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Rating Action: Moody's upgrades Citrix rating to Baa3; outlook stable
Global Credit Research - 04 Dec 2020
New York, December 04, 2020 -- Moody's Investors Service, ("Moody's") upgraded Citrix Systems, Inc.'s ("Citrix") senior unsecured debt rating to Baa3 from Ba1. The upgrade is driven by Moody's expectation of Citrix's continuing steady operating performance, strong cash flow, solid credit metrics, and disciplined financial policies. Moody's also withdrew the company's Ba1 Corporate Family Rating, Ba1-PD Probability of Default Rating and SGL-1 Speculative Grade Liquidity rating. The outlook is stable.
Citrix grew revenues 10% in the year-to-date period ended September 30, 2020 partially aided by the remote work requirements emerging early in the year. Moody's Senior Credit Officer Matthew Jones noted "though some of the growth was aided by the pandemic, we expect the need to securely provision a flexible work environment will drive mid-single digit revenue growth for Citrix over the next several years."
Debt to EBITDA was 2.7x in the LTM period ended September 30, 2020 and has ranged between 1.5x and 3.0x over the last five years as the company used debt to fund acquisitions and buybacks while using strong levels of free cash flow to pay down debt in intervening periods. Jones further added "Moody's expects Citrix to continue to make acquisitions to supplement R&D and drive growth with leverage ranging between 2x and 3x over the next several years." Buybacks and acquisitions may be lumpy however and could exceed free cash flow in certain years.
The Baa3 senior unsecured rating reflects Citrix's leading market positions in several segments of the virtualization, mobile application and network infrastructure markets and strong free cash flow. Citrix is the largest provider in the workspace, desktop and application virtualization software market. The market should grow at strong single digit rates over the next several years driven by functionality and security requirements of remote workers. Revenue growth at Citrix is somewhat muted by the shift to a subscription model though growth should still achieve mid-single digit levels as the company goes through the transition. Moody's expects the Workspace segment (approximately 75% of revenues) to grow at solid levels while the Networking segment (approximately 22% of revenues) will likely have more volatile and flatter multi-year growth. Tempering the credit profile is the evolving technology landscape, competition from larger as well as niche competitors and Citrix's share buyback and acquisition appetite.
Social risks are considered low to moderate, in line with the software sector mainly stemming from social issues linked to data security, diversity in the workplace and access to highly skilled workers. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. While Citrix has faced challenges through the recession brought on by the pandemic, particularly as IT budgets have been under pressure and appliance installations were delayed, the company has also benefited from solutions critical to support the remote work environment. Cyber security risks are moderate at Citrix and arise from breaches on installed customer software as well as internal Citrix systems.
Citrix has a widely held public shareholder base and an independent board of directors. Activist investor Elliot Management, who had initiated its position in 2015, sold its remaining ownership interest and gave up its Board seat in early 2020. Moody's expects that while Citrix may occasionally make debt funded acquisitions, the company will maintain strong cash balances and quickly return leverage to relatively conservative levels. Citrix has occasionally used debt to fund share buybacks although Moody's expects most future buybacks will be funded out of internally generated cash.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation of mid-single digit revenue growth, substantial free cash flow generation and maintenance of solid credit metrics. The ratings could be upgraded if Citrix continues organic growth in revenues, profits and cash flow, diversifies its product base and demonstrates an ongoing commitment to conservative financial policies. The ratings could be downgraded if performance deteriorates, leverage remains above 3x on other than a temporary basis or Citrix adopts more aggressive financial policies.
Liquidity is robust based on high levels of cash and investments, expectation of annual free cash flows (after dividends) in excess of $800 million and an undrawn $250 million revolving credit facility. As of September 30, 2020, Citrix had $925 million of cash and short term investments. Moody's expects that Citrix will pay under $200 million in dividends annually ($175 million in the twelve months ended September 30, 2020).
The following ratings were affected:
..Issuer: Citrix Systems, Inc.
....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa3 from Ba1
..Issuer: Citrix Systems, Inc.
.... Probability of Default Rating, Withdrawn , previously rated Ba1-PD
.... Speculative Grade Liquidity Rating, Withdrawn , previously rated SGL-1
.... Corporate Family Rating, Withdrawn , previously rated Ba1
..Issuer: Citrix Systems, Inc.
....Outlook, Remains Stable
The principal methodology used in these ratings was Software Industry published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130740. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Citrix Systems, Inc. is a global provider of virtualization, mobile application and network infrastructure software. The company had revenues of $3.2 billion in the twelve months ended September 30, 2020.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Matthew B. Jones VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Stephen Sohn Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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