January 13, 2015 Citrix Systems Inc. Current Recommendation Prior Recommendation Outperform Date of Last Change 7/09/2014 Current Price (01/12/15) $61.15 Target Price $64.00 NEUTRAL SUMMARY (CTXS-NASDAQ) Citrix Systems reported mixed results in the third quarter of 2014. While earnings exceeded expectations, revenues lagged the Zacks Consensus Estimate. Encouraged by the earnings beat, the company raised its bottom-line guidance for 2014. We believe the global trend toward virtualization and cloud computing will help Citrix to retain its momentum in the long term. Moreover, both its XenMobile and XenApps are gaining significant market traction in the highly lucrative enterprise mobility segment and Windows app virtualization. In addition, Citrix Systems has come up with an innovative app called ShareConnect, which will provide unique desktop-like facilities to ipads and Android-based tablets. We remain Neutral on the stock. SUMMARY DATA 52-Week High $72.68 52-Week Low $52.72 One-Year Return (%) 4.01 Beta 1.79 Average Daily Volume (sh) 1,209,280 Shares Outstanding (mil) 161 Market Capitalization ($mil) $9,845 Short Interest Ratio (days) 2.95 Institutional Ownership (%) 94 Insider Ownership (%) 1 Annual Cash Dividend $0.00 Dividend Yield (%) 0.00 5-Yr. Historical Growth Rates Sales (%) 15.7 Earnings Per Share (%) 12.8 Dividend (%) N/A using TTM EPS 21.3 using 2014 Estimate 25.3 using 2015 Estimate 22.0 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Below-Average Type of Stock Large-Growth Industry Comp-Software Zacks Industry Rank * 113 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 589 A 615 A 641 A 740 A 2,585 A 2013 673 A 730 A 713 A 802 A 2,918 A 2014 751 A 782 A 759 A 848 E 3,140 E 2015 804 E 841 E 825 E 914 E 3,379 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.45 A $0.56 A $0.53 A $0.73 A $2.27 A 2013 $0.46 A $0.47 A $0.53 A $0.87 A $2.33 A 2014 $0.50 A $0.63 A $0.57 A $0.72 E $2.42 E 2015 $0.56 E $0.67 E $0.64 E $0.91 E $2.78 E Projected EPS Growth - Next 5 Years % 15 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 1989 and headquartered in Fort Lauderdale, Citrix Systems is a leading provider of virtualization, networking and cloud computing solutions to more than 230,000 organizations worldwide. Its products include XenApp that runs the business logic of applications on a central server, XenServer, an enterprise-class platform for managing server virtualization in the datacenter as a pool of computing and storage resources. The company s products also comprise XenDesktop, an integrated desktop delivery system; NetScaler, a Web application delivery and traffic management product; and Access Gateway, a line of universal SSL/VPN appliances. Citrix also offers online services, consulting, technical support, and product training and certification services. The company markets and licenses its products through value-added resellers, channel distributors, system integrators, independent software vendors, and original equipment manufacturers as well as through websites. Moreover, the acquisition of Sanbolic, completed in Jan 2015, will enable Citrix to further develop a range of differentiated VDI packages. Citrix operates in four reportable segments as follows: REASONS TO BUY License Updates and Maintenance (45% of the total revenue in 2013): This segment consists of fees related to Citrix s Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Subscription Advantage is an annualrenewable program that provides subscribers with automatic delivery of unspecified software upgrades, enhancements and maintenance releases if they become available during the term of the subscription. Product and Licenses (31%): This segment primarily consists of fees related to the licensing of Citrix s major products including Desktop Solutions products, Datacenter and Cloud products. Software as a Service (20%): This segment consists primarily of fees related to online service agreements, which are recognized ratably over the contract term. Professional Services (4%): This segment includes fees from technical support services, which are recognized ratably over the contract term as well as fees from product training and certification and consulting services. The desktop virtualization market is expected to accelerate in the near future. The company, which delivered higher than expected earnings in the third quarter of 2014, should perform well in the coming quarters on the back of the rapidly growing virtualization market. Centralized management of employee desktops will provide greater security, control and cost savings. At the same time, virtual desktop will also give end users flexibility, choice and the convenience of selfservice. As a leading provider of enterprise software with desktop virtualization at its core, Citrix will benefit from this business trend. Consequently, Citrix expects revenues in 2014 in the band of $3.13 billion to $3.14 billion, well over 2013 levels. Citrix has also increased its 2014 EPS guidance. Earnings are now expected in the range of $3.22 $3.25 (old guidance: $2.47 to $2.52). We expect the company to achieve the updated guidance. Citrix is concentrating on three broad markets: Desktop virtualization, Cloud Infrastructure and networking, and Collaboration and sharing. As desktop virtualization has become the top priority for any IT set-up, Citrix is continuously introducing innovative products that will facilitate business flexibility, security and centralized management system. In order to counter installation difficulties, Equity Research CTXS Page 2
REASONS TO SELL Citrix launched XenDesktop 7.5 suites. It is a cloud-ready platform that allows easy access of Windows apps and desktops from any console. At present, it is one of the company s most popular products. Citrix is a key player in the global market share for the cloud-based remote support services systems. These contracts were mainly from financial services and healthcare verticals. More than 25% of these deals include orders for multiple products of Citrix, which strengthen the company s bundled offerings. In Sep 2014, Citrix Systems launched an innovative app called ShareConnect, which will provide unique desktop-like facilities to ipads and Android-based tablets. Using ShareConnect will make work easier for users who are on the move for the greater part of the day. Through this app, they will be able to access important business applications, files and networks even when they are out of office. We believe the ShareConnect app will help Citrix Systems drive its top and bottom line even higher in the coming quarters. Prior to this, in February, Citrix and CA Technologies had struck a deal to allow implementation of the Citrix NetScaler SDX networking platform to CA SiteMinder, a leading access management solution. This integration will enhance user authentication and deliver secure and better access to the CA Technologies. NetScaler product suite remains the largest catalyst for the Cloud Infrastructure and networking segment. In the reported quarter, NetScaler was integrated with more than 800 desktop orders as part of the solution. Any adverse macroeconomic situation may result in the slowdown of enterprise IT spending. Hence, the desktop virtualization market may evolve lesser than anticipated and Citrix may lose its market share more quickly than expected. At present, Citrix is facing twin problems: (1) continuation of global macroeconomic headwinds retarding the momentum of new license sales; and (2) growing demand for tablets over PCs or notebooks. Several industry researchers have predicted that of all the corporate desktop PCs, only a few will use virtualization in the future due to costs associated with this technology. As a result, the long-term growth of Citrix may face headwinds beyond 2014. The server virtualization market is intensely challenging and is becoming more commoditized. Citrix has been steadily cutting the prices of its XenServer product line and as a result, most of its offerings are free. The company witnessed a relatively slow conversion from free offering to paid-for-essential versions. Citrix provides software and equipment for streamlining business computer systems. The demand for its products and services depends substantially upon the general demand for business-related computer appliances and software. Fluctuations in the demand for these products and services could have an adverse effect on the company s business, results of operations and financial condition. Moreover, the company continues to face stiff competition from VMware. Acquisition of Desktone by VMware will allow the company to offer DaaS through its Cloud Hybrid Service. Moreover, Citrix s desktop platform faces stiff competition from VMware s View product and Oracle s broad virtualization stack. Furthermore, as the company forays into different markets, it will be exposed to foreign currency fluctuation risk. Equity Research CTXS Page 3
RECENT NEWS Citrix Completes Sanbolic Buyout- Jan 12, 2015 In a bid to expand further, Citrix duly completed its acquisition of Sanbolic, an innovator and leader in workload-oriented storage virtualization technologies. The erstwhile Sanbolic s core technology will help to reduce the cost and complexity of storage for App Delivery and virtual desktop infrastructure (VDI) Deployments. The terms of the deal were not disclosed. Citrix Beats on Earnings in Q3 Oct 22, 2014 Citrix Systems reported mixed third-quarter 2014 financial results, wherein its bottom line surpassed the Zacks Consensus Estimate while the top line missed the same. GAAP net income in third-quarter 2014 came in at $47.5 million or $0.29 per share as opposed to $76.7 million or $0.41 per share in the prior-year quarter. Quarterly adjusted earnings per share of $0.57 were significantly higher than the Zacks Consensus Estimate of $0.51. Total revenue stood at $759 million, up 6.5% year over year but fell short of the Zacks Consensus Estimate of $772 million. Gross margin in the reported quarter was 82.1% compared with 82.6% in the year-ago quarter. Operating expenses totaled $564.4 million against $501.4 million in the prior-year quarter. Quarterly operating margin stood at 7.7% against 12.3% in the prior-year quarter. At the end of the reported quarter, deferred revenues were $1.4 billion against $1.3 billion in the year-ago quarter. During the third quarter of 2014, Citrix generated approximately $164.1 million of cash from operations against $223 million in the prior-year quarter. The company had nearly $747.2 million of cash and marketable securities compared with $734.6 million at the end of 2013. Also, the company had $1,285.1 million of convertible notes outstanding in the reported quarter. Revenues by Product Mix Product and Licenses revenues were $193.2 million, down 4.1% year over year. License updates and maintenance revenues were $358.3 million, up 8.8% year over year. Software-as-a-Service (SaaS) revenues came in at $165.3 million, reflecting an 11.5% increase from the prior-year quarter while Professional Services revenues were around $42.3 million, up 25.5% year over year. Revenues by Product Grouping Mobile and Desktop revenues in the third quarter totaled $393 million, up 3%. Networking and Cloud Solutions revenues increased 6% year over year to $155 million. Revenues by Geography Revenues in the Americas (both North & Latin America) region were $318.2 million, up 4%. Revenues in Europe, Africa, and the Middle East region increased 7.7% to $202.6 million. Revenues in the Asia- Pacific region were $73 million, up 3.8%. 2014 Financial Outlook Citrix expects revenues in fiscal 2014 in the band of $3.13 billion to $3.14 billion. Management projected reported earnings in the range of $1.57 to $1.58. Adjusted earnings per share will likely be in the $3.22 $3.25 band (old guidance: $2.47 to $2.52), exclusive of adjustments Equity Research CTXS Page 4
VALUATION Citrix is currently trading at 22.0x our 2015 earnings estimate. This is at a premium to the S&P 500 but a massive discount to the industry average. We remain Neutral on the stock with a target price of $64, based on 23.0x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Citrix Systems, Inc. (CTXS) 25.3 22.0 15.0 18.0 21.3 50.6 23.2 Industry Average 30.2 39.9 15.6 32.5 36.9 245.9 19.7 S&P 500 16.3 15.3 10.7 15.9 18.8 19.4 12.0 Adobe Systems Incorporated (ADBE) 46.8 27.4 9.3 82.5 95.8 101.3 13.7 CA Technologies, Inc. (CA) 13.5 13.1 2.7 8.1 11.8 14.6 9.6 Dassault Systemes SA (DASTY) 23.0 20.8 11.8 18.9 25.4 36.6 20.9 DST Systems Inc. (DST) 17.2 12.8 11.3 18.6 20.5 8.6 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Citrix Systems, Inc. (CTXS) 5.0 6.3 3.0 16.7 0.6 0.0 15.8 Industry Average 8.4 8.4 8.4-9.9 0.2 0.3 5.7 S&P 500 5.1 9.8 3.2 24.8 2.0 Equity Research CTXS Page 5
Earnings Surprise and Estimate Revision History Equity Research CTXS Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CTXS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1105 companies covered: Outperform - 15.2%, Neutral - 78.7%, Underperform 5.8%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Maharathi Basu Editor Anindita QCA Nalak Das Reason for update 3Q14 Earnings Equity Research CTXS Page 7