Citrix Systems (CTXS)

Over the last nine months, we have talked a lot about the transformation of the modern workforce, and the move away from the head office configuration to the work from home model. It’s something that was already happening to a small degree but was supercharged by the onset of the coronavirus pandemic and the need for workers to remain isolated from their colleagues.

Almost overnight stocks that were previously on the periphery became household names. I’m guessing not many of you would have heard of the name Zoom before February of this year. Now its a verb in its own right. You can “Zoom” someone, much like you “Uber” to a destination, “Google” an important price of information, or “Hoover” the mess off of the floor. My kids don’t go to school assemblies anymore, they hold Zoomblies instead.

The pandemic has been a godsend for companies like Zoom, Peloton, Slack, Draft Kings, and the more well known “stay-at-home” stocks such as Amazon, Netflix, Apple, and Electronic Arts. Many of these are all outstanding performers in the pandemic portfolio that we’ve had running since March. To the end of October, the portfolio has made approximately 68% for anyone who was invested for that period. Not a bad return at all for an 8 month period.

Today’s stock report subject is another that will take advantage of the work from the new home ethos. But it’s one that hasn’t really taken off like some of the others. When the pandemic first hit companies were scrambling to adapt and tended to focus on the more immediate “critical business” needs of its employees. Get people a desk, a laptop, a phone, and a video link and we’ll sort out the rest later.

Now that the initial setup is pretty much done, and the reality sets in that working from home is the new normal, it will be time to make things easier for workers to perform their roles in a multitude of locations. Whether it be in the office, working from home, or out on the road, systems that help with this process will play a big part in the changes going forward. That’s where Citrix Systems comes in.

Citrix is a multinational software developer that provides server, application and desktop virtualisation, networking, software as a service (SaaS), and cloud computing offerings. Their products can be found at over 400,000 businesses worldwide, including 99% of the Fortune 100 companies, and 98% of the Fortune 500.

They are a big name in the industry and have been working on modernising their technology to enhance the work from home experience well before anyone had heard of Covid19. Their virtual desktop product enables employees to get easy, secure access to their main work computer from any location where the internet can be found and on any device. It helps IT departments consolidate their computing to a data centre which allows companies to save money by handing out less expensive equipment to employees. And it gives companies more control with how their workers interact with their systems, while helping to secure work from offsite environments.

Recent big-name signings have included Fujitsu, Nissan Motors and Anheuser Busch. Importantly, these signings have been to the subscription-based model Citrix has been converting to rather than the one-time license type model of the past. Here, each company pays a subscription for every employee, rather than a one-off cost. Fujitsu has signed 140,000 employees for example, while Nissan has signed up 136,000. At $25 a head, that sort of money starts to really add up as you keep adding more clients.

The subscription model has been the go-to model for the majority of big technology companies in the modern era. Companies such as Microsoft and Adobe have led the way with pretty much everyone else from Apple to Amazon following suit. And there’s a good reason for it. Subscriptions provide predictability and recurring revenue. They also give businesses an insight into their customers which can help nurture relationships, and increase product satisfaction.

Currently, Citrix receives 62% of its revenue from subscriptions and it would like this to be more than 80% by 2021. It’s this transition that has seen its share price struggle over the last year where others have taken off. Revenue slows when you forgo large upfront one-off license fees and replace it with lower-priced, long term subscriptions. However, it proves to be a much better financial benefit in the long run. Studies have shown that in the long term “lifetime revenue” increases per customer, and client retention is much greater.

Interestingly, in its last two earnings reports, Citrix has beaten estimates on both the top and bottom lines but has still been punished by investors. In the second quarter, it dropped 16% and then another 10% in the third quarter. For a stock that will benefit from the work from home phenomenon, it is yet to be rewarded. But I believe with the delayed revenue on its way that may just be yet to come.

The Citrix share price started the year around the $112 mark, dropping to $106 in the March swoon, before hitting highs of $165 in July. The last two quarters have seen the price pull back to the $120 mark where I believe it provides a great buying opportunity. Investors were wanting a “blow it out of the park” style result from its last two earnings – which never eventuated. But this is a slow build. Revenue will continue to grow as subscriptions continue to increase and companies now set their sights on improving the work from home experience. It’s one of the few pandemic trades where it isn’t too late to get in at a great price.

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