Yesterday Elliott Management, a hedge fund firm that owns 7.1% of Citrix’s stock, sent an open letter to Citrix’s board of directors claiming that Citrix is inefficient and lacks focus. Elliott also proposed a vision for the “New Citrix” which includes re-focusing on the core components and spinning off or selling non-core products including GoTo and NetScaler.
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Elliott is asking for a meeting with Citrix’s board to discuss the proposal, though they wrote that if the board is not receptive then they’d push for change directly. Elliott has a history here, as described by Hoover’s, "Hedge fund firm Elliott Management takes an activist approach to investing, frequently amassing significant but minority stakes in distressed or underperforming companies and attempting to foment change.”
I want to dig into the details of the letter, but before I do, I’d like to say that I agree 100% with everything that Elliott is suggesting and I love their ideas. (And seeing as how Citrix’s stock jumped 7% on the news of this letter, I think I’m not the only one to agree!)
Elliott’s assessment of Citrix’s current state
I guess it’s easiest just to read the letter yourself. To paraphrase, Elliot wrote:
- Citrix’s stock could be worth $90-100 by the end of 2016. (It was at $66 but jumped to $70 when Elliott’s letter was released.)
- Every year over the past six years, Citrix’s stock as done substantially worse than any major index or their peer group.
- Citrix’s business model is overly complex.
- Citrix’s execution has been “terribly poor” for more than two years.
- Citrix’s sales & marketing organization is operating “well below industry benchmarks on efficiency and effectiveness, with the weakest metrics among its peers”. They also wrote that the sales organization has a “poor alignment between performance and compensation”
- "Citrix’s channel strategy is stretched across too many channel partners, with important channel-enablement resources being directed to sub-scale partners”
- "The recent product-release issues in both XenApp and XenDesktop, marred by critical feature gaps from prior versions . . . demonstrated a disconnect between customer requirements and development roadmaps.”
- "Citrix’s recent history of funding speculative R&D initiatives without clear route-to-market or tangible competitive advantage must be reevaluated immediately”
- "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”
- "CloudBridge, CloudPlatform and ByteMobile are non-core, are underperforming and are distractions to the management team . . . [and] should be sold or realigned.”
- The GoTo and NetScaler brands are high-value, but they are not part of the core Workspace Services segment.
- "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”
Elliott’s “New Citrix” Plan
- Elliott is proposing a new plan which involves “fundamental change” and “effective oversight”
- GoTo should be sold or spun off. "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”
- Something should be done with NetScaler, possibly selling it. "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”
- Citrix should spend $4.5-$5.3 billion to buy back shares, including taking on debt to do so.
My analysis of this plan
Umm… yes please!
If you look at Elliott’s assessment of Citrix’s current state, what’s not to agree with there? Overly complex business model? Check. Terribly poor execution? Check. Too many channel partners? Check. Product release issues with critical feature gaps from previous versions? Check. Speculative R&D without a clear route to market? Check. Too many underperforming products? Check.
Really the only thing there that anyone could disagree with (unless you work at one of the sub-scale partners) is the selling or spinning off of GoTo and NetScaler. But really those both make sense.
When Citrix acquired the GoTo product line in 2003, we all wondered what that had to do with their core MetaFrame business. And now in 2015, we’re still wondering what that has to do with their core XenDesktop / XenApp business? I mean yeah, the GoTo products are great, but every minute Mark & Co spend thinking about GoToMeeting is a minute they don’t spend thinking about Citrix Workspace Services. Every minute GoToMyPC is mentioned in a Synergy keynote is a minute that thousands of people are not hearing more details about XenApp.
Same for NetScaler. NetScaler is awesome. But what does it have to do with Citrix’s core business? Yeah, sure, you need fast, secure, reliable networks to deliver remote applications and data. But there are lots of companies in the application delivery controller market that build those things. Unfortunately Citrix decided to try to force the advanced XenApp, XenDesktop, XenMobile, and Storefront features into NetScaler. This is bad for several reasons:
- It creates an “us versus them” for all the other ADC vendors. All those other companies like F5, etc. who could be helping Citrix sell are now their competition.
- The “us versus them” also happens within customers. The Citrix team wants to use advanced features of XenApp, but that requires NetScaler. The customer’s networking team says, “We’re an F5 shop,” so now the Citrix team is kind of stuck.
- Networking/ADC admins are not Windows/VDI admins. It’s a giant pain for a Windows admin to have to figure out how to install, configure, manage, and secure some networking appliance thing just to get access to all the features they thought were built into their Windows delivery product.
So to me, getting rid of GoTo and NetScaler makes sense. Same for all the other stuff that really has nothing to do with their core. CloudBridge, CloudPlatform, ByteMobile, Grasshopper, OpenVoice, Podio . . .
Heck, while they’re at it, maybe they can ditch XenServer and try to re-friend VMware? (Ehh.. probably it’s too late for that. Too bad they didn’t think of that two years ago.)
What’s up in the air is mobile. Citrix’s entry into the mobile space was weird, because they waited a long time to make a move and then paid a huge price for what was essentially the #4 player in the market at that time. It seems that only recently (like, very recently) have they gotten their act together in the mobile space.
Whether they keep XenMobile really depends on whether the industry continues to believe that “mobile” and “Windows desktops and apps” should come from the same company. At this point I believe that they can, but the jury is still out on that.
Same for ShareFile. Is ShareFile really something that people care about? I guess if they have XenMobile and Worx then it’s just part of that? The problem with having ShareFile is it makes them against companies like Box and Dropbox. If it were me, I would ditch ShareFile and crawl hands and knees to Dropbox and Box and say, “Hey, we want to make your products first-class integration with Worx and XenMobile. What do you need from us?” Because as those companies move to offer more web-based document editing apps, a company like Citrix would be a fantastic partner to help with the “other” apps that are still Windows apps. But as they are now, Citrix has ShareFile and their mobile stuff doesn’t integrate with other cloud-based storage products, so Box and Dropbox are not going to do Citrix any favors.
Citrix’s response to the Elliott letter
Last night Citrix put out a press release which said, "Citrix has always maintained an ongoing dialogue with our shareholders, and we welcome their input. We will review Elliott's suggestions and respond as we do with all shareholders who engage with us. The Citrix Board and management team continually evaluate ideas to drive shareholder value and are committed to acting in the best interests of all our shareholders."
I’m not hearing “no” . . .