Thursday, February 7, 2013

Citrix Systems Research and Analysis

It’s not often that you come away from a set of earnings wondering more about what happened in the previous quarter, but that was the case with Citrix Systems' (NASDAQ: CTXS) recent set results. In summary, they were a pretty good set of results, and the stock looks like a good value despite the rise. It’s almost as if Q3 was an aberration. The company remains one of the best plays on the growth of mobility and cloud computing in the market.

Citirix Delivers Growth

The market was spooked by the VMware's (NYSE: VMW) results earlier in the week, and investors were understandably nervous going into Citrix’s results. In the end there was nothing to worry about, and my suspicion with VMware was that its problem is more about finding growth hard to come by thanks to its market dominating position and penetration. The market is just going to have to downgrade its growth expectations for VMware going forward, and you can see that reflected in the stock price. Is it the same thing with Citrix and desktop virtualization?

For myriad reasons outlined in this previous article I don’t think the desktop virtualization market is grinding to a halt, but you wouldn’t have thought this from the previous two quarters' numbers at Citrix.

Here is a look at the three revenue drivers for Citrix in terms of year on year revenue growth:

Product & License sales make up 42% of revenues with License updates at 47% and Software as a Service (SaaS) with 21%. However, the former is the key because future updates and SaaS revenues largely depend upon new product sales. There was a snapback in growth, and it was stronger than the market expected. Perhaps the cause of this was some cautiousness amongst clients over political developments or just a pause to refresh. Who knows?

What we do know is that orders came back strongly and Citrix is now forecasting mid-single digit growth in desktop solutions for this year. So while growth is slowing in its core desktop solutions market, investors need to understand that its end market drivers are changing. Citirix isn’t just about desktop virtualization anymore.

Citrix, Mobility and the Cloud

Whereas previously Citrix was purely about virtualizing Microsoft (NASDAQ: MSFT) Windows apps and desktops, it is now, naturally, following the IT market's development into multi-platform solutions. Corporations need IT to be integrated and work across various devices. Throw in the powerful trends towards corporate spending on mobile, Bring Your Own Device (BYOD) and software rather than PCs or hardware, and Citrix is an obvious beneficiary. It isn’t just about desktop virtualization anymore.

With that said, it still makes up a significant portion of revenues; any slowing growth will obviously hit the company. It’s something to look out for, particularly as the desktop business largely relies on new business, but this quarter has silenced the naysayers for now.

Furthermore, growth in the product groupings outside of Mobile & Desktop totaled 31% in the quarter, and these divisions make up around 44.3% of Citrix’s revenues.

In addition, its partnership with Cisco Systems (NASDAQ: CSCO) looks set to bear fruit within the data center. Cisco has halted new investment in its application delivery controllers (ADC) and is now recommending Citirix’s Netscaler as the next generation product of choice for its clients. Indeed, Netscaler is being integrated into Cisco’s suite of products. Of course, F5 Networks is the leader in the ADC market and is optimistic about replacing Cisco’s existing clients. F5 is a formidable competitor but this isn’t a zero sum game. Both companies can grab market share from incumbent Cisco clients.

Citrix Systems Earnings Analysis

A quick look at the revenue guidance for Q1 from a historical perspective reveals that Q1 is forecast to be a bit seasonally weaker than usual.

On the other hand, its full year guidance implies around 14% revenue growth (earnings will grow less thanks to acquisitions and some margin reduction due to product mix shifts) and cash flow generation remains extremely strong due to increases in deferred revenues as SaaS and license revenues increase.
I think the stock remains undervalued and its key partnerships with two tech giants (Microsoft and Cisco) means it is a genuine takeout prospect. Neither of these corporations is short of cash, and with Microsoft in particular it would make perfect strategic sense. Given successful execution of its earnings forecasts Citrix could easily trade with an 80’s handle, and I think there is further to run here.

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