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 is moving towards a subscription-based business model that will help to simplify its solutions consisting of Digital Workspace, Networking, and Analytics.

CTXS Details

International Expansion & Robust Product Adoption Aid CTXS:  Citrix Systems Inc. (NASDAQ: CTXS) is engaged in providing networking, virtualization, and cloud-based solutions to organizations all over the world. The company’s offerings include XenApp, XenDesktop, XenServer, NetScaler services, and XenMobile ShareFile service. It also offers safe digital cloud-based workspace technologies, which can be operated across both hybrid and multi-cloud infrastructures.

The company’s mission and vision involve proposing a general-purpose digital workspace that helps all users with secured, reliable, and unified access to all applications and content needed to be innovative anytime and anywhere. The company is expected to benefit from the strong implementation of its workspace and desktop virtualization solutions traction as remote work trends continue to rise due to the COVID-led disruption. The company also rides on solid traction for subscription-based services and witnesses significant adoption of its subscription services as customers attempt to maintain business stability amid the COVID-19 led pandemic. Additionally, traction observed by ShareFile deserves a special mention.

Notably, the company has collaborated with Check Point Software Technologies to launch next-generation firewalls within Citrix SD-WAN. The company also rolled out Citrix® Web App and API Protection™, to provide comprehensive security for applications and APIs in multi-cloud environments in a secure and reliable manner.

As far as FY19 performance is concerned, the company reported revenues of $3.01 billion on increasing popularity of the company's products. Further, international expansion was a key positive during the year. International revenues (sales outside the United States) represented ~48.2%, 47% and 46.3% of total net revenues in FY19, FY18 and FY17. The increasing trend depicts that the company has strengthened its international foothold and is expected to continue the same, in the days ahead.

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. Over the same time frame (2017-2019) SaaS revenues witnessed a CAGR growth of 49.1%. Higher revenues will expand margins and increase profitability in the long run.

Past Performance of Key Financials (Source: Company Reports)

Also, the company’s financial performance stands to benefit from the COVID-19 induced digital transformation across all industries, as more and more enterprises are moving from on-premises to the cloud-based solutions, in order to enhance their businesses efficacy.  Amid the increasing threat of cyber-attacks, the company remains confident to enhance the security capabilities, which are likely to drive incremental adoption of its products, and improve its financial performance, going forward.

3QFY20 Key Financial Highlights: During the quarter, the company reported non-GAAP earnings of $1.38 per share, down 9.2% on a year-over-year basis. Revenues for the quarter stood at $767.17 million, up 5% from the prior corresponding period. Strong adoption of the company’s offerings supporting secure remote work amid coronavirus lockdown was a key positive. Product and license revenues came in at $87 million, down 33% year over year, whereas revenue from support and services decreased 6% year over year and came in at $417 million. However, revenues from Subscription skyrocketed 56% year over year and came in at $263 million. During the quarter, SaaS revenues stood at $138 million and accounted for 52% of total subscription revenues. SaaS revenues went up 37% on pcp. Other subscription revenues in 3QFY20 increased a whopping 111% year over year. During the quarter, the company reported total operating expenses of $511.6 million, up 3.3% year over year. Non-GAAP operating margin came in at 29%, which decreased 200 basis points quarter over quarter.

Segment-wise Revenue Summary (Source: Company Reports)

Revenues Highlight as per Product Group: In Q3FY20, revenues from Workspace product stood at $573 million, up 12% year over year due to higher adoption of SaaS-bases subscription solutions. Workspace subscription revenues went up by 26% on pcp. Networking revenues came in at $166 million, which declined 12% from the prior corresponding period. However, networking subscription revenues during the quarter went up by 136% on a year over year basis.  Professional Services revenues went down 13% 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)

Revenues from Geography & Customers: Revenues in the Americas stood at $414 million, down 1% from prior corresponding period figure. Revenues in Europe, Middle East, and Africa or “EMEA” increased 17% year over year and came in at $276 million. Revenues in Asia-Pacific and Japan or “APJ” stood at $76 million, down 3% on pcp. Revenues from SSP customers decreased 44% year over year and came in at $22 million. Notably, revenues from non-SSP customers stood at $746 million, up on pcp.

Geography & Customer-wise Revenue Summary (Source: Company Reports)

Balance Sheet & Cash Flow Highlight: The company exited the quarter with a cash balance of $938 million, and long-term debt amounting to $1.73 billion. Cash flow from operations during the quarter stood at $112 million. The company has $714 million remaining in share repurchase authorization. Further, CTXS also paid a quarterly dividend of $43 million. Notably, the company has authorized a cash dividend of 35 cents per share, payable on December 22, 2020.

Key Updates:

1. On 29 October 2020, the company announced that it is unveiling two new workspace security solutions intended to secure access and protect applications wherever work needs to get done.
2. In order to assist companies to simplify the selection of vendors and leverage their existing investments, CTXS recently informed the market that it is expanding the Citrix Ready™ Workspace Security Program to incorporate Zero Trust solutions from trusted and verified partners.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form 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 Sep’20 gross margin at 83.4%, higher than the industry median of 77.2%. EBITDA margin for Sep’20 came in at 24%, higher than the industry median of 11.2%. Net margin for Sep’20 came in at 12.8%, as compared to the industry median of -0.3%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company is facing sluggish demand in its professional services business, which is likely to weigh on top-line growth. Also, rising investments in 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. CTXS’s leveraged balance sheet also poses risks with long term debt of $1.73 billion at the end of 3QFY20. Company's total cash balance amounted 938 million, indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, competition from peers adds to the woes.

Outlook: For 4QFY20, the company expects revenues to be in the range of $775 million and $785 million, whereas non-GAAP earnings per share are expected to be between $1.25-$1.35 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 $3.20 billion and $3.21 billion, up from the prior outlook of $3.18-$3.21 billion. Moreover, non-GAAP EPS (earnings per share) is now expected to come in the ambit of $5.89 and $5.99, up from the prior guidance of $5.65-$5.85. For FY20, the company expects non-GAAP operating margin to be ~29.5%. The company also provided FY21 outlook, wherein it expects revenues to grow ~4% on a year over year basis and non-GAAP earnings per share are expected to be between $6.2-$6.4 per share.

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 $114.43 with a market capitalization of ~$14.13 billion as on 02 November 2020. The stock made a 52-week low and high of $100.31 and $173.56, respectively, and is currently trading below the average of its 52-week trading range. The stock of CTXS has corrected by ~18.2% 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 are expected to drive revenues in the quarters ahead. On the technical analysis front, CTXS has a support level of ~$112.24 and an immediate resistance level at ~$131.2. Considering the above factors, we have valued the stock using the P/E multiple 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), to name few. Hence, we recommend a “Buy” rating on the stock at the closing price of $114.43, up by 1.02% on 2 November 2020.

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

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