Spinoff Woes: CTXS Tanks on Announcement

It’s been just a few days since Citrix (CTXS) announced plans to spin off its GoTo product family into a separate entity, but things are already looking ugly for the software company. News that management would also cut 1,000 jobs didn’t sit well with investors, and the stock pulled back more than 10% on Wednesday. I’m generally skeptical of spinoffs, but recent actions make it worth a second look.  

CitrixIn July, the former CEO of CTXS, Mark Templeton, announced plans to retire, but was supposed to retain his position during the formal search for his replacement. That turned into a sudden exit for Templeton after the most recent quarterly earnings release.

This week’s major spinoff news now means CTXS needs to find two permanent CEOs, instead of just one. Senior Vice President Chris Hylen will step up in the interim, but it’s a sloppy move that doesn’t look planned, and I think that’s a big reason the stock has been tanking this week.

As far as I can tell, CTXS is hoping that its GoTo products will get a big multiple as a standalone company. That’s probably right, too, considering the current market. LogMeIn (LOGM) trades at 40x next year’s earnings per share, while Citrix stock trades at just 17x, so a breakout does have a chance to enhance value.

However, the longer-term issue of the business as a whole seems to have hit a wall. A forward-looking global technology provider shouldn’t be eking out 1%-5% annualized revenue gains. That’s actually pretty disappointing.

How Might the Spinoff Affect CTXS Stock?

Spinning off GoTo may open up growth on that side, but what’s interesting about this rhetoric is that it’s positioned as a margin strategy: CTXS is trying to eliminate costs on that stagnant revenue pool to liberate some incremental profit. This doesn’t confirm that GoTo is where the growth (and profit) is, but it does point out that that’s where a lot of the costs are lurking.

Despite lower-than-expected revenue growth, the $4.40-$4.50 EPS guidance for 2016 that CTXS reported is better than expectations of $4.20. Clearly, GoTo — at about 20% of revenue — is a drag on profits. The main question here is whether the spinoff will help or hurt Citrix stock in the long run. I think, at the very least, getting rid of drag on profitability makes it a good idea, especially since the market will give some “optionality” value to GTM.

A separate GoTo company may be able to spend more to pursue other growth opportunities, but there was zero touting of GoTo as a hot growth opportunity in management’s spinoff presentation, which I think they would emphasize if that story was really there. It’s possible that, down the line, the Street will value GoTo with more lenience because it’s more end-user-oriented than core enterprise Citrix. But, the newly spun out Hewlett-Packard companies, Hewlett Packard Enterprise (HPE) and HP Inc. (HPQ), show us how that hypothesis can play out.

In the end, whether GoTo works out as a standalone company is an open question, but the near-term impact for Citrix stock and total shareholder value is likely positive. Still, while the activists who had been pressuring the company to maximize value may be satisfied for now, it’s going to take a few years after the spinoff before the long-term capital return plan is even in play.

Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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