Looks to Engage on Plan for Fundamental and
Sustainable Change
Believes Citrix can Achieve Stock Price of $90
- $100+ Per Share by the End of 2016
Today, Elliott Management Corporation (“Elliott”) holder of 7.1%
of Citrix Systems (NASDAQ:CTXS) stock, sent the following letter to
the Board of Directors of Citrix:
June 11, 2015
The Board of DirectorsCitrix Systems, Inc.851 West Cypress Creek
RoadFort Lauderdale, FL 33309Attn: Thomas Bogan, ChairmanAttn: Mark
Templeton, CEO
Dear Thomas, Mark and Members of the Board:
I am writing to you on behalf of Elliott Associates, L.P. and
Elliott International, L.P. (together, “Elliott” or “we”),
which together own 7.1% of the common stock and equivalents of
Citrix Systems, Inc. (NASDAQ: CTXS) (the “Company” or, “Citrix”), making us one of your largest
stockholders.
We believe that Citrix can achieve a
stock price of $90 – $100+ per share by the end of 2016.
This outcome – which represents an increase in stockholder value of
approximately 50% – is achievable because Citrix has leading
technology franchises in attractive markets but has struggled
operationally for years. As a result, today Citrix’s operations and
product portfolio represent an opportunity for improvement of
uniquely significant magnitude.
The purpose of today’s letter is to a) introduce ourselves, b)
preview some of the extensive work we have done to validate the $90
– $100+ per share opportunity, and c) respectfully request a
meeting with the Company’s board of directors (the “Board”) to share our detailed thoughts about how
to improve Citrix for the benefit of stockholders, employees and
customers.
Today’s letter is being made public primarily because Elliott
has become a 13D filer. We want to be clear about our intentions
and avoid undue speculation.
To be clear, we approach this opportunity with tremendous
respect for the work Mark and the entire Citrix team have done to
achieve technological leadership, particularly in the high-quality
markets in which Citrix participates. Without their vision, the
enormous opportunity outlined below would not exist today.
About Elliott
Elliott is an investment firm founded in 1977 that today manages
more than $26 billion of capital for both institutional and
individual investors. We are a multi-strategy firm active in debt,
equities, commodities, currencies and various other asset classes
across a range of industries. Investing in the technology sector is
one of our most active efforts at Elliott and one in which we have
built a long track record.
Within the technology sector, we have made approximately three
dozen active investments and have successfully identified
value-creating opportunities at companies such as BMC, Informatica,
Brocade, Riverbed, Juniper, Novell/Attachmate, Blue Coat and many
others.
One key differentiating factor in Elliott’s active investments,
especially in the technology sector, is our deep focus on
operations. Our team includes experienced and proven C-level
executives with technical and operational capabilities from
software and technology companies. These executives evaluate
operations, products and markets within our investments and work to
develop strategies to streamline operations, grow revenue and
create value. We also have long-lasting engagements with leading
operations consulting firms, sales and marketing specialists, and
technical consulting firms that we deploy on our investments.
Finally, in addition to our public portfolio, we have significant
investments in private technology companies, which provide
important insights into operating best practices, market trends and
general industry knowledge.
The Citrix Opportunity
Citrix has great products in strong markets. However, Citrix has
struggled operationally and has consequently missed a profound value creation opportunity to capitalize
on these products and markets. Despite Citrix’s strong products,
the Company’s stock price performance tells the story of deep
underperformance across every relevant benchmark, including its
closest peers, over every time period during the last six
years:
Ending June 10, 2015
Citrix's TSR Relative to:
1 Year 2 Years
3 Years 4 Years 5
Years 6 Years
1. S&P 500 Index
(7%) (29%) (84%) (98%) (65%) (56%)
2. NASDAQ Composite
(16%) (46%) (100%) (120%) (93%) (96%)
3. S&P 500 IT Index
(13%) (42%) (80%) (111%) (71%) (70%)
4. Proxy Peer Group
(15%) (44%) (85%) (116%) (56%) (74%)
Over the years, Citrix has recognized that operational changes
are needed and that its product portfolio requires rationalization.
In 2010, Citrix made promises of “efficiency” and “focus” with the
goal of achieving margin targets and rationalizing the portfolio.
Unfortunately, these promises were followed by a period of nearly
400 basis points of margin contraction and an expansion into
several non-core product categories.
In early 2014, Citrix again made a series of promises to address
the operational and share price underperformance. Despite the fact
that these promises were nearly identical to the promises made in
2010, many investors and analysts hoped that this time Citrix was
finally going to remedy the serious deficiencies in its cost
structure. However, operating expenses have continued to outpace
revenue growth, and both profit margins and profit dollars have
declined over the last 12 months.
It is perhaps because Citrix’s promises have uniformly been
followed by increased costs and greater product breadth that the
research community maintains a skeptical approach to Citrix and
continues to call for organizational change, as the quotes below
illustrate:
- “We maintain our Buy rating, although
we stress that significant changes are needed to help drive
value for shareholders, which would include rationalizing
business lines as well as further cost reductions” – Goldman
Sachs, April 2015
- “We have found that it takes the same
time, if not longer, to explain the businesses that Citrix is in as
to explain Microsoft. We believe divestitures would help clarify
the business for investors, which would help the stock price” –
Sanford Bernstein, April 2015
- “The Company’s execution has been
terribly poor for more than 2 years, and we believe management
will be compelled to make more organizational changes going
forward – beyond those already announced” – Credit Suisse,
April 2015
This is just a small sampling of commentary, but it provides a
highly accurate picture of analyst sentiment toward Citrix and is
consistent with other well-respected software analysts.
Furthermore, based on numerous conversations with your stockholder
base, we believe these quotes are representative of stockholder
sentiment as well. Unfulfilled announcements of expense rebalancing
and incremental, recurring restructurings are damaging to companies
and destabilizing to their employees and customer relationships. In
Citrix’s case, these announcements have also impaired the Company’s
credibility with stockholders. We believe that Citrix today has a
far superior opportunity to make serious and lasting changes and to
create sustainable value for stockholders.
New Citrix Operating Plan
Today, Elliott is formally requesting a meeting with the Board
to share the details of an operational plan that we believe will
create tremendous value for stockholders. What we call the “New
Citrix” Operating Plan (the “New Citrix
Plan”) was developed through exhaustive research and with
the help of a full team of operating partners with proven
experience turning around software companies. That team includes
the following:
- Senior Software Executives: We
have assembled a team of senior software executives to evaluate
Citrix and the opportunity for value creation. These are C-level
software executives who have assisted us in understanding the
operating and strategic possibilities at Citrix and who have helped
diagnose issues at, and develop solutions for, other software and
technology companies in which we have invested.
- Top-Tier Consulting Firm: We
retained a leading consulting firm to aid in our in-depth diligence
on Citrix’s products and markets, conducting a survey of more than
400 customers and channel partners, enabling us to better
understand the competitive landscape from a customer’s perspective
and identify key factors in purchase decisions.
- Sales and Marketing Specialist
Firm: We engaged with a leading salesforce consulting firm to
analyze Citrix’s go-to-market strategy and its efficiency. We
evaluated Citrix’s salesforce organization structure, typical deal
team composition, channel ecosystem and compensation methodology to
determine what steps are needed to conform Citrix’s go-to-market
strategy to the industry’s best practices.
- Operations Consultant: We worked
with a major operations consulting firm to conduct a “deep-dive” on
Citrix’s operations in product development, professional services
and various support and corporate functions, which provided
important insight into Citrix’s geographic footprint, utilization
of its international workforce and efficiency of its product
development organization.
- IT Specialists and Data Center
Engineers: We worked with highly experienced technical experts
with deep knowledge of Citrix’s product portfolio to better
understand how it evolved, including understanding perspectives on
product roadmaps, critical features / functionality and how these
products integrate into broader IT solutions.
- Investment Banking Firms: We
engaged with two leading investment banks to ensure our
understanding of capital return options, as well as strategic
options for the GoTo and NetScaler divisions.
The New Citrix Plan is based upon two driving principles: the
need for i) fundamental change
and ii) effective oversight.
The key components for fundamental change are as follows:
1) Implementation of Operational Best Practices: Citrix’s
cost structure is the result of years of layered complexity and
expenses. The structure has become highly inefficient in terms of
actual cost and is also ineffective at generating revenue growth.
We have identified numerous opportunities throughout the
organization for significant improvement, which we believe will
result in both superior revenue performance and a more efficient
use of resources. In total, our New Citrix operating model target
for operating expense is a range of 54.5% –
55.0% of revenue by 2017 relative to 63% over the last 12
months. Our team has identified the major areas for improvement as
follows:
- Sales & Marketing: Citrix’s
sales & marketing organization is operating well below industry
benchmarks on efficiency and effectiveness, with the weakest
metrics among its peers. This is primarily the result of a highly
cumbersome and ineffective go-to-market strategy. Critical
operational metrics, including the ratios of management positions
to quota-carrying reps and sales engineers to field reps, remain
out of line with industry best practices. This inefficiency has led
to weak productivity per sales FTE and is exacerbated by poor
alignment between performance and compensation. In addition,
Citrix’s channel strategy is stretched across too many channel
partners, with important channel-enablement resources being
directed to sub-scale partners. We are confident all of these
issues are fixable through a full realignment to implement best
practices in the areas of deal team composition, sales management
span of control, channel management and compensation
structure.
- Research & Development:
Citrix’s product development effort needs a full operational review
with strong cross-functional participation. The recent
product-release issues in both XenApp and XenDesktop, marred by
critical feature gaps from prior versions, had a deep impact on
execution over the last several years and demonstrated a disconnect
between customer requirements and development roadmaps. In
addition, Citrix’s recent history of funding speculative R&D
initiatives without clear route-to-market or tangible competitive
advantage must be reevaluated immediately. These speculative or
non-core projects need to be scaled back or eliminated and
resources reallocated to the product categories where Citrix has
the greatest likelihood of success. Return-on-investment project
tracking with a focus on risk-adjusted returns needs to be
implemented and strictly followed.
- Product Portfolio: Citrix’s
product portfolio is too broad for its scale and contains far too
many underperforming product lines that consume valuable resources,
have low or negative (i.e., loss-making) return profiles, and serve
as distractions. For example, we believe CloudBridge, CloudPlatform
and ByteMobile are non-core, are underperforming and are
distractions to the management team. We believe these businesses,
particularly ByteMobile, should be sold or realigned.
2) Evaluation of High-Value Non-Core Assets: Citrix
possesses high-value, strategic assets that we believe can be
separated from the core Workspace Services segment: the GoTo
franchise and NetScaler. Such separations would not only be
meaningfully accretive to value but also would enable Citrix
management to focus on improving the Company’s core operational
execution.
- Spin or Sale of the GoTo
Franchise: While we recognize the broad notion of empowering a
mobile workforce, this business’s go-to-market strategy, product
development roadmap and end-market are absolutely distinct from the core of Citrix. GoTo is an
attractive business with scale in its market, and we have
confidence that it can realize significant value through several
alternative transaction structures, including a sale or a spin. We
also further believe that core Citrix’s management can create
significantly more value for stockholders by focusing on
operational execution rather than attempting to oversee the GoTo
franchise.
- Exploration of Strategic
Alternatives for NetScaler: We are not explicitly advocating
for a sale of NetScaler, but we believe the sale option should be
seriously explored to assess potential strategic buyer interest and
valuation, which we believe may be robust. NetScaler is an
excellent business, and its ADC technology is an industry-leader;
however, we believe Citrix has overly relied on the virtualization
cross-sell, resulting in significant under-penetration in
non-virtualization use-cases and within the telco vertical. We
believe other strategic owners can accelerate NetScaler’s growth
through greater scale and unique customer relationships. It is
critical for the Board to consider whether Citrix is the parent
company best positioned to maximize
NetScaler’s value.
3) Capital Allocation: If effectively executed, the New
Citrix Plan will result in tremendous value creation over the next
several years. As a result, Citrix’s stock is deeply undervalued
today. Furthermore, Citrix’s balance sheet is being under-utilized
given its strong cash flow profile, even at today’s level of
inefficiency. At a more appropriate 1.5x – 2.0x target net leverage
ratio, Citrix would have $4.5 – $5.3 billion of buyback capacity
through 2017 while maintaining an investment grade rating. Debt
financing remains at historically attractive levels, and we believe
Citrix should take advantage of this opportunity to repurchase 56 –
61 million shares from now through 2017.
4) Management: Over the past two years, Citrix has
suffered a wave of senior-level management departures, which have
introduced uncertainty and instability into the organization. In
several cases (e.g., Sumit Dhawan and Bob Schultz), these valuable
managers have left to join Citrix’s direct competitors. Citrix
requires stable and confident leadership of its business units and,
under the New Citrix Plan, will also require proven operational
skillsets to drive fundamental change. Elliott is looking forward
to working with Citrix to address its ability to retain and recruit
top talent.
This high-level summary is a brief overview of the details
supporting the New Citrix Plan. Though significant in magnitude,
changes of this kind are relatively common in the software sector.
Nonetheless, a key differentiator, and the second tenet of the New
Citrix Plan, is effective oversight. A strong and
capable Board that oversees and holds management accountable is
critical. We look forward to discussing our
recommendations regarding proper oversight of the New Citrix Plan’s
execution.
New Citrix Plan Results
By implementing the New Citrix Plan and providing the oversight
necessary to ensure its execution, we believe Citrix can achieve a
stock price of $90 – $100+ per share by the end of 2016,
excluding the impact of separating
NetScaler and GoTo. We believe there is potentially significant upside from these price targets if
Citrix executes on the separation of these high-value strategic
assets. The table below details Elliott’s model scenarios
supporting our stock price targets.
Elliott Base Case
Elliott Upside Case
‘14A – ‘17E Revenue CAGR 1
4.0% 5.5% 2017E Operating Expense % of
Revenue 55.0% 54.5% 2017E Operating
Margin 30.0% 30.5%
2017E Leverage (Net Debt / EBITDA) 2
1.5x 2.0x
2017E EPS 3
$6.20 $6.70
NTM P/E Multiple 4
14.5x 15.5x
2016 Price Target 5
$90.00 $103.75
% Gain to Unaffected Price 6
41% 63%
As this table demonstrates, reasonable revenue growth and P/E
multiple assumptions can achieve tremendous results under the New
Citrix Plan. Moreover, the vast majority of the value creation of
approximately $26 in the Base Case is driven by operational
improvements, as margin expansion drives approximately $207 per
share of value increase and improved capital allocation drives
approximately $6 per share of value increase.
Next Steps
As is always the case, we look forward to a collaborative and
positive dialogue with Citrix’s Board and management. To that end,
we respectfully request a meeting in the next few weeks with the
full Board during which we can share a detailed presentation of the
New Citrix Plan and discuss what we believe are the necessary steps
for its implementation. It is our sincere hope that we can work
together to implement the New Citrix Plan, which we are confident
will create real and lasting value for your stockholders.
Elliott hopes that the Board also sees the need for fundamental
change and oversight and will therefore be excited to embrace this
opportunity. We would be remiss if we failed to note that, to date
and as recently as last month, the Company has repeatedly resisted
public calls for real change from the broader investment community.
We hope that the Company can move on from that position and work
together with us to realize the profound opportunity to create
value that is undeniably before us. Elliott is prepared to push for
change directly, but the far better course is for Citrix to
embrace this offer of cooperation and for us to proceed
collaboratively, and quickly, together.
Thank you very much for your time and consideration. I look
forward to our meeting.
Best regards,
Jesse CohnSenior Portfolio Manager
Cautionary Statement Regarding Forward-Looking
Statements
The information herein contains “forward-looking statements.”
Specific forward-looking statements can be identified by the fact
that they do not relate strictly to historical or current facts and
include, without limitation, words such as “may,” “will,”
“expects,” “believes,” “anticipates,” “plans,” “estimates,”
“projects,” “targets,” “forecasts,” “seeks,” “could,” “should” or
the negative of such terms or other variations on such terms or
comparable terminology. Similarly, statements that describe our
objectives, plans or goals are forward-looking. Our forward-looking
statements are based on our current intent, belief, expectations,
estimates and projections regarding the Company and projections
regarding the industry in which it operates. These statements are
not guarantees of future performance and involve risks,
uncertainties, assumptions and other factors that are difficult to
predict and that could cause actual results to differ materially.
Accordingly, you should not rely upon forward-looking statements as
a prediction of actual results and actual results may vary
materially from what is expressed in or indicated by the
forward-looking statements.
About Elliott Management Corporation
Elliott Management Corporation manages two multi-strategy hedge
funds which combined have more than $26 billion of assets under
management. Its flagship fund, Elliott Associates, L.P., was
founded in 1977, making it one of the oldest hedge funds under
continuous management. The Elliott funds' investors include pension
plans, sovereign wealth funds, endowments, foundations,
funds-of-funds, high net worth individuals and families, and
employees of the firm.
1 Elliott estimates, based on Company filings and Wall Street
estimates. Analysis performed as of June 10, 2015
2 Share repurchase plan assumes a mix of accelerated share
repurchases and recurring quarterly buybacks between 2015 and 2017
to target the stated net leverage levels. Share repurchases are
assumed to be funded by available US cash ($250 million minimum US
cash balance) and the issuance of US debt financing at a 4.5%
annual rate. Incremental interest expense from new debt issuance
netted against US taxable income at the US statutory rate of 35%.
Share repurchases executed at a price per share implied by similar
valuation multiples as the assumptions above. The Elliott Base Case
and Elliott Upside Case assume an average share repurchase price
per share of $80.25 and $87.75, respectively, for the 2015-2017
repurchase plan (round to the nearest $0.25 per share)
3 EPS metrics round to the nearest $0.05
4 Elliott estimates, based on a conservative valuation relative
to the Company’s peer group
5 Price targets round to the nearest $0.25. The impact of the
convertible note conversion at $90 per share assumed to be
mitigated by the existing note hedge
6 Unaffected price assumed to be $63.80 as of April 10, 2015,
which was the day following Citrix’s Q1 2015 earnings
preannouncement and when significant speculation of potential
activist interest in Citrix’s stock began
7 Elliott estimates, based on a constant unlevered valuation
multiple and assumes Citrix’s status quo share repurchase plan of
approximately $400 million per year
View source
version on businesswire.com: http://www.businesswire.com/news/home/20150611005626/en/
Elliott Management CorporationStephen Spruiell,
212-478-2017sspruiell@elliottmgmt.com
Citrix Systems (NASDAQ:CTXS)
Historical Stock Chart
From Aug 2024 to Sep 2024
Citrix Systems (NASDAQ:CTXS)
Historical Stock Chart
From Sep 2023 to Sep 2024