By Rakesh Sharma at Investopedia | Updated October 22, 2015
Read original article here - http://www.investopedia.com/articles/investing/102215/citrix-turnaround-cards.asp
For Citrix Systems Inc. (CTXS), it's been the best of times and the worst of times this year.
Even as an activist hedge fund demands its breakup, the Fort Lauderdale, Florida-based company reported solid earnings after market close that beat analyst expectations. The company had revenues of $813 million and earnings of $1.04 per share. The figures surged past analyst expectations of $786 million in revenue and earnings of $0.84 per share. Overall, the company's share price is up by 13% this year and, as of this writing, is trading at 42 times its next year's earnings.
The results are a pleasant surprise for the company's investors after six years of declining growth. But, investors should not take the latest earnings as a sign that the company is out of the woods yet.
A HEDGE FUND INTERVENES
Citrix had six years of declining growth as it navigated a challenging transition in its business model from high margin on-premise software to a volume driven Software-as-a-Service model. It laid off employees and streamlined its product lineup this year to make the change.
In June this year, activist hedge fund Elliott Management took a 7.1% stake in the company. Since then, Citrix's CEO has resigned and the hedge fund has put forward a number of demands, including revamping the company's channel management strategy and a sale of its GoTo services product suite. To avoid a breakup, Citrix tried to sell itself as a whole in September.
COVERING GROUND IN SAAS
Citrix's sale attempts were based on balance sheet math. Revenues from SaaS services, which includes Citrix's communication cloud and the GoTo service suite, grew 10 percent last year. The division also includes the company's fastest growing product ShareFile, whose sales grew 40 percent last quarter (and 60 percent last year). According to Citrix CFO David Henshall, ShareFile is poised to play a "larger and larger part of the business."
The problem is that ShareFile cannot grow fast enough.
The Enterprise File Synchronization and Sharing (EFSS) space is deeply competitive and features an array of players ranging from deep-pocketed companies, such as Apple Inc. (AAPL) and Google Inc. (GOOG), to startups, such as DropBox, which recently entered this space.
The nature of the industry is reflected in ShareFile's precarious positioning. Although it is among the top five vendors for enterprise file synchronization and sharing software, ShareFile still trails market leaders like EMC Corp.'s (EMC) Syncplicity by Axway and Box. What's more, research firm Gartner's latest report on the market states that ShareFile's procurement process and support service level is not optimal.
A SHAKEUP IN THE COMPANY'S PRODUCT LINEUP
At the end of last year, Citrix's product and licensing revenue had grown by a mere one percent from previous year figures. This past quarter, however, it grew by 7 percent. But the growth cannot be entirely due to a sales increase. A reflection of this is the past quarter's decline in professional training and certification revenue. Instead, the company has had to streamline its product line and retire non-performers, such as XenClient, in response to weak sales. Simultaneously, competitor VMWare's all-out war against its bestseller XenDesktop has eaten into its market share and eroded its product ecosystem.
THE BOTTOM LINE
Citrix is in the middle of a business transition as it adjusts to new marketplace realities. The company faltered during the initial part of its execution; however, it has done well this year. It needs to further execute aggressively to catch up with competitors and carve out a niche for itself in the SaaS marketplace.