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Citrix profits pinched by Europe, Uncle Sam

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Stalled sales in Europe and Latin America, coupled with uncertainty around the US Federal budget during this election year and ongoing economic malaise, helped to put the squeeze on profits at virtualizer and optimizer Citrix Systems in the second quarter.

But the company is still growing well, despite some very tough comparisons to the year-ago period and remains cautiously optimistic about the second half of the year.

In the quarter ended in June, Citrix posted sales of $615.2m, rising 15.9 per cent, but income before taxes fell by 15 per cent to $85.5m. Were it not for a tax benefit of $6.5m compared to tax payments of $19.3m in the year-ago quarter, Citrix would not have been able to say that net income grew by 12.3 per cent to $91m.

Hardware product and software license revenues combined amounted to $187.9m in Q2 (rising 9.7 per cent), while software as a service sales (mostly from its GoTo family of online services) hit $125.5m (jumping 17.9 per cent).

License updates and maintenance revenues, which are part of a financial category that Citrix is using now, were $272.5m (up 17.6 per cent and rising in lockstep, more or less). Professional services revenues hit $29.2m, shooting up 37.3 per cent in the quarter.

CFO David Henshall said in a conference call with Wall Street analysts after the market closed that a number of customers, particularly in Europe, had either stalled projects or broken them into pieces to spread over multiple quarters, as they were jittery about the economy. This impacted sales in all of Cisco's operating groups.

That said, Citrix did 39 deals that raked in more than $1m a pop, which is 13 more deals than it did of the same size in Q2 2011 – and the big deals this time are all bigger, too. Of these big deals, 26 were in the Americas region, nine were in EMEA, and four were in the Asia/Pacific region. The company's deferred revenue rose by a very impressive 24 per cent to over $1bn.

Sales in the Americas rose by 10.5 per cent to $259.8m, in EMEA by 20.7 per cent to $164m, and in Asia/Pacific by 23.6 per cent to $66m. The SaaS revenues are of $125.5m are not counted in any particular geography. The collaboration and data sharing products in the SaaS portfolio drove over half of revenues in this segment, and their revenues rose by 33 per cent.

The core Desktop Solutions group at Citrix, which peddles its XenDesktop PC virtualization stack and the XenApp application virtualizer, posted $343m in revenues in the quarter, up 13 per cent despite the fact that new software license sales were only up 7 per cent in the quarter.

Of those 39 million-dollar-plus deals that Citrix did, 18 of them were for desktop or application virtualization (and often both, since XenDesktop includes XenApp). Henshall said that Citrix did deals with 3,000 customers in this area.

It closed 144 XenDesktop deals with over 1,000 seats and had 25 deals with over 5,000 seats. That works out to at least 250,000 seats, and is probably a bit more than that, if you do some estimating. New license sales accounted for around $275m in revenues for the Desktop Solutions group.

Again, Citrix shareholders should thank the management team for spending $500m to acquire XenSource five years ago. Virtual desktop infrastructure (VDI) has kept Citrix relevant without destroying its former Presentation Server (now XenApp) application virtualization biz.

XenServer has not been much of a money maker for the Data Center and Cloud group at Citrix, but NetScaler's application optimization appliances (which came from an even earlier acquisition) sure have been. In the June period, Data Center and Cloud products had $112m in revenues, up 20 per cent, with software license sales up 15 per cent.

NetScaler software license revenues account for the bulk of this, and were up 15 per cent. Henshall said on the call that of the 3,000 XenDesktop deals that Citrix did in the quarter, 500 of them had NetScaler appliances, either in hardware or virty software appliance forms, attached to them.

The multitenant NetScaler SDX appliance aimed at service providers had "strong demand" and accounted for 10 per cent of overall NetScaler software license sales in Q2. The NetScaler VPX virtual appliances had 700 new customers. Growth has slowed for the NetScaler line from the first quarter, but Henshall reminded everyone that NetScaler had very high growth in the prior year's period.

Citrix added 250 people in the quarter and now employs over 7,300 workers worldwide. One thing the company did not do was buy back any of its own shares in Q2, and that was because it was in the middle of acquiring Bytemobile, a provider of data and video optimization solutions that has 130 mobile network operator customers, for $435m.

That deal was announced on June 7 and finalized on July 9, and Bytemobile will be formed into a Cloud Networking division at Citrix. It is expected to yield about $16m in revenues for Citrix this year.

In any event, now that this deal is closed, Citrix will wade back into the Wall Street share stream and pull out about $100m of its shares a quarter, according to Henshall. The Citrix board authorized the company to spend another $400m today, and that brings the authorizations on the books to just under a half billion bucks.

Mark Templeton, CEO at Citrix, said in the call that the company was gearing up to support the new Windows 8 variants on the desktop and tablet and Windows Server 2012 on the server, Citrix will be releasing service packs to bring support for these future Windows products to market.

Templeton also said that "Project Avalon" – the mashup of XenDesktop PC and app virtualizer, the NxTop client virtualization tool Citrix acquired in May, and the CloudStack cloud controller that it fully open sourced and made an Apache project in April – was on track to go into beta later this year, with a product announcement due in 2013.

He added that putting CloudStack under Apache was helping boost its adoption, with more than 100 new clouds based on CloudStack going live each month. Eventually, many of those customers will want support contracts for their commercial installations.

Looking ahead, Citrix expects for sales in the third quarter to be somewhere between $645m and $655m, which would represent 15 per cent revenue growth at the midpoint; non-GAAP earnings per share will be somewhere between 64 and 66 cents.

For the full year, Citrix hopes to rake in somewhere between $2.56bn and $2.58bn, which is 16.5 per cent revenue growth at the midpoint and which indicates a pretty solid finish to the year despite the economic uncertainties. Non-GAAP EPS for the full year is pegged at between $2.78 and $2.81. ®

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