Unsurprisingly, Citrix Systems (NASDAQ:CTXS) posted strong first-quarter results. After all, the company's products allow computer working environments to be available anywhere at any time, which is what many enterprises needed almost overnight as they shifted to work-from-home protocols in an effort to limit the spread of the coronavirus.
These short-term tailwinds could turn into a secular trend as companies experience the benefits of such solutions. But that does not mean you should buy Citrix stock. Here's why.
Impressive first-quarter results
Citrix reported better-than-forecasted first-quarter results, leaving little room for doubt in the company's position.
|Metric||Previous Guidance||First-Quarter Results|
|Revenue||$730 million to $740 million||$861 million|
|GAAP EPS||$0.74 to $0.80||$1.42|
|Non-GAAP EPS||$1.15 to $1.20||$1.73|
The company experienced a burst in demand for its solutions as many countries have been enforcing work-from-home policies. And management has accommodated this sudden new demand, mostly from its more than 400,000 existing customers.
Instead of requiring multiyear commitments, the company proposed short-term licenses at discounted prices to allow its customers to address their urgent -- and maybe temporary -- need to scale their consumption of Citrix services. As a consequence, the total average contract duration of deals booked in the first quarter dropped to 1.3 years, down from 1.4 last year and 1.7 during the prior quarter.
Limited impact in the medium term
That boost may translate into long-term revenue growth as Citrix's customers may realize the extra flexibility such solutions offer. A survey from the research company Gartner confirms this potential, reporting that 74% of CFOs who responded plan to shift at least 5% of on-premise employees to remote working after the coronavirus crisis settles.
Yet despite the spectacular first-quarter results, management barely updated its full-year guidance. It slightly increased the upper end of its revenue range, but it decreased the expected GAAP operating margin, resulting in an unchanged GAAP EPS range of $3.29 to $3.50.
|Metric||Previous Full-Year Guidance||New Full-Year Guidance|
|Revenue||$3.10 billion to $3.13 billion||$3.10 billion to $3.16 billion|
|GAAP Operating margin||17.2% to 18.2%||17% to 18%|
|Non-GAAP operating margin||28% to 29%||28% to 29%|
|GAAP EPS||$3.29 to $3.50||$3.29 to $3.50|
|Non-GAAP EPS||$5.35 to $5.55||$5.40 to $5.60|
Management stayed prudent as the company's customers remain exposed to a recession. Enterprises may choose to prioritize their business continuity over investments in computing infrastructures, which wouldn't bode well for Citrix.
Citrix's solutions can easily scale with existing customers, and they can also accommodate the urgent and basic capabilities remote workers need. However, they require upfront design and implementation efforts for remote employees to access all of their enterprise applications.
Before the coronavirus outbreak, I discussed how Citrix's rich valuation did not not offer a comfortable margin of safety for prudent investors. Since then, the stock price has increased by 10.6%. As the full-year guidance has barely changed, I still don't think the stock offers a prudent investment opportunity.
Granted, management expects annual revenue growth to exceed 10% beyond 2024 as the company ramps up its subscription offerings. But the midpoint of the full-year revenue range corresponds to revenue growth of only 4%. In any case, the market expects much higher revenue growth, as it values Citrix at a huge multiple of 41.8 times the midpoint of the 2020 forecasted GAAP EPS.
In addition, management executed its accelerated share buyback program during the first quarter, spending $1 billion to repurchase shares at a demanding valuation of $121/share -- 35.6 times the midpoint of the 2020 EPS range.
And to finance this buyback program, Citrix increased its net debt (total debt minus cash and cash equivalents) from $154 million at the end of last year to $1.18 billion three months later.
Given the company's high operating margins and its exposure to a market that is poised to grow, that debt load doesn't represent a threat. However, Citrix has become riskier as it can't rely on a large cash balance (net of debt) if a prolonged recession materializes. In addition, that level of debt reduces the company's potential for acquisitions.
Thus, prudent investors should stay on the sidelines as long until Citrix's lofty valuation cools down.