Citrix Systems (NASDAQ:CTXS) posted better-than-expected fourth-quarter results. Yet at first sight, there's nothing to be excited about. Revenue increased to $810 million, up 1% year over year. And the near-term outlook doesn't look much brighter, since the midpoint of 2020 revenue guidance of $3.115 billion corresponds to 3.5% year-over-year growth. Also, management expects non-GAAP (adjusted) operating margin to decrease from 30% in 2019 to a range of 28% to 29%.

For a tech company that is expanding its business into the growing cloud computing market, this performance looks weak. But in the long term, Citrix should profit from this transition.

From perpetual to subscription

Citrix's legacy business consists of selling hardware and software that allows users to remotely access a virtual computer desktop hosted in a data center. Compared to a classic Windows 10 workstation, this solution offers the advantage of keeping the same desktop environment from any device, anywhere. Also, computer administrators benefit from the more efficient central management of employees' working environments.

But with the emerging cloud-computing technology, enterprises have been moving a part of their on-premise applications and infrastructure to the cloud, which makes Citrix's legacy portfolio less relevant. In response, Citrix integrated its solutions with the ecosystems of public cloud providers such as Microsoft's Azure and Alphabet's Google Cloud. As a result, Citrix Workspace, the company's new platform, has become an attractive solution for mobile users working in a hybrid multi-cloud environment.

Man touching cloud with padlock icon on network connection.

Image source: Getty Images.

This transformation involves short-term headwinds, though. With its legacy offerings, Citrix received up-front payments for selling perpetual licenses and multi-year maintenance. But with the shift to cloud-based solutions, Citrix switched to a subscription model. Thus, the company receives smaller annual recurring fees instead of large upfront payments, which negatively impacts its revenue and free cash flow in the short term.

As an illustration, fourth-quarter revenue from the product and license division and the support and services division dropped to $616 million, down 21% and 5% year over year, respectively. In contrast, revenue from the subscription division increased to $194 million, up 49% year over year. 

As a result, revenue from the subscription segment increased to 24% of the company's total revenue during the last quarter, from 16.2% a year ago. And management expects revenue from subscriptions to represent 65% to 75% of the company's total revenue by 2024. 

In the medium term, the headwinds resulting from this transition should wane, and revenue growth should accelerate. In fact, total deferred and unbilled revenue, an early indicator of revenue, jumped 15% year over year.

Fully priced growth acceleration

Management forecasts revenue growth to progressively increase to a range of 8% to 10% by 2024 and exceed 10% over the long term. Also, it expects non-GAAP operating margin to reach at least 34%.

However, even if you assume a flawless execution over the next several years, the company's valuation doesn't look cheap.

Metric Citrix
Forward price to sales 

5.2  

Forward P/E (GAAP)

36.5

Forward P/E (non GAAP)  22.8 

Data sources: Citrix Systems and Yahoo! Finance

The difference between the company's GAAP and non-GAAP results is mostly due to share-based compensation (SBC) that management excludes from its calculation of non-GAAP earnings. SBC isn't a cash expense but it still represents a real cost to shareholders in terms of dilution

Thus, investors should value this tech stock based on its GAAP results. And since Citrix's forward GAAP P/E ratio of 36.5 doesn't provide any margin of safety, even when taking into account the forecasted revenue growth acceleration over the next several years, prudent investors should stay on the sidelines.