Citrix Systems - I Don't See Compelling Upside Unlike Barclay's Analysts

Oct. 7.13 | About: Citrix Systems, (CTXS)

Shares of Citrix Systems (NASDAQ:CTXS) ended Monday's trading session unchanged after the company received an upgrade from analysts at Barclays Capital.

Unlike analysts at Barclays I don't see the compelling upside in Citrix' shares at the moment. The premium valuation and continued margin pressure make me very hesitant to pick up some shares at the moment.

Barclays Is Positive

Analysts at Barclays upgraded their rating on Citrix from "equal-weight" to "overweight," while raising the price target by a buck to $78 per share.

Barclays noted that the desktop growth/sentiment is improving after a tough second quarter, and improved enterprise spending in the second half of this year.

According to analysts, the recent pullback gives an opportunity to pick up some shares. Desktop license growth of 5-8% should be achievable, given the easy comps. Channel checks with partners of the firm indicate that none of the business partners is performing below plan.

Note that Citrix is scheduled to release its third-quarter results October 23.


Citrix ended its second quarter with $700.2 million in cash, equivalents and short-term investments. The company operates without the assumption of debt, for a solid net cash position.

Revenues for the first six months of the year came in at $1.40 billion, up 16.5% on the year before. Net earnings fell by 22.5% to $124.1 million. At the presentation of the second-quarter results, the company guided for full-year revenues of almost $3.0 billion, and earnings of $350 million.

Trading around $71 per share, the market values Citrix at some $13.3 billion. This values operating assets of the firm around $12.6 billion. As such, operating assets are valued around 4.2 times annual revenues and 36 times annual earnings.

Citrix does not pay a dividend at the moment.

Some Historical Perspective

Over the past decade, shares of Citrix have seen considerable upside. Shares rose from lows of $15 in 2004 to highs in the mid-80s in 2011. Ever since, shares have been trading in a $60-$80 trading range, currently exchanging hands at the midpoint of the range.

Between 2009 and 2013, Citrix stands to increase its annual revenues by a cumulative 85% to just below the $3 billion mark. Net earnings nearly doubled to $350 million, similar to the earnings reported in 2011 and 2012.

Investment Thesis

Citrix Systems operates in the business software and services infrastructure, a segment that is generally showing growth although it depends largely on which specific segments you are focusing on.

As such, Citrix is facing headwinds in desktop applications while it benefits from cloud computing and mobile markets. Yet Citrix is facing tailwinds as well, including the trend to access work places from the cloud and mobile devices. This results in an increase in demand for secure and virtualization tools as offered by Citrix, both in the public and private cloud.

A key product launch was the XenMobile Enterprise Edition, which was released in the summer. The offering is an integrated product of apps, data management and e-mail. Notably the pipeline for the mobile edition is doing great. Other important and well-known offerings include the "GoToMeeting" collaboration application.

Notably the cloud operations are showing rapid growth. Second-quarter revenue rose by 46% to $165 million in the segment, making up a solid portion of Citrix' revenue. The division with its major product offering "Netscaler" made up 23% of total revenue.

Within the infrastructure, maintenance and the SaaS business, growth is less impressive. Within the entire spectrum Citrix is competing against the likes of Oracle (NASDAQ:ORCL), VMWare (NYSEARCA:WMW) and F5 Networks (NASDAQ:FFIV), to name a few.

CEO Mark Templeton remains focused on the long-term strategy to focus on the cloud and mobility, thereby improving the agility and security of customer's technology infrastructure.

While I do think that Citrix has a nice business going on, its main issue is the lack of profit improvements as margins continue to be under pressure. While Citrix has grown revenues from $2.2 billion in 2011, to an expected $3.0 billion this year, earnings will stagnate around $350 million, valuing operations around 36 times earnings after backing out the net cash position.

This makes me quite cautious given the fall in recent earnings, and the premium valuation. Unless Citrix can show real prospects in improving earnings, I remain on the sidelines. Unlike Barclays I don't see the compelling upside at the moment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.