In With the Old, Out With the New?
A bet on legacy software provider Citrix and it’s successful transition to SaaS
Thesis
Citrix is a great business with strong cash flows, a robust client base, and long standing strategic partnerships. Recent trends in work from home applications paired with Citrix’s transition from perpetual licenses to a SaaS subscription model make its growth prospects incredibly attractive. Additionally, it is of my belief that Citrix is currently undervalued, both fundamentally and when compared to its peers.
About Citrix
Citrix is a multinational enterprise software company that creates digital workspaces that enable employees to access all applications and content anytime, anywhere, and on any device. They break up their businesses into 3 parts:
- Workspace, the platform that allows employees to work outside of the office — make up 70% of revenues
- Networking, the products that manage speed, reliability, and security of products and services — make up 25% of revenues
- Professional Services, the services that help customers implement Citrix products — make up 5% of revenues
Industry Tailwinds
Although the reopening of the U.S. economy may result in businesses moving a range of employees back into offices, it is likely that the work- from-home infrastructure and employee flexibility will remain in place.
In 2019, 16% of workers were fully remote, this number has jumped to 80% in 2020. I have no expectation that this trend will continue perpetually, however even if this number reverts back to ~20% in 2021/2022 it is likely that clients will retain the software regardless. Why?
Even if fully remote work kicks back down to roughly 2019 levels, employees could very easily take ~1 day a week, a month, etc to work from home. Still requiring a base level of remote work infrastructure. In addition to accelerating work from home (WFH) software adoption, COVID-19 has also validated the idea that people can be productive at home. It has proven that businesses can continue to operate despite a bulk of their workforce working from the confines of their own home. This validation paired with peoples neutral or positive experiences with WFH will be a long term driver of Citrix client retention and growth.
Recent Shifts
Citrix is shifting its business in 3 ways:
- From on premise data centers to the cloud
- From perpetual licenses to subscription business
- From individual point products to a unified platform for work
This is essentially where the core of the bet takes place. The success in the shift from perpetual license model to a subscription software as a service (SaaS) model is massively important. If done correctly, it will provide sustainable predictable revenues, reduced cost of revenue, and will provide more opportunities for customers to upgrade and be upsold.
The reason I believe Citrix will be successful in this restructuring is due to what they have accomplished in the past few years. They have been able to grow subscription revenues significantly over the past four years while decreasing, less efficient, product and license revenues.
Furthermore, as subscription revenue becomes a larger part of total revenue , the cost to generate this revenue will decrease fairly significantly. Below, we can see that although subscription, support, and services revenue was roughly 81% of revenue (2019), it was just 75% of cost of goods sold versus Product and License revenue which made up 19% of revenues but 25% of cost of goods sold(2019). Another figure to put into perspective the efficiency of the newly adopted subscription model is the COGS margin for subscription, support, and services which sits at an average of 12.3% vs a product and license model margin of 16.7%.
Clients and Partnerships
Clients
Citrix has an incredibly robust client base with over 100 millions users and 400 thousand paying clients. It supplies:
- 98% of Fortune 500 companies
- 99% of Fortune 100 Companies
- It’s Largest customers are often the longest tenured customers
Partnerships
Citrix has nearly 10 thousand partners that help accelerate the development of existing, future solutions and go-to-market initiatives.
Attractive Price
Current market conditions seem to be favoring growth over value and have left Citrix’s stock at an incredibly attractive price for any new investors. At just a ~25 price to earnings ratio and ~18 enterprise value to EBITDA it is one of the most undervalued companies in the market basket. With earnings per share of greater than 4 and a return on equity of 153% it is also one of the most efficient and best businesses of the bunch.
I have included a fundamental analysis below which places a conservative implied share price of Citrix at roughly $125 per share. This has not taken account share buybacks over the next few years which will include $1 billion worth of buybacks from its common stock as announced in Jan of 2020. Additionally, other analysts have price targets of greater than $169 with optimistic values reaching over a $200 price tag.
Risks
Every investment comes with risks, however the two I want to highlight are the following:
- Citrix’s reliance on strategic partnerships
- Specialized new SaaS competitors
Mitigates include:
- The long standing nature of many of the strategic partnerships make me believe that is unlikely for changes in their relationships to occur
- High enterprise software and SaaS customer retention rates and Citrix’s acceleration of SaaS restructuring
Conclusion
This is my first public bet on a business, idea, trend, etc. After my analysis of Citrix and comparable publicly traded enterprise software businesses, I propose taking a long Citrix (CTXS) position with an implied share price of $124.88, but with expectations of a ~$170 price target.
I began researching CTXS @ $114 and have made purchases at $118 and $120.
