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The difficult earnings season for technology continues, and Citrix Systems $CTXS didn't disappoint to disappoint. The market is in no mood to take
prisoners right now with any kind of tech company that misses revenue
and earnings forecasts. Consequently, the stock took a battering after
it missed and guided earnings lower for Q2. On the other hand, I think
there are some mitigating circumstances and this drop is a good
opportunity to pick some up. So I did.
Citrix's citric Q1 results
A quick summary of the earnings and guidance relative to analyst forecasts
Q1 Revenue of $672.9 million vs. analyst estimates of $676.9 million
Q1 Non-GAAP EPS of $0. 62 vs. analyst estimates of $0.63
Q2 Revenue guidance of $705 million-$715 million vs. analyst estimates of $711.5 million
Q2 EPS guidance of $0.62-$0.63 vs. analyst estimates of $0.70
Full Year Revenue guidance of $2.95 billion-$2.98 billion vs. analyst estimates of $2.97 billion
Full Year EPS guidance of $3.08-$3.11 vs. analyst estimates of $3.14
So, its Q2 EPS guidance is way below consensus estimates but the full
year revenue guidance is in line with the market and Citrix’s previous
guidance. However the full year EPS forecast is now 1.4% below
estimates. Is that really a reason to panic?
I think the answer to this question is ‘no’, but then again, I can
appreciate how some investors wouldn’t want to spend a summer waiting
for the market to wake up and come around to its point of view. As for
the maintenance of full year revenue guidance and the decent looking
earnings guidance, well, what usually happens is that the market chooses
to ignore them and focus on the near-term trends. They appear to be
negative. Or do they?
Short-term loss aversion
I have a few points to make over these results which should add more color.
Firstly, there was a combination of temporary macro weakness and a new product issue which appears to be rectifying.IBM, Oracle, TIBCO, Fortinet, F5 Networks $FFIV
have all missed estimates this earnings season. There is no doubt in my
mind that corporations are in a ‘cost-cutting’ first mode right now,
and fears over the sequester haven’t helped. In fact, they appear to be
using any excuse to delay purchases, particularly with discretionary
items.
IBM and Oracle saw general weakness (although they blamed sales
execution), but I note that F5 is undergoing some product refreshes
while the story with Citrix was largely over disappointing mobile &
desktop virtualization revenue.
Citrix argued that this was partly due to the Q1 launch of its
enterprise mobility XenMobile solution. In other words, customers may
well have delayed orders. In a cautious spending environment, it’s
reasonable to expect CIOs to ‘prioritize their caution’ towards any
solution that wasn’t mission critical or required consideration. Is this
what also happened with F5’s product refresh?
The good news is that Citrix forecast low double-digit growth in
mobile & desktop license, and that its full year plans were ‘on
track’.
Secondly, the Q2 earnings estimate is disappointing, but this is the
first time that the company has actually given Q2 guidance. I suspect it
did so because management knew the earnings number was coming in way
below market estimates. I think that this is a consequence of the way
analysts were modeling the numbers.
Moreover, the product mix (with Netscaler sales increasing strongly
but virtualization growth weaker) is contributing to lower margins.
Indeed, Citrix did lower full year margin and earnings guidance, but it
was hardly a dramatic downgrade.
Thirdly, Netscaler saw strong growth in the quarter. Interestingly,
this is in contrast with F5 Networks’s recent results. It’s hard not to
conclude that the relationship with Cisco $CSCO
hasn’t helped. After Cisco decided to stop investing in its application
delivery controller (ACE), it shifted to recommending that its
installed base should purchase Citrix’s Netscaler.
While the market was also made open to F5, it appears that Citrix has
taken the opportunity to broaden the number of verticals it sells into.
If there was some good news for F5 investors, it is that Citrix is not
seeing any competitive changes in the sectors where it competes with F5.
As for Cisco, these results are a good sign that its intelligent
networks have real relevance with its customers.
Where next for Citrix?
In conclusion, if Citrix hits its full year guidance then the stock
will be higher from here, although, I doubt many will believe that right
now. In my view, there were enough positives in this report to justify
topping up. Netscaler sales were excellent and XenMobile was cited as
being on track for the full year. The weakness in desktop & mobile
virtualization license sales is understandable in the context of a weak
tech spending environment for Q1, and the launch of XenMobile seems to
have caused some delays.
As ever, investors need to focus on valuation. This stock generated
nearly $700 million in free cash flow and despite the weaker Q1, it is
guiding towards over 14% revenue growth in 2013. If the tech slowdown
proves to be temporary and customers get acquainted with the XenMobile
offering, then the stock could recover nicely from here.I bought some more in anticipation.
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