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Application and server virtualization software maker Citrix Systems says that business began slow last July, but after putting the brakes on costs, it has reported respectable numbers for its fourth quarter.

For the final thirteen weeks of the year, Citrix reported sales of $416m, up 4 per cent, and net income came to $60m, down 4.8 per cent from the prior year. Not so bad. But Citrix also decided to lay off 10 per cent of its workforce yesterday. That tells you how much confidence the company has in the economy and IT spending in 2009.

For the full year, Citrix was able to show 14 per cent revenue growth, to $1.58bn, and it brought $178m to the bottom line, which was down 16.8 per cent. Revenues and profits are going in the opposite directions since the economic meltdown got into full swing during the summer. Hence the layoffs.

Citrix had 4,600 employees as the quarter ended, and in a conference call with Wall Street analysts, Mark Templeton, the company's president and chief executive officer, said that Citrix was not just cutting employees, but also rejiggering its workforce. Specifically, the company is coordinating customer-facing sales reps, territory managers, and channel managers so that multiple people are not calling on the same customers peddling different products - a practice that is a residue of the acquisitions that Citrix has done over the past several years as it builds its software portfolio.

Templeton said that management positions across divisions and geographies would similarly be consolidated and would be beefing up its Web-based self service capabilities for customers and partners to cut support costs. Internal projects are being prioritized (and presumably some are being mothballed) and Citrix is also cutting back on contract workers and travel for employees. Merit-based pay increases for the company's officers and vice presidents are being killed, and pay increases for other employees that would normally be done in the second quarter are being pushed out to the fourth quarter.

The workforce reductions will save Citrix about $50m a year in costs, and the company will book charges in the range of $19m to $23m, mostly in the first quarter of 2009, to cover the layoffs.

Citrix said that in the fourth quarter, product license revenues fell by 9 per cent. License update sales rose by 13 per cent, and online services sales rose by 18 per cent. Education and tech support sales rose by 13 per cent. You can see where people have stopped spending money. Ironically, sales for Citrix grew by 3 per cent in the Americas, fell by 2 per cent in EMEA, and fell by 5 per cent in Asia/Pacific. But he company is sitting on 533m in deferred revenues and $575m in cash and short-term investments. So it can afford to ride out a downturn.

Application virtualization product sales came to $276m in Q4, down 3 per cent, and license revenues in this subset of the Citrix stack fell by 18 per cent. The anchor product in this group, XenApp (formerly known as Presentation Server), continued to ramp, and the XenApp Platinum edition accounted for 33 per cent of license sales in the application virtualization area for the year.

The company signed three deals worth more than $1m each in the fourth quarter, but Citrix said that the run rate for XenApp was below expectations. But subscription renewal rates were up. For the year, application virtualization products accounted for $1.08bn, an increase of 8 per cent compared to 2007.

Application networking products, with NetScaler and WANScaler being the anchor products, accounted for $54m in sales in Q4 (up 13 per cent) and $193m for the year (up 24 per cent). Citrix said that service providers and related Internet companies showed weaker demand for these products, but that it was getting some traction with corporate clients. NetScaler Platinum accounted for about 30 per cent of application networking sales in Q4 and 26 per cent for the full year.

The Xen hypervisor and related management tools for virtualizing servers and desktops has been a boon for Citrix in terms of mindshare, and it's a growing business. But Xen still has a long way to go before it's a big revenue contributor. In the fourth quarter, Xen desktop and server product sales hit $9m, a 40 per cent sequential increase from the third quarter. Citrix said it has added hundreds of new customers for its Xen products and added that it has boosted its channel partners for its XenServer server virtualization tools to over 4,300.

XenDesktop, the company's virtual desktop serving product (as distinct from the Project Independence type 1 hypervisor that it is working on with Intel for virtualizing PCs and laptops) has over 1,400 partners and had over 14,000 evaluation downloads to date. Licensing and customer counts doubled compared to Q3.

Online services, which has GoToMeeting as the key product, accounted for $69m in sales in Q4 (up 18 percent) and accounted for $260m for the full year (up 22 per cent). GoToMeeting sales rose by 50 per cent in Q4, which shows you how people are cutting back on travel and the kind of services they are using instead to meet. Citrix said that it would be layering on voice services for GoToMeeting before this quarter ends, hoping to take advantage of the economic downturn in a way that few vendors can.

Looking ahead to the first quarter of 2009, Citrix said that it expected sales to be down about 5 percent compared to Q1 2008, when it had $377m in sales. (That's $358m if you do the math). Citrix added that it expected IT spending to decline globally in 2009 and that it was planning to have flat revenue for the full 2009. No word on what profitability might look like this year.

Templeton offered his own assessment that cloud computing or utility computing or whatever you want to call it will take off this year.

"The CIOs I have talked to recently are ready to do something different," he explained. "They are ready to achieve the IT cost structure of the Web by centralizing, virtualizing, optimizing, and delivering apps and desktops from an enterprise cloud. Why? It's because they're doing the math and finding that cloud economics are amazing." Citrix, of course, has spent the last year positioning its suite of products, many of them acquired, as the means to create an enterprise cloud.

"This year, squeezed by declining budgets and IT consumerization, thousands of CIOs will have the ah-hah moment. The gap between the Web and the enterprise is simply no longer defensible to users, to the CEO, or to the CFO." ®

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