Along with the better-than-expected fourth-quarter results it delivered this week, Citrix (CTXS) announced that it had entered into a definitive agreement to purchase software-as-a-service (SaaS) work management specialist Wrike for $2.25 billion in cash. Despite management's optimism, however, this large acquisition doesn't get me excited.
Shift to the cloud
Citrix's core business consists of providing its clients' employees with secure, consistent, and simple ways to access their applications and data from anywhere, using any device.
As enterprises have been shifting some of their infrastructure and applications to the cloud over the last several years, Citrix developed cloud capabilities to complement its legacy on-premises solutions. And following the trend in the software industry, it has been transitioning from one-time license agreements to subscription-based offerings.
The company's fourth-quarter results showed that those shifts to subscriptions and the cloud are well underway. Revenue from subscriptions increased by 76% year over year to $341 million, which more than offset the 69% decline in legacy products and licenses revenue to $54 million. Even taking into account the 6% decline in support of services revenue to $417 million because of the shift to subscriptions and cloud offerings, total revenue increased by 8% to $810 million.
Over the next several years, management anticipates high-single-digit percentage annual revenue growth as customers keep moving to the company's subscription-based cloud offerings. Notably, Citrix ended the broad availability of perpetual licenses for its flagship product, Workspace, during the fourth quarter.
Limited product synergies
In addition to its transition to the cloud, the company is looking to expand beyond its core business. Hence, its deal to buy Wrike.
That decision looks surprising, as Citrix and Wrike address different markets. In contrast with Citrix's infrastructure products, which tech departments purchase to facilitate the work of remote employees, Wrike addresses business customers with its SaaS solution for employees to manage projects and improve collaboration. It competes with SaaS work management specialists such as Asana, Workday, and Smartsheet.
Granted, Citrix can leverage its base of more than 400,000 customers in an attempt to cross-sell Wrike's software to companies seeking tools to improve the productivity of remote employees and distributed teams. But Citrix's Workspace already integrates with Wrike -- and with any SaaS provider, including Wrike's competitors. The possibilities for product synergies beyond that seem limited: It's unclear how Citrix might combine some of Wrike's functionalities with its core infrastructure solutions.
In fact, the acquisition of Wrike may an attempt by Citrix to hedge itself against the threat SaaS platforms represent to its core business over the long term. Such platforms have become an alternative method by which remote workers can access their working environments from anywhere.
A fair valuation
Despite the limited product synergies, Citrix agreed to acquire Wrike at a price that was 12 times the midpoint of its estimated 2021 SaaS annual recurring revenue (ARR) of $180 million to $190 million. That's a generous premium, even for a business that is forecast to grow at a 30% annual rate.
In addition, the deal will add $2.25 billion to Citrix's total debt net of cash, cash equivalents, and investments, which was $841 million at the end of the last quarter.
However, trading at 21 times forward earnings, Citrix stock seems reasonably valued compared to some high-growth tech stocks. But it doesn't represent a bargain given management's ambition of generating high-single-digit percentage revenue growth over the next several years.
In fact, Citrix seems fairly valued right now. Investors should keep the company on their watch lists, and reconsider buying the tech stock when its price becomes more attractive.