Thursday, October 22, 2009

Citrix Systems (NASDAQ:CTXS): Not Good Enough?

Analyst comments following Citrix Systems (NASDAQ:CTXS) results last night leave an impression that the outlook might weight on the shares near-term:

- Credit Suisse says that although revenue results and guidance were relatively in line with expectations and management continued to control expenses to report upside to September quarter operating margin estimates, the company’s operating margin guidance of 75-100 basis points expansion for 2010 fell short of consensus expectations of approximately 200 basis points. The lowered margin guidance relative to expectations reinforces our belief that the company will return to “investment mode” as the economy recovers given management’s commitment to the desktop virtualization market.

- JP Morgan believes the revenue guidance of 8-9% growth implies material contribution from the Desktop Virtualization market, raising the risk of achieving these goals. However, if this growth is realized, it appears to us that the margin guidance is relatively conservative.

- Morgan Stanley believes cons. margins for CY10 are too high as a) VMW is outspending CTXS on VDI—which will drive a CY10 investment cycle, and b) our universe in general will see discretionary spending return in a recovery. Mgmt. prudently guided margins below cons. for Q4, and for 75-100 bps of expansion in CY10, vs. the 170 bps in consensus and our 80bps. While this will weigh on the stock near term, it removes the margin overhang.

- Merrill Lynch lists reasons to stay cautious:

1. CY10 not a ‘cyclical’ rebound. Investors view CTXS as a growth cyclical leveraged to an economic rebound. Hence the premium multiple. But CY10 outlook implies license and total rev of +5% and +9% y/y, not that faster vs. mature companies like MSFT, ORCL, and SY trading at a lower valuation.

2. Core XenApp business implies a tepid growth. For CY10, we expect Networking and Online to grow at 8% and 18%. Moreover, we model XenDesktop to grow 126% to $65mn albeit off a small base of $29mn. On the flip side, this implies core XenApp growth of only 2%. Moreover, starting 1Q10, Citrix will report XenApp and XenDesktop as a single segment, making it hard for investors to discern the underlying growth rate for core XenApp as well as XenDesktop (a key underpinning for the premium stock valuation).

3. Near term disruption from XenDesktop Trade-up. A Trade-up program starting 4Q would allow current XenApp customers to move to a super set XenDesktop for an upgrade fee. But XenDesktop charges on a per user or per device model vs. XenApp that allows concurrent users, which could imply higher costs for some customers, potentially causing NT disruption.

There were many positives as well and JMP Securities lists them:

1) While we still think it’s early in the ramp of desktop virtualization, the company reported 10 large desktop deals over 2,000 seats each, (compared to ten 1,000-seat deals last quarter), a positive indicator for this potentially large market, in our opinion. 2) Deferred revenue grew to $556 million (vs. our $541 million estimate), up from $481 million last year, resulting from the strength in the subscription business. 3) From a geographic perspective, the company noted ongoing improvements in the Americas and Asia with particular strength in Japan. 4) The company’s Online Services business(its SaaS offering) posted solid growth, up 21% for the year vs. our up 18% estimate driven by customers looking to reduce travel and increase productivity through tools like web conferencing. 5) The company recorded 12 deals over $1 million (five of which were XenApp, three were XenApp/XenDesktop combos, and four Netscaler) compared to seven deals last quarter, an encouraging trend, in our opinion.

Action: This is a deja vu for me with PLCM yesterday serving as an example. Both co's had decent quarters with in-line revenue and EPS helped by cost cuts.. however, they both seem to go into spending mode to fight off bigger, better-equipped competitors. This extra spending pushes operating margin leverage further away, which scares off some of the investors.

Basically it is yet another case of share vs margin.

The commentary is not as scary as it was with PLCM yesterday, so I don't expect the same kind of punishment for the stock. Still, I would expect the shares to fall more than the 4% decline in after hours trading.. say around 8-10%. That means anything above $39.5 is a short.


  1. Some more comments:
    - Barclays says to buy on weakness
    - Goldman positive:
    (1) Virtual desktop traction continues to build, and the company’s tone was more upbeat about improvements in pipeline overall; (2) Large deals came back with 15 >$1m signed in the qtr, the largest number in the company’s history; (3) Margin upside was evident once again, with operating margins up 130 bps yoy, providing 2c of upside.
    Stays Conviction List Buy.
    These are the most positive comments I have seen today. Still, my expectations remain the same.

  2. Very interesting reading from FTN Midwest:

    CTXS remained bullish on desktop virtualization, describing strong Q/Q growth in pipeline, deployments, and bookings. Still 4Q and
    2010 guidance, which doesn’t include a big contribution, was in line.
    • CTXS bullishness around desktop virtualization was also at odds with its pricing strategy on XenDesktop 4, in our opinion. CTXS talked of a
    need to lower prices even if it risks cannibalizing XenApp in order to win share and drive market adoption, yet with a strong pipeline built so far around XenDesktop 3, and a superior product in 4, it seems unnecessary to have to lower prices in order to drive the market.
    • CTXS’ lower pricing discussion uncomfortably reminds us of the big XenServer expectations 2 years ago which were never realized in part as XenServer is now a free product.