Citrix Systems, Inc. (CTXS), the business software and services company, is in an intermediate uptrend. Citrix is a cyclical growth company that is facing profitability margin pressure. Also, the firm is in a cyclical growth industry and is benefiting from the expansion of the cloud computing and mobile markets.
The combination of those factors should be helping Citrix to outperform the market, which it has over the three-year and five-year time periods. But, more recently, Citrix has underperformed the market -- with the exception of the one-month and three-month time horizons. I think Citrix will continue to outperform because of the favorable industry dynamics and quality of its product offerings.
Citrix recently released solid product offerings, which are factored into my revenue growth forecast. Furthermore, I expect Citrix to continue its active acquisition strategy. All that said, Citrix is fairly valued; I would like to accumulate share of this company on a decline in the valuations. (My intrinsic value estimate is $70.25.)
- There continues to be an increase in the number of alternatives to Windows operating system powered desktops, in particular mobile devices such as smartphones and tablet computers. Users may increasingly turn to these devices to perform functions that would have been performed by desktops and laptops, which in turn may shrink the market for Citrix's desktop virtualization products.
- The efforts to protect intellectual property may not be successful, which could materially and adversely affect the business.
- Industry growth might slow, which would weigh on the valuations of the company.
- The share price is volatile and investors could lose a portion or all of their investment.
Citrix is a cloud computing company that enables mobile work styles simply and securely. The company empowers people to work and collaborate from anywhere as easily as they would in their own office. Citrix cloud computing solutions help IT and service providers build both private and public clouds, leveraging virtualization and networking technologies to deliver high-performance, elastic, and cost-effective services for mobile work styles. Citrix is also the maker of the GoToMeeting collaboration application.
The company's revenues are derived from its infrastructure products (which primarily include its mobile and desktop products), networking and cloud products, license updates, maintenance and professional services, and SaaS products (which primarily include collaboration and data sharing, remote access, and remote IT support products). Infrastructure and SaaS constitute the company's two reportable segments. Citrix markets and licenses products directly to enterprise customers, over the Internet, and through systems integrators. That is in addition to marketing and licensing products indirectly through value-added resellers, value-added distributors, and original equipment manufacturers.
Citrix is pursuing a growth through acquisition strategy. As of June 30, 2013, goodwill represented 35% of total assets. Total intangible assets were 46% of total assets, and 70.8% of total equity. A decrease in the value of intangible assets could adversely impact the valuation of Citrix. Besides acquisitions, Citrix is investing cash from operating activities in available-for-sale investments.
Citrix has technology relationships with Microsoft (MSFT), Cisco (CSCO), Alcatel-Lucent (ALU), Dell (DELL), Hewlett-Packard (HPQ), IBM (IBM), Fujitsu (OTC:FJTSF), Amazon (AMZN), and Intel (INTC). These relationships are bullish for the valuations and give Citrix a competitive advantage. In terms of total revenue composition, Ingram Micro accounted for 16% of net revenues in 2012, 17% of total net revenues in 2011, and 17% of our total net revenues in 2010. Ingram Micro has bargaining power, which is bearish for the valuations.
Citrix's competitors include Oracle (ORCL), VMWare (VMW), F5 Networks (FFIV), Microsoft, Cisco, and Riverbed (RVBD). Citrix faces competition from larger rivals, but my research suggests Citrix's offerings are outstanding. Citrix competes in the virtualization, mobility, networking, cloud, collaboration, and data sharing markets (which are all growth markets). Thus, Citrix is in an industry that is cyclically bullish.
- Citrix announced the availability of the Citrix Worx App Gallery with more than 100 committed third-party apps; Worx App Gallery is the fastest growing enterprise mobile app ecosystem on the market today. Worx Mobile Apps are available to customers using XenMobile.
- Citrix is No. 19 on a list of the companies that give the toughest interviews; the list places Citrix ahead of Facebook (FB) but just behind Microsoft. I consider the company having a difficult interview process to be bullish for the valuations, but the quantity of grammatical errors in Citrix's SEC filings makes me question the results of the hiring process.
- Citrix announced the release of Citrix XenClient 5, which offers the first solution to unify the mobile worker experience across hosted and local virtual desktops.
- Citrix announced it can enable enterprise customers and service providers to deliver high performance mobile apps, and Windows Server-based session desktops from Microsoft's Windows Azure cloud platform with the recently announced Citrix XenDesktop 7.
- The Citrix ByteMobile T3100 Adaptive Traffic Manager was named the winner of the 2013 LTE Award for Best LTE Traffic Management Product, presented by Informa and telecoms.com.
Financial Performance Forecast
Citrix is positioned in a growth industry; that and the quality of the product and service offerings should drive Citrix's financial performance over the foreseeable future. Also, the key strategic technology alliances should contribute to revenue growth. Consequently, I am forecasting revenue growth of 17% in fiscal 2013 and revenue growth of 10% to 15% in fiscal 2014.
Revenue should be about $3.03 billion this year, and between $3.33 billion and $3.48 billion in fiscal 2014. I'm forecasting a continued decline in the gross margin to about 81% in fiscal 2014 with operating income in the 12% to 16% range and net income in the 10% to 14% range. Revenue composition will be a contributing factor in margin determination; the growth of the Networking and Cloud, and Services divisions could weigh on the gross margin.
In terms of the ratio analysis, I have seen more liquid technology sector firms; the lack of liquidity may be due to the active acquisition strategy. The financial leverage ratio is trending higher, but the debt/equity ratio is zero. The asset utilization is improving. Overall, the ratio analysis is bullish for the valuations. The industry dynamics, financial performance forecast, and ratio analysis are bullish for the valuations of Citrix.
I'm going to use the multiplier models to value the common equity shares of Citrix. I'll use the absolute values, the time-series trend, and the historic averages. The current share price is $71.96.
Given the growth rate of revenue, Citrix is fairly valued to modestly undervalued on an absolute basis. Based on the time-series trend, Citrix is fairly valued after being undervalued a couple of months ago; there is room for the valuations to continue to increase. The intrinsic value using the historic price/earnings ratio is $60.22, using the price/book ratio it is $66.69, using the price/sales ratio it is $71.96, and using the price/cash flow ratio it is $82.11. The average of those intrinsic values and the intrinsic value using the historic averages is $70.25.
Citrix is fairly valued. I would use a 15% to 20% decline in the share price to accumulate shares; the highest level I would consider purchasing shares is $61.17. Unfortunately for me, the opportunity to purchase shares in that price range happened during June and July. That said, I'm bullish on the firm's prospects and will use a dip to accumulate shares.