the way they manage and move money"
"In the phase of a noisy competitive market, we extended our industry leaderships by growing our active account base by 18 million with greater engagements than ever before"
We introduced a host of new innovations across our merchant and consumer value propositions
We took the clear lead in online conversion through one touch
"And we bring to our merchants an increasingly active and growing days of consumers who are ready to transact across online, in-app, and in-store environments"
"In the past year, we significantly increased our market opportunity for the series of transformative strategic partnerships with the networks, financial institutions, tax companies, and mobile carriers"
We accomplish this by putting our customers first in everything we do
We call this being a customer champion and this philosophy guides our every action
Let me start with a quick recap of our results and John will provide more details in his remarks
"As I mentioned, we delivered a solid fourth quarter"
"Customer engagement in the fourth quarter increased to 31 transactions for active accounts up from 27 a year ago, and 30 last quarter"
Holiday shoppers increasingly bought gifts online and with their mobile devices through convenient omni-channel shopping experiences
"For PayPal, this helps drive a 25% increase in payment volume, resulting in $99.3 billion of payment volume in the quarter"
"According to Internet retailer, Black Friday 2016 was the largest mobile shopping day in history"
Between Thanksgiving and Cyber Monday PayPal processed more than 2 billion in mobile payments
And mobile accounted for a third of our overall payment volume during the quarter
Mobile is becoming an increasingly important competitive differentiator for PayPal
More than half of our active account base transacted on the PayPal platform using their mobile device over the last 12 months
The scale and reach of our platform clearly separates PayPal as one of the world's leading FinTech companies
"In 2016, we processed 6 billion payments, an increase of 24%"
"This represented a total payment volume of 354 billion flowing through the PayPal platform of which more than 100 billion was mobile payment volume, an increase of 55%"
"Braintree ended the quarter with 428 million cards on file, and PayPal has well over a billion financial instruments on file"
"In Venmo, was one of Time magazine's best apps of the year and one of Fortunes 10 breakthrough brands"
"In Q4, Venmo processed 5.6 billion volume, an increase of 126%"
"As you may recall, Venmo processed 1 billion in monthly TPV for the first time just last January"
"For the full year, Venmo processed $17.6 billion, up 135%"
It’s been several years since we expanded our mission to be more than a button on the website
"We have evolved to become the platform and payments partner of choice for merchants around the world, as they move towards a multichannel retail experience driven by the mobile phone"
"For example, with Braintree's commerce infrastructure tools, we are creating simpler ways for merchant install for contextual commerce experiences that transform the way consumers shop and pay"
"For entries forward API, which merchants securely share, payment data with other sites and apps, allowing customers to purchase from multiple merchants in a single convenient and secure experience"
Simply put it produces by its and away the best conversion rate in the payments industry by making it faster and simpler for customers to pay with the single tax
We ended the year with over 5 million merchants offering One Touch to more than 40 million consumers
PayPal has the unique distinction in the corresponding benefit of having a deep and trusted relationship with almost 200 million merchants and consumer accounts through our two sided network
This means we can deliver new payment experiences like One Touch for the speed and impact that there is truly differentiated
eBay and PayPal have always enjoyed a close partnership
eBay CEO Devin Wenig and I are committed to further strengthening what is already a strong relationship
We are working closely to creating better payment experiences for their buyers and sellers
"For example, our teams collaborated this past year on new customized checkout experiences that helps to reduce card abandonment, increase loyalty, and help buyers seamlessly transact on eBay's platform"
"As we look to 2017, we see even greater opportunities to work together"
"In the quarter, we were also proud to welcome several great brands to our platform"
"DE, the second-largest retailer in Europe, Crate and Barrel, which now offers PayPal as a payment option on its web and mobile sites, and on the CB2 and landed not cite for their global customers"
"Squarespace, an all in one website publishing e-commerce platform"
Now it’s more than 1 million paid subscribers
Seamlessly integrate PayPal into their online stores
"To give you an idea of the demand for PayPal within the first 24 hours of launching, we saw hundreds of Squarespace merchants integrate into PayPal and that demand continues"
"Finally, consumers can now create a campaign on go funding on behalf of their favorite charity"
By doing so they take advantage of the PayPal giving funds facility to receive and process donations and avoid the complexity of having to handle the funds themselves
"Last year, highlighted our commitment to putting our customer’s front and centre"
That led to our decision to offer greater customer choice in our payments experiences
This partnership allows the PayPal wallet to be closely linked and Discover cardholders acquires and merchants
"It will allow PayPal credit customers who link their discover cards to purchase online, in-app and in-store at contact listed enable merchants in the US"
"And in a first for us, PayPal customers will be able to use their discover cash back bonus to pay for purchases at the millions of online and mobile merchants that accept PayPal"
"We expect that the reward points will become an easy convenient and alternative source for customers of PayPal and our financial institution partners, the pay for online and mobile shopping due to PayPal platform"
"In the fourth quarter, we entered into an extended partnership with cellular carriers, software providers and leading consumer brands"
One prominent example of this is the global partnership agreement we announced with Intuit
"Building on successful regional agreements, we are not deploying our express checkout and more than 1.5 million quick book small businesses and self-employed customers worldwide"
The PayPal and Intuit partnerships due to business owners simpler and faster ways to accept invoice payments and significantly accelerate the fees with which they can collect funds
"Based on our role out in Australia, we found that merchants who offered PayPal payments in their quick book invoices will pay two times faster than it to get paid without PayPal"
This meaningful improvement in cash flow is crucial for the SMB market
We are proud to bring this benefit to Intuits customers
"Our partnerships with Facebook, Google, American Mobile, Vodafone, AliExpress, and other financial institutions and major retailers continue to grow as our platform and capabilities expand"
"Our separation from eBay afforded us an opportunity to sign a unique, meaningful, and expansive mission for our company"
I believe our expanded focus and value proposition allowed us to widen the distance from our competitors
"We upgraded our platform invested significantly in our global compliance capabilities, improved our developer tool sets, and drove our scale and engagement through a unique and enhanced value proposition"
We are inspired and focused on the opportunities in front of us and we look forward to providing ever more value to our customers and our shareholders
Before I conclude my remarks I’d like to just take this opportunity to publicly welcome the newest member of PayPal’s Board Belinda Johnson
Belinda has filled an impressive track record at Airbnb
She’s already proving to be a great addition to our board and we look forward to her valuable contributions
"As I mentioned in my remarks, seeing money digitizing is a big move to mobile, it is a big move to really online being sort of online payments and then pick up in stores or commerce is really just becoming commerce"
"I mean a great example of that is this was the best retail holiday season in five years, but you saw - in-store sales actually drop and online move up to almost 17%, 18% or so"
New market opportunities frankly internationally that we are beginning to see and have a platform now that we can extend to many more markets of Venmo
We see the beginning of monetization as we come into this year
"And we are seeing the back of the year, the beginnings of some in-store volumes based on tokenization and our partnerships with both the network and financial institutions and then we've got a tremendous number of new partnerships, whether it be with Facebook, or Intuit or FI’s really around the world right now that is growing exponentially since we've announced our network agreement"
We are very focused on those opportunities and we are comfortable with that guidance
I’ll take the first part of that and then I’ll wisely let John take the next part of it
"So, let me just back up a little bit, as you know and everyone on the call knows credit is and will continue to be an important flywheel for us"
"It reduces card abandonment, it increases basket size for our merchants and consumers"
When somebody uses credit they do two times the spend on our PayPal network than somebody who doesn't
"When we do PayPal working capital on average those that we lend to, they see their sales go up 20% plus, and so it’s a tremendous flywheel for us"
It is a small part of a business and it’s likely to remain so as well
And we have great amounts of data and really I think world class modeling around this
"That said that is no reason really to use our balance sheet or the receivables and there are, as we've mentioned before, a lot of benefits of asset right"
"Obviously, we tie up a lot of our free cash flow in the receivables with free cash flow, for other capital allocation that we might do, we have reduced exposure, we still have a differentiated proposition that we would use our data and our modeling with our partner to bring back a differentiated proposition into our phase and there are very attractive economics to share"
"And as we've seen right now, from people who are very interested in partnering with us, our portfolio is very effective"
That is a working hypothesis as we are going through this
So let me start with the mobile and then I will go into the impact of some regulatory and change of administrations
I mean more half the sales that are going online are being driven by mobile
"Mobile is blurring lines of distinction between in-store environment and online environments, where like commerce is just becoming commerce"
"And truthfully, mobile is the biggest competitive differentiator for us"
"If we think about mobile, the real problem that merchants have with mobile is that when a browser begins the shopping experience on mobile between 65% and 74% of the time there is card abandonment because it’s such a small screen, it’s difficult to put of the payment information in there et cetera"
So with One Touch we have 87% conversion on mobile
"The next closest is 51%, the industry average is like 44%"
"Remember one other thing I said in my remarks with over half of our active basis on mobile payment transaction is through the PayPal platform in the last 12 months, over 100 billion in the volume of 55% for the year"
"No, I was thinking in, see if I can [indiscernible]"
I will start of a little bit and then you can jump in
"Not as much built into the customer choice piece of it, although I will say we’re pretty encouraged by the initial results that we’re seeing on choice"
"If you give somebody the choice to pay, they become more engaged, the average price that they pay or the basket size that they have goes up, as well these are not surprising"
"We anticipated, but it’s nice to see those things starting to really happen in the market, but we have a ton of that built into our guidance as well that to me is more of a 2018, 2019 phenomenon"
I just want to thank everybody for joining us on the call
"I’m pleased to say that PayPal delivered another strong quarter of financial results, achieving new milestones for the Company on multiple fronts"
"We generated 747 million in free cash flow, up 51% from a year ago"
Perhaps more importantly we had strong performance across our customer metrics
"We ended the quarter with 210 million active accounts including 17 million merchant accounts, growing our base at 12% year-over-year"
"Given our first half results, we now anticipate our net new active additions will exceed 25 million for 2017. Engagement once again increased growing 10% year-over-year, our customers now transact 32.3 times per year, up from 29.4 times a year ago, and 31.7 last quarter"
"Our growing base and increasing customer engagement enabled us to pass another milestone, as we processed a 106 billion in payment volume exceeding 100 billion in quarterly TPV for the first time"
"TPV grew at a currency neutral rate of 26% year-over-year, accelerating 75 basis points from last quarter"
"In the quarter, 34% of the payments on our platform were made on a mobile device"
"PayPal processed approximately 36 billion in mobile payment volume in Q2, up 50% year-over-year"
One Touch adoption continued to expand in the quarter with over 60 million consumer accounts opted in
"Merchant accounts accepting One Touch now numbered just over 5.5 million growing by 500,000 in the quarter"
"Venmo users sent and received 8 billion in the second quarter representing a 103% increase from this time last year, as we continue to achieve increasing network effects in the millennial markets"
John will share more details about our results and guidance in his remarks
Our performance is driven by the cumulative effect of multiple incidents
Our overall scale is accelerating due to the network effects of our two sided platform
It is clearly a macro secular shift toward digital payments and our customer choice results continue to exceed our expectations
"We have completed a rollout of choice across our on-boarding, servicing and checkout experiences in the United States and over 13 million customers have opted into choice"
We have the data from millions of customers over multiple quarters
We are beginning to see clear trends resulting from our choice initiative
"Despite our transaction volumes increasing by more than 20%, our net call volume into our global operations are down year-over-year"
"More importantly, customers who have opted into choice have meaningful increases in overall satisfaction"
"As a result, choice is driving a significant reduction in churn and a meaningful lift in overall engagement"
", we are pleased to be expanding this rollout into Australia, Canada, The UK and Japan later this year"
Choice will also help to expand PayPal's presence in our customers' lives
"These opportunities are driven by the land mark partnership agreements we have announced with technology companies, financial networks, wireless carriers and financial institutions around the world"
"In the second quarter, we continue to make excellent progress with our partnerships"
"We continue to expand our relationship with Visa, expanding our partnership in the Europe"
"As most of you will recall, last quarter, we announced an agreement with Visa that covered the Asia-Pacific region"
"Consequently, we now work around the globe with Visa"
"to instantly transfer money to their bank account via eligible debit card, linked to their PayPal account"
Findings faster and more convenient ways for our customers to fund into and out of their PayPal accounts is a key part of our overall value proposition
"For example, we are pleased to see leading issuers including Wells Fargo and HSBC actively marketing PayPal to their customer base, encouraging their clients to link their cards into PayPal accounts"
"Furthermore, as part of our expanded relationship with Citi and Chase, we will make Citi ThankYou Rewards Points and Chase Ultimate Reward Points available in our PayPal wallet to be used as a funding source for consumers shopping at our 17 million merchants"
"As I've said on last quarter's call, it's hard to overstate the difference in the relationships we now have with companies across multiple sectors to many once view as potential competitors"
We are confident these partnerships will drive enhanced value to our mutual customers
"The accelerating and extensive scale of our two sided global platform, which will allow consumers and merchants to transact instantly in new context, across operating system, technologies and platforms, create a strong foundation and is very attractive to multiple partners"
"Our open technology platform has enabled expanded partnerships with Google, Apple, Facebook and Samsung over the past few months"
These agreements benefit both PayPal and our partners by creating innovative consumer-focused experiences that connect their combined billions of consumers to new buying experiences enabled by PayPal's powerful platform
"In addition, Android Pay users on Google's Chrome mobile-web will be able to seamlessly pay at the millions of online merchants that accept PayPal, simply by using their PayPal account and fingerprint authentication"
"Just like the deployment of One Touch, this great new checkout experience will be available to millions of PayPal merchants without requiring any integration work from the merchant, further extending the value we bring to our merchant customers"
"Also in the quarter, Facebook announced additional commerce experiences with PayPal that will be available within its Messenger platform"
At F8 Facebook shared that over 1 million joint PayPal and Facebook customers have already enabled our payments experience within Facebook Messenger
We anticipate that this integration will expand to more countries around the world in the coming months
This complements our existing integration into Siri and Apple iMessage and marks a growing relationship with Apple
"Finally, we announced a strategic partnership with Samsung"
"will be able to use PayPal to pay for purchases in-stores using Samsung Pay's mag-stripe emulation technology, which is used at the vast majority of merchants that accept cards"
"The totality of these partnerships reinforces the fact that we're becoming an underlying open payments platform and wallet for many of the leading technology platform, OEMs and wireless carriers around the world"
We continue to make good progress in rolling out Venmo as a payment option for PayPal merchants
"As we shared last quarter, we're not introducing the ability for U.S"
PayPal merchants to accept Venmo as a mobile payment option
Venmo users are now able to use Venmo at an expanded number of PayPal merchants such as lululemon and Forever 21 and I'm quite encouraged by the early results
We expect that the ability to pay with Venmo will be widely deployed across millions of our PayPal merchants by the end of this year and I look forward to sharing more details in the coming quarters
"As of today, this includes bringing the power and reach of the PayPal platform to the expansive and rapidly growing Chinese consumer market"
"We're very pleased to announce that PayPal has signed a strategic partnership agreement with Baidu, the leading Chinese language internet search provider with approximately 700 million users"
This partnership allows Chinese consumers to pay with their Baidu Wallet and PayPal at our merchants outside of China
"Beginning later this year, this partnership will provide Chinese consumers more ways to discover and buy from PayPal merchants in the U.S"
and will eventually expand the PayPal's entire global merchant base outside of China
We expect this partnership to drive significant demand and additional cross-border trade over the PayPal platform
"In addition in helping our merchant customers maximize their opportunities in the age of digital commerce, another key part of our strategy is helping underserved consumers, join and thrive in the digital economy"
"Our goal is to create an open platform for digital commerce to deliver innovative mobile checkout experiences that blur the lines between physical, online and mobile shopping"
That vision has grown increasingly important to our merchants in today's rapidly evolving retail landscape
Our execution in support of that vision is yielding strong results and expanding our leadership position
Our efforts to place our customers' frontend centered everything we do is driving the scale and engagement on our platform
It has opened the door to strategic and reductive partnerships that have extended the PayPal experience across multiple contexts in existing and new geographies
But we know we are still in the early stages of our transformation and we are just scratching the surface of the opportunities in front of us
"We are fully committed to delivering a true core experiences and additional innovative and comprehensive solutions for our customers, helping our consumers and merchants to navigate the rapidly evolving and expanding digital payments landscape"
"And with that, I would like to now turn the call over to John"
So I am quite pleased with our progress on engagement
It is up 10% despite really what is an accelerating day right now which is kind of the high-class to have
We are seeing tremendous adoptions across merchants and consumers into the PayPal franchise
"As I mentioned, we think we’ll exceed 25 million net new actives for the year"
"In past couple of years, we’ve taken our active user engagement up almost seven transactions per user across the whole days"
But now it is being driven the majority from our PayPal core wallet and that is a great story for us
"So, that is a piece of really good news that you probably wouldn’t see from a number in and up itself"
"And it kind of feels like, we’re just at the beginning of this"
"We've got One Touch that is driving engagement, that’s driving increased engagement and it’s accelerating across the base"
"Choice still new, but choice engagement and summing up into choice that engagement is up quite substantially, and I am really pleased with what we are seeing from choice"
"As I mentioned, we're about 13 million plus customers that are in choice now, that will grow and that will impact engagement"
We’re obviously just beginning of the journey the movements in your context
"Now, we now at basically major agreements, we're pretty much every major issuer, we’ve got agreement from the financial networks to utilize their tokens and those start to move us, move more an in-store environment as we go into next year, that'll also drive engagement"
"Right now, there's no engagement with Venmo, it's P2P, but we don't count that in our engagement"
"That is our goal, not to drive once a week, but to drive two times a week"
And I feel with all the initiatives we've right now and the trending that we're seeing that over -- our medium to long term that’s within our reach too
So feeling pretty good about where we're on the engagement side
"You've violated first quarter rule, one question, but otherwise okay"
"So, listen one of the things I mentioned in my opening remarks is we're beginning to see a tremendously collaborative relationship with issuers right now"
We're seeing I mentioned two that are marketing to their pace to actively encourage them to link their cards into our PayPal account
And consumer will opt on how they want to pay and where they want to pay on that
"And so a consumer adds to P2P, we see them they engaged more, their use of PayPal goes up, their churn goes way down, and it is a gigantic benefit for our flywheel and for our economics"
"And that comes through us, as Bill said, historically as we have seen with P2P and others"
"We also start in-store with Vodafone as we go down, we have seen these"
They use PayPal more in app and online because the distinctions between those things are blurring especially with mobile
"And so, our ability to engage with consumers and drive that engagement is a good thing both for consumers, for merchants and for the economics of PayPal"
"And as I mentioned, you know, I said I think we'll do an excess of 25 million net new active that would imply so that we're going to do another on average 6 million or so in the third and fourth quarter"
"Availability just thing like availability is up, that matters a lot, we'll wait and see"
"So I think there is a number of things and we also obviously with 210 million people now on the platform, we’ve got maybe at a tipping point of these network effects right now where there's so many merchants on the platforms, so many consumers on the platform, that it's a must have for people especially if they move into mobile check out experiences"
"And so, I'll look at a number of things that we've done over the course of the last several years, and they're beginning to take hold in the market, and really driving our results and Bill would you answer that"
"I'll just add one last thing and then we'll be done with your question, Ashwin"
"We didn't underestimate what can happen with Baidu, I mean we're now tapping into that Chinese consumer marketplace, and that is going to open up a whole new market for consumers to come on to the PayPal platform, interact with our PayPal merchants outside of China and drive what we think could be substantial cross-border traffic"
"And I talked about this, it's not just Baidu, it's Baidu and PayPal"
So almost a little like we've done with Android Pay that it's a cobranded experience and sign up to our PayPal account from there
"So, there're a lot of things that we're working on, a lot of things we still want to implement but feel good about the current trend right now"
"Yes, so, we've done I think 24 major partnerships in the last 18 months and you've seen it last quarter starting to accelerate actually"
And it's accelerated that people are beginning to understand the assets that we bring to our partners
"And so, we're -- and very importantly, we're a neutral third party platform"
So we don't compete with any of our merchants or partners who are allies in advancing digital payments
"So, I think our positioning is really good within the entire ecosystem to continue to partner"
"There're a number of other partnerships that are on the horizon and I think the more we partner the more people see that the benefit of doing that could be quite substantial, so I think we announced enough partnerships right now, so we'll save some for the next -- for the next announcement"
But I think we're really well positioned on that front
"John mentioned, we've $6.4 billion of cash equivalents on our balance sheet"
We're generating -- now with our guidance is over $2.9 billion of free cash flow for the year
"There is no question about it and we are very active and looking at range of opportunities around the world, both big and small"
But look those opportunities needs the time to our vision in our mission
I mean it's amazing in velocity of new functionality and innovation that Bill and his team are putting out into the market place
"And so, well, we used to have to buy at onetime because it would take us month to make a change on our website because we have such a monolithic infrastructure"
Second thing is we can partner now in ways that we never partnered before
We have new velocity about cooperating with people
It's created in environment that gotten very competitive one to one that’s much more cooperative
We have a ton of complimentary resources that we can use with partners
"And now many times where we used to think that we will have to buy something, we can that partner on a commercial relationship to go and do that"
"And then obviously, if we can't do any of that we look at buy and we do that in a very disciplined manner"
"We have got certain amount of skill and capabilities and so you can expect us to continue to be acquisitive, but in a disciplined fashion and within the context that what I just mentioned"
"So, I’ll start off and then I’ll turn it over to Bill"
But I think there is a real difference now with the partnerships that you mentioned that are major tech platform companies
I think none of that really wanted to go into payments as an end to itself
"And so, it might be more engagement on their platform and that engagement lead to key metrics that they want to try to keep the advertising, it could be other thing"
"And when we made the shift to being an open payments platform as opposed to just seeing a button as I check-out experience, and really open our platform up to pretty sophisticated technological upgrades through open APIs with the partnership we had with tokenization and that kind of thing"
"We were then able to become really in many ways an underlying payment OS or those tech platforms that enable them to create the experiences, that they wanted to drive for their end user"
And so that partnership is fundamentally different right now and it has evolved greatly over the last several years
"I'll ask Bill to add a color to that, but it's a very different conversation that we have now then we used to have"
"Obviously, we've worked closely with JP Morgan Chase over the last couple of years actually, as we've talked about the potential for how we might work together"
And I'm really pleased with where we came out in this partnership
"We both see a lot of value in it, if two very strong companies lending what are really impressive assets to create consumer experiences, including as you mentioned processing through Chase Net which obviously does give the potential"
So I'm really pleased with the comprehensive nature of the partnership that we have with Chase because time to work through all the details of it
But I think both of us are really good about and really good about what we can drive coming out of that
"I think you just think about things like reward points, Discover, Chase, Citi have all decided that utilizing the reward points within the PayPal platform to utilize those for purchases that are 17 million merchants"
"That’s a real significant differentiation for those particular financial institutions and their customers who are using their instruments, but also for PayPal because you now can utilize those reward points in a split transaction"
"You have X number of reward points, but maybe couldn’t do that full transaction"
"You can now split that, you can use this reward points to purchase 40% of which we are going to do and then the other 60% can be done to whatever funding instrument you select as a consumer"
"There are all sorts of things within these relationships that we have, they try to enhance value for our mutual customers that, if you parse through them, it's really quite significant and differentiated from where we were certainly a year or so ago"
"Now the in-store stuff, we obviously now have the ability to use industry tokens from these Mastercard and others"
"And now, we are working with each of the FIs to use their tokens for their particular instruments"
"And so, you will start to see that’s just a naturally begins our rollout"
There really is much of a trial and error per se on this
"And you will simply be able to use that instrument seamlessly across where actually it is accepted now on android phone for instance across in-app experience, online experience, or an in-store experience without us having to do bespoke customization of software at the point of sale terminal"
So that would just be a natural rollout utilizing existing POS technology
We really appreciate your time and we look forward to speaking with all of you soon
"And that will reach the milestone that we've been talking about, about being faster than any other enterprise software company in history to that $10 billion mark"
"When I joined salesforce nearly four years ago, Marc and I put together a plan to become more strategic to our customers and to become more of an enterprise skilled company, and that plan really had three parts to it"
The second was expanding our international reach to serve our global customers
"And the last was building the world's strongest ecosystem in the cloud, and that was with our SI partners and our ever-expanding ISV community"
"Well today, we have strategic relationships with the largest and most successful companies in the world"
"We're inspiring companies of all sizes, all industries and all geographies"
We have clearly become the trusted advisor to our customers for their digital transformations
"All of this is translating to our results, including a record number of big transactions"
"In fact, we hit a huge milestone this fiscal year which we're incredibly proud of, and that was achieving 100 $10 million-plus relationships on an annual basis and the number of $20 million-plus relationships has nearly doubled in just one year"
"We expanded our relationships in Q4 with three of the five largest CPG companies in the world, all of them running on salesforce"
We're also building on a very strategic relationship with Farmers Insurance
"In Q4, we expanded relationships with Anthem, athenahealth and one of the largest healthcare companies in the United States, Humana"
It's been less than a year since they've been GA and we've already seen great traction
"In fact, more than 70% of customers who have purchased one of these industry solutions are net new logos to salesforce in this fiscal year"
So all of these are proof positive around the power of speaking the language of the customer
Each of our regions grew more than 25% in constant currency for the full year
"In fact, EMEA and Asia Pac both grew 29% year-over-year in constant currency"
"And this is, again, something that we're very, very focused on and very excited about"
"Now to that end, we expanded relationships in Q4 with some amazing brands like Shell, Michelin, Emirates and Maersk in Europe"
"We had other huge international wins in the quarter with BRF, Latin America's largest food company, also with the Japanese Cabinet Secretary for Social Security and Tax and Fujisoft, all in Japan"
"So great progress, again, on the international front"
"As far as partner momentum, we continue to strengthen our partner ecosystem"
"In fact, we are seeing partners grow their salesforce practices by more than 50%"
"Today, every single one of the top five SIs in the world run their business on salesforce"
We're also seeing strong momentum in our ISV community and the innovation around our platform in that community
"In fact, today nearly 90% of the Fortune 100 are running apps from the AppExchange and these are apps that are being installed by customers at a rate of more than one per minute every single day, which is pretty incredible"
"And look, this operational excellence, it's already paying off"
We're driving incredible value and innovation for our customers
"In fact, this quarter, we had a huge set of Commerce Cloud wins with Levi's and The Gap and YETI and many, many others"
"And Commerce Cloud grew customer gross merchandise value by 26% in constant currency from a year ago, again, an acceleration from Q3. So look, in summary, I would tell you that no other technology company is building the relationships that we are"
"We continue to paint a vision for their success, and as I said, we are executing at scale across every part of the company and delivering success for our customers better than anybody else in the world"
We have a standard template and process when we integrate these companies in all lines of business
"So for example, in the go-to-market business aspect of the company, we try to keep these companies together because we want to incubate them"
"We want to bring them into our culture, but we also want to make sure that we allow or we put them in a position where we can attach to the install base and the customer"
So they can get the power of salesforce when they come into the company
But it's – because we have a standard model from an operational perspective on how we bring these companies in so that we minimize disruption and we try to get them to hit the ground running as fast as we can
"Well, I think that the – I think it's pretty clear that customers – the company over the last 18 years has had an incredible vision and consistently has delivered new innovation to the marketplace"
"Obviously, pioneer in cloud, and bringing sales Cloud to the market 18 years ago was a great start"
"We've gotten beyond the first act, the second act, the third act, the fourth act, and we're well into our fifth act-plus around innovation and Einstein is certainly a great example of that"
"I mean, I can go through every one of the lines of business"
"But at the end of the day, yet again, you're painting a vision for our customers and providing them with a very compelling technology to get insights about their customers and what sort of use cases that that technology can be applied to"
So every customer that I've spoken with is hugely excited about the potential for Einstein and what it means to their business models and their business
And we're just starting to see the beginning of it
"So, look, we put a premium on what we refer to as enablement, right? We bring a lot of people into the company, 5,000-plus people this year"
"And we take advantage of some amazing technology; Trailhead is an example, so we're making sure that we can bring people up to speed and hit the ground running very quickly"
We don't just train somebody once and then that's it
There's no end of job when it comes to the training and enablement
"As I said, I think it's one of the reasons why we're so different than the rest of the marketplace in terms of the effectiveness of our go-to-market teams"
"We're the market leader of the Magic Quadrant with Gartner, if you take a look at that"
"It is – after sales Cloud, it is the largest cloud, I guess you could say, company in the world in terms of size and scale"
"We're enabling our sales teams and our customers' success teams, and I think it shows up in our results"
"So we're in an enviable position where we're a market leader in every cloud that we make and produce and bring to the market, and that drives incredible amounts of customer success into the marketplace for our customers"
"And when we go to market, we go to market on a solution basis, which is typically a multi-cloud solution"
"So that could be by industry, that could be by line of business"
"But when I think about, for example, the top 10 deals in the quarter, I can tell you that 8 of the top 10 deals in our quarter in Q4 had multi-cloud solutions"
"They buy solutions because they're looking to solve a business problem, and we are uniquely positioned to solve those business problems in the marketplace as it relates to customer engagement"
We have an excellent execution strategy which I outlined in the call earlier
"And yeah, just to give you an example, I talked a lot earlier about the level of relationships that we're establishing with these customers"
"When I talked about achieving this goal of 100 $10 million-plus relationships and doubling the number of $20 million-plus relationships, just to put that into perspective, if you go back to – I joined the company back in FY 2014 – and again, I had the privilege of working with an amazing team and an amazing company"
"But to put that in perspective, fast forward to where we are today"
"We have three times, three times the $10 million-plus relationships with customers than we had back in FY 2014. We have five times the $20 million-plus relationships that we had back in FY 2014. Well, how did that happen? Well, it happened because we had a compelling vision"
"It happened because we had a multi-cloud portfolio that added a lot of value, incredible value, that allowed these customers to drive digital transformation and engage with their customers in entirely new ways, in unprecedented ways"
So there is an incredible amount of opportunity on an attach basis across all of our clouds
"We're seeing more and more demand for it, and we are uniquely positioned to provide that for our customer base"
"Listening is very, very important, but also it's bringing a point of view, whether it's an industry perspective or a line of business perspective, as I said before"
"At the end of the day, let's use consumer packaged goods, in a quarter, three out of the top five consumer packaged goods companies in the world, and these are massive companies"
These are brands that we all know and we'll talk a little bit about that next week
CRM is the fastest-growing enterprise market and we're the market leader
We continue to separate from the rest of the marketplace
"Obviously, it starts with a compelling vision, an incredible execution and operations of scale"
But we started off the year with a fantastic quarter
"We're certainly very, very proud of the entire company and are very thankful to our employees, and all of our – really all of our stakeholders"
But we have some momentum carrying into the quarter
"And I think that's reflected in our forward guide, which I think Marc and Mark talked about"
"We've got a great story, a compelling vision for our customers and we continue to execute in an unprecedented way, better than anybody else in the marketplace"
"And before I begin the script and talking about our quarter, I really wanted to review something that I sent to the Company last week, regarding some of the things that we’ve been seeing in the world"
And I thought it would be appropriate if we just took one minute and just allowed you to hear these words as well
As the world has watched with all of us the horrors of the last week taking place in the United States and Spain
The pure hatred that we have seen displayed is everything we all want to end
And I’ve been especially disheartened to see the display of symbols of hatred including Nazi flags and salutes to KKK hoods
The horrible tragic death of Heather Heyer was a senseless act of terror and this hatred must end now
"salesforce is a company that is built on the values of love, equality and generosity"
We work hard every day to improve the state of the world through our own work and promote our Company’s mission to others
We all have to recommit to our own personal acts of love and kindness as this is the only way to fight this pure hatred
"We can all make our own choices between love and hate, and we can all love more"
"Now is the time for all of us to remember, love thy neighbor as thyself"
We had our best quarter ever and we reached a huge milestone for the company
While I can remember how many employees and customers and partners came up to me and said there is no way you are going to get to $10 billion
"What kind of a dream is this? And now, I am absolutely thrilled that in the second quarter we broke through the $10 billion run rate, doubling the Company in such a short time"
"Now, salesforce is the first enterprise cloud software company in the history of the industry to reach the $10 billion run rate"
This makes salesforce the fastest growing enterprise software company ever to reach this milestone
And this incredible achievement is now coupled with an incredible dream
We now set our sights on $20 billion and doubling the Company again
"Now, let’s talk about some of the highlights of the quarter"
"As I mentioned, we have more than $15 billion in booked business on and off the balance sheet, that’s up 29% from a year ago"
"In fact, we added more than $3 billion to this balance since last year"
"Now, there is a reason for our incredible success year-after-year and why we continue to be investing at such an incredible rate to be the number one CRM company, is because no other company like ours has ever been as committed to customer success as salesforce, and that’s reflected in how our customers are driving tremendous success for their customers"
"You all know that customer relationship management, whether it’s B2B or B2C, has already become the most important and fastest-growing enterprise software category, growing at nearly 14%, and that’s going to come for years to come"
"Well, it’s a massive $100 billion plus opportunity that salesforce is leading, and we are in a phenomenal position going forward"
We all see the $1 trillion CRM opportunity in front of us
"And we are delivering this at a scale every single day, creating nearly 3 million sales opportunities, more than 5 million customer cases sending 1.4 billion emails, processing 1 million purchases, and producing 40 million reports and dashboards every single day, that’s 1 billion reports and dashboards a month, by the way, all while delivering more than 5 billion platform transactions a day"
And it’s no wonder that Forbes just named salesforce the most innovative company in the world again
"According to IDC, the combination of CRM and IA - excuse me, according to IDC, the combination of CRM and AI will create more than $1 trillion in new GDP impact worldwide; 800,000 net new jobs by 2021, amazing"
"And we’re already seeing how Einstein is a game changer for customers, delivering hundreds of millions of critical insights, recommendations and predictions every single day"
No other company can match this level of focus on the CRM market
"All of this adds up to salesforce, becoming increasingly strategic to our customers and to our partners who are trusting us to bring them into this incredible new future"
You’ll hear more about that in a second from Keith
"While it’s only August, we’re officially on the road to Dreamforce, which is going to take place in San Francisco, November 6th through 9th, and it’s going to be the most exciting, most inspirational and most innovative Dreamforce ever"
And I hope all of you can be there; you’re not going to want to miss one moment
And I think that’s on the mind of every single member of our management team
I think we’ve continued to deliver those numbers actually very well and we’ll continue to do that going forward
"And that’s also under the guise of pressure that we get from foreign exchange, like every time the euro increases, its valuation that puts more pressure on our bottom-line"
"Well, let me take the last question first, which is that salesforce actually gets its data from a lot of different places"
"More than half of the transactions, when we talk about 5 billion transactions a day, more than half of those transactions are API transactions already, that’s other computers filling our database with data"
And we have just amassed a huge amount of customer data based on that
We have so many integrations and so many customers so deeply integrated
And then there is many different ways that customers get their information into our system
"Of course, we have many natural language type systems like one you mentioned, voice type systems like you’ve seen us do work with Alexa, with Amazon and I think you will continue to see an evolution of that"
I don’t think any enterprise software company has done as good a job with mobile as salesforce
"salesforce has -- with salesforce1, with My salesforce1, salesforce Inbox, many of our mobile offerings and mobile platform capabilities, more mobile capability than any other enterprise software company"
And that has really allowed customers to access and work with an input data in lots of new ways
"Because mobile devices are empowered and enabled to so many kind of, I would say, next generation capabilities including many operating systems that have very deep AI, as you know, all of that is already tied into salesforce"
"And I’ll tell you, we took our whole management team offsite two weeks ago to lay out our plan for what we call chapter three"
"Chapter one for us certainly was zero to $1 billion, it’s well documented in the book Behind the Cloud, how we did it, what we did, all of those capabilities"
We want to write a second book now for entrepreneurs of what we did from $1 billion to $10 billion
We think that’s an important story that needs to be told
"Now, we’re in chapter three, which is to go from $10 to $20 billion"
And I’m sure all of you can see that’s going to happen in fairly short order
I think that one of the things that we have done to focus on and make sure that we blast through $10 billion is to focus on customer success
I think a lot of mistakes that the other entrepreneurs have made and I can go through each one
"In enterprise software specifically, it’s not to really double down at this point, again on the customer"
"Get absorbed in your own myopia, get absorbed in your corporate politics, get absorbed in your corporate bureaucracies and yourselves, and try to break out of yourself and recognize the most important thing, continues to be the customer"
"And how do we enable that customer and empower that customer and of course, we’re going hold ourselves accountable and we’re also going to deliver all kinds of other capabilities along the way as well"
"But, that is really our focus, which is how do we make our customers more successful than ever"
And I think that’s the heart of our culture
But I think nothing is more important to our Company than customer success
"And even though the vast majority, let’s say half of the 27,000 employees that work for us today probably were not with us two years ago"
So that is something that we really have to spend time with them at
We’re different than other software companies because we really care about that customer and we’re going to make sure that customer is successful
"When you’re an enterprise software, you have to realize, it’s hard work, not everything is going to be perfect all the time, there is going to be problems"
That’s why being so committed to the customer I think is more important than ever
And then we coupled it with this incredible CRM opportunity
And I have to say our competitors have really done a horrible job in last few years
I just would say that a lot of them have abandoned the CRM market
"If you talk to the major CRM analysts and we do that, we just had one of them at our management conference, they are shocked, we’re shocked of how these companies have really walked out of the CRM market, companies that had huge multibillion dollar positions in the CRM have ceded that market to us"
More than half of our organization is a customer-facing organization
That is going to serve us very well for years to come
"So, I feel very good and I think you can see it in the numbers here"
No software company kind went through the $10.4 billion number at these rates
And I feel that that’s going to continue to happen
"I mean, one of the cool things for us is we have a tremendous capability with our platform"
"The traditional approach has been companies building vertical apps, almost from the get-go and creating these customizations and enhancements right inside the hard line code"
"That never sat well with me, mostly because my background was in application development and deployment tools"
"So, we really built our platform in a way that let us build our core applications and let our customers extend them"
And that is why so much amount of data has been built inside of salesforce
I don’t think a single customer has the same implementation of salesforce
"And yet when we upgrade and update our software which we do three times a year, we don’t break links and we don’t break these customizations, and customers get Einstein and mobile and all of our enhancements and yet they have their highly customized capability, no other company in the world has that"
"Even today when most companies upgrade and update their core applications even in the cloud, they don’t upgrade all customers democratically, they kind of give customers warning bells that we are going to do this but it’s going to break your system"
We have a way through our metadata architecture to really extend that
"And then, as we have acquired companies, we have brought that platform religion to them"
Platforms are incredibly important because they let customers enhance their system in highly specialized way
Platforms are also extremely important because they drive down attrition
"I think as we -- we just ran our numbers for this management conference that I mentioned, two weeks ago, if you look at our attrition rate over the last 10 years, one of the reasons we drive it down is because of our platform"
"When we figure out a market or capability that we want to have or focus on, we can rapidly deliver that"
That’s also true with Keith’s healthcare initiative as well
And that I think has been a very powerful part of our approach
And we of course have tightly integrated that into our core platform
"So, customers for example, I’m wearing this amazing new Louis Vuitton watch today"
"And then all of the CRM data for Louis Vuitton however is built and managed inside our core platform, and all of it is deeply integrated"
That’s a great example of our platform strategy where we let customers build highly complex applications like Louis Vuitton with their icon app and you can see that inside any Louis Vuitton store when you go into work with a Louis Vuitton account executive and you can see it yourself as a consumer with Heroku when you use LV Pass on your phone
"I mean, I think Einstein has hugely exceeded our expectations"
"And I would say from my perspective, it’s already material part of our results"
"That has really happened faster than we expected, more deeply than we’ve expected, and it’s been more exciting for our customers than we expected"
"I think also, the branding choice that we made with Einstein also exceeded our expectations because it let us rapidly communicate to our customers that we’ve extended our core platform with artificial intelligence"
"As we kind of head towards Dreamforce, you’re going to see a lot of exciting things"
"But, we’ve seen some amazing breakthroughs in using artificial intelligence with healthcare"
And every company has to look at what are they using -- what are they doing with AI to make their customer relationship better
And I can tell you that helps that Louis Vuitton account executive when I walk in the store; they are able to give me that next best offer
"I think it’s probably one of the reasons that we already closed at Kering Group in this quarter, another incredible luxury brand family with Gucci and Bottega Veneta because we’re able to offer these companies the ability to have much better, much smarter relationships and do it so unbelievably quickly"
"I also just bought some amazing new sneakers on Adidas and called Primeknit Shoes, checked out some of the stuff they have or some of the stands that tennis shoes or other Yeezy 350s that they have on the Adidas and a lot of the recommendations and capabilities that you are getting already on the platform are through Einstein"
"So, Einstein is an incredible advancement and it’s great for all of our clouds"
"And again, I don’t think the other enterprise software companies that moved fast enough into artificial intelligence"
Let me jump in and then maybe Keith or Mark might want to add on the first one and I will close loop on the second one on the 18% and 19%
"We have -- I think it’s really reflective of a strong business that we’ve been describing, that Keith has been describing in his dialogue, a large sort of deals over a long time but just overall health, across geos, [ph] across clouds"
"Keith, if you want to jump more into that, but I think the 30% is a slight acceleration"
"If you want to add any more commentary, I will circle back to 18% and 19% DR"
"In terms of the DR of 18% to 19%, this is really about the deepening invoice seasonality, it just continues"
"And one of the things that I would call out to everyone and I think just to share with you is that we have 12 years of history on our webpage, our IR webpage with supplemental information that shows every quarter for 12 years and the sequential impact because this has been a topic we’ve been trying to share at Dreamforces for the past several years"
"But you can actually see the math and even fit in the guide for this quarter, and it really shows us deepening invoice seasonality continues"
"First of all, I think you can see this great win with the Veteran’s administration this quarter is an indication of the government vertical is working better than we expected"
"And I think we started to see government spending come back on line this quarter, really for the first time"
"And as you mentioned, IBM, we continue to get more and more integrations with IBM"
We’ve had some great early successes with Watson
And our opportunities are to work with all of these amazing companies to deliver a solution that serves our customers
And I think we’ve been probably done a better job I think in forming the strategic alliances and maintaining them than probably any other company in the industry
And I think it’s one of the reasons we had such a great quarter
"We’re thrilled to raise guidance for the year and set our next dream as $20 billion, and here we go"
"In addition, we continued to return capital to shareholders with a $100 million share repurchase; Trac will discuss the financials in more detail"
"The market that we serve through our three customer segments of Semiconductors, Systems and Software Developers remains mostly unchanged since last quarter"
The consolidation drive to combine forces in order to better attack certain markets or more effectively utilize resources is likely to continue
"Many of these consolidations have worked their way through the system, and while they are a headwind, Synopsys has fared well"
"The technology leadership and completeness of our solutions, combined with unwavering support, has made us a highly valued partner"
It’s hard to overstate the promise and the challenges brought by the new applications that are emerging as the age of ‘smart everything’ is taking shape
"Our broad portfolio, proficiency and problem-solving experience, reaching from Silicon to Software, continues to increase in value as the challenges grow more and more multi-dimensional"
Our third customer segment – software developers across many industries – is a growing differentiator for Synopsys
"Fixing issues by sending out a stream of software patches is now untenable with systems that touch human life, society’s infrastructure, all the way to high-value industrial and financial systems"
"Through our most advanced design tools, we are well-known for supporting adoption of 16, 14, 10, and 7 nanometer FinFET technology"
"With our advanced lithography and TCAD platform, we are also well engaged in the development and research of 5, 3, and 2 nanometer nodes"
"For example, we teamed up with IIT Bombay to announce an important extension of our Sentaurus TCAD for FinFET reliability modeling at 7 nanometer, 5 nanometer and below"
"Meanwhile, adoption of advanced design with our tools continues unabated"
"Of the 300 FinFET designs completed to date, Synopsys was relied on for more than 95% of those chips"
"Significantly, 55 of the 56 tape-outs at 10 nanometer and below were completed using Synopsys"
"Overall, our digital design platform, which is centered around synthesis, place and route, and sign-off, continues to make great strides"
"First, our leading synthesis franchise around Design Compiler, which benefits from an extraordinarily strong and broad usage base, is seeing a rapid succession of technology advances and runtime improvements, including in its ability to deal with advanced test requirements"
"And as a result, we are seeing notable successes in head-to-head benchmarks and customer engagements"
"And third, the strength of our gold-standard sign-off franchise"
"The adoption is swift as market-leading companies such as Broadcom, Juniper Networks, MediaTek, Renesas Electronics and Samsung Electronics have already deployed HyperScale in their signoff and tape-out flows"
"The sharing of physical sign-off algorithms from IC Validator, natively inside IC Compiler II, also greatly improves sign-off time as it minimizes physical design violations during, instead of after place and route"
"In custom/analog design, adoption of Custom Compiler is steadily progressing"
Verification is a showcase of our broader Synopsys Silicon to Software vision
Our focus is squarely on the greatest enabler of the IoT/Smart Everything age: the intersection of hardware and software verification
The center of our offering is our VCS simulator franchise
"During the quarter, we announced the roll out of massive parallelism natively integrated in the next release of VCS"
Our hardware-based ZeBu emulation and HAPS prototyping had another strong quarter as well
"The combination of increasing customer demand and our ability to deliver the fastest solution on the market today, gives us confidence that our verification business will do very well again this year"
"Strength was across the board, with notable wins in 7 nanometer and continued momentum in IoT"
A major Chinese customer selected Synopsys for a wide range of IP for their 7 nanometer designs
TSMC certified our area-optimized USB 2.0 solution for IoT for its 40 nanometer Ultra Low Power process
"The ARC SEM security processor won the Linley Group’s best processor IP award for 2016, based on power/performance efficiency, as well as unique security features"
"These characteristics are particularly important in the expanding automotive space – a key focus segment for Synopsys, touching our IP, EDA and software security portfolios"
"Our customer base in automotive continues to widen, including new semiconductor companies as well as OEMs and noted Tier 1 suppliers"
"In Q1, a high-profile automotive semiconductor company adopted our test solution for use in mixedsignal automotive ICs to enable ISO 26262 compliance"
Their ICs are for safety-critical systems and therefore require in-system and power-on self-test to comply with the standard
"Key elements of our EDA, IP and Software Integrity portfolio are now certified for the most stringent level of automotive safety measures defined by the ISO 26262 standard"
Which naturally leads me to our Software Integrity group
"Clearly, security challenges are only increasing, but so is the recognition that finding and fixing security vulnerabilities must be addressed vigorously while developing the software"
That means high-quality code-checking long before the software gets deployed is a must
"For example, Online Trust Alliance, a well-known industry organization, states that 100% of recently reported IoT vulnerabilities could have been easily avoided if manufacturers and developers took security and privacy measures into account throughout the development process"
"Our strategy is to: First, broaden and deploy our Software Sign-off Platform"
"Second, accelerate our penetration of key verticals in both the embedded and enterprise spaces"
"While it’s early, we are making great progress: 8 of the top 10 software companies in the world are now Synopsys customers; So are 7 of the top 10 automotive OEMs; And, illustrating the TAM-broadening potential for Synopsys, so are 16 of the top 20 commercial banks in the world"
"Having greatly tuned our channel in fiscal 2016, we continue to invest in this promising business"
"In Q1, we launched a new version of our static analysis tool with enhanced security for mobile and web applications"
It’s designed to help provide enterprise-level security analysis and broad programming language support necessary to address today’s many evolving application security demands
"While arguably an older language, it’s a very important legacy component in many oil and energy systems"
"Synopsys is eminently engineering-centric, while Cigital brings a demand creation element, with customer touchpoints earlier in the security strategy development process"
"Thus far, the integration is proceeding well, and we had our first taste of the potential of the combination just this week at RSA, the world’s largest security conference, where Synopsys highlighted the most comprehensive software security solution available today"
"In summary, we exceeded expectations in Q1 for an excellent start to fiscal 2017, and we’re raising our full-year guidance"
"In general, when the customers feel that they have a good year, everybody is a little bit more pleasant to deal with, as you would expect"
"Nonetheless, though, I think if there is one positive I would take out of this, is that the predictions that we’ve made now for of a number of years that electronics would bring about a wave of new opportunities through this whole notion of a smart everything, you can also call it machine learning or digital intelligence, is starting to become visible"
"I think that is very exciting because if you have something that’s a little bit smart, the one thing you want it is to be smarter"
And one way to make it to smarter is to give it more compute power
We can see that the pressure and the push for advanced nodes is very solidly driving this notion forward and it’s becoming increasingly real
"All you have to look at is how immensely powerful automatic driving cars are, and yet how immensely far they still have to go before you can completely trust them"
It’s in that context that the combination of hardware is getting better leads to software that is much more performance
"That leads to applications that really, I think, will wow us in the years to come"
I think there is a little bit of that in this picture as well
You said at the beginning of the year we were cautious because we felt it was fairly difficult to predict a part of the hardware waves
And you were right because we have not predicted such a strong Q1; and the fact that Q2 is a strong follow up is only encouraging
But it’s also true that we want to remain cautious
"That when you look at in aggregate, raising a year is a big year when you do better early in the year, but many things can happen"
"There’s no indication of bad news, it’s just that we are digesting the good news, I think, at a slightly slower clip than being too aggressive"
I think we have – it was close about halfway in the quarter
"So far, the integration is, on both sides, a lot of learning while making sure that we continue to execute well"
And I can state that the execution appears to be on track based on the plans that they have
"We are step-by-step broadening the Cigital capability on a world-wide basis, which is a great opportunity, and at the same time making sure that both teams are well educated on the offerings that we have"
I think we are well on track to create something that is stronger again
"That belief is bolstered somewhat by the fact that the non-Cigital part of Synopsys, of SIG, did well again"
"And I think we have alluded to that the last few conference calls, that the predictability of that business, the number of large deals, was on a very good track"
And so that gives us a degree of solidity that gave us additional courage to make this move
"Regarding the linearity, of course I understand that many of you are trying to handicap how good the rest of the year looks"
I think what we’re fundamentally communicating is that our guidance at the beginning of the year turned out to be more conservative than the first quarter delivered and therefore we made some changes
"But we are maybe a conservative Company, or fundamentally we try to execute to what we say we will do"
And that’s why after the first quarter we don’t want to change guidance too much
"I think we have many customers that are actually quite interested in the emulation part of the business, in the prototyping part of the business, because they’re going more and more into the hardware-software part of the space that determines their time to market"
And so it’s well possible that the second half of the year turns out to be strong
It’s just that we don’t have visibility to that
These are quite distinct markets because they have different catches both in speed but also in the ability to debug and look at things
"At the same time, one of the very strengths that our verification platform has, is that it can be used very much as a continuum"
"Meaning that one can do parts of the design in the VCS software simulator, one can do part of it in emulation or in the prototyping boards"
"Because while things like IoT, machine learning, automotive are going growing very rapidly, they pull with them an unbelievable need for more capacity and everything that connects to the cloud, to a massive amount of computing and therefore the bandwidth and the storage that goes with that"
And so IT is particularly relevant in people that want to very quickly do complex systems where they don’t want to build all the blocks themselves
"And our IP blocks have literally been honed over many, many years and are constantly pushing the state-of-the-art"
I mentioned already the verification of this intersection between hardware and software
"For us the promise of the software space, we originally got into that by realizing that software complexity was starting to rival hardware complexity, and that the penalty for errors was rapidly moving up"
Penalty for errors in hardware has always been high
"Software, as I said, you could get away with patches"
But that’s not the case when the software drives things of very high value all the way to cars and human lives and so on
And so you amend that with the very fact that there is a world of hacking that really with nothing good in mind
"You can see that the need for high degrees of discipline in the software space is a necessity, even if it will take some time before development flows get there"
"While this is a new market, it’s particularly rewarding now as we start to see that we are interacting with companies that literally five years ago we would never have dreamed of talking to"
"And we’re talking insurance companies, health companies, banking consortia, and so on"
And these are all people that use software and use it in the context of very high-value propositions
So they need to be safe and they need to be efficient
"For many, many decades most positions have always been shared in various ways"
There are a few that are sole positions or there are a few that where one or the other company is massively dominant
But we are in field where constant advances are constantly being explored
And we have been very fortunate to do very well in this
Customers will look at anything that helps them but they are also increasingly benefiting from the collaboration that comes out of fairly deep long-term relationships
"Well, in general, we compete intensely for this market that continues to push hard and in some cases accelerate their need for technical advances"
"And so as you know, there are not that many players in our field"
And so it’s a healthy and good thing that we are both pushing hard
All of these are probably statements that some of our competitors would make about themselves as well
"And we never underestimate them, but we are both providing tools that are sort of similar to race cars, the faster they go, the better for the customer"
And these changes invariably are around finding a way to dramatically improve one of three characteristics
These evolutions are not linear because often you work for two or three years on a set of profound algorithms and then suddenly it makes a difference
"If you look at a little bit higher level, and this is where sort of intersects with the strategy for a Company, the big inflection points from my perspective have been the addition of the IP business to EDA"
"And this, of course, now already quite a number of years ago but now it is a significant portion of our business"
I’ve alluded the last couple of years to the inflection that is coming with the addition of the software side of hardware-software
And it’s not a surprise that so many of the verification expenditures are increasingly focusing on that
And so that is how we are looking at our opportunity space
"I’m not sure I completely answered your question sharply, but I did give, I think, what I think are the big things that actually bode well for us for a number of years to come"
"Well, listening to my predictions through your mouth, I almost feel clairvoyant because indeed the deals did get larger"
And that’s not surprising because this is the same history as EDA many years ago or many other fields where automation and verification takes hold
"And yes, it takes hold faster with people that look forward and so on"
But really it happens very often when people have a catastrophe or an issue to deal with
"And to be honest, I don’t recall if we were completely engaged with Cigital at that point in time already"
"And so in that sense, I think that we will first learn how to run that business well"
"And assuming that goes well, my guess is that this will broaden more and more on a world-wide basis"
"Well, if you don’t mind, we don’t want to talk about individual legal situations, so let me more generalize"
From time to time we obviously see glaring cases of misuse of software
And we try to respond forcefully but gracefully to it
"It is always better if we can guide a customer towards a healthy long-term solution, if I can call it that"
Every thoughts and that’s more difficult and maybe legal situation is resulting from that
"We’ve had a few of those in the past, they have been resolved, I think, professionally and positively"
Asia-Pacific itself has multiple components and Taiwan and Korea have been big parts of that for many years
"In the last number of years China has grown immensely, and of course the potential to continue to do so"
"Simultaneously, we know by virtue of having been in China since really the early 90s, how the competence of the engineering teams and the companies that have grown and some have merged and have grown again, have progressed quite superbly"
"And so in that sense, a number of companies that do state-of-the-art design in China just like anywhere else in the world"
"We have been very fortunate to be, I believe, the largest contributor to that from an EDA space point of view"
"IC Compiler II has seen, actually, an enormously rapid adoption rate which continues"
"And which is solidified more and more by the fact that we are also getting increasingly excellent results, especially when used in conjunction with some of our other tools"
"And our focus has been primarily in the more advanced node, the FinFET technology"
"And we are seeing some very good adoption, especially in the last few quarters"
For starters we certainly don’t underestimate what the change can do for Mentor
I certainly can not say that we’ve seen an increase in competitiveness
And that will certainly be a continued angle for competitiveness in this regard
You are saying that we will see the software business and the IP continue to grow well
That decision gets made sort of on a continual basis
We had a very strong quarter and we look forward to Q2 with a fairly high degree of confidence and a strong year as well
"And as usual, we will be available for the after call phone calls"
I'm happy to report that our second quarter results were strong
We executed $100 million share buyback for a total of $200 million so far this year
"The landscape around us is solid with what feels like a continuing stable outlook for 2017. Our 3 customer groups, semiconductors, systems companies and software developers, continue to invest significantly"
This is driven by the dawning age of digital intelligence which is both exciting and evolving quickly
"Everything around us is becoming smart, connected but also complex"
"Mounting software content, whether integrated on a chip or as an app, creates huge functionality, development and security challenges"
Let me provide some highlights from the quarter beginning with core EDA
Synopsys is a mission-critical partner for the most advanced designs
Our EDA and IP collaboration with TSMC illustrates this
"During Q2, we announced full flow certification for TSMC's 12- and 7-nanometer processes as well as broad IP cooperation for 12-nanometer FinFETs"
Customers today rely on Synopsys for more than 95% of their FinFET designs
"Meanwhile, we-re already partnering on early R&D of 5-nanometer and below"
Our design platform is generating solid results and notable customer successes
"IC Compiler II, our place and route solution, is used on highly complex chips, some as advanced as 7-nanometer, by companies such as Xilinx, NVIDIA, ST and Broadcom"
"Meanwhile, intensive R&D across our digital platform is delivering new high-impact capabilities at a very rapid pace"
"In custom, our long-time leadership in simulation and our new Custom Compiler design solution are generating high interest"
"Custom Compiler's FinFET optimizations and our close collaboration with UMC, for example, enabled customers to use Custom Compiler in their new 14-nanometer process"
"In verification, we continued to see excellent results and a strong outlook for the year"
"Our Verification Continuum platform is in high demand for 2 reasons, first, we have leading-edge verification technologies ranging from simulation to emulation to prototyping to static techniques to powerful, well integrated debugging; and second, our coherent platform is solidly centered at the intersection of hardware and software, the very intersection enabling Smart Everything and addressing the time-to-market urgency of this dynamic market"
We continue to see great progress ranging from excellent customer interest in our new superfast VCS simulator to platform-wide adoption and proliferation
"Over the last several quarters, leading mobile, graphics and processor companies have aligned with us through expanded multi-year strategy -- strategic agreements, including simulation, verification IP, debug, formal, emulation and prototyping technologies"
"On top of this, virtual prototyping which enables early software development and architecture assessment, resonated particularly well in the automotive market"
"During the quarter, we announced support for chips from Silicon Mobility Inc"
", a leading semiconductor provider for hybrid and electric vehicle control systems"
"Let me pause for a moment on automotive, where, over the past several years, we've deployed a wide range of targeted solutions"
"With touch points ranging from functional safety to autonomous driving to the next-generation of infotainment, all the way to lighting simulation, Synopsys is growing into a crucial participant in the automotive ecosystem"
"Elements throughout our EDA, IP and software integrity portfolio are now certified for the most stringent level of automotive safety defined by the ISO 26262 standard"
"In IP, for example, over the last 8 quarters, we significantly extended our portfolio of certified IP"
"More broadly, in Q2, we saw strong demand in IP with particular momentum in advanced technology and security"
We announced an expansive portfolio of IP for TSMC's 12 FFC process and taped out multiple 10- and 7-nanometer IP test chips with advanced foundries
"We're systematically building out our portfolio of security IP for mobile, automotive, IoT and cloud computing markets"
"In Q2, for example, we delivered a high-performance, hardware-secure module that protects sensitive information and data processing within SoCs"
"The need for security is, of course, much broader than IP which brings me to our third customer base, software developers across many industries"
We're strong in the embedded space with growing transaction sizes and are gaining good traction in the automotive industry with our security solutions and well-respected expertise
Our objective is to drive demand creation at early stages of security strategy development
"Finally, Synopsys was named a leader in Gartner's Magic Quadrant for application security testing"
The Magic Quadrant is an important indicator for customers who often use it to narrow their list of potential vendors
We've already seen increased customer interest as a result
"In closing, as we look to the second half of the year and beyond, our priorities remain centered on generating long term shareholder value"
And you can see that the entire field is really poised to demand more computation
"And while there are some up and down from quarter-to quarter, they are driving the leading edge and they need the tools to support that"
"We must have used the word hardware is lumpy every time and that is an indication that the visibility is not complete, meaning that some of these things come in and then the customer wants immediate fulfillment or delayed fulfillment"
And that is only a center of strength for Synopsys
"And so the distinction between semiconductor vendors and system vendors sometimes is a little blurred because they tend to increasingly do stuff for each other or demand from each other that, that sits at this intersection"
"So both of those, I think, sort of grow hand in hand"
"Actually, sorry I forgot that part of your question"
"And with continuous complexity of chips and by the way, continued complexity of the IP blocks, delayed collection of these blocks just continues to grow and the efficiency with which people can put together large chips is directly a function of which blocks are available, how easy is it to integrate them and how much do you trust the vendor because, obviously, you're highly relying on who provides you those blocks"
"And so as companies design large chips or larger systems, increasingly, they put their engineers on those aspects that they can't purchase but where they can provide additional differentiation while outsourcing increasingly blocks that, in the past, they would have done themselves"
The companies have no aligned time line for these projects and so I don't see any seasonality
"But one could have the configuration that, for some reason, there are some quarter, there are more project finishing than others or deliveries that we could do"
"So it could be somewhat lumpy, but it's not because of seasonality"
5-nanometer is not on the market and 5-nanometer is still in deep development
"And even when I say for the 7-nanometer -- 7-nanometer is really leading edge and what that means is that the foundries that provide the technology and that manufacture these chips will keep refining their technology on ongoing basis because they constantly are trying to tune the yields that they get because if you have a little higher yields, meaning a higher percentage of chips that work on a wafer, that has enormous economic impact"
And so we-re in constant interaction with foundries
"Every time that they tune it a little bit, we tune our tools and in some cases, we also tune our IP a little further"
"Yes, we have a number of efforts in these advanced nodes and the word ready is not a black and white, meaning that there are certain things that are already earlier"
"There are certain things that are already with 7-nanometers, not quite there, for test chips, for example"
And so there's a very complex multi-year process to bring something to market
"But from my commentary, you should read that we-re well exercised in trying to align as much as possible with the foundry train so that we arrive at the station at the same time"
There are some very fundamental IP that's impacted by EUV
"And there are many, many layers, so EUV will be for the very refined ones initially"
"And so we're well on top of that, but it does not mean a big effort nor a big issue"
"Just to clarify, when we do IP, people buy existing functionality but very often wanted to be delivered in a very specific form, maybe with some alterations or with some tuning for their versions of technology"
And the reason you saw us hesitate is because we rarely think about it in those 2 categories
"Yes, we have seen those since like the middle 1990s"
"We've been in China for a long, long time and they have been, for now many, many years, many design companies"
"And so I would say, we're at least already on the third or fourth generation of companies where a bunch have disappeared, reconfigured and so on"
"And now there is a significant segment of strong Chinese companies that are -- that have, year after year, become closer and closer to be at the state of the art and we would certainly say that there are a few companies that are designing with absolutely state-of-the-art silicon technology"
"I mean, memory development is development that requires pretty deep understanding of semiconductor physics and device construction"
"And so with the number of companies we have now been working for a while on the development of those, you're absolutely right that, in the last recent period, I would say maybe last 2 years, there has been an increase in attention and effort"
"And that is the direct response to the fact that most economies are seeing an enormous amount of data coming about, that the big data will be analyzed and therefore, the -- be it in the cloud or be it the devices around it, are all going to use massively more memory and that their strong desire to make that memory a lot faster so that you can do more processing"
"And so in that sense, while China may be new to this game, the push in new memory technologies is quite interesting and that fits well the overall picture of a semiconductor business that is going to be an enabler to many other high-tech capabilities"
"I don't know the exact answer, but I can venture that it is probably half to a little bit more as outside"
And the reason for that is that the marketing needed in our core semiconductor space is not that high because we have many very good connections and we can relatively easily access people that need security and quality tools for their software
"Whereas in the rest of the space, there are many different market segments"
It is that they're also very strong in the financial market
"And so the way you communicate with financial market is very different than, let's say, the health market or the embedded software market and that is why some marketing effort has to be specialized on that"
"From a sales point of view, there, it is much more a question of global access and how quickly can we grow this and be in a situation where we have high-quality salespeople"
"We're growing well, but there's no end to that one yet"
"Well, so for being at Synopsys for 30 years, I would say our capacity has always been less than the customer wanted and more than they thought they would get, meaning that the state of the art is limited typically by a few things which is, one, is how fast can you run; and two, how much can you run at the same time"
"And so it has been actually quite remarkable how, over all this time period, these numbers have continued to increase"
"And I'm certainly on record of having argued many times that we-re the other half of Moore's Law which is if they can manufacture it, we will find a way to simulate it, to design it and so on and that goes hand in hand"
"But for the most state-of-the-art situations, one has always had the limit of what one can do"
"The second comment I would have for that, it is quite remarkable how, over all these years, over and over, there have been redesigns of architecture of utilization of compute environments, of utilization of multiple computers, multiple cores, multiple threads that have managed to keep your question in check"
So we're always chasing the horizon in other words and this is true on the hardware side in emulation or prototyping
And expect that to absolutely continue and we will stay at the leading edge of that
"Secondly, regarding the intersection of prototyping and software integrity, I expect that we're going to start seeing some of that in the not-too-distant future"
"So far, there's not been a lot of evidence of that, but we have not really pushed on that front yet either"
"The intersection between prototyping of emulation, we have already seen quite a bit of that"
"And by the way, it's intersection of prototyping, emulation and simulation and in some cases, even virtual prototyping"
And that is because the system people would like to simulate software on larger systems that have many components that may be defined at different levels of abstraction
I don't want to give the impression that this is routinely easy
But we-re in a very strong position with this and the most advanced customers are very literate about this type of problems
"For starters, we're fortunate that our own processes around upgrading our firewalls, of making sure that all of the patches have been applied to software have been effective, so we have not had any issues with this"
"Very clearly, every time there is a big story, in this case, massive number of stories, the attention level around the notion of security goes up"
"And we-re sitting in the space where the idea is to design security in the first place, not to just fix all the things that went wrong in the past but make it essentially correct by construction"
"And so from that perspective, I think we-re in a very healthy situation"
"I feel that we can now state that this business has, for lack of better term, reached critical mass"
"And what I mean with that is that a number of years ago, we made the decision to move up from the silicon to the software"
"We made a decision to bank beyond the hardware and software intersection and that, moreover, this new TAM that touches many companies that, in the past, we have no business with looks very promising"
There were many execution challenges in getting there
And I'm very encouraged with where we-re in the middle of 2017 because we see this vision materializing
"And hopefully, it's not on the back of catastrophes around us but more on the premise that building correctly for the future is really where the software industry should go and that is where our contribution will be"
"Well, for the first part of your question, yes, we think that it is in the low double digits"
"I'm sorry, I couldn't acoustically hear your second part of the question"
"Yes, automotive has been an interesting area because it's having so much attention, frankly, by a whole number of people that may create a bit of a bubble there"
"But at the same time, there's a good reason it's getting so much attention which is it is the showcase for what modern hardware software will be able to do to fundamentally transform a field that has been relatively slow in evolving"
"And so we have invested quite a bit over the last few years not only to make sure that the tools are capable of dealing with this type of designs, but our IP portfolio has grown significantly in the realm of having certified IP"
And certification of IP is for one key reason which is automotive demands a certain set of checks to make sure that what you're doing is actually safe
"And in the past, safety has been actually developed quite well in automotive"
"With this very, very rapid increase of both hardware and software, the complexity that comes with that is going to be a challenge for safety and the fact that we have a portfolio that is now massively certified, I think, bodes very well for our position there"
"Well, one of the key pieces is that the intersection of hardware and software has been driving verification extremely hard and a subcategory to that is really emulation and prototyping"
"And I expect that to continue because if you want to go to market, you want to start the software development as soon as you possibly can and make sure that it's going to work with the hardware that takes a long time to manufacture"
So that has really been one of the key variables in this game
"Hopefully, you took away that we had a very strong quarter, that the outlook for the coming quarter is strong, the overall year is looking extremely solid"
"But most importantly, I think the alignment around our Silicon to Software strategy appears to be working quite well and all the individual businesses have contributed strongly to our present success"
"So with the intent to continue on that trajectory, we thank you for your support and attention"
I am happy to report another excellent quarter and with it another outstanding year for Synopsys
"As we assess the business we’ve built over the past 30 plus years and look forward to the next five years to 10 years, we’re enthusiastic about our prospects"
The market opportunity is vast and increasing as we enter the age of Smart Everything
Synopsys is well-aligned to benefit from the emerging market dynamics
"And lastly, our financial position and priorities amply support our aspirations"
Let me expand on these three elements of our value proposition
"First, the age of Smart Everything or Digital Intelligence is here"
"Following the decades driven by Computation and then Mobility, Digital Intelligence is the third major wave of electronics impact"
"Week by week we can see its reach growing, be it through the Internet of Things, automotive, virtual reality, medical devices or industrial"
"The need to manipulate massive amounts of data, apply AI through machine learning, while guaranteeing security is unstoppable"
All of this is made possible with an insatiable hunger for next-generation advanced chips and complex software developed by our customers
"Second, Synopsys is uniquely positioned at the very intersection of silicon hardware and software"
Our design and verification tools are essential for the next-generation of advanced chips and systems
"In addition, our Software Integrity portfolio prevents code flaws from becoming security disasters"
"And third, we have maintained strong financial solidity while broadening our company TAM precisely for the opportunity at hand"
"Elaborating on our market and technical position, let me provide some highlights, beginning with EDA"
"With continued silicon and architectural sophistication, the success of next-generation chips is paramount in bringing about big data and machine learning opportunities"
We continue to strongly invest in our market leading digital design platform
"The largest ever FinFET design was implemented with the Synopsys platform, as was the largest networking processor in the world"
Our digital platform is consistently trusted on the most advanced projects and is relied on for more than 95% of all FinFET designs
"Our success is particularly evident in applications such as mobile, automotive, CPUs, graphics and AI-specific processors"
"And while we’re seeing share gains with customers across industries ranging from networking to storage to sensors, automotive has been particularly strong with nine of the top 10 automotive IC suppliers enabled through the Synopsys platform"
"Meanwhile, the move to smaller geometries continues"
"New manufacturing approaches, new materials, and new innovative transistor structures require our 3D TCAD expertise to develop them"
"Customers such as MediaTek, Renesas, Panasonic, ST and TDK/Micronas have reported very successful deployments and tapeouts using our Custom Compiler solution, which is targeted specifically at FinFET designs"
"We realized a number of years ago that as chips and systems became more and more complex, verification would increasingly be required at the intersection of hardware and software"
"Over the last years, while collaborating with market leading customers, we developed a comprehensive verification platform that excels at exactly that"
"One example is Samsung SARC, which chose our Verification Continuum, including simulation, formal, emulation, debug and verification IP as the primary solution for their advanced mobile processor designs"
"Among high profile customers presenting at the Design Automation Conference in June, AMD highlighted its use of our ZeBu emulation for early software development and bring-up"
"For software, emulation speed is critical and ZeBu is the fastest solution in the market"
"In Q4, we saw another example of the huge potential for our emulation"
"A mobile giant, faced with verification challenges inherent in software-rich mobile platforms adopted ZeBu citing its performance superiority"
"Over the past 15 plus years, we’ve built the broadest portfolio of IP titles and subsystems and have become a trusted partner and market leader"
"During 2017, we further expanded our portfolio, with continued focus on automotive, IoT and security"
"We expanded our IoT offering with our new ARC Secure IP subsystem for endpoint security and our IoT Development Kit to accelerate software development for sensor fusion, voice recognition and face detection designs"
"We announced the collaboration with Morpho, a leader in digital security and identity solutions to accelerate deep learning processing for embedded vision applications"
"In Q4, we acquired Sidense, adding One-Time Programmable Non-Volatile Memory IP, which is used in automotive and IoT among other markets"
"Our IP group has been a beneficiary of customer consolidation, providing outsourcing options to companies who want to target their limited engineering resources more towards differentiating their projects"
"Over the past three-and-a-half years, we’ve become a clear leader in this emerging high-growth industry"
"As we gain scale and credibility, our brand recognition continues to strengthen"
Gartner ranks Synopsys now as a leader in its Magic Quadrant for Application Security Testing
"With Open Source making up 60% or more of all applications, this capability is critical to deliver a robust platform"
"Initial customer reaction has been great, as they recognize the benefits of combining Black Duck’s highly respected capabilities with the broader Synopsys offering"
"Lastly, I’ve mentioned a number of vertical markets this afternoon"
One key vertical that is going through momentous change and is directly impacted by our end-to-end solutions is automotive
Let me provide some highlights resulting from our multiyear automotive strategy
"In Q4, we extended a multiyear Automotive Center of Excellence collaboration with NXP, enabling early software development for next-generation electronic systems"
"We’re also well-recognized in the industry, serving as a leader on the Society of Automotive Engineers’ Cyber Security Task Force focused on driving new standards for software security"
"In summary, for Synopsys, fiscal 2017 was an excellent year, positioning us well going forward"
And we’re making significant progress in scaling our software security platform and market leadership position
"Well, RISC-V is sort of in its beginnings, but it is also one processor among many being built right now"
"This is aimed, I think, at being more a general purpose processor and maybe of high interest to some parties"
"But many people are focusing right now on the development of AI-specific processors, and so from our perspective as EDA and IP provider, it’s a little bit like the more the merrier, because we can support many people doing designs, and we expect many processes to be optimized specifically for the applications, because the hunger for more speed will be so high that just going to smaller geometries will not be sufficient, and therefore, people will say, “Hey, if I can build processors that are narrower and just aimed at some application and can make them faster,” and we’re seeing really a plethora of companies investing in them"
"Well, I think, the answer is yes, yes, yes, because there is no question that the overall global economy has done well, mostly because all regions are reasonably solid and so having those in unison tends to help things"
"Secondly, there is no question that semiconductor has had a very, very strong year"
"And in all fairness, this is after a few years of not being particularly strong and so these things tend to go up and down but up feels better than down, no question about that"
"And then, lastly, and I think that that is actually the factor that will matter most in the long-term is that, this move into this next wave of electronics enabling a very notion that was [indiscernible] in the ‘90s of artificial intelligence and outcomes under a set of other names, big data, machine learning, digital intelligence, I’d like to call it Smart Everything, that will drive a very broad consumption of semiconductors, because the amounts of data generated by IoTs and various forms of sensors are growing by leaps and bounds, and just think of any camera as being really billions of pixels being generated"
"Secondly, this data needs to be manipulated through machine learning, which is extremely compute in terms, and then the machine learning it in terms gets interpreted in the utilization, let’s say inside of a car for example"
"And then on top of that, you need to add one more aspect, which is security"
"And security, there is a very, very big component to that in the software part of our business, but it also will impact hardware as a variety of security modules will get added"
"So, I think, that semiconductor is at -- really at the heart of enabling a whole new wave of impact and therefore would stay reasonably healthy just on that basis only"
"And frankly, our first job is to always make sure that the company really lands well and that we can quickly look at what are the upsides for them with Synopsys or for Synopsys with them, that goes in both directions"
"Having said that though, I think, what is exciting about Black Duck is that, they are really have grown up and have impact to the whole aspect of software refer to as Open Source"
"There are quite a number of lurking dangers in that and there is a large catalogue of known vulnerabilities, and when people integrate this Open Source code material and they don’t pay attention to at least the vulnerabilities that already known, I think that’s closely delinquent when thinking about building secured software"
And so it’s just a natural for us as an extension of our focus on quality and security of software
"It’s actually a quite difficult question, because we touch many, many companies that are in the automotive space and we ourselves find it a bit challenging to know exactly what is in the automotive part and what is in the regularly semiconductor deliveries"
"Having said that though, the reason I like to highlight automotive is because it is such a poster child for what big changes are happening in an industry that traditionally was very slow in the adoption of any super advanced technology and so many semiconductor technology"
"I highlighted specifically the fact that we had invested substantially in automotive certified IP in FinFET 16, because three years ago nobody in their right mind would have ever associated the word FinFET in automotive and today all of the big providers in that value chain are focusing on that, because they need more computation inside of the car"
So I think we’re well-equipped to be a good provider in that value chain
"Well, I am always careful answering questions like that, because often the claims get out of hand quickly"
"We have extremely competent competitors like Cadence and Mentor, of course, are the largest ones"
"In some areas, Cadence has been growing a bit faster in digital design"
"But in aggregate as an industry, we’re quite competitive, because we have to constantly develop technology that’s at the leading edge"
"Well, a little bit everything you said is true, meaning that, there’s no question that when your customers do really well, they are a little less hesitant in spending money and semiconductors have been doing extremely well and I expected right now to continue for a bit"
"At the same time, the -- our solution in the verification space, the overall verification platform, which includes the emulation and the FPGA prototyping boards has done very, very well"
"And this is not completely a surprise, but somewhat difficult to predict in timing, because it follows what we have said, which is the center of gravity between hardware and software is going to increase in importance"
"With more complex software, people want to run the software before they have the hardware and therefore they model the hardware and that’s the basis that we’re in"
"And as you probably know the advanced nodes keep rolling out at a rapid pace, because the providers are very competitive with each other"
"And last but not least, the Software Integrity platform, so far I think is living up to our open expectations to be good pillar for the company that is on one hand completely adjacent to what we already do both in terms of technology and complexity and in many cases in embedded situations"
"On the other hand, it’s clearly a fresh TAM for us as we were talking to customers that in the past we would never have dreamed of interacting with"
"Jokingly, I sometimes say, we now have customers from Samsung to Starbucks, in fact is it’s actually true and so that is a very big opportunity space"
"This makes for a very long discussion, because we have -- we are now very, very rich in technologies in this domain"
"And this is a domain that has been extremely fractured in the past, and we’re already starting to get I would say very strong positive feedback from the number of CIOs or people that are responsible for the security of software that being able to interact with a company that has longevity and some mass, gives them a better feeling of security that we’re going to be around"
"That’s just another way of saying, there is a lot of work ahead and we are continually integrating capabilities"
But it is after we really understand them well and so an integration is really a two-year to three-year process at many different levels
"Having said that, Black Duck resonates very well with many of our customers and they understand immediately that doing some automatic checks on software that comes in from variety of not always understood sources is a good defense mechanism that they need and so, I think, that we will be well-equipped together with them to drive this area forward"
"We don’t disclose the exact metrics, but we have a fairly good discipline for that"
"But in aggregate, it has been part of how we continue to create value for the company and in that context Black Duck is not an exception"
"Nothing is perfect and I am sure we can always do better, but we do have a long-term experience that has worked out pretty well for us"
Cigital was particularly focused on the financial sector
"At the same time, my mentioning earlier of the automotive sector was interesting, because those people are just as interested in the issues of security and software as anything else"
The other areas that are also highly paranoid about what can happen medical is a good example and you’ve seen some really horrific acts happening there
"And so, I think, over time, no area, no verdict vertical is immune to the damages that can be done by essentially leaving the software doors wide open for hackers"
And so this is going to become more and more a must do everywhere
"But clearly, the sectors that are most sensitive also the ones that have been most attacked"
"And the financial sector, it quickly goes to the bottomline, because the attack means trying to steal money and that brings a very rapid reaction"
"So we are prudent in investing in verticals, because each vertical requires skills, it requires understanding the vocabularies and it requires understanding who to interact with"
"But I think our opportunity space will continue to grow and with is this part of our company broadening, we will put some more effort in understanding what are the best channels to do that, but so far I think we’ve been executing reasonably well"
"And while we have a number of teams that are extremely skilled at this, every case is different and so they take some time"
"And what is also interesting is that as we bring new members to our team, they bring fresh perspective, I like to call it fresh DNA that allows us to shop and how we think about the field"
"To be honest on your TAM question, I sort of read the same reports that most people do and I am equally skeptical if the number reflects any reality, because when you have a very rapidly developing market where there are many, many different, very fractured companies, that typically indicates that there’s a high need and that the need is still not satisfied or still in development and those are actually all positive words, because that’s just coming opportunity, but it also says that adding up whatever these companies have been able to do and then extrapolating this mostly spreadsheet effort"
"And I don’t want to be negative when people are trying to forecast it, because it is important, of course, but from our perspective, right now, the size of the TAM is the least of our issues"
"I think we have open space to run with and our challenge is how quickly can we execute on this, not are there more customers to call on, there are many more"
"So at this point in time, first a big thank you for having reported on us and supporting us during the year"
"Fiscal ‘17 turned out to be a very good year, not only from results point of view, but to most importantly from the perspective of preparing us for the next few years"
And by now it already feels a little old and so we are fully proceeding on like on 2018 and hope to talk to you soon
"As usual, we’ll be available for individual calls in a few minutes"
"Before we get into the segment results and updates that I typically go through, I want to cover our orders for the quarter, which help provide the foundation for the trends that we are seeing as well as of our expectations going forward"
"If you could please turn to Slide 4, which shows our order trends, excluding our SubCom business"
"In Europe and the Americas, orders grew approximately 3% and 1%, respectively"
Please turn to Slide 5 so we can discuss our results by segment and let me start with Transportation
Segment sales exceeded the expectations due to strength in China and Korea
Growth was led by demand from China as the expected expiration of government incentives spurred demand in the quarter
"Turning to Commercial Transportation, our team delivered another very strong quarter against still a tough backdrop"
Oil and gas declined 24% as expected due to the weakened market conditions and we feel that our oil and gas business has now bottomed and expect this business to remain stable at the current level as we benefit from new programs ramping later in the year
"So please turn to Slide 7, so I can talk about communications solutions"
"Quarter one was a solid quarter from the Communications segment, including our achievement of a key milestone in our data and devices business"
"On SubCom, the business declined slightly in the first quarter as a result of program timing"
So let me turn it over to Heath and he will cover the financials
"So now, I will get into our guidance for the second quarter as well as for the full year of 2017. So, if you could please turn to Slide 10 and I will follow up with the quarter two outlook"
"This guidance does include the impact of a stronger dollar, which we expect to be a $60 million headwind to sales and a $0.03 headwind to EPS on a year-over-year basis"
Now if you can turn to Slide 11 and let me cover full year guidance
I believe this is prudent given the uncertainty in the macro environment
"And when you look at the implied trends for first half to second half, please keep in mind the impact of the stronger dollar and the tax dynamics that Heath mentioned earlier and we have some slide details in the back of slide material for your reference"
Then this is offset by $0.16 of headwind from the stronger dollar
"So really, highlighting the strong business model Heath and Tom talked about"
And we expect sensors to grow mid single-digits in total year-over-year
"And as I mentioned earlier, we’ve hit a milestone of improved performance in the D&D business"
"And I do want to say on behalf of the leadership team as well as our 70,000 employees I want to publicly thank Tom for his leadership over the past 10 years"
"So with that, Tom I will turn it back over to you for closing comments"
"When you look at it, the first quarter what was a very strong quarter and it was driven at Asia"
"When you think through the content, it’s broad based"
"It is not one application and I think really when it comes to the perfect content and the share gains, it represents our strong global position that we have throughout automotive"
"But the content along all the trends we have, whether it’s electronification of the car, how the car gets more connected or around the green side of the car, how emissions and electronics get put them on"
"So it isn’t one specific area, it’s really the combination of all the trends we talked to you about"
"So as you know, we produce where our customers consume"
"So when you look at our footprint and a lot of the work that we have done to get our capacity to the right part that Tom and Heath talked about in their prepared comments, we feel very good about where our footprint is aligned with where our customers are"
So we are fairly balanced when it comes to that element
"How the border tax comes out, I think we all have to sit there and wait to see how that does"
"When we sit there today, we like where we are positioned manufacturing wise and we will keep you all updated"
"Clearly, on things and tax related to repatriation, being a Swiss company, that doesn’t really impact us positively or negatively"
"So from that viewpoint when we look at the guidance we gave you, it’s pretty much a steady-state guidance as we think about it"
"What I would say Craig, I think there is a couple of things"
"One of the things, if you look to the quarter, it’s very broad based across all our businesses"
And that’s something you haven’t seen in a while
"I would also say both through our direct customer relationships, I would also say our channel partners you will see some confidence in some of their activity"
The other thing that I would say is – it is across – all orders grew in all three regions
"So there is to your view, some glimmer of I think it shows the background around our markets, but I would also say there is still uncertainty in the macro when you deal with things like the currency rates that while we have capped our back half the way it is from where we guided"
"So when we sit there, I do think you are going to continue to see improvement"
"Clearly, you are going to see improvement in our Industrial and Communications segment as we go through the year"
I think the order trends for some of the comments we made show very strong trends that we are excited about
We did a lot of pruning to get that business focused on applications where we thought we could get paid for the great engineering and serve our customers for that we do
"So I do think there are some positive glimmers of momentum not only in the business, but in the markets we serve"
"So, I do think it feels a little different from the backdrop than it was a year ago or even during certain times last year"
"I know we use the transmission example as one to bring it to life, but it is then brake applications"
"It’s throughout the auto, is where we get those"
So it is much broader than that and probably what we should do is break some of those and there is the life as we talk to investors
I know we have been talking a lot about the transmission example
"That’s why we have confidence that over time, what we do around $60 today, over the next 5 years, we can take up to that $80 range, not only from the trends that we benefit from, but also bringing those integrated solutions to our customers and we become more important to them and serve to many where they are in the world"
"Number one is when you look at our oil and gas business, we basically are seeing stabilization"
"And that stabilization, we are happy to see certainly we hope upside comps as oil moves, but right now, I would say as we see it from the programs we are exposed to is much more around stabilization than I would say any ramp up"
"The other element that I would say when you think about our oil and gas business, it is very much around oceanic oil"
"So pipelines, land-based, we are not strong in that"
"So on that, it is important to understand this is really around offshore oil and gas and the indicators around that are really offshore rigs"
"So where we see things right now is it’s still stable in our guidance, and hopefully, we get some benefit from some of the things that President Trump is talking about that those kick in and help them back to get us little bit more upside in industrial"
"On SubCom, we feel very good about where we are at"
"Similar really, not much has changed since the last quarter"
"Our backlog, we are booked for the – so really when we look at the programs that we win throughout this year, it’s really around 2018. So, 2017 is very locked and loaded"
"Our team is working very hard to execute to the backlog with where we are from an execution perspective and really program – it’s a pipeline of programs that we are quoting and trying to win, it’s still very active"
"So clearly, benefit from cloud applications, not only in SubCom, you’ve heard it in D&D, where we have also had that benefit"
The hyperscale customers and we are getting benefits in both the segments from them
We did inch up the restructuring comments from 90 days ago and largely there is not one item on there that drives it
"And then there are some structural things that we look at and we will continue to be ongoing, I’d say for this year and probably into the early part of next year, just in terms of how organized and the layers within the company"
"So more to come on that, but I think we are sharpening our pencils certainly"
Not all $150 million of that restructuring would be cash charges
There is some things in there that are non-cash that we will talk about later in the year
Intercontec has been a great performance out of the gate
"We are also very pleased with the performance on the medical side, Creganna – well, both of those are well ahead of the deal model expectations and are executed very well"
"And Creganna, we will anniversary here little bit late this quarter, in terms of the fresh full year on our portfolio"
The Medical space has continued to have legs to it
Our expectations around sensors has not changed for the New Year
"The only change we would have to be due to FX, so our expectation has not changed versus where we were"
"I think when you look at it, certainly, we did get impacted in our sensors business by the same thing that impacted our industrial business since we bought Measurement"
And Measurement was very much focused on industrial applications
"What we really get excited about was when we bought Measurement, we basically signed up to scale that and use our go-to-market and take that great Measurement technology into different markets like automotive and to places like industrial transportation"
"And really, those program wins and that momentum there is very strong, that program pipeline is strong"
"But as you know, those programs don’t – one of the day and ship them in three months, they are programs that we have been building out past couple of years"
That’s why we are investing ahead in sensors and part of those programs
"They are not just the sensor element, they are things that also have additional things on them"
So we feel very good that we are leveraging our go-to-market to get those wins
"Certainly, you are not seeing them in the numbers yet"
They are a big chunk order in automotive and they are among many technologies
"So there you amended either temperature, the pressure, they are among many different technologies and in the sensor space the fragmentation around the sensor space, really make to that, you compete against different people not one competitor"
"So we will continue to share those as they ramp, but 2018 will be the year where you will start seeing it in the numbers versus just from our works"
"When you look at it Mark, similar to last quarter, we knew there is this China incentives that was ending at the end of the first quarter"
We expected a slide in China demand that the incentive is sort of phased out throughout the year
"So when we look at the second half, the second half is identical to where we were 90 days ago and if there is more incentives around China, I would expect we would benefit from it, but they are not there yet"
"Tom, do you want to start with that and I will jump in then?"
"Now, when you look at it clearly, we view that as an opportunity"
"When you get into any integration and one of the things that’s great about the business that we have always had is we benefit from electronics trends, but we also get integrated out due to electronic trends"
"Connectors can be integrated out by semiconductors and so forth, but because there are more electronics happening, it also creates in that content opportunity"
"I think when we look at it Steve, it’s really around it creates more opportunity because of the abilities we have and the value we provide to our customers"
"So why as we said there it’s why we get excited about our content in auto being able to grow from the 60 to 80 that we talked about, because what sensors brings to it, how we integrate these things in, I mean we probably aren’t to a turnkey level, but you describe how I think about it, but that integration we provide to allow some way to get to a turnkey level is very important"
"We don’t view its displacement, because we are very close to the architecture of the vehicle and what we do"
And that is a very important factor as people continue to evolve the architecture
"The world that we play in partnering with BOEs and the Tier 1s, both of them are our customers is really what we get excited about why I am so buoyant on the content opportunity"
"I think when you look at it, I think you can always think that we have always a priority towards the components side, but even when you do take Creganna, that is doing more than just a component"
So I think you will see things over time of that can add integration like skills
But I think it will be a balance of both and it will be how does it tie into our strategies in different markets
"I think you have seen move into that with Creganna, but we had more the component they had much more a full assembly and integration capability that we had and that’s one of the things we get excited about the close of our customers and medical wanted that"
"So I think you will see a little bit of a different answer in different markets, but I think you expect a little bit above from us"
"Thanks, Sujal and thank you, everyone, for joining us today"
I believe this quarter's performance continues to demonstrate the strength of our business model with all of our segments contributing
"When you look at our third quarter, we delivered sales of $3.4 billion"
"In our customers broader supply chain, there are supply constraints in certain areas that led to some of our quarter's reorders (8:47) being placed for delivery outside of our fourth quarter, and we have accounted for this dynamic in our guidance for the fourth quarter"
"So let me turn to segment performance, and let me start with Transportation, if you could turn to slide 5, please"
We also expect the benefit from new program ramps as we go forward which will also continue the outperformance due to content versus market
"However, demand in the second half of this year has exceeded our expectations, and has led to some near-term inefficiencies in our supply chain as we make sure we satisfy our customers"
"So if you could please turn to page 7, and let me cover Communications"
Performance was well ahead of the market and included contributions from all three of the businesses
"And let me get into guidance, and I'll start with the fourth quarter"
"And if you could turn to slide 10, please, I'd appreciate it"
"And while we're not providing guidance beyond this fiscal year, I would ask that as you look at your models, you keep in mind our typical seasonal trends as you think about next year"
"And while demand continues to be strong, we historically see seasonal declines in the mid-single-digit range from quarter four into our first quarter"
"Now, let's turn to slide 11, so I can cover full guidance or ramp up and then go to Q&A"
Our guidance relating to SubCom is being maintained that we're going to grow high-single digits in that business
"Lastly, before I go to Q&A, I want to close by thanking our employees all around the world for their continued strong execution and commitment to our customers"
"So, with that, Sujal, let's open it up for questions"
"But let me take it because it is something what we think about our Transportation business model, first it always starts with a global picture"
"So it is along all three dimensions both with where safety applications go, certainly the emission and the green go and also around the connected"
"And what we feel very proud of if you went back five years ago, our content per vehicle in a car was around $50. Today, it's well over $60, and we with the programs that we are winning, we see that content momentum continuing to increase"
"And I always do think, Shawn, it's important to make sure when you talk EV about – close to 90 million cars are made in the world, and today, there's about 4 million that are electric vehicles whether it's pure electric or plug-in hybrid, et cetera"
"So, what's really – what we like about that is you do have your emission regulation to drive that increase, but when you sit there, we see the opportunity to that type of level to quadruple of the amount of electric type vehicles over the next five years"
"And when you sit there, that really comes down to the energy management that gets into the harsh environment"
So the whole environment that you have there really plays to our strength of our engineers and how we have to work with our customers to really make this volume grow
"When you think about from a content, on a traditional combustion engine, due to the trends I just talked about, what occurs on that combustion on a model, we typically get about 1.5 multiple of content to a hybrid and then about 2x content increase on a pure electric"
"So if something has $60 today of content on a vehicle, an opportunity to get closer to $100 on a hybrid and you could go up to basically $120 on a full electric is the simplest way to think about it"
"I would guess it's a fair question, but really what it is, is what we're seeing is in certain parts of the supply chain, you see this in some areas and so forth as lead times have expanded, we've seen some customer behavior place orders now that are a little bit more extended"
"So when we typically think about our orders, our orders are typically pretty current"
We typically have orders that are for the current quarter or further out
I just think there will be things that will smooth out over time
"I would say when you take our lead times, collectively, yes, they're pretty normal"
"Let me take that, and I think when you think about North America automotive, I want to take a step back and frame global automotive first"
"We have to realize there's 90 million cars, plus or minus, made on the planet and 17 million of those cars are made in the United States"
"So I do think we have to remember, 50 million of the cars made in the planet are in Asia, and well in the mid-20s are made in Europe"
So we have the same content trends but the size or sensitivity is only about $800 million of total TE
"So, I think about it, I think it gets a little bit too much press when you think about TE versus our great global position we have in automotive"
"So, certainly we won't want to see that, but it won't be a big thing in the big picture of TE"
"On sensors, your second question, when we sit there our turf momentum that we talked to you about in many quarters is continuing"
"And what we really appreciate is that the programs that we're winning across the sensor portfolio that we got with mesh (39:40) the wins we're getting with our customers are across humidity, pressure, force, position, et cetera"
So I think it does show the momentum that we really have strength in the automotive with our great sales team and go-to market resources
"I think when you think about SubCom, you're right on"
"When you think about the customer dynamics versus where they were 5 to 10 years ago, it's clearly a customer dynamic that you actually have the real user relay to the business model doing it"
"When you think about it, this year we're going to be a little bit below $1 billion, and I think as you look into next year, I think our fair assumption is sort of keep that flattish because we do get to a level of capacity constraints as well as have orders that are coming in and the routes we're building"
"I think as we sit there, some of the things that we continue to think through is what are the next routes to those customer needs, how do we schedule that"
"So, it does not feel to us that you would have the trough cycle we've had in the past when you had customer dry up or customers be impacted by financing cycle because these customers do have capital and do not need capital markets"
"So we're still in the middle of what trough is, but it still feels like a business that the trough is much higher"
"I think it begun probably in the $700 million to $1 billion range, is what we've been telling people, but I would say we're still trying to figure that out"
"So, let me take it from what we're seeing through our channel partners because when you go outside of Transportation and you're into our Communications segment excluding SubCom as well as our Industrial segment, you do have about 40%, 50% of those businesses go through distribution"
"What we're seeing, we're seeing right now through our channel partners, they're having point-of-sale out that's pretty much high-single digit and their inventory has been very flat"
So we don't see inventory building up in the channel and staying very consistent with where it's been
And the order rates that we're having from our channel partners were pretty similar to our company average in a low-double digit
"So, the dynamics we're seeing through distribution, I would say, are consistent overall"
We're not seeing inventory getting ahead of itself
"We'll guide, Matt, when we get to our first quarter call"
"So, I just think some observations I would make as we exit there"
"I talked about, certainly, I think with what we're seeing, we would expect a seasonal coming out of the quarter four and the quarter one"
And I think we've been very clear that we think we can grow mid-single digit in it
"I think when you get into the industrial markets, I see them improving"
"So I think sort of where we're running right now, our strength in the medical market certainly what we're seeing along factory automation applications which is real demand when we see it with the servos, the drives, the robotics"
We're seeing that and we're winning in those applications
We talked about being a mid to high single digit grower
"I think SubCom, back to Joe's question, I think I would think about that being flat next year"
"And then in D&D and appliances, I think you would have things that would be closer to where those markets are, after a really hot year"
And we'll give you our formal guidance when we talk to you in November
"But that's just, as you all think about it maybe some ways to frame it, based upon what we're seeing here without formally guiding"
"Jim, when you look at – it's Terrence, I think there is two pieces to it"
The biggest piece is the efforts we've done over the last three years to get that business focused on high speed and move away from the consumer device base primarily
"Well, just to make sure what I said maybe I wasn't clear, when we look at that, it's just our orders have been placed on us because people are worried about the extended supply chain, and we were impacted by that"
"On the items that Heath talked about, maybe around Transportation, it's not related to passives"
"This would be base metals, some plastics, things that we actually use on our manufacturing that because our demand was higher, certainly a good problem to have, and it has created inefficiencies not only in the extended supply chain, but also bringing in our factories, we had to do more changeovers to make sure we didn't disappoint our customers, which we're always going to do"
"China auto as we spoke early in the year was extremely strong back in that first quarter as the incentives were benefiting, and you saw it in the registrations"
"What's been nice is, China auto is sort of have played out as we expected"
"It was a little stronger in the first half, but as it worked down post the incentive, it's been in line with what we have expected"
"And the other thing that's very nice to your point, you're starting to see registrations turn positive, and what we've also seen is that dealer inventories are back to normal levels in China around – we typically like to see them around 40 days and that's where they're at"
"So, very positive on it and it's actually nice that it's come in line with how we expected"
"On Subsea, I think when you look at it, when we talk about it historically, it would be – it has a benefit in an up cycle SubCom and if you went down the trough, how you look at it"
It is a very strong business model from an ROIC no matter where you are
"So, I think you can think about it a little bit more linearly"
"For any of you who missed the release, you can find it on our Web site at ti"
"This call is being broadcast live over the Web, and can be accessed through our Web site"
"As usual, Kevin March, TI's Chief Financial Officer is with me today"
"Also with me is Rafael Lizardi, who will become our Chief Financial Officer, February 1st"
"Rafael joined TI in 2001, and was named Vice President in 2010, followed by Corporate Controller in 2012. He holds a Bachelors degree in Electrical Engineering from the U.S"
"Military Academy of West Point, and Masters in Business of Administration from Stanford University"
"As you know, Kevin, who has been our CFO for 13 years, plans to retire later this year"
"During his tenure as CFO, TI's free cash flow per share has grown in average of 13% annually"
"Our dividend has increased by a factor of 24%, and our share count has been reduced by 42%"
Kevin will continue to be with TI until October 2017 to transition his duties between himself and Rafael
TI is clearly a better Company because of his leadership
"I worked with Rafael for the past decade, and look forward to continue to work with him in his new role as CFO"
"With that, before I review the quarter, let me provide some information that’s important to calendars"
We plan to hold a call to update our capital management strategy on February 8th at 10:00 AM Central time
"Similar to what we've done in the past, Rafael and I will provide some insight into our strategy"
"Now, let's start with the quick summary of our financial results"
The improvement we saw in the third quarter in the industrial market continues
Demand in personal electronics market was down slightly from a year-ago
I'll elaborate more on our end markets in a few moments
"Earnings per share were $1.02, and included $0.14 for items that were not in our original guidance for the quarter"
"With that back-drop, I will now provide details on our performance, which we believe continues to be representative of the ongoing strength of TIs business model"
"In the fourth quarter, our cash flow from operations was $1.4 billion"
"Free cash flow for the trailing 12-months period was $4.1 billion, up 6% from a year ago"
"In 2016, we returned $3.8 billion of cash to owners through a combination of dividends and repurchases"
Embedded Processing increased 6% from the year ago quarter due to processors and micro-controllers
"For the year, in total, Analog was up 2% and Embedded was up 8%"
"These are power, signal chain and high-volume Analog in logic"
"Connected MCU, which merges connectivity and micro-controllers and processors, which is essentially unchanged"
"Communications equipment and enterprise systems were 13% and 6% respectively, both year and to last year, while other was about 4%"
"Operator, you can now open the lines for questions"
"In order to provide as many of you as possible an opportunity to ask question, please limit yourself to a single question"
"After our response, we will provide you an opportunity for an additional follow-up"
"I haven’t but I would certainly can, inventory was even with the Eureco [ph] and decreased by about a half of week sequentially"
And it's still running at around four weeks in the channel
And I just also have a reminder that that number benefits because of our consignment programs that we have in place with our distributors
"Yes, so I think if you look at year-over-year by end market, personal electronics was down slightly due to mobile phones"
"So, if you back out mobile phones the actually personal electronics was up slightly, so that was the main reason that we saw that"
"And that weakness in mobile phones was not just inside of HVAL, but you've saw that to a lesser extent inside the Power"
I'll just add Stacy as a seamless plug for our capital management call
Rafael and I'll cover more that detail in our capital management call
"Stacy, let me just add to that that are -- for looking at next year our commitment, our capital management strategy and the discipline execution of that strategy remains unchanged"
Our target is to return all of our free cash to the owners of the Company
"Yes, I think if you look for -- look at it for the full year, it decreased 3% year-on-year"
And we expect kind of going forward that we would be somewhere in a mid-single digit decline
"There is seasonality inside of the other business it's driven primarily by calculators, they have a very strong seasonality due to back to school and then we also have royalties inside there that can choppy every once in a while"
"So those are the types of things, but overall when you look at much like this year we saw a 3% decline just probably similar to what we would expect to see going forward"
"Ambrish, actually, if you look at the actual numbers I know you are using the rounded numbers that we've gave you"
"Yes, it included several agreements with the several different cross licensees, but the part of that was a sale of some IP assets, and that was recognized and restructuring other lines"
"On an ongoing basis, it tends to be multi across license agreements"
"So, we would expect about $20 million of annual benefit for the foreseeable future as a result of agreement to these new intellectual property contracts"
It's a roughly $20 million a year annual benefit going forward
Again please plan to join us for our capital management call on February 8th at 10 AM Central Time
"Over the last 12 months, we have invested $1.4 billion in R&D, an important element of our capital allocation"
"Embedded Processing was 29.9%, up from 25.7% a year ago"
"Net income in the first quarter was $997 million or $0.97 per share, which included an additional $0.08 discrete tax benefit that was not in our original guidance"
"Let me now comment on our capital management results, starting with our cash generation"
Cash flow from operations was $795 million in the quarter
"Inventory days were 132, consistent with our long-term model of 105 to 135 days"
Capital expenditures were $127 million in the quarter
"On a trailing 12-month basis, cash flow from operations was $4.76 billion, up 9% from the same period a year ago"
Our cash flow reflects the strength of our business model
"In the first quarter, we paid $500 million in dividends and repurchased $550 million of our own stock for a total return of $1.05 billion"
Total cash returned to owners in the past 12 months was $3.82 billion
These combined returns demonstrate our confidence in our business model and our commitment to return excess cash to our owners
"Outstanding share count was reduced by 1% over the past 12 months and has been reduced by 42% since the end of 2004, when we initiated a program designed to reduce our share count"
"In fact, we have reduced shares every quarter year on year for 52 consecutive quarters"
Our cash management and tax practices are fundamental to our commitment to return cash
This onshore cash is readily available for multiple uses
"Before moving to Q&A, there are three changes that I want to explain to help you better understand our first quarter results and our second quarter outlook"
"The first is to remind you that in the fourth quarter of 2016, we adopted a new GAAP standard that impacts the accounting of taxes for stock-based compensation"
"To help you model the tax rate and discrete tax items, I am sharing the quarterly assumptions and their impact"
We will continue to report how our results differ from our guidance just as we did this quarter
"To start with, our operating tax rate for 2017 is estimated to be about 30%, unchanged from previous guidance"
This operating tax rate assumes no discrete items and it's what you will need to use as a starting point for your longer term models
"Next, we are assuming discrete tax items of about $30 million, $20 million and $10 million in the second, third, and fourth quarters of 2017 respectively"
"Therefore, the effective tax rates which include discrete tax items translate to about 28%, 29% and 30% in the second, third and fourth quarters respectively"
These are the quarterly effective tax rates you should use for your 2017 models
"If you do the math using these numbers, you will get an effective tax rate of 27% for the year"
"I advise you not to use 27% in any quarter as the size of discrete tax items vary quarter to quarter, particularly in first quarter"
We will post a chart summarizing our assumptions for these discrete tax items as well as the retrospective impact of this new standard on our website at ti
Hopefully providing these discrete tax item assumptions will be a good start in dealing with this new accounting standard
A chart summarizing these changes and their retrospective impact will be available on our website The last change is also effective first quarter of 2017 and impacts how we handle royalties
"They were about $30 million in the first quarter of 2017, about what they were a year ago"
We expect royalties to continue to run generally at about this level for many years into the future
"I'm hopeful that spending some extra time talking through these accounting details will help you in understanding our results Now to wrap up, we remain focused on growing free cash flow per share over the long term and investing to strengthen our competitive advantages"
We believe our first quarter results continue to demonstrate our progress
And that's exactly what we've been doing for the last couple of years
"And in fact, on a trailing 12-month basis, we're just below that"
"So as you think forward, you should model us along those lines"
"If you're thinking kind of on a tactical level first to second, I would remind you that second quarter does have three months of higher pay and benefit raises versus only two months in first quarter"
"So you may have some of that played in kind of similar to what happened last year, maybe a little less than that"
"Yes, we are – well, I'll answer our inventory days and then I'll let Dave comment on the disti channel"
"We looked at – we're always considering options and looking at things, but it has to be an opportunity that is focused on industrial, it's focused on automotive, catalog type of parts, Analog catalog"
So it has to be a good strategic fit from that standpoint
But then the other component that has to be there is that the numbers have to make sense
"So when we have both of those combinations, then we are willing to move forward on considering that further"
And that's what we're focused on industrial and automotive
"In fact, it's 40% less at the chip level than on 200-millimeter"
"Well, I'll give you some color and then I'll let Dave chime in"
"But, we think of our strategy, as stated in the capital management strategy for many years, is that we want to add capacity well ahead of demand"
"So we're thinking longer term, 10, 15 years out when we're making capacity decisions"
"So if you do that math on a sequential basis, you'll get somewhere close to where you need to be"
Let me address the second part of that question first
"That's clear, we've been focusing on industrial and on automotive"
"On your first part of your question, I would take you back to my earlier comments"
"We like, our stated goal or model is 20% to 30% OpEx"
"com, and a few other things that help us build those competitive advantages"
"So OpEx 20% to 30% in stable times, in the bottom half of that, so 20% to 25%, and we have been running like that for now 27 months"
So you should think about that way when you're modeling our OpEx
"Over the last 12 months, we have invested $1.5 billion in R&D, an important element of our capital allocation"
Net income in the third quarter was $1.29 billion or $1.26 per share
"Let me now comment on our capital management results, starting with our cash generation"
"Cash flow from operations was $1.72 billion in the quarter, up 18% from a year ago"
Capital expenditures were $186 million in the quarter
"On a trailing 12-month basis, cash flow from operations was $4.82 billion"
Our cash flow reflects the strength of our business model
"As Dave mentioned already, in September we announced we will increase our dividend by 24% and also increase our share repurchase authorizations by $6 billion"
"Our quarterly dividend went from $0.50 per share to $0.62 per share, or $2.48 annualized"
This is our 14th consecutive year of dividend increases
"And over the past five years, we have increased the dividend by a compounded average rate of 24%"
Our total outstanding repurchase authorization was about $10 billion at the end of third quarter
"For the third quarter, we paid $495 million in dividend and repurchased $650 million of our stock, for a total return of $1.15 billion in the third quarter"
"Over the last 12 months, we paid $1.99 billion in dividends, or about 47% of free cash flow, evidence of their sustainability"
"Outstanding share count was reduced by 1.5% over the past 12 months and has been reduced by 43% since the end of 2004, when we initiated a program designed to reduce our share count"
Total cash returned to owners in the past 12 months was $4.32 billion
These combined returns of dividends and repurchases and our recent announcement to increase the dividend and share repurchase authorizations demonstrate our confidence in our business model and our commitment to return excess cash to our owners
This is consistent with our long-term objective to have onshore cash readily available for multiple uses
"Inventory days were 119, up 1 day from a year ago and within our expected range"
Our expected annual operating tax rate for 2017 continues to be about 31%
"For fourth quarter 2017, we expect our effective tax rate to be about 29%, which includes about $20 million of discrete tax items, up from our previous guidance of $10 million"
This is the rate you should use for your model for fourth quarter
"For 2018, we're providing you with our quarterly tax rate expectations for both the operating and effective tax rates"
You can find this detail on our Investor Relations website under the Financial Summary Data section
"Now to wrap up, we remain focused on growing free cash flow per share over the long term and investing to strengthen our competitive advantages"
We believe our third quarter results continue to demonstrate our progress
"Yes, Adam, thanks for giving me opportunity to talk about that"
"And the difference is higher working capital, particularly accounts receivables and tax payments"
"If you look at the accounts receivable from 3Q 2015 to 3Q 2016, that actually drained whereas from 3Q 2016 to 3Q 2017, it built"
So that is a source of cash in one case and a use of cash in another case
"But, and in the case of the tax payments, we had a higher, disproportionately higher tax payment in the most recent comparison versus the previous trailing 12-month comparison"
"So we have said that in a stable environment, which we are, we can run in the bottom half of our expectations of 20% to 25%"
"So we've been running at about 22%, so that's well within that"
"So in R&D of course we're focusing on industrial and automotive, because those are the best markets"
"com and demand creation just to continue building on our reach of channels, reach of markets, competitive advantage that we have talked about"
"Before we go to the next caller, I'd like to just make a comment on the previous question on working capital"
"I want to stress that while our accounts receivables increased in that last comparison, the delta days sales outstanding actually decreased by 1 day"
So it's at 34. So that just goes to show you how healthy the account receivable balance is
What I would tell you is that generally what we suggest and what we recommend to analysts and investors to think about our fall through – in the 70% to 75% range
"But that is over the long haul, over a relatively long amount of time"
"In any one quarter, that fall through can be a little different"
"Now for example, in the comparison versus a year ago, which arguably, I would argue is more relevant as it has more time obviously in between, that was close to an 85% fall through, right"
"But at the end of the day, the main objective here is to grow free cash flow"
"We think that is – we believe that is what really drives value for the owners of the company, so and then return all that free cash flow to the owners"
So that's the key message that the core objective that we're trying to achieve
"And as I mentioned earlier on an earlier question, on a trailing 12-month basis, which is how we think is appropriate to look at, is, came in at 22%"
"So it's trended a little down over the last few years, but it is well within the bottom half of our expectations of 20% to 25%, which is our expectations when things are stable, which they are now"
"And that's over the long haul, right, not in any one quarter"
"As of March 31, 2017, the company maintained total assets of $2.3 billion and total liabilities of $3.5 billion"
"Assets included $1.8 billion of cash, cash equivalents and marketable securities, of which $316 million were held domestically, with the remainder held abroad"
The sequential decrease was primarily a result of lower marketing spend in the first quarter compared to the fourth quarter
"This compares to $0.85 in the first quarter of 2016 and $0.92 last quarter based on 131.6 million and 125.5 million weighted average diluted shares, respectively"
"As a result, we will begin to use a 25% non-GAAP tax rate when reporting second quarter 2017 non-GAAP results"
"Operating cash flow for the first quarter was $148 million and free cash flow was $139 million, compared with $150 million and $143 million, respectively, for the first quarter last year"
"Dilution related to the convertible debentures was 21.3 million shares based on the average share price during the first quarter, compared with 21.1 million for the same quarter in 2016 and 20.6 million shares last quarter"
The share count was reduced by the full effect of fourth quarter 2016 repurchase activity and the weighted effect of the 1.8 million shares repurchased during the first quarter
Capital expenditures for the year are still expected to be between $35 million and $45 million
"And cash taxes for the year are now expected to be between $20 million to $30 million, changed from the $15 million to $25 million range provided on our last call"
"As previously mentioned, the majority of expected cash taxes in 2017 are foreign, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures"
"As we said last quarter, these convertible debentures are an important part of our capital structure, and our intention, based on current conditions, is to not redeem these debentures as they become redeemable in August of this year, which will allow these cash tax benefits to continue to accrue"
"The financial guidance provided reflects the completion of our iDefense asset sale on April 1, 2017. In summary, the company continued to demonstrate sound financial performance during the first quarter of 2017. Now, I will turn the call back to Jim for his closing remarks"
#NAME?
"The reason behind that is partly because Q4 was so high, we had a large amount of marketing spend going into the market in Q4. And then, with regard to our marketing spend this year, the timing of our marketing activities are more heavily weighted toward events later in the year than last year"
We're not disclosing the sale proceeds from iDefense
"We have three of the transliterations in market, two in Korea and one in Japan"
"At this point, we don't have any additional details on any additional launches"
"In China, we are still going through the licensing process to operate our Chinese IDNs, but no additional details to share at this time and we'll provide more information on these and future roll-outs as appropriate"
"The 10-year note issuance, which totaled $550 million, is scheduled to mature on July 15, 2027, and carried an interest rate of 4.75%"
"As this offering closed in early July, our second quarter ending balance sheet does not reflect the net proceeds from this issuance"
"As of June 30, 2017, the company maintained total assets of $2.3 billion and total liabilities of $3.5 billion"
"Assets included $1.8 billion of cash, cash equivalents and marketable securities, of which $269 million were held domestically with the remainder held abroad"
"This compares to $0.91 in the second quarter of 2016 and $0.96 last quarter, based on 130.6 million and 124.5 million weighted average diluted shares respectively"
"Operating cash flow for the second quarter was $181 million and free cash flow was $171 million, compared with $167 million and $161 million respectively for the second quarter last year"
"Dilution related to the convertible debentures was 22.5 million shares, based on average share price during the second quarter, compared with 21.9 million for the same quarter of 2016 and 21.3 million shares last quarter"
The share count was reduced by the full effect of first quarter 2017 repurchase activity and the weighted effect of the 1.7 million shares repurchased during the second quarter
"Capital expenditures for the year are now expected to be between $40 million and $50 million, changed from the $35 million to $45 million range provided on our last call"
And cash taxes for the year are still expected to be between $20 million and $30 million
"The majority of expected cash taxes in 2017 are foreign, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures"
"As we said in prior calls, these convertible debentures are an important part of our capital structure, and our intention based on current conditions is not to redeem these debentures as they become redeemable in August of this year, which will allow the tax benefits to continue to accrue"
"In summary, the company continued to demonstrate sound financial performance during the second quarter of 2017. Now, I'll turn the call back to Jim for his closing remarks"
"The only other point I'd put on that, Rob, is as you saw in the first quarter, we had also good demand coming out of the U.S"
"During the quarter we purchased some additional software licenses for the core business, and we also had slightly higher legal fees in the quarter"
"But again, on a non-GAAP basis, we were pretty much flat"
"And compared to last quarter, which was a similar amount, and year-over-year, I believe it was $99 million a year ago quarter versus $100 million there"
"We did have a little bit higher stock-based compensation in the quarter on a GAAP basis, and that's really a function of two areas"
"And then we also, as a senior management team, do have some longer-term incentive programs, and as we continue to execute on our plan and deliver on the results over and above some of the goals that were set, we do have some accelerators that get accrue there as we continue to execute"
"But again, from a GAAP perspective, we had a little bit more stock-based compensation"
"And as I said, we had a few other nits and that in the quarter"
"But in general, very consistent with the year-ago period as well as sequentially"
"As of September 30, 2017, the company maintained total assets of $2.9 billion and total liabilities of $4.1 billion"
"Assets included $2.4 billion of cash, cash equivalents and marketable securities, of which $757 million were held domestically with the remainder held abroad"
"This compares to $0.93 in the third quarter of 2016 and $1.05 last quarter, based on 127.7 million and 124.0 million weighted average diluted shares respectively"
"Operating cash flow for the third quarter was $175 million and free cash flow was $153 million, compared with $171 million and $165 million respectively for the third quarter last year"
"Free cash flow in the third quarter was lower, partially due to a timing some capital expenditures"
"Dilution related to convertible debentures was 24 million shares, based on average share price during the third quarter, compared with 20.8 million for the same quarter of 2016 and 22.5 million shares last quarter"
The share count was reduced by the full effect of second quarter 2017 repurchase activity and the weighted effect of the 1.5 million shares repurchased during the third quarter
"Capital expenditures for the year are now expected to be between $45 million and $55 million, changed from the $40 million to $50 million range provided on the last call"
And cash taxes for the year are still expected to be between $20 million and $30 million
"The majority of expected cash taxes in 2017 are foreign, primarily because of domestic tax attributes, including cash tax benefits from our convertible debentures"
"As we said in prior calls, these convertible debentures are an important part of our capital structure, and our intention based on current conditions is not to redeem these debentures, which will allow the cash tax benefits to continue to accrue"
"In summary, the company continues to demonstrate sound financial performance during the third quarter of 2017. Now, I will turn the call back to Jim for his closing remarks"
"Total C2C cross-border principal increased 1% or 2% on a constant currency basis, while principal per transaction declined 2% or 1% in constant currency terms"
The 1% cross-border principal increase was an improvement from the 1.5% decline we reported for the 2016 full year
"Last month, the World Bank updated its cross-border remittance principal estimates, and its data indicates the overall market declined 1.2% in 2016, following a 2.7% decline in 2015. Factors cited by the World Bank for the decline last year included low oil prices, weak economies in the Gulf states and Russia, reduced flows from Europe to Africa and the translation impact of the stronger U.S"
"The World Bank is projecting an improvement in 2017, driven by stronger global economic outlook"
"Mix had a negative impact of approximately 2% in the quarter, while pricing had a positive impact of approximately 2%, primarily driven by price increases implemented last year, and that remained in place"
We continue to view the current pricing environment as stable
"Turning to the regions, we implemented a new regional structure this quarter in our C2C segment due to some leadership and organizational changes"
"Changes include a few modifications in the country composition of the segments by geographic regions, which we detailed in an 8-K we published last week and are also available in our 10-Q"
"We believe this new methodology provides you with a better understanding of where our business is originated around the world, and how economic trends and other macro events may affect our results"
We have provided the 2016 historical quarterly regional results using this method in the filings I just mentioned
"So, turning to the regions, regional results for the first quarter, I'll be referring to constant currency movements as I discuss individual country contributions to the regions' results"
"outbound, particularly to Latin American countries, continue to be a strong grower"
"However, our Mexico business did continue to grow faster than the market based on the latest Banco de México principal and transaction data for the first quarter"
The regions' results were also impacted by reduced sends from these countries into India
Total inbound business to India was down just over 20% in the quarter
Business originating in the Latin America and Caribbean region was very strong
"electronic businesses, which were partially offset by declines in U.S"
"The higher tax rate in the quarter was due to the impact of changes in the internal ownership structure of certain of the company's international subsidiaries, which were implemented to help address upcoming regulatory changes in Europe"
"The first quarter negative impact is expected to be largely offset by lower taxes of a comparable amount over the remainder of the year, resulting from the structural changes"
Depreciation and amortization for Business Solutions was approximately $11 million in the current quarter compared to $13 million in the prior year period
Turning to our cash flow and balance sheet in the first quarter
"Cash flow from operating activities was $86 million, which includes $151 million of payments related to the settlement with the Federal and state governments announced in January, and approximately $19 million of WU Way-related payments"
"Excluding these items, cash flow from operating activities was $256 million in the quarter"
The remaining $440 million of legal settlement payments will be made in the second quarter
Capital expenditures were $26 million in the first quarter
"During the quarter, we issued $400 million of five-year notes with a coupon of 3.6%"
"We also returned $308 million to shareholders, including $83 million in dividend and $225 million of share repurchases, which equated to approximately 11 million shares"
"The outstanding share count at quarter end was 472 million shares, and we had $1.2 billion remaining under our share repurchase authorization"
"Based on the first quarter results and our recent business trends, we are affirming our full year outlook"
"Our outlook include savings of approximately $20 million from deficiency actions included in the WU Way initiatives in 2017, and we expect approximately $25 million of additional savings in 2018. In addition to the impact from the subsidiary ownership structure, we also expect other discrete tax benefits in the fourth quarter, which we're anticipated in our original outlook"
"For the full year, the GAAP effective tax rate is still projected to be approximately 11%, while the adjusted rate is expected to be approximately 13%"
GAAP cash flow from operating activities is expected to be approximately $200 million in 2017 due to the impact of the $591 million payments related to the settlement agreement with the U.S
and State governments announced in January to be approximately $100 million of anticipated final tax payments related to the previously-announced IRS agreement in December 2011 and the WU Way-related payment
"Excluding these items, we expect operating cash flow of approximately $1 billion"
"So, to summarize, the first quarter business performance was solid, strategic progress continued and we are on track with our full-year outlook"
Most of that benefit will hit us in the second half of the year
"And then, based on our current forecast for foreign exchange rates, we think that FX impact will be a little bit less in the second half of the year, so you get a pickup on those items"
"We had somewhat of a marketing benefit in the first quarter, and I expect that we'll get back to our normal averages for marketing spend, there's some timing in the first quarter"
"It's the way – in our consumer bill payments business, we're seeing – we had couple of things happening over the course of the last year"
And the great thing about India is that we have fantastic retail coverage
"I mean, we had planned on – obviously our outlook for the full year has not changed, so 11% and then 13% adjusted"
"So, we had planned on these activities for the year"
"The timing in the first quarter was less under our control, I would say"
"And so, we're going to get those same benefits the rest of this year, because we had planned on it"
"We've basically accelerated into Q1. And then, the second and third quarters should be closer to our full year average tax rate"
"And the fourth quarter, I would expect to be substantially lower because we have a number of different discrete benefits that we had already planned on, plus this timing benefit"
"So, it should be substantially lower than you'll see for even the second and third quarter as we go into the fourth quarter"
com customer is something we spoke about last year
"We knew that we were going to lose it at the end of last year, which is what happened"
"And so we're going to see that grow over impact at least through the first three quarters of this year, a little bit in the fourth quarter"
"So you'll see a three-point impact from that as we move through, but our goal is to grow the business faster than what we achieved in the first quarter"
"So I would not model minus 3% in that business, that's not our objective"
"The C2B business has been growing in the low double-digit range for quite a long time now, the last several years"
"It's being driven by a couple of different things, the Argentina cash walk-in business where consumers are paying bills at retail locations, and then our electronic payments business here in the U.S"
And we're very excited about the opportunities in that business
"No, it's a longer-term impact on the tax structure"
"As you know – as you may know, we own a bank in Austria"
"And so, we've combined or we're going to be combining those organizations to provide the right type of licensing structure ultimately"
So that's the underlying activity that we're driving at
"I mean, we're always looking for opportunities to optimize how we spend there"
"And over time, the composition of how we spent that money has changed, right? And as we've completed many of the Southwest Border requirements, that spending has gotten less over the last couple of years, but it's migrated to other programs"
"So, we're always putting technology in place and we want to automate those things"
"Our first priority this year really is to address the requirements that we have under the settlement agreements, and that's the reason for the higher spend this year"
And we'll look to stabilize as much as we can over time
"Well, Ashwin, I believe that the Western Union Business Solutions should have a better performance than we reported in Q1, I agree on that with you"
"I think, the global economic environment, when that improves, when more export-import connection happens, especially on the small and mid-sized business entities, that will improve given how linked that sending money and receiving money is with importer and exporter"
"It's more really a focus on the sales getting new customers, where its liking is that I understand more is on the foreign trade part – foreign exchange trade part on the hedges and on the forwards"
"However, the payments part, like the invested (42:11) payments, like NGO payments is doing very well"
How you pay your builds or cross-border builds during (42:18) performance very well
"However, on the trading part, foreign exchange trading part, we do need some more focus here"
"And I know the team is doing a little – putting also Wu Way activities around that's looking really how we can improve the part generally, this part has to improve, and I believe that over time it will improve"
"You know our business very well, Ashwin, depending on the corridor"
"We do have corridors, which are higher FX, zero fees"
"It's really like an airline management where you fly from one destination to another destination, which seats you for use, and that's exactly what we are doing with our teams"
"I think, in the portfolio management, the team is impressive"
"It's really looking at every corridor, understanding the customer needs on FX side"
"We can be even better there, having the right balance between foreign exchange and fees, but our business model is built mostly on fee and less on FX"
"But there is, I believe, opportunity to see the customer need and go after that"
"Yeah, our cash balance was higher at the end of the first quarter than we've had for some time"
And that's in anticipation of making these final payments for the legal settlements
"By the end of the year, we should be at a lower level of cash"
We currently have about half of the cash at the end of the first quarter U.S
"On an ongoing basis, we generate about 75% or so of our cash flow outside the U.S"
And that includes any repatriation that we may do back to the U.S
"I mean, we're excited about the Facebook announcement and the potential there"
"Our customers really don't have to leave the messenger environment to do a transaction, but for us it's just another channel to allow customers to do a transaction with us, right"
"Whether it's Viber or WeChat or Facebook, we just want to provide as many avenues as possible for customers to be able to do a transaction with us"
"On Facebook specifically, whether they come through Facebook or whether they come to us directly on wu"
"com, we're really indifferent because the economics of that transaction are about the same for us"
"So, we'll see – it's early stages, but we'll see how that kind of transpires"
"The only other piece that we have there is, we have a refinancing to do of another $500 million maturity at the end of this year"
"So, we will likely pre-finance that before the December maturity"
"But by the end of the year, we should be at about where we were for the first quarter, assuming nothing else changes"
"And for the full year, I would expect this to be at the higher end of our 3.5% to 4% range"
"And in the last couple of years, we've been closer to 3.5%"
"I would expect to be at a more full run rate, but we're going to keep looking for more opportunities there"
"So, right now, we plan for about $20 million this year, and then incrementally $25 million next year, but we're going to keep looking for more opportunities for savings"
"Don't forget, I mean, I said we are – just launched 40 countries, it's only 40 countries to send money to 200 countries"
"And combining digital with retail, it's the secret sauce, different customer use cases"
"So, I'm quite optimistic, and the teams are also optimistic on that"
Still 80% of the customers didn't use the recent – retail money transferred for the last
"Total C2C cross-border principal increased 4%, or 2% on a constant currency basis"
"Principal per transaction increased 1%, or was flat constant currency"
"Mix had a negative impact of approximately 1% in the quarter, while pricing was flat compared to the prior-year period"
"Turning to the regional results for the quarter, I will be referring to constant-currency movements as I discuss individual country contributions to the region's results"
domestic money transfer business originated at retail locations declined due to price reductions and softer transaction trends
Weakness in the Middle East send markets continued to contribute to the decline
and the Pago Facil walk-in bill payments business in Argentina
electronic bill payments business is the largest component
"We achieved approximately $11 million of savings from the WU Way initiatives in the quarter, bringing the year-to-date savings totaled to $12 million"
"We now expect approximately $25 million of savings for the full year, up from our previous estimate of $20 million"
"Full year WU Way spending is expected to be closer to $95 million, down from the previous estimate of $100 million"
"Foreign exchange hedges in the third quarter had a negative impact of $2 million due to the strengthening of the euro and other key currencies, which compared to a benefit of $12 million in the third quarter of 2016. For the full year, we now expect approximately $5 million in hedge benefits"
The effective tax rate in the quarter was 1.5% compared to 9.6% in the third quarter of last year
"The adjusted tax rate was 3.6%, which compared to 11.7% in the prior-year period"
The tax rate in the quarter reflects discrete benefits related to statute of limitations expirations on certain reserved items
"Our full year tax rate outlook has not changed, as we continue to expect full-year tax rate outlook has not changed, as we continue to expect the gap effective tax rate to be approximately 10% to 11% and the adjusted rate to be approximately 12% to 13%"
Depreciation and amortization for Business Solutions was approximately $11 million in the current quarter compared to $13 million in the prior-year period
"Turning to our cash flow and balance sheet, cash flow from operating activities was $423 million year-to-date"
"This includes outflows of approximately $600 million from payments related to the settlement with federal and state governments and WU Way spending, net of associated tax benefit"
Capital expenditures were $47 million in the third quarter
"During the quarter, we issued $100 million of five-year notes with a coupon of 3.6% and $250 million of floating rate notes due in 2019. We returned $180 million to shareholders in the quarter, consisting of $80 million in dividends and $100 million of share repurchases, which represented 5 million shares"
The outstanding share count at quarter-end was 459 million shares and we had $956 million remaining under our share repurchase authorization
"On the tax items, the approximately $100 million of anticipated final tax payments related to the 2011 IRS agreement are no longer expected to be paid in 2017. In addition, this year's cash flow is benefiting from a tax refund related to prior-year overpayment and other lower than expected tax payments"
"Excluding the impacts of the settlement agreement payments and WU Way spending, expected operating cash flow for the full year would be approximately $1.2 billion"
"So to summarize, we are pleased with the solid business performance in the third quarter"
"So it could be a little bit above or around that range, it really depends on how the spending goes in the fourth quarter"
It's really hard to predict exactly where that will be
"Our third quarter, we grew about 4% in principal, so we'll see where we end up for the year, but we're tracking in terms of at least the third quarter"
"Darrin, we have, as you know, we have thousands and thousands of corridors, so we're always moving pricing in many of those corridors, sometimes up, sometimes down, but on a macro basis, it doesn't translate too much in terms of net change"
"But individually, individual corridors we're moving pricing for sure"
I would say both of those things are benefiting us
"I would say that, you know we're in the 3.5% to 4% range"
But we're also trying to do things as efficiently as we can you know with technology and other solutions
"So – you know we've been stable in that 3.5% to 4% range now for the last few years and you know so it's not – it's a relatively small range as you know, so that's we are still in that range"
And the dotcom business domestically continues to do very well and accelerated slightly actually in the quarter
"I don't have a forecast for the spread, but some of it is continuing from the larger price reductions we had made in Argentina more than a year ago"
"Argentina, Brazil, Chile, the conditions are quite strong there"
"I'd say I think it's mostly timing, we had been messaging earlier in the year that we were under-spending in marketing"
"And so now that's catching up with us, so it's as expected from a couple of quarters ago"
We're launching a number of different programs on the digital side to acquire customers
We're also trying to create awareness at some of our other digital capabilities of paying out into accounts
"Obviously, we have 50,000 locations here in the U.S"
"; Walmart has 4,000. Walmart, what they did most recently was they reduced an already low price"
And so it really remains to be seen on whether an even lower price is going to bring in more traffic into those stores
"If you look at our nation-wide pricing, it's pretty competitive to the other offerings and distribution is very strong as well"
We have not changed our full-year outlook on the tax rate
"So still 10% to 11% or 12% to 13% adjusted tax rate for the full year, which is the same as we gave last time"
"Well, there are three pieces to the North American business that you're looking at"
We saw strong trends similar to what we saw in the prior quarter and that's the largest piece
"Some of it may be related to the hurricanes, but we'll see what that impact was as we get into the fourth quarter"
"It's hard to know exactly how much that was, but some of it may have been from the Hurricanes"
to Mexico is also part of that number and the transaction trends there were a little bit softer as well
"The overall market seems to be a bit softer in Mexico, that seems to be more of the impact"
But obviously we like the fact that we're getting more savings that's positive for us
We want to be 200 countries to 200 countries digital to digital in our wu
"Ashwin, we came into this year expecting at the higher end because of some of the joint settlement agreements and the incremental activities, so the timing of some of those things have allowed us to be at the lower end"
"I mean, part of the reduction – sorry, Ashwin, part of the reason why we are at the lower end as you heard last time, we talked about the Southwest Border activities being completed early"
And so that's something that we had not anticipated at the beginning of the year
So that's one of the reasons and then other efficiencies
There is probably some pricing that's helping us there
"We expected that in the second half of this year, we would start to get some grow-over benefit"
"Key parts of the Middle East started to decline in the second half of last year and then as we go into the fourth quarter, India, the demonetization that began in India in November of last year should start to grow over"
And the Middle East is a key sending region to India and so that should start to help some of the actual metrics in the Middle East and India
So you should start to see a little bit better grow-over impact from that as we go into the fourth quarter
"I don't know where it ranks, but it's still very important to – that's a very important corridor for us, Saudi to India"
"I don't know of its exact ranking, but clearly the top corridor for Saudi is to India"
About two-thirds of our transactions are initiating in our mobile app on wu
"com, about two-thirds of our business is originating on a mobile app and it's even higher in the U.S"
"I mean, it depends on the trends that we see in other parts of our business"
We'll start to see some grow-over benefit as I just mentioned in certain parts of our consumer business
We've continued to see good strong trends in our digital business
"And our bill payments businesses have been doing quite well, both Speedpay as well as Pago Facil"
"Over the long term, probably not, but in the short term, if there are extreme moves in currencies, then customers may change their behavior at times"
"When we saw the Indian rupee weaken some time ago or when we've seen the peso, we've seen a large influx of business into those markets"
So currency moves in the short term can certainly have an impact on consumer behavior
"We have dotcom today originating transactions which largely pay out on retail, this gives us the opportunity to pay out to all debit cards in the United States, and including Mastercard debit card"
"So, we'll have to see, we don't really have any projections to give you on that, because we just, we expect it to launch early next year"
"No, the realized savings this year will be $25 million and we'll have an incremental $25 million next year realized"
So total realized savings next year of $50 million
"So the programs themselves we may continue, but we're not going to have the spending next year, so it's zero"
"Before diving into quarter one results, I want to highlight a few changes we've made to our reporting beginning in 2017. As we previewed last quarter, post the spinoff of Conduent, we have streamlined the management of the business along geographic sales channels and, therefore, now have one reportable segment"
We are at the same time enhancing our disclosures to provide additional insight on our results
"On cash flow, we're providing some commentary around our expectations for normalized operating cash flow after we get past near-term higher restructuring payments and pension contributions"
We believe these reporting changes will give greater context to our results and perspective of our business model
I'll talk more about them as we go through the presentation
"Within our definition of operating income is equity income, which was down year-over-year due to the Fuji Xerox receivable write-off that Jeff mentioned"
"As Fujifilm recently announced, they are reviewing the appropriateness of accounting practices related to certain sales of leasing transactions involving Fuji Xerox New Zealand"
"Our first quarter results included charge of approximately $30 million within equity income, representing our share of the current Fujifilm estimated adjustment for this review"
"The tax rate of 27.5% was within our full-year range of 25% to 28%, and was higher by 6.1 points year-over-year, an approximate negative $0.01 impact year-over-year to adjusted EPS"
"Overall, adjusted EPS of $0.15 was down $0.03 from Q1 2016 driven by the higher tax rate and the Fuji Xerox matter"
"Lastly, we saw better performance in high-end equipment sales, which were down 6.1%, or 3.7% in constant currency, an improvement from the fourth quarter"
It was down 2% in actual currency and up 0.4% in constant currency
"I'll now shift to discuss our key performance metrics, a view which I have already touched on"
"Turning to installs, as expected, color was stronger than black and white"
Signings in the quarter of $532 million were down 6% year-over-year and down 5% on a trailing 12 months basis at constant currency
"With that, we did see improvement in new business signings which were up 1% year-over-year at constant currency"
The last key measurement I'd like to cover is strategic transformation
"We have many projects underway spanning the company and we continue to target $600 million in gross savings for 2017. We took, as anticipated, a fairly large restructuring charge of $120 million in quarter one to position us to achieve our full year gross savings objectives"
"Before moving on to cash flow, I'd like to take some time to cover the trends we're sitting at a high level and how we expect them to play out as we progress through the year"
"Operating cash flow generation coming from continuing operations in the quarter was $190 million, up $103 million year-over-year and free cash flow was $164 million, up $109 million year-over-year"
"As we indicated last quarter, our operating cash flow guidance of $700 million to $900 million will be about $200 million lower this year than normalized operating cash flow of about $1 billion driven by higher restructuring payments and pension contributions"
"Q1 operating cash flow reflected the higher restructuring payment expectations, $60 million versus $21 million in the prior year"
The pension contributions of $23 million were only a small portion of our guidance of $350 million for the full year
"Cash used in financing was over $1 billion and reflected $1.3 billion in senior note repayments and $87 million in dividends, both common and preferred"
The first was the repayment of $1 billion associated with two senior notes that matured
"In addition, in the quarter we exchanged $600 million of certain senior notes due 2018 through 2020 for $300 million in cash and $300 million in new senior notes due 2022 with a fixed coupon rate of 4.07%"
"So, to summarize, overall a positive start to the year with most operational metrics in line with expectations, putting us on track to meet our full-year guidance"
And the two primary items which you mentioned are the higher pension contributions over that period of time being approximately $100 million-plus higher each given year
"And then also, we were going to have higher restructuring payments each of those two years as we were doing our strategic transformation"
We would expect those to normalize and have a $200 million-plus benefit versus to get to a more normalized $1 billion cash flow in 2019 and beyond
So similar to what we said at year-end both 2017 and 2018 would be dampened by approximately $200 million
"We are working continuously to improve our working capital both from an inventory management perspective, managing receivables, payables, timing, et cetera, and we have some specific projects in place to really focus on inventory management, but the primary things impacting the normalized cash flow are the higher restructuring payments this year and next year, and the higher pension contributions"
"As far as your second part of your question regarding the uses of cash, similar thoughts to year-end"
"Given the $700 million to $900 million of operating cash flow we're expecting this year, and our cash on hand on the balance sheet at the end of the year, we projected to have about $1 billion to $1.2 billion in cash available"
"Just to follow-on, I was going to say the same thing"
"We are investing in systems, as Jeff mentioned, the delivery area"
"As far as the Fuji Xerox, just to confirm it is a $0.03 impact in our adjusted EPS, so the $0.15 adjusted EPS does include that $0.03 or $30 million charge, or we would have been say it another way, $0.18 without it"
"Clearly, we did not know anything when we gave guidance back in January about this charge when we were setting guidance for the full year"
"With that said, when you go throughout the year, and we update and we do detailed analyses internally projecting for the rest of the year, there are puts and takes that occur and I'm not going to go through all the details of those but one example of that is we give guidance at the beginning of the year and factor in a certain amount of transaction currency headwinds for the year"
"Updated based upon current foreign currency rates, we see that being a couple of pennies less for the rest of the year and that would be something that we factor in to our updated overall guidance analysis"
"So the $0.03 clearly was not expected; however, it is factored into the full year updated guidance now and when we look at other puts and takes that come into play as we update each quarter end and we're reaffirming the $0.80 and $0.88 and knowing that that $0.03 charge is in the Q1."
We're not going to go into really details regarding the Fuji Xerox matter other than what they have disclosed
Fujifilm put out a press release last week that specifically cited a ¥22 billion receivable adjustment
Fujifilm has stated that they are in the process of an investigation
The ¥22 billion is their current estimate that they put out there
"With that said, as we made in our note in our disclosures that could change, but we are not aware of anything additional at this point other than the ¥22 billion, which we've calculated to have a $30 million impact"
"A couple of things really from a difficult compare perspective, we're expecting a little bit bigger headwind in Q2 from a transaction currency perspective"
"Also, if you're looking at Q1 last year, we had not fully ramped up our strategic transformation, our restructuring process"
"So we now have full ramped-up strategic transformation this year in Q2 and in last year in Q2, so that creates a little bit tougher compare"
"So, with that said, we don't give – we're not giving formal quarterly guidance on adjusted EPS, or anything"
"But I think, historically, if you do the math, Q2 has been around 25% of the full year, and it looks to be in that zone for this year"
"The headwinds are really that transaction currency in Q2 this year, which we do, by the way, expect to moderate in the second half of this year"
I will start on slide 6 with an overview of our financial performance
"As stated last quarter, within our definition of operating income is equity income, almost entirely related to Fuji Xerox, which was down year-over-year"
I should note that equity income in Q2 did not include any out-of-period impact from the resolution of the Fuji Xerox accounting practices review
"It was determined that our share of the final Fuji Xerox adjustment of approximately ¥40 billion was approximately US$90 million, which was higher than the original estimate of $30 million and deemed to be material to our current year financial results"
"Accordingly, we will be revising prior period results, including Q1 when we booked the estimated $30 million charge for that matter"
We have provided in our materials the revisions for the past three years
"Tax rate of 27% was within our full-year range of 25% to 28% and was higher by 8.5% year-over-year, an approximate negative $0.09 impact year-over-year in the quarter to adjusted EPS"
"As I highlighted earlier, the driver of the higher declines in the U.S"
"I'll now shift to discuss our key performance metrics, a few of which I've already touched on"
Signings in the quarter of $643 million were down 6.5% year-over-year and down 5% on a trailing 12 months basis at constant currency
We had strong contributions from renewals this quarter at a renewal rate of 86%
This was more than offset by lower new business signings
The last key measurement area is strategic transformation
"I get a number of requests from investors to expand on some of the actions we're taking under the program, and would like to take a minute to describe a few of the initiatives"
"Within facilities, we are consolidating locations, 79 thus far, with more planned at the balance of the year"
"As an example, we moved our headquarters to a smaller location at favorable terms, resulting in a couple million in annual savings"
"In supply chain, we're negotiating with vendors for better terms and have outsourced activities"
"We've closed five major warehouses and a number of district part centers, which combined will drive around $24 million in annual savings once fully implemented"
"Within IT, we are consolidating vendors in areas like mainframe support, moving to shared environments and leveraging more cloud tools to enable greater customer self-service in areas like billing and collection"
We've reduced spend that layers in a number of areas and we're leveraging more technology to become more efficient in how we get work done
"Before covering cash flow, I'll cover the trends we're seeing in how we anticipate they will play out in the back half of the year"
"Operating cash flow generation coming in from continuing operations in the quarter was strong again at $343 million, up $84 million year-over-year"
"And free cash flow was $322 million, up $101 million year-over-year"
"Cash flow was driven by working capital timing and improvements, including in accounts payable related to the timing of supplier and vendor payments, the impact of lower equipment sales, a benefit to both accounts receivable and finance receivables, as well as the weighting of pension contributions to the second half of this year"
"Through the first half, we have contributed $46 million of a planned approximately $350 million for the full year"
"Cash used in financing was $80 million and reflected $68 million in dividends, both common and preferred"
"As we highlighted previously, a focus area for us in 2017 is getting our capital structure aligned to the new Xerox"
We have made good progress and we continue to look to ways to optimize our balance sheet
"So let me just give some thoughts to you on all the four measures that we give a little guidance on, on the adjusted EPS"
"We're very comfortable with where we're at year-to-date, 13.3% in Q2, first half at 12.2%"
But we're still very comfortable with the 12.5% to 13. 5% range and believe we're set up pretty well for that
"We believe the second half will be better than the 5.4% down at constant currency with once again Q4 being the strongest quarter of the year and Q4 being better than Q3. From an operating cash flow perspective, once again, as I said in my prepared remarks, we're very pleased with where we ended for Q2 at $343 million, $533 million for the first half of this year"
"And I think most everybody knows and I'll just remind everyone the timing of our pension payments we gave guidance towards $350 million in pension payments for the full year, which is still on track, but only $46 million were made in the first half"
"There's also some timing of payables, with payables management that was a help in the first half that won't necessarily repeat in the second half"
"So then after all that getting to your question regarding the adjusted EPS and really, there a lot of factors as you can imagine that go into it"
"Currency, we think based on current spot rates, will be a little bit better than we had expected as far as the headwind at the beginning of the year, in particular in Q4. And Q3 will probably be similar as far as the negative impact to the first half of the year, but Q4 we expect to have a more modest negative impact from a currency perspective"
The Fuji Xerox provision is clearly a favorable item
"And in the first quarter, we took that $30 million hit on that and that was revised $24 million or most of it was revised out"
"So, some favorable items there, but to get to the higher end of the range, a few things"
"A lot of things have got right, but not everything as far as the timing"
"We plan to have – we want to have flexibility, continue to do as much of that as we can"
We want to continue doing that in the second half of the year
"And this, leaving – to answer your question specifically, leaving the lower end of the range opened or not adjusting that leaves you opportunity to be flexible, where opportunities arise in the A4 area"
"And then, one of the bigger things is that, from a tax perspective, we gave guidance range of 25% to 28% for the full year for effective tax rate"
We think that might be lower a little bit with some things you see and maybe in the second half
"But still, it is higher than the midpoint of the range so far this year"
"We thought it was prudent to narrow the range, given half the year is up and we basically removed the top 25% or $0.08 from it"
"As everyone knows, last year we overachieved with respect to the $500 million target and achieved by $550 million"
"In 2016, we stated a goal for $600 million, this year we are very pleased with where we're at year-to-date, and believe we are firmly on track to meeting that target and hopefully exceeding it"
"Which would lead to, obviously, your $1.15 billion, if I'm doing my math right, that we're likely very much on the plus side of the $1.5 billion for the three years when you factor in 2018. But as far as formally giving an updated number, it'll probably be later this year"
But we are very confident in being – hitting the $600 million this year and overachieving on the $1.5 billion
"But to give updated three-year number later this year, we'll give that"
"But it also offsets other headwinds, such as currency"
"Not giving specific guidance as to flat or positive for Q4, but as far as Q4, it's owned"
But we do expect there's a normal ramp from Q3 to Q4 that occurs
"As far as EPS and operating cash flow, once again, there are a lot of variabilities, as you know, that go into operating cash flow"
"And one of them in particular is the pension contributions, and we've said $350 million"
It's an area that we look at closely as far as our funded pension status
And just want to leave things open from the perspective of whether we want to have flexibility for maybe additional funding there
"But yes, normally, all else being equal, you would – you could have a slightly less, actually operating cash flow because taking off the top, but it's not that significant compared to all the variables that go into determining it"
"sales in the March quarter increased for the sixth consecutive quarter to $609 million, up 4% sequentially and up 7% on a year-over-year basis"
Operating income for the quarter increased 6% sequentially to $173 million or 28.5%
Tax rate was 10% for the quarter due to discrete item
Our net income for Q4 was $153 million or $0.57 per share
"Finally, our EPS was $2.32 for the year, a 13% increase over FY 2016. Now, some key points on the balance sheet and cash flows"
"Accounts receivables decreased by nearly $100 million, as we collected last quarter's higher than normal receivables balance"
Operating cash flow was $306 million for the quarter
"In the quarter, we paid $82 million in dividends, and we repurchased 1.8 million shares for $108 million, an average price of $58.45. We ended the quarter with diluted shares at 267 million, which included the impact of 15 million shares from the convertible and the warrant associated with it"
"For a complete explanation of the impact of these instruments on share count, please refer to our convertible FAQ on our Investor Relations website"
"As we have discussed, capital allocation remains a top priority for the company"
"This year, we returned $855 million to shareholders through $333 million of dividends and $522 million of share repurchases"
This total capital return is $90 million more than we returned to shareholders in the prior year
Our board recently authorized an increase to our dividend for the 12th consecutive year
We continue to execute on our share repurchase program with the intention of exhausting our $1 billion authorization over the next several quarters
We currently have $680 million left on that authorization
"In the June quarter, we are expecting sales to be between $600 million and $630 million"
"On end markets, we expect the communications category to be up, industrial and A&D categories is expected to be flat sequentially"
"And, lastly, broadcast, consumer and automotive is expected to be slightly down"
"Finally, our tax rate is expected to be between 12% and 15%"
We will provide full year FY 2018 guidance at our upcoming Analyst Meeting in New York City on May 22. We look forward to seeing you all at that meeting
John William Pitzer - Credit Suisse Securities (USA) LLC Moshe?
So I might frustrate you by not being very precise
And again that's in the context of some of our older data center business not growing as much as we would like
"And in certain cases, our design wins that we've had were slowing down"
"Then with regard to share count, so I haven't been providing detailed share count guidance for the past couple of quarters for a couple reasons"
One is I don't want to kind of signal exactly what we're doing on our buyback
"And the second part is, the complexity of the convert and its impact on our diluted share count is hard to describe briefly"
"So I would though recommend you, CJ, go to our website"
We're going to update what we expect to be the impact on diluted share count from the redemption of the convert in this quarter
"Like I said, it's fairly complex, but we've tried to make it understandable"
"And you will see that it will have a significant impact in this current fiscal quarter, and then because of the way the accounting is done for the share count, it will actually even translate to a further reduction in the next quarter"
"So I mean, I will actually, I'm happy to take a follow-up if there's something specifically you were looking for, but I'm not going to give you a precise share count guide"
"It's generally been on an upward trend as design wins that we have, one in our 28-nanometer generation ramp in"
"As you know, in defense, it's a very, very long-tailed business"
"So given our competitive position and strength of design wins and our continued design wins in large opportunities like Joint Strike Fighter, we feel very good about the business"
"So I think an element of your question, Blayne, was maybe related to whether the applications on AWS are kind of nichy or small or whether there's some big entities using it"
"And the launch partners range obviously from some smaller entities to some very large entities, and they're doing a range of applications that are fundamental to each of the companies in the core businesses"
So I do think the scaling opportunity is there and very well represented
So the industrial A&D softness is due to program-specific things in defense primarily
The rest of the business areas are relatively going to be flat relatively quarter on quarter
"In the automotive, consumer, broadcast space, as we've mentioned in this call already, we've set a record in automotive"
"And if you go back a quarter, we talked about kind of a low based on some inventory things"
So we're going to see a little bit of dip in automotive
"And by the way, though we expect a longer-term trend upward based on the strength of our ADAS design wins, we won't be surprised by some quarterly fluctuations"
"But underneath that, the ADAS business is very strong"
It's just kind of a quarterly correction and the rest of the end markets in that segment are flat
"We will probably talk a little bit more in May about longer-term trends in audio/video broadcast, but you're right, the industry is facing some headwinds, and we are feeling those as well"
"Chris, we'll, like all the other questions that relate to longer-term views on the business, we'll talk about that more in our Analyst Meeting"