Citrix Systems (CTXS) has been hovering just under $60 since mid-October when the company lowered its third-quarter earnings guidance and the stock subsequently dropped 11% the following day. During the conference call on October 23, CFO David Henshall highlighted a few areas of relative weakness. The first area was the mobile and desktop segment, where revenue came in at $381 million for the third quarter, which accounted for roughly half of all revenue for the quarter. While this represented 8% year-over-year revenue growth, quarter-over-quarter growth was flat and the results did little to quell analysts' concerns of ongoing sluggish growth in the segment.
One explanation given by Henshall was the longer-than-expected adoption period of the company's new XenDesktop 7 release, although he did mention that it had a record quarter for new trial downloads. Another cause for weakness was the ongoing strategic shift to a mobile focus, which he expected to be driven by the release of the new XenMobile platform.
The other major segment that disappointed was networking and cloud, where revenue came in at $146 million. This represented a 15% year-over-year increase, compared to 46% and 47% year-over-year increases, respectively, in the previous two quarters. The stellar growth has been driven primarily by the NetScaler platform, Citrix's application delivery controller product. Henshall attributed the slowdown in growth to the timing of large orders in the cloud and Internet categories, but remained bullish on the cloud networking segment.
Indeed, Citrix's cloud networking products, particularly NetScaler, should continue to benefit from growth in the ADC market. Casey Quillen, Senior Analyst at market research firm Dell'Oro Group, believes that the core market drivers are in tact, and he sees the impact of the public cloud on virtual ADCs as just the beginning. Additionally, Cisco's (CSCO 1.69%) discontinuation of its ACE product in late 2012 left a giant hole in the ADC market, which continues to be filled by Citrix and competitor F5 Networks. Just after Cisco discontinued ACE, it partnered with Citrix to offer NetScaler as a replacement ADC.
Long term industry growth
While this weakness appears temporary and attributable to timing issues and segment focus shifts, it is important to look at the industry's longer-term growth prospects as a whole. Information technology market research firm IDC recently released its top 10 technology predictions. Of particular relevance to Citrix's new XenMobile platform is the predicted sales growth of tablets (18%) and smartphones (12%) for 2014. IDC also expects cloud spending to increase by 25% in the coming year.
Concerning XenDesktop 7 and the desktop virtualization market, there have been some notable moves in the market, particularly Amazon's release of WorkSpaces and VMWare's acquisition of Desktone. Citrix's general manager of desktop and cloud division, Sudhakar Ramakrishna, sees this as validation of the market potential for desktop virtualization software. If the desktop virtualization market is to grow and mature, Citrix should be ideally positioned.
Attractive valuation
Examining the average analysts' FY2013 EPS estimates before and after the announcement, they were revised down from $3.10 and are currently at $2.96. Using the P/E multiple prior to the revision of 21.5, that should put the stock around $63, versus the current $60, or about an 4% over-correction. Considering the company's historical valuation (using TTM P/E), it is also trading at the lower end of its recent historical range at a trailing multiple of 36.
By examining these multiples on a growth basis, analysts estimate EPS growth of 13% for 2014, giving a price-to-earnings growth ratio of 1.53, which is not unreasonable. If you expect XenMobile and XenDesktop growth to accelerate next year and EPS growth to follow suit, then the PEG ratio gets more attractive.
Risks
As with any investment, especially in dynamic industries such as cloud and virtualization, there are risks. In the third quarter, XenDesktop 7 experienced slow adoption issues, and with Amazon and VMware competing for market share, adoption issues could continue. Also, if the XenMobile platform doesn't gain significant traction, or if enterprises chose different methods to manage mobile devices, growth in the mobile and desktop segment could be weak again.
Final word
While sluggish growth in mobile and desktop has held this stock down, this could be a great opportunity to pick it up at a decent price. The networking and cloud segment should continue to experience strong growth from NetScaler and the Cisco partnership. If XenDesktop and XenMobile start to gain traction, this company will really start to fire on all cylinders. For confirmation that these products are the real deal, keep an eye out for signs from the company's next earnings release on January 30.
