Despite beating expectations, shares of remote work company Citrix Systems (CTXS) fell 16% after it reported its second-quarter results. The company has been slowly transitioning its customers to a cloud-based subscription model, and that slow pace was punished in the market in spite of its positive progress. But the stock's drop may present a great opportunity to buy this tech stock at a solid value.
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Strong quarterly revenues
Citrix virtualizes desktops and applications to enable easy, secure work access from any location. The company reported strong results in the second quarter of 2020, maintaining its trend of increasing total revenue. Of particular importance was the prominent increase in subscription annual recurring revenue (ARR), a metric used to measure annualized revenue from subscription-based offerings. Second-quarter subscription ARR increased $949 million, up 54% year over year, and software-as-a-service ARR increased $590 million, up 41% year over year.
In Citrix's case, the company has been slowly shifting its product mix away from one-time product sales to a cloud-based subscription that makes its products more accessible, similar to what Adobe (ADBE 0.87%) did. The jump in subscription sales firmly reinforces that the company is headed in the right direction.
However, reported revenue for the second quarter only increased 7% year over year, down from the 20% increase in first-quarter comparisons. But investors likely shouldn't worry: Citrix actually expected this slowdown, since changing its product mix would understandably cut into its current revenue stream. Instead of buying one-time licenses, which typically cost more up front, customers buy lower-priced, longer-term subscriptions.
Investors were expecting consensus-crushing figures, given how the pandemic has accelerated the shift toward remote work, but Citrix has seen current customers focusing more on immediate critical business needs. That made its transition toward cloud-based products slower than previously anticipated.
To address this, Citrix has teamed up with Microsoft (MSFT 1.82%) to offer a hybrid cloud program, integrating Citrix virtualization software with Microsoft Azure and 365. The aim is to move on-premises Citrix customers to the cloud by combining features of its own offerings and Microsoft's that facilitate the conversion, thereby hastening a transition that has already taken several years to complete.
So even though total revenue grew at a slower quarterly pace compared to the three months before, Citrix expects that subscriptions will grow to represent 80% of revenue by the end of 2020. As such, the company is guiding yearly revenue to at least $3.18 billion, an increase of 5.6% from the year before.
Future hints of solid growth
Indeed, the company's future outlook is strong on the back of expected increasing demand. The coronavirus pandemic has reinvented the work environment as we know it, requiring companies to adopt digital practices to support safe, remote workplaces. Citrix jumped on the digitalization bandwagon ahead of the curve, and that strategy should continue to serve it well in the near future.
Specifically, the company's conversion to subscription cloud-based software follows Adobe's switch to the cloud. This changeover has helped revitalize other companies, and the numbers seem to support that Citrix is benefiting from this move, too. The change is likely to cause near-term revenues to weaken, though, since up-front license sales are being converted to recurring subscriptions. Yet over the long term, the lifetime revenue per customer may actually increase, given that cloud contract duration averages longer than on-premise product solutions. This may stem from a customer's greater reliance on integrated Citrix software, as well as the higher switching costs of completely changing one's system from one cloud-based service to another.
As a result, Citrix currently enjoys solid profitability, with a trailing 12-month gross margin around 85% and a trailing 12-month net profit margin around 24%. Further supporting the company during a potentially turbulent 2020 is its positive free cash flow, a trend that Citrix has maintained over the past five years to help it continuously reinvest in improving its products.
Image source: Citrix Systems.
Positive brand positioning
Nevertheless, many companies are deploying software-as-a-service (SaaS) products, which may make Citrix's virtualized desktops less necessary over the long term. With increasingly easy access to individual programs through an online portal, current and future customers may not see the benefit of virtually replicating a physical desktop for remote use. SaaS subscriptions currently comprise 16% of the company's total revenue and 54% of all its subscriptions, so future competition could potentially cut into the expected Citrix demand curve.
However, Citrix pre-emptively addressed this by expanding its own SaaS products, like secure, remote-access gateways, single sign-on capabilities, intelligent workspace microapps that integrate third-party SaaS applications, and content collaboration storage. The company also offers increased security and integrated IT support for its desktop-as-a-service product, and that may add significant value for its enterprise customers when it comes time to choose between providers.
Furthermore, Citrix has recently repositioned itself as a go-to digitalization provider in the wake of the pandemic. Not only has it branded itself as a great choice for seamless remote work management, but also as an integrated system that helps companies move their employees back into a physical office should they choose. This may entice potential customers to sign up, despite their reluctance to invest in longer-term digitalization projects during this uncertain economic period.
Overall, given its solid results quarter after quarter, Citrix will likely continue growing over time. Share prices seem likely to mirror that growth as the company moves more fully into a cloud-based model, especially if Citrix is able to adapt to the increasingly ubiquitous presence of SaaS apps. Given that the company is currently at the midpoint of its historical price-to-earnings (P/E) ratio, this dip after earnings might be a great opportunity to invest in a remote work stock at a good value.
