Citrix Systems shares were almost cut in half Monday after the software developer warned that its second quarter sales and earnings will fall dramatically short of analysts' estimates. But as far as profit warnings go, this one actually offers some hope.
During a conference call Monday, CEO Mark Templeton outlined the distressing news, essentially blaming a rapid shift from shrink-wrap box licensing sales to paper licensing for the short-term malaise.
Call it an ugly side effect of doing more business online as customers buy and upgrade programs electronically rather than buying the shrink-wrapped version through the channel.
Making matters worse, Templeton said, is the fact that most of the paper licensing deals are larger accounts, involving more than 500 end users, and they typically take six to nine months to close.
As a result, Citrix will write off $8 million to $10 million in channel inventory this quarter and possibly more down the road if the transition to paper licensing continues to surge.
"Customers are moving to paper licensing model much faster than we anticipated," Templeton said. "This is positive news in the long-term because larger customers are deploying our software."
So for those of you keeping score at home, Citrix (Nasdaq: CTXS) is landing and working on those whale-sized contracts, but it's taking longer than the company expected to close these deals. Templeton said it had around 20 deals valued at between $750,000 top $1.3 million just waiting to become official.
PaineWebber analyst Don Young took the easy and predictable route, downgrading Citrix from a "buy" recommendation to "neutral." Prudential Securities also cut it from an "accumulate" rating to a "hold."
Naturally, Citrix shares collapsed Monday, falling 18 1/16, or 44 percent, to 23 1/8. Citrix also fell 20 percent on Friday. That's more than a 60 percent haircut in two days.
Although none of the analysts following Citrix were immediately available for comment, one can expect that at least one or two of these firms will have the foresight to stand behind one of the best-performing software stocks of the past two years.
Investors can't be blamed for unloading the stock Monday. It's symptomatic of today's mindset. If a tech company's going through some short-term pain, bail out and find the next bus leaving town. Maybe we'll get back on in a few quarters.
But Citrix didn't say they weren't selling their software or that demand was drying up. It could be simply in a business model transition, one that most software companies are going to be dealing with in during this pivotal electronic transition.
In March 1999, this stock was trading at $20 a share and announced a 2-for-1 split. It then resumed its ascent, soaring to an all-time high of 122 5/16 in March of this year. In between, it delivered another 2-for-1 split in February.
Before Monday's news, all 11 analysts following the stock rated it either a "buy" or "strong buy," most of them rating it the latter.
These may be growing pains. But today's technology investor, for the most part, has no sympathy or patience for a company facing even the slightest hint of adversity.
Those investors willing to see Citrix through this hiccup stand to reap some huge dividends.
"As the pipeline there grows, the sales cycle there tends to be extended," Templeton said. "This is a good thing long-term because the deals are larger. We expect the trend toward paper will continue and this is a good thing for our business, but it creates this transitional process in the meantime and it forces us to now remodel the business in terms of growth."
Of course, Citrix is now expecting a second-quarter profit of between 9 cents to 11 cents a share, roughly half the First Call Corp. consensus estimates of 21 cents a share.
Certainly the stock should be punished, but a 44 percent decline appears to be way too severe.
It also said sales would fall somewhere between $105 million to $110 million.
Considering all that went wrong this quarter, that's still an 11 percent improvement from the year-ago quarter. Not great, but not too bad especially when you consider the possible upside surprise waiting a few quarters hence when those whale contracts close.
The company said paper licensing would account for 15 percent of revenues in the second quarter, compared with less than half that in previous quarters. The figure will reach 20 percent in the fourth quarter.
Templeton said customer demand was "as strong as we've ever seen it" for the second half of the year, but operating margins will drop because of the product shift.
When Citrix announces its second-quarter results on July 19, it will provide more insight. There's even the possibility of a more optimistic outlook for the third and fourth quarters.
Meanwhile, investors have to decide if Citrix is worth the risk at such a discounted price.