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Citrix desktop virt soars in Q4

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Citrix Systems staked its future on virtualization when it shelled out $500m to buy XenSource in August 2007. And while it's arguable that virtualization on servers and desktops has not played out as expected, mashing up system virtualization technologies with existing application virtualization tools to create new products - as confusing as it may be to talk about - seems to be getting traction among Citrix shops.

In the fourth quarter, Citrix said that desktop virtualization has started to go mainstream and its numbers are begging to reflect this fact. The numbers coming out of Citrix also reflect that the fourth quarter of 2009 was a whole lot healthier for just about all IT vendors than the prior year's end, which was just awful.

In the quarter ended in December, Citrix brought in $451.1m in revenues, up 8.5 per cent. Product license revenues rose a tiny bit - a key metric for assessing the comfort level of IT shops when it comes to spending for new projects - up 3.7 per cent, to $168.3m. Software license updates to existing customers accounted for $156.4m in sales, an increase of 6.5 per cent over the year-ago quarter.

Online services, including the GoToMeeting family of products, grew smartly, up 18 per cent to just under $82m, and technical services (training, professional services, and so forth) brought in $44.5m, up 19.8 per cent. While Citrix kept its research, development, and general expenses under tight control, sales and marketing costs were up by $15.3m and the company also booked $3.6m in restructuring charges. But revenue growth and a timely $6.95m income tax reversal with Uncle Sam allowed Citrix to boost net income in the quarter to $88.1m, an increase of 46.7 per cent.

For the full year, Citrix booked sales of $1.61bn, up 1.9 percent, and net income was $191m, up 7.1 per cent. Citrix ended the year with $619m in deferred revenues (up $63m) and $1.21bn in cash and equivalents. The company could be interested in making acquisitions and, with a $7.7bn market capitalization, might be an attractive takeover target for someone with deep pockets and an interest in desktop and server virtualization.

Oracle and IBM are the obvious choices, and a case could be made for Hewlett-Packard or Microsoft buying Citrix, despite the relatively high price the company would command. A merger between Citrix and Novell would probably be the best thing to happen to Novell since it acquired SUSE Linux in 2003. It is not clear if this would be a good thing for Citrix.

With the mishing and mashing of Citrix and XenSource products that has occurred throughout the past two years, it is impossible to extract the sales of Xen-based products from sales of other products originally created by Citrix. In a conference call with Wall Street analysts, David Henshall, chief financial officer at Citrix, said that application and desktop virtualization product sales were up 5 per cent, to $290m, in the fourth quarter of 2009.

XenDesktop, the virtual desktop infrastructure (VDI) tool that streams virtualized PC images out of central servers, had $26m in license sales in the quarter, with $30m in total revenues. A trade-up promotion on XenDesktop4, which came out last October, helped add $20m to deferred revenue in the quarter as well, according to Henshall. Citrix had five deals for XenDesktop that had at least 10,000 seats, and Henshall said that during the quarter, Citrix sold "hundreds of thousands" of new licenses to XenDesktop 4 and closed deals at more than 1,000 new customers.

The company also had more than 20,000 downloads of the evaluation version of XenDesktop. Citrix had seven deals for XenDesktop that were worth more than $1m a pop. XenDesktop Platinum Edition, which includes the XenApp application streaming middleware (formerly known as Presentation Server), accounted for 60 per cent of the XenDesktop mix, and XenDesktop Enterprise edition (which has all the bells and whistles, including some desktop virtualization on the client side), accounted for 35 per cent. XenApp Platinum Edition, which has some virtualization technologies embedded in it, was 40 per cent of the XenApp mix.

Basically, Citrix is merging the products, and we can't really tell who is buying what any more. "We will continue to call out certain metrics for the standalone products within this category," Henshall explained, "but they are clearly becoming less relevant as customers begin to acquire the full desktop virtualization that incorporates both of these capabilities."

A few quarters ago, Citrix jammed the XenServer hypervisor and related Essentials management tools for server virtualization into the same category as its NetScaler network caching appliances, so it is very tough to see how the XenServer and Essentials tools are doing too. Henshall said that the Application Networking and Server Virtualization group at Citrix had $70m in sales in Q4, up 18 per cent from the year-ago quarter.

He added that there were over 20,000 production activations for XenServer in the fourth quarter and that downloads of the evaluation versions of the XenServer and the Essentials add-ons "are running at record rates." Citrix estimates that XenServer captured about 10 per cent of virtualized new server sales in 2009m with XenServer in production at more than 40,000 companies worldwide. The largest company, according to Mark Templeton, chief executive officer at Citrix, has more than 20,000 machines running XenServer.

Citrix is not focused on selling XenServer explicitly, as it was when it first acquired XenSource to make a run at VMware, the leader in both server and desktop virtualization at the time (and probably still today). But it is, says Templeton, adamant about leveraging XenServer technology in as many ways as possible.

"The importance of XenServer to us is as the underlying platform not only to offer customers a server virtualization solution, but as the platform to run and virtualize XenApp as it underlies desktops in the full stack and as it underlies NetScaler VPX," explained Templeton. "We also leverage a lot of the technology in the XenClient project that you will see more of later this quarter."

XenClient, which is being co-developed with Intel, is a bare-metal hypervisor for Intel-based PCs that is being beta tested at 50 customers now and really should get to market pronto. The thing Citrix wants people to consider now is that XenServer is a foundation technology that gets monetized with the Essentials tools on servers as well as on XenDesktop, XenApp, and NetScaler.

The main thing is that XenApp, the flagship product at Citrix, has 15 million current licenses and about 10 million that have lapsed off subscriptions, and Citrix wants to throw in everything, including the kitchen sink and the one in the basement, to get those seats upgraded to a more modern set of virtualized middleware for supporting applications and PCs. Citrix has about 3,000 XenDesktop customers to date, with a third of them coming during the fourth quarter alone.

Looking ahead to the first quarter of 2010, Citrix says it expects sales to be in the range of $405m to $410m, with earnings per share coming in at between 23 and 25 cents. In the first quarter of 2009, which was arguably the bottom of the economic meltdown, Citrix had sales of $369.1m and earnings per share of 4 cents.

Despite its cautious outlook, Citrix is courageous enough (unlike most IT vendors) to make predictions for the full 2010 year. The company has a fairly tight range for expected sales, of between $1.74bn and $1.76bn, and says it can bring $1.33 to $1.34 per share to the bottom line. That represents 8.4 per cent revenue growth over 2009's level at the midpoint of expectations, and something like 30 per cent growth in EPS. That's not too shabby. ®

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