Virtualization can't save Q1 profits for Citrix

'Smaller IT budgets are the new reality'

Next gen security for virtualised datacentres

Virtualisation may be a hot technology, but making money on any kind of IT right now is a challenge, as the latest financial results from Citrix Systems show.

In the first quarter ended in March, Citrix did a better job of pushing up its top line than many of its peers in the IT racket, with sales declining by 2.1 per cent to $369m. As is the case among most software companies since the global economy started to tank last summer, software license sales at Citrix were down significantly, as IT shops put on the spending brakes.

In Q1, Citrix said that its software license sales plummeted 23.9 per cent to $111.9m, but thanks to a large installed base for its various products, Citrix was able to pump up license update sales by 10.7 per cent to $148.2m. The company added that online services (anchored by its GoToMeeting service) posted $72m in sales, up 16.1 per cent, and technical services sales came in at $37m, up 8.3 per cent.

Citrix kept pretty tight control on costs, chopping across the board, but booked $20.7m relating to the restructuring it announced at the end of January, that would see it cut 10 per cent of its 4,600-strong workforce. This obviously took a bite out of profits in the quarter, and drove net income down by 80 per cent to $6.93m.

Application virtualisation, which includes the Presentation Server (now XenApp) Windows application streaming tool that Citrix is best known for, accounted for $240m in revenues in the quarter. This is down 10 per cent, according to David Henshall, chief financial officer at Citrix, during a conference call with Wall Street analysts.

He said that the number of $1m and larger deals that the company signed dropped and the number of small deals (which are tied to the number of employees at its customers, who are also doing layoffs in many cases) showed weakness. The manufacturing, retail, and financial services were also challenging for application virtualisation sales. Henshall said that renewal rates for its XenApp and Presentation Server products were in the middle 80 per cent range, which he characterized as a "real solid performance."

The Citrix application networking line of products, which has NetScaler as its anchor product, posted 45m in sales, up 25 per cent. About two-thirds of sales came from enterprise and government accounts, with sales into enterprise accounts up 35 per cent. The full-tilt-boogie NetScaler Platinum edition, which is aimed at enterprises, comprised 25 per cent of total NetScaler sales in the quarter.

After watching Citrix shell out $500m to buy XenSource in August 2007, what investors, customers, and competitors really want to know is how the XenServer and XenDesktop virtualisation tools are doing in the market. Henshall said that XenServer and XenDesktop together had a 150 per cent growth in the quarter, with sales of $7m in total sales. To date, these Xen products have over 5,000 customers globally.

This is a long way from the vast installed base that virtualisation juggernaut VMware has, but in anticipation of VMware's just-announced vSphere 4.0 stack, at the end of February Citrix launched a partnership with Microsoft. They also announced a substantially rejiggered XenServer stack that provides much of the functionality of the core vSphere product at what Citrix pitched as much lower prices than VMware was charging at the time. In the wake of the vSphere 4.0 launch, the truth is more complex, but suffice it to say that Citrix is in a war with VMware, and it needs to use price as its lever.

This puts pressure on revenues and profits for the XenServer products even as the installed base grows, which it is doing and will continue to do, thanks in large part to the Microsoft partnership and the need for IT departments to get more efficient and flexible.

"We believe that smaller IT budgets are not a short-term trend," explained Mark Templeton, president and CEO at Citrix, in the analyst call. "It is the new reality. The traditional computing model is ageing rapidly, exposing the realities of its complexity, true cost, and inflexibility. And while this is a problem for some in the industry, it is good for Citrix because it encourages IT to break with the legacy thinking of distributed computing and embrace a transformational approach."

Like Citrix, VMware is feeling the pressure from the economic downturn and from competitive forces. In its first quarter ended in March, VMware's sales rose by 7 per cent to $470.3m, but software license sales fell by 13 per cent to $257m and the quarter was really only saved by a 48 per cent increase in services sales, to $213.3m. And with the vSphere 4.0 stack coming out as the economy is still weak around the globe, VMware is warning that its second quarter could be flat or, gasp!, down.

Don't get the wrong idea. Citrix is not in a particularly weak position, not with a good and diverse product set that can challenge VMware in virtualisation as well as $905m in cash and investments in the bank. The board of directors at Citrix authorized the company to spend up to $50m in its stock as part of the restructuring, and has now authorized an additional $300m.

You can argue amongst yourselves if this is a good use of cash, but I think it is silly to engineer earnings per share increases to somehow make a company look stronger than it really is. Hopefully Citrix will find something better to do with its cash, like hang on to it and invest in its own business and employees.

Looking ahead, Henshall said that Citrix expected revenues in the second quarter to be flat to slightly down compared to the prior year, when the company grew sales by 17 per cent to $391.7m and posted a net income of $34.65m. He added that for the full 2009 year, Citrix expected sales to be flat compared to 2008, a year that saw Citrix post $1.58bn in sales and bring $178.3m to the bottom line. Citrix is not giving guidance on profits for the second quarter of 2009 or the full year, obviously. ®

5 things you didn’t know about cloud backup

More from The Register

next story
The Return of BSOD: Does ANYONE trust Microsoft patches?
Sysadmins, you're either fighting fires or seen as incompetents now
Oracle reveals 32-core, 10 BEEELLION-transistor SPARC M7
New chip scales to 1024 cores, 8192 threads 64 TB RAM, at speeds over 3.6GHz
Docker kicks KVM's butt in IBM tests
Big Blue finds containers are speedy, but may not have much room to improve
US regulators OK sale of IBM's x86 server biz to Lenovo
Now all that remains is for gov't offices to ban the boxes
Gartner's Special Report: Should you believe the hype?
Enough hot air to carry a balloon to the Moon
Flash could be CHEAPER than SAS DISK? Come off it, NetApp
Stats analysis reckons we'll hit that point in just three years
Dell The Man shrieks: 'We've got a Bitcoin order, we've got a Bitcoin order'
$50k of PowerEdge servers? That'll be 85 coins in digi-dosh
prev story


Endpoint data privacy in the cloud is easier than you think
Innovations in encryption and storage resolve issues of data privacy and key requirements for companies to look for in a solution.
Implementing global e-invoicing with guaranteed legal certainty
Explaining the role local tax compliance plays in successful supply chain management and e-business and how leading global brands are addressing this.
Top 8 considerations to enable and simplify mobility
In this whitepaper learn how to successfully add mobile capabilities simply and cost effectively.
Solving today's distributed Big Data backup challenges
Enable IT efficiency and allow a firm to access and reuse corporate information for competitive advantage, ultimately changing business outcomes.
Reg Reader Research: SaaS based Email and Office Productivity Tools
Read this Reg reader report which provides advice and guidance for SMBs towards the use of SaaS based email and Office productivity tools.