Analyst Note| Dan Romanoff, CPA |
Narrow-moat Citrix Systems reported mixed second-quarter results, including weaker-than-expected revenue and slightly better EPS. It also issued guidance for the third quarter that was well below expectations and lowered its full-year outlook on headline measures based on sales execution issues. Management was quick to say that demand was solid and pointed to annual recurring revenue. But it also noted that the acceleration of cloud adoption was causing problems with sales execution, which is primarily related to a lack of an overall go-to-market focus and forecasting. We have seen cloud transitions experience faster-than-expected cloud adoption in the past, so this should not be a huge surprise. However, in this case, we think the combination of a miss last quarter, the miss this quarter, a large acquisition (which triggered activist investors in the past), and a less-than-clear explanation of the sales execution issue on the call have conspired to drive a sell-off that is as punitive as it is fundamental. We are lowering our fair value estimate to $125 per share from $149 based on an accelerated transition to software as a service, which we expect to hurt overall growth and margins over the next several years. In short, we have less confidence in the medium term.