The key problem is not the earnings/business going forward but the loss of credibility with analysts,especially ML with regards to how the events of last week and Monday took place,allowing a deluge of sell orders BEFORE the company spoke up!
From RB thread...."=REFLECTIONS: WHAT CTXS MIGHT HAVE DONE
Monday morning quarterbacking isn't fun to endure if you're the one being second guessed. But sometimes the lessons learned are worth it. At any rate, here's what I think CTXS should have done. Some of it requires speculation as to things we don't know for sure, but which, for the most part, I think can be reasonably extrapolated. I post this now because, although CTXS management can't turn back the hands of time, the clock is still ticking and we must judge CTXS future prospects, at least in part, by how much longer it takes them to get around to doing this stuff right.
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By the time it barely survived making its revenue and earnings targets for Q1 (with a furious effort to book sales at the end of March), and completed its announcements to that effect the third week of April, the following had to have long since become apparent to CTXS management:
(a) the transition from shrinkwrap to paper license was not proceeding according to plan,
(b) that the shrinkwrap channel was clogging up,
(c) DSOs were rising well beyond what could be dismissed as within normal statistical tolerances,
(d) its sales staff were proving ill equipped to close deals at the CIO level and that more training and perhaps new personnel were needed,
(e) the length of time to close was clearly going to be longer than revenue and earnings forecasts had counted on, and that in order to be accurate going forward they'd have to be revised to match the delay (in receipt of revenues);
(f) the possibility was growing that some of the bigger deals it had hoped for might never happen at all -- CTXS was, in at least some instances, simply being rebuffed or turned down, not just stuck in lengthened negotiations closing a sale;
(f) Resellers were sporadically reporting sales lost to small and mid-size customers turning to other solutions (their own re-writes) -- a portion of the heretofore unquestionable market for CTXS' products was possibly shrinking,
(g) it's most important business partner and largest customer (Microsoft) was rapidly nearing a point where its future was going to be called into question and uncertainty was going to buffet it around (the findings of fact were in, and anyone following the trial knew exactly what the ruling would be -- by that time it was becoming more clear daily what the market was already doing to MSFT);
(h) the market had moved from indiscriminate mania to one which would punish severely for earnings misses;
(i) interest rates were rising, and the value for good relations with cheap sources of non-borrowed capital (read: investors) would rise with them;
(j) the fast moving tech industry, particularly in the wireless arena, had entered an era where huge strategic advantage was conferred on those companies with high enough market caps that they could rapidly acquire the competition or strategic competencies, R&D, or products missing from their own mix using inflated stock as currency;
(k) in this era of rapid evolution, there simply isn't time to develop everything in house, acquisitions are often the only way to survive and thrive;
(l) a generous market cap and share price weren't just important for short-term investor sentiment, but for their value in the acquisition capability game;
(m) as companies are overwhelmed with choices for IT expenditures and whiz bang technology, the credibility and stability of the seller was/is increasingly important.
This was the backdrop as CTXS management moved the company into the first weeks of May.
IMO, here's what the company should have done:
PHASE I (last 2 weeks of April and 1st week of May)
(a) Revised its strategic plan for transition generally;
(b) Immediately acquired a few top notch high level sales reps who had not only worked at the CIO level, but were superstars at that level;
(c) Developed and scheduled a "crash" training program to get the sales force bridged up to the next level, using these new superstars;
(d) Called in Ed Iacobucci to personally handle the 3-5 biggest deals (which, once closed, would be the bait used in the "clubby" world of Fortune 500 conventions and follow the leader mentality);
(e) Re-cast its own internal financial goals and estimates;
(f) Developed for the investment and analyst community, a strong summary of the increased investments in acquisitions, R&D, and sales training (read: a good explanation for why expenses were rising fast enough to temporarily knock down margins);
(g) Develop internally for strategic response, a plan for how to address those potential customers eschewing CTXS' products in favor of software re-writes;
(h) Develop an internal "message" to reinstill confidence and avoid the loss of talented employees (hey, don't you think the employees were shaken up by this blunder and needed a little reassurance to keep from bolting?);
(h) Develop for external consumption (analysts, investors, media) a favorable casting of that plan;
(i) Immediately cut flow into the channel in order to avoid the otherwise inevitable "write-off" of inventory;
PHASE II (first week of May)
Two weeks in advance of its annual shareholders meeting, CTXS management should have scheduled a supplemental analysts briefing. At the briefing it should have disclosed/discussed the following:
(a) develop the larger context for the 2000 transition (i.e. CTXS historic growth/long term strategic plans);
(b) list the aforementioned "challenges" it faces, together with the crisp, clear plans it for addressing each of those challenges;
(c) balance each "challenge" with one "new market opportunity" (International expansion of current products, embellishment of immediately available new products (for Unix, etc.), future of ASP, general importance of wireless);
(d) begin, gradually, the process of guiding down.
This would have gotten the bad news out of the way and let it be subsequently swept away by a positive shareholders meeting.
PHASE III (shareholders annual meeting)
Management is candid with shareholders about lowered expectations for coming quarters.
Lives by the addage: ALWAYS UNDERPROMISE AND OVERACHIEVE.
Clearly articulates future course of CTXS. Even if remaining vague enough not to compromise strategic advantage.
PHASE IV (post shareholders meeting)
Keep a hawk's eye on the sales feedback loop.
Provide conservative and gradual changes in guidance as necessary in advance of the quiet period.
Repeat for Q3.
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There are those who might argue that this amounts to a whole lot of hand wringing over nothing, that none of this much matters. Or that it's water under the bridge. They might contend that although the price of the stock went down in the short run, the business itself wasn't really harmed. That maybe the management might have been a bit better on the investor relations and media management front, but that at the end of the day, outside of some ruffled feathers among investors, it won't matter a year from now. Here is a partial list of reasons why I think it does matter. And will continue to matter until management gets its act together and goes back and does things right.
(1) Customer confidence directly affects the bottom line. Do you think CTXS shareholders, analysts, and media hounds are the only ones who were shocked by how poorly the CTXS management blundered not only in blowing earnings, but in how it subsequently dealt with that failing? I don't think so. I think every single CTXS customer is aware, some accutely. Now picture yourself on the cusp of doing a deal with CTXS that's 10-100 times larger than the "test" deal you did last year. You're not just in for the cost of the software, you're committing to the cost of training, IT, disruption of system during the uptake/installation. But really you're also committing to locking yourself into CTXS' product for the long haul. That's the beauty for software manufacturers -- once your software becomes a customer's installed base, they're yours forever, or until they decide they want to start all over again -- a daunting, disruptive process that's usually not worth it. BUT, remember that knife cuts both ways. It means before embedding a company's software across the board and getting "married" or locked in with only an expensive and hassle filled way out, you hold the seller to higher standards of reliability. AND you want to know that you can count on the company to maintain its lead, rather than leaving you stranded or getting bypassed by a competitor, leaving the you compromised. So here's CTXS right on the cusp of a bunch of first time big deals and this is what it does to show how reliable it is. If you're going to tie up your company and put it in the hands of another, you're looking for trusted management a la Cisco, not the sort of management that does stuff like CTXS' just did. Until and unless CTXS' management does something to show it's got its act together, I'll bet there are some big customers who are going to leave it at the altar of these big deals. And I'm afraid the incredibly pathetic conference call on Monday just won't suffice.
(2) To a large degree we live in a world where perception becomes reality. I just spoke to a young man who's graduating a semester early from Duke University. He's a top notch programmer. He actually wants to live in south Florida rather than Austin or Silicon Valley. His perception of Citrix? Well, let's just say he reads the papers, and after Monday he won't be interviewing there -- he's scratched them off his list. Unfair or not, CTXS has been portrayed in the press as having really screwed up, apparently so clueless that it claims not to have seen it was about to be run down by a large locomotive until it got the cattle grille in the teeth. Then been less than proactive in addressing its issues, having left everyone wondering what its plan of action was, and having largely botched the public relations and media end of things. That's not just most of us on the investor Boards, that's most anyone who even glances at the front page of the business section each morning. The ripple effect stretches beyond lost customer confidence and sales, it extends to ability to hire the best new talent -- the intellectual capital upon which CTXS' long term future ultimately rests.
(3) Right or wrong, true or false, CTXS management is seen by many as having not only screwed up but then been dishonest about the screw-up. Who cares you might ask? Analysts care, investors care, potential acquisition candidates care lots. Can you imagine if CTXS lost the ability to make a critical future acquisition because the potential acquiree didn't trust that CTXS management wouldn't screw up and dump the stock in the drink again for failure to handle the media and investors better? Or think about these industry consortiums CTXS has assembled and has come to rely so heavily on. They worked because CTXS was seen as a leader, a company that really had its act together. After this, will as many companies be willing to accept CTXS' word for how it will develop an entire industry. Would you want to commit to follow CTXS management with the future of your business? Knowing that you might wind up on the cattle grille next time too?
In sum, this matters because until CTXS management fixes this up right, it will cost them customers and sales (and revenues and earnings), it will cost them potential human capital (new and old), it could cost them the ability to do creative deals, and it could cut CTXS' ability to draw others to risk their business investments and direction in following CTXS as it attempts to create new ways of doing business -- without which it's future prospects are much diminished. " |
