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Morningstar | Citrix 2Q Results See Hybrid Cloud and Subscription Booking Success; Maintaining our $83 FVE

Citrix sits on hybrid cloud nine as second-quarter results came in strong, led by popularity in hybrid cloud offerings and the highest-ever subscription bookings mix in overall product bookings--mostly within workspace services. Business momentum has led management to consequently raise full-year and third-quarter revenue guidance, though stressing that it may be too early to assess the long-term trend hybrid cloud and subscription bookings could have on earnings. We are maintaining our $83 fair value for this narrow-moat name as we believe Citrix's success in hybrid solutions is sustainable due to its reliable niche, security-concerned customer base, and Microsoft Azure partnership. However, we expect margin expansion to be difficult.

Second-quarter revenue rose 7% year over year, coming in at $742 million, ahead of our estimate. Citrix's subscription business was the highlight of revenue sources, rising to $111 million, up 49% year over year, and responsible for 42% of total product bookings.

Among product groups, workspace services stole the show. A turn to hybrid cloud solutions drove growth in workspace services, Citrix's largest product group at 61%, where revenue was up by 7% year over year at $455 million. This is unusually high growth for the product group considering its recent history. Within product and subscription in workspace services, revenue grew 20% year over year.

We think Citrix's focus on hybrid cloud initiatives is clever given the inevitable move to hyperscale cloud and bracing for less on-premises data centers. While cloud providers' solutions and alternatives bring a threat to Citrix, we believe that as long as Citrix holds its partnership with Microsoft Azure, it will remain relevant in the public cloud transition. The partnership is responsible for million-dollar deals. Citrix Cloud had four transactions greater than $10 million in the second quarter. In addition, we believe Citrix's niche customers will keep hybrid cloud solutions alive and well in the near term, as opposed to all-public cloud architectures.

Citrix raised revenue guidance for fiscal year 2018 to between $2.92 billion and $2.95 billion given its recent success with subscription and cloud services offerings. We continue to believe margin expansion will be a challenge for the company, especially as Citrix's economies of scale may decrease as it intends to support companies at all stages of the cloud transition, from all on-premises to all on cloud.