CITRIX (CTXS)

Courtesy of Tijuana Jackson Academy

TICKER: CTXS

Citrix Systems is a software company that specializes in virtualization technology. This enables hardware endpoints such as laptops to access servers and applications that are stored in remote locations and data centers. The transition to subscription revenues through its cloud suite and the recent acquisition of Wrike make it a very attractive investment.

Transition to Subscription Driving Revenues

The company has become a core technology provider for business in the US. 98% of the Fortune 500 companies use Citrix today as it has become an indispensable must have products to get work done smoothly. Its workspace product enables remote access 24/7 from any location at the user’s convenience. The specific software applications for each customer are stored, opened, and saved by individuals through cloud storage and password-secured access.

In the past, the company sold software packages and licenses to run individual business networks. The offsite cloud model has completely revamped the company’s approach. The transition from software sales into a cloud-based subscription model for remote business application was completed in 2020. By Q4 2020, subscriptions made up 85% of Citrix’s new bookings, which is up from 69% for the same quarter in 2019. The pandemic was a boon for convincing existing customers that the future of work is outside of a regular office setting. The company has focused on improving its cloud experience while raising subscription prices. In a step forward to improve the workspace experience, the company has acquired Sara’s platform Wrike.

Wrike Acquisition

Citrix acquired Wrike in an all cash deal for $2.25 Billion which was financed through debt. Wrike is a project management and work collaboration tool, similar to Jira by Atlassian. The pandemic and the rise of virtual teams have made platforms like Wrike all the more relevant, as its products enable distributed teams to collaborate on projects, assign tasks to team members and track project milestones.

The valuation for Wrike seems reasonable, despite the high nominal price tag. Wrike is expected to bring $175 million of SaaS revenues, which puts revenue multiples at 12.8x for 2021. Wrike’s revenues is expected to grow at a rate of 30%, so the valuation multiple is cheaper than comparable SaaS companies at such a growth rate. By comparison, a company like Atlassian, which has a growth rate of 22% is trading at a revenue multiple of 27.3x.

Wrike’s collaboration capabilities act as a complementary application for the infrastructure-oriented Citrix to sell. Citrix primarily sells products to IT teams while Wrike focuses on functional departments like marketing and sales. The acquisition is expected to merge the two go-to-market approaches which will unlock a myriad of cross selling opportunities. Wrike will also be able to access a much larger customer base and have opportunities to expand deployment to other departments with the clients of Citrix.

Financial Performance and Valuation

Citrix had a robust 2020 with pandemic tailwinds resulting in work from home adoption and one-time booking revenues from existing clients. This resulted in $861 million revenues in Q1 and has continued the growth momentum through the rest of the year. The acquisition of Wrike should also boost revenues by approximately $175 million in 2021, but adjusted EPS will be impacted slightly based on share dilution. Citrix now has a debt to free cash flow ratio of 2.93 and management can use $700 million cash flow to repay net debt in less than three years. The Wrike Acquisition is expected to boost free cash flow in a few years and will speed up the deleveraging process.

Citrix seems to be mispriced vs its very bright operating future especially considering the comparable valuation for cloud-centric companies. Citrix is currently trading below industry multiples with better than industry growth prospects. Citrix is currently trading at a Price/Sales multiple of 4.30, when tech stocks are trading in revenue multiples of 7 to 20. Earnings growth overall is projected to be near industry-normal rates in coming years. If we assume that sustainable annual EPS reaches 15%, the stock is primed to advance into the future.

Conclusion

Citrix is often overlooked by most technology investors, given the current comparable valuation. The shares offer a risk-reward proposition at the current price with increased profit margins and revenues from the recent acquisition and transformation to the subscription model. This will translate to increased cash flow generation, which will translate to share buybacks and debt reduction in the future.