Company Overview: Citrix Systems Inc. (NASDAQ: CTXS) is engaged in providing virtualization, networking, and cloud computing solutions to organizations across the globe. The cloud-based methodology facilitates customers to benefit centralized control and SaaS-style updates in a cost-efficient manner, thereby reducing complexities. The company’s offering includes XenApp, XenDesktop, XenServer, NetScaler services, and XenMobile ShareFile service. The company is moving towards a subscription-based business model that will help to simplify its solutions consisting of Digital Workspace, Networking, and Analytics.

CTXS Details

CTXS Rides on Robust Traction for its Subscription-Based Services: Citrix Systems Inc. (NASDAQ: CTXS) was incorporated on April 17, 1989 and has its headquarters in Fort Lauderdale, Florida. The company is engaged in providing virtualization, networking, and cloud computing solutions to organizations all over the world. Citrix Systems Inc. offers safe digital cloud-based workspace technologies, which can be operated across both hybrid and multi-cloud infrastructures. The company’s vision involves offering a general-purpose digital workspace that encourages all users with secured, reliable, and unified access to all applications and content needed to be innovative anytime and anywhere.

In FY19, the company reported revenues of $3.01 billion. Citrix Systems Inc. has three operating segments namely Product and License, which accounted for 19% of total revenue in FY19 and consists of revenue from perpetual product offerings mainly from the sale of software solutions. Secondly, the Subscription segment accounted for ~22% of total FY19 revenue and consists of ratable cloud services solutions, on-premises subscriptions, and Citrix Service Providers (CSPs) offerings. Third segment, Support and Services, accounted for the remaining 59% of total FY19 revenues and consists of revenues from perpetual product and license offerings.

The company rides on solid traction for subscription-based services and has witnessed significant adoption of its subscription services in April 2020 as customers attempted to maintain business stability amid the COVID-19 led pandemic. Furthermore, a rise in remote work trends owing to ongoing coronavirus induced pandemic heightened the implementation of the company’s desktop virtualization solutions. Notably, growing acceptance of the company's products inspires confidence in the stock.

This apart, the company’s revenues are expected to benefit from the COVID-19 stimulated digital transformation across all industries, as more and more companies are transitioning from on-premises to the cloud to enhance their productivity. Notably, the company expanded its Remote PC Access solution to the cloud to take advantage of this demand. Further, CTXS remains on track to enhance the security capabilities of its offerings in the midst of escalating threats pertaining to cyber-attacks, which is expected to drive incremental adoption of its products and contribute to the top-line growth, going forward. In doing so, the company partnered with Check Point Software Technologies to unveil further next-generation firewalls within Citrix SD-WAN. The company also rolled out Citrix® Web App and API Protection™, latest cloud-delivered service that offers comprehensive security for applications and APIs in multi-cloud environments in a secure and reliable manner. Further, the company expects growing momentum in the United States and EMEA regions in the days ahead.

The company’s subscription revenue growth story remains remarkable. The company’s revenue witnessed a CAGR of 3.2% over the period of 2017–2019. Notably, in 2019, subscription revenue grew by 43% year over year. Higher revenues will expand margins and increase profitability in the long-run.

Past Performance of Key Financials (Source: Company Reports)

Ongoing digital transformation has led to higher traction in the software industry. Notably, the industry has witnessed a series of innovations in artificial intelligence, cloud computing, predictive analysis, IoT, which have set the platform for consistent growth. The near-term prospects appear encouraging, given increased spending by enterprises on software procurement. Further, the ever-increasing need to secure cloud platforms, amid cyber-attacks and hacking, drives demand for cyber security software. Additionally, in order to achieve scalability and agility for software development as well as IT operations, organizations are focusing on rapid migration to cloud and DevOps technologies. This move helps enterprises to deliver a flawless digital experience to clients. This trend is expected to benefit CTXS, going forward. 

2QFY20 Key Highlights: During the quarter, the company reported non-GAAP earnings of $1.53 per share, up 26.4% on a year-over-year basis. Revenues for the quarter stood at $798.93 million, up 7% from the prior corresponding period. Strong adoption of the company’s offerings supporting secure remote work amid coronavirus lockdown was a key catalyst. Product and license revenues came in at $130 million, down 8% year over year, whereas revenue from support and services decreased 6% year over year. However, revenues from Subscription skyrocketed 56% year over year and came in at $243 million. During the quarter, SaaS revenues were $131 million and accounted for 54% of total subscription revenues. SaaS revenues went up 43% on pcp. During the quarter, the company reported total operating expenses of $533 million, up 2.3% year over year. Non-GAAP operating margin came in at 31%, flat quarter over quarter.

Segment-wise Revenue Summary (Source: Company Reports)

Revenues as per Product Group: In Q2 FY 20, revenues from Workspace product stood at $585 million, up 9% year over year due to higher adoption of SaaS-bases subscription solutions. Networking revenues came in at $186 million, which went up 4% from the prior corresponding period. Professional Services revenues on the other hand went down 21% on a year-over-year and came in at $28 million. As the business shifts toward subscription solutions, Professional services revenues are expected to decline in the coming times.

Product Group-wise Revenue Summary (Source: Company Reports)

Geographic Revenues: Revenues in the Americas stood at $432 million, almost in line with the prior corresponding period figure. Revenues in Europe, Middle East, and Africa or “EMEA” increased 15% year over year and came in at $277 million. Revenues in Asia-Pacific and Japan or “APJ” stood at $90 million, up 18% on pcp.

Geography-wise Revenue Summary (Source: Company Reports)

Balance Sheet & Cash Flow Details: The company exited the quarter with a cash balance of $555.1 million, with long-term debt amounting to $1.73 billion. Cash flow from operations during the quarter stood at $419 million. The company reported deferred and unbilled revenues of $2.654 billion in 2QFY20, up 19% year over year. The company has $714 million remaining in share repurchase authorization and paid out quarterly dividends of $43 million. Notably, the company has authorized a cash dividend of 35 cents per share, payable on September 25, 2020.

Key Updates:

1. In a recent update, the company expanded its ties with Microsoft to address the needs of a rapidly evolving work environment amid coronavirus led lockdowns.
2. The company also collaborated with Upwork for the introduction of the latest Upwork Talent Solution with Citrix Workspace, which is intended to assist companies to enhance their productivity amid increasing remote-work trends.
3. Recently, Citrix Systems and Google Cloud entered an Oncology Venture, intended for the care of patients around the globe.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 41.04% of the total shareholding. The Vanguard Group, Inc., and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 11.67% and 8.57%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: The Company reported Jun’20 gross margin at 84.7%, higher than the industry median of 77.3%. EBITDA margin for Jun’20 came in at 26.1%, higher than the industry median of 9.2%. Net margin for Jun’20 came in at 14.1%, as compared to the industry median of -1.1%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is facing sluggish demand in its professional services business, which is likely to weigh on top-line growth. Also, rising investments on portfolio expansion and product developments are expected to weigh on the company’s margins. CTXS is also facing coronavirus-induced challenging demand environment, which is estimated to hurt prospects in the near term. Further, a leveraged balance sheet and increased competition from peers adds to the woes.

Outlook: For 3QFY20, the company expects revenues to be in the range of $750 million and $760 million, whereas, non-GAAP earnings per share are expected to be between $1.20-$1.25 per share. For FY20, the company raised its outlook owing to a strong pipeline for secure, remote work offerings. The company now expects revenues to be in the range of $3.18 billion and $3.21 billion, up from the prior outlook of $3.10-$3.16 billion. Moreover, non-GAAP earnings per share are now expected to lie in the ambit of $5.65 and $5.85, up from the prior guidance of $5.40-$5.60. For FY20, the company expects non-GAAP operating margin to be in the range of 28-29%.

FY20 Outlook (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CTXS closed at $138.08 with a market capitalization of ~$17.06 billion. The stock made a 52-week low and high of $91.07 and $173.56, respectively, and is currently trading above the average of its 52-week trading range. The stock of CTXS has corrected by ~6.65% in the last three months. Robust adoption of cloud-based services, growing abundance of IoT, AR/VR devices and enhanced implementation of 5G along with expanding international clientele is expected to drive revenues in the quarters ahead. On the technical analysis front, CTXS has an immediate support level of ~$135.3 and a resistance level at ~$150.1. Considering the above factors, we have valued the stock using the P/E multiples based relative valuation method (illustrative) and arrived at a target price of an upside of lower double-digit (in % terms). For the purpose, we have taken peers like VMware Inc (NYSE: VMW), Microsoft Corp. (NASDAQ: MSFT) and Fortinet Inc (NASDAQ: FTNT). Hence, we recommend a “Buy” rating on the stock at the closing price of $138.08, up 1.27% on 17 August 2020.

CTXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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