Citrix Makeover: 9 Sweeping Changes Being Demanded By Elliott Management

A New Citrix Plan

Elliott Management Group, a powerful New York-based hedge fund that has pressed for changes at a number of technology companies, including EMC, has set its sights on steering Citrix Systems, the beleaguered virtualization vendor, in a new direction.

Jesse Cohn, the driving force behind Elliott's tech activism, has led a series of bold forays into the tech sector, many of which have sought to dismember the businesses they targeted.

Cohn on Thursday disclosed that the hedge fund now has a 7.1 percent stake in Citrix and presented the rough outlines of the "New Citrix Plan" in a letter to Citrix's board of directors.

Among the areas in which Cohn is looking for changes are Citrix's channel strategy, which he claims "is stretched across too many channel partners, with important channel-enablement resources being directed to sub-scale partners."

1. Fix Channel Chaos

Buried in the recommendations were some pointed suggestions for a makeover of Citrix's channel.

"Citrix’s channel strategy is stretched across too many channel partners, with important channel-enablement resources being directed to sub-scale partners," the plan states.

"We are confident all of these issues are fixable through a full realignment to implement best practices in the areas of deal team composition, sales management span of control, channel management and compensation structure," Cohn said in the letter to the Citrix board.

2. Reduce Operating Expenses

"Citrix’s cost structure is the result of years of layered complexity and expenses," the plan states.

The plan's target is to get operating expenses in the range of 54.5 percent to 55 percent of revenue. They've been at 63 percent over the last year.

The hedge fund claims it has "identified numerous opportunities throughout the organization for significant improvement, which we believe will result in both superior revenue performance and a more efficient use of resources."

3. Sales And Marketing Changes

Elliott Management claims Citrix's sales and marketing is "well below industry benchmarks on efficiency and effectiveness, with the weakest metrics among its peers."

The poor performance results from a "highly cumbersome and ineffective go-to-market strategy," said Elliott in the letter.

"Critical operational metrics, including the ratios of management positions to quota-carrying reps and sales engineers to field reps, remain out of line with industry best practices," the hedge fund said.

Citrix also isn't doing a good job in rewarding those sales agents who are outperforming their peers with better pay, according to Elliott. The result is poor productivity across the sales workforce.

4. A Full Operational Review Of Product Development

Elliott claims the latest versions of Citrix's flagship XenApp and XenDesktop products were "marred by critical feature gaps from prior versions" and "demonstrated a disconnect between customer requirements and development roadmaps."

For that reason, "Citrix’s product development effort needs a full operational review with strong cross-functional participation," according to the hedge fund.

Elliott also reprimands the vendor for funding "speculative R&D initiatives without clear route-to-market or tangible competitive advantage." Such investments "must be reevaluated immediately," said Elliott in the letter.

5. Get Rid Of Underperforming Product Lines

"Citrix’s product portfolio is too broad for its scale and contains far too many underperforming product lines," the Elliott letter states.

CloudBridge, CloudPlatform and ByteMobile are examples of those dispensable products. They aren't particularly profitable, don't integrate with the company's core technology, and, according to the hedge fund, "serve as distractions."

ByteMobile, in particular, should be jettisoned, Cohn's letter asserts.

6. Find A New Home For Online Services Like GoToMeeting

GoToMeeting is probably the most familiar Citrix product to the general public. But the collaboration platform and its companion online services products -- GoToAssist, GoToMyPC, GoToWebinar and a few others -- might find a better home with a different company, according to Elliott Management.

Those SaaS products depend on a product development road map and go-to-market strategy "absolutely distinct from the core of Citrix."

Unlike CloudBridge and ByteMobile, the GoTo franchise is an attractive asset.

It's got scale in its market, "and we have confidence that it can realize significant value through several alternative transaction structures, including a sale or a spin," according to Elliott.

7. Assess Potential Sales Of NetScaler

NetScaler, Citrix's hardware and virtual appliance for optimizing and securing network traffic delivering cloud services, needs to be reassessed, according to Cohn.

"We are not explicitly advocating for a sale of NetScaler," Cohn states, "but we believe the sale option should be seriously explored to assess potential strategic buyer interest and valuation, which we believe may be robust."

Cohn believes Citrix has overestimated the power of cross-selling NetScaler with its virtualization products, and that has led NetScaler to miss out on other use cases, including the "telco vertical."

8. Increase Share Repurchases

"If effectively executed, the New Citrix Plan will result in tremendous value creation over the next several years," the letter to the board asserts. Cohn said Citrix shares are currently "deeply undervalued."

And Citrix isn't making the most of its balance sheet and all the cash in it, "even at today’s level of inefficiency." A little more debt would mean a lot more capacity to buy back shares through 2017 while maintaining an investment grade rating.

"Debt financing remains at historically attractive levels, and we believe Citrix should take advantage of this opportunity to repurchase 56 – 61 million shares from now through 2017," the plan goes.

9. Hire New Talent

Citrix has been struggling with a well-documented talent flight of over the last two years across all departments. Losing one senior manager after another makes it hard to control the impression that everyone is jumping ship.

Elliott notes the departures "have introduced uncertainty and instability into the organization." Cohn's letter references two of the departed managers, Sumit Dhawan and Bob Schultz, both of whom went to hated rival VMware.

Elliott Management claims the New Citrix Plan will help Citrix start winning back talented managers and engineers who have proven they have the skillsets needed to navigate fundamental changes, and who can impose "stable and confident leadership of its business units."

"Elliott is looking forward to working with Citrix to address its ability to retain and recruit top talent," the letter states.