Is Elliott Management’s Proposal Good For Health of Citrix Systems, Inc. (NASDAQ:CTXS)?
There are actually two important questions here. One is whether Elliott Management’s recommendations to Citrix Systems, Inc. (NASDAQ:CTXS) make any sense. The other question is whether Citrix will agree to follow the proposals by the activist investor.
Perhaps the simple answer is that Elliott’s recommendations are useful, especially in speedily bolstering shareholder value. However, the recommendations could also derail Citrix’s progress, considering the direction that the management has already focused the company.
Citrix is attempting a turnaround, both by cutting costs and reorienting its products. Earlier this year, the company announced plans to remove 700 positions, a step that was expected to save up to $100 million. Citrix is taking some charges along with it as it restructures.
The company reported a 48% dip in profit in the last quarter (1st quarter of 2015) and warned that more disappoints are coming in the current quarter (2nd quarter of 2015). In essence, Citrix is looking at 2015 as a transition year and its performance will likely be dented by various reform programs, such as restructuring.
The Citrix management’s growth plan
For the management of Citrix, the future lies in offering bundled software solutions. The company has come up with a suite of enterprise mobility solutions called Citrix Workplace Cloud (CWC). The management of the company is of the opinion integrated offerings will unlock more potential for future growth.
Among other things, Elliott wants Citrix to simplify its products structure, possibly spinning of or divesting some product categories.
Looking the position of Citrix’s management and the recommendation of Elliott, what comes out clearly is that the two parties have diametrically opposite views of the future of the company.
It is worth looking at Citrix’s potential growth catalysts to see whether the management is on the right track regarding reforming the company.
Mobile and cloud are some of the areas that Citrix Systems, Inc.(NASDAQ:CTXS) is hoping to drive growth. Usage of mobile devices in enterprise environments is on the rise, alongside Bring Your Own Device (BYOD) trends. This is happening as corporations embrace more mobile connections and expand access to company resources so that employees can work from any location on any device,
Citrix has products like XenMobile and XenDesktop/XenApp to address enterprise mobile and desktop virtualization needs of corporations. On the cloud side, the company has products like NetScaler and CloudPlatform. NetScaler speeds up cloud deliveries while CloudPlatform supports building of cloud platforms, which can be public or private.
XenMobile: The rise of enterprise mobile is driving the demand for Mobile Device Management (MDM) solutions, which is currently a more than $1 billion market. XenMobile positions Citrix to take advantage of the rapidly growing MDM market.
Citrix has a differentiated offering in the MDM segment, which includes XenMobile and a host of other complementary solutions. With XenMobile, Citrix is also able to address BYOD needs of enterprises.
IDC estimates that the MDM market will expand at a compound annual growth rate of 35% between fiscal year 2014 and 2015.
XenDesktop: Citrixis is currently the leader in desktop virtualization, controlling more than 60% share of the market. The release of XenDesktop 7.6 and the expected increase in IT spending by corporations are likely to lead to gains for the company in the desktop virtualization space.
In the recent past, enterprises have slowed down their IT spending, leading to some softness on the desktop virtualization front. However, increased IT budget allocation is expected after the recess and that bodes well for Citrix.
NetScaler: Citrix’s NetScaler is tracking well and is a key growth driver, currently accounting for about 35% of the company’s license revenue. The company’s recent acquisition of ByteMobile will strengthen the position of NetScaler, especially in the telecom market.
Solid distribution channel: Citrix boasts a network of more than 10,000 global partners, which enables it to server more than 330,000 customers. The company can rely on its vast partner network to accelerate the adoption of its integrated CWC offerings.
Areas of concern
High expectations for XenDesktop: It appears that there is high hope about future growth of Citrix Systems, Inc.(NASDAQ:CTXS)’s XenDesktop. That is a great thing, but should XenDesktop growth fail to meet expectations, the result can be disastrous for the stock price.
There are at least two factors that could lead to lower than expected growth of XenDesktop. One is a lack of interest in the product among end-users. The other, increased competition from the likes of VMware, Inc. (NYSE:VMW) in the desktop virtualization space.
Partnership with Microsoft: Citrix counts Microsoft Corporation (NASDAQ:MSFT) among its critical partners, especially concerning XenApp. Any development that could alter the relationship with Microsoft in an adverse manner could lead to material negative impact on Citrix’s financial performance.
Citrix finished the first quarter with cash and equivalents of $402.9 million, a significant in increase from $260.2 million at the end of the fourth quarter of 2014.
The Elliott factor and Citrix’s new strategy
Elliott is proposing a number of operational and strategic reforms in Citrix Systems, Inc.(NASDAQ:CTXS). The activist investor, which owns 7.1% of Citrix, believes that the stock could rise to between $90 and $100 if its proposal is honored.
Elliott’s proposal includes divestment of certain assets to focus the company on areas with high growth potential and high profit margins. However, the management of Citrix believes that holding onto the vast product lineup offered in an integrated manner is the best way to go.
To drive growth, Citrix is taking an integrated approach, where it has a new enterprise mobility suite called Citrix Workspace Cloud (CWC). The product has GoToMeeting and NetScaler among others as its components. The company is expected to bring CWC to market in the third quarter of 2015.
Under what it calls the “New Citrix plan,” Elliott is asking the board and management of Citrix to improve talent retention and acquisition. The fund is also proposing divestment of high-value noncore assets. The other thing that Elliott is recommending is recapitalizing the business, which can be achieved by unlocking funds through disposing of noncore properties. To drive more value, Elliott is also asking Citrix to adopt operational best-practices.
Elliott wants Citrix to divest products like CloudPlatform, CloudBridge and ByteMobile.
The fund is also advocating for a sale of NetScaler. The other alternative would be to spin off the businesses, whichever yields maximum value for shareholders.
Given the direction that the management of Citrix has already taken with CWC, it is unlikely it will be willing to unwind to accommodate Elliott’s proposal of stripping down the company’s products structure.
What is clear at this juncture is that the management of Citrix would be more interested in driving forward with CWC to see its impact on the company’s performance. It would likely take a year or more to come up with a clear assessment of CWC’s viability.
For that reason, while Elliott is making important reform recommendations, some of them, like divesting certain high-value products, could prove unpopular with Citrix’s management and board. However, on issues like more cost-cutting and adoption of operations, best-practices are things that Citrix can do as it reorients its products.
Elliott has influenced various tech companies to either sell to private equity firms or incorporate its representative on the board. The fund successfully pushed for the sale of Informatica. The fund is also pushing EMC Corporation (NYSE:EMC) to spin off VMware. While the issue is still in a stalemate, the fund has secured two positions on the board of EMC. Riverbed and Novell are some other companies whose ultimate fate was influenced by Elliott.
Given Elliott’s reputation as activist in tech stocks, anything could happen to Citrix Systems, Inc. (NASDAQ:CTXS). In stark departure from its past activism, the fund is not seeking the sale of the entire Citrix, but certain parts of the company, to create more shareholder value.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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