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More and More Comfortable With Citrix

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Random notes from the latest quarterly report, some conference presentations, and other assorted research.

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Two quarters removed from when I got involved in the Citrix Systems (CTXS) story, the overall picture remains pretty much the same. I'm getting more and more comfortable with the valuation/cash cushion at current prices, while at the same time it is clear that a return to upper 20's growth rates is still a few quarters away. Here are my random notes from the latest quarterly report, some conference presentations, and other assorted research. To have a better idea of what I am talking about you may want to revisit the first piece I wrote.

  • Many companies lay out grandiose marketing schemes that purport to revolutionize their performance. Rarely does that amount to much. With that caveat, CTXS "643 Program" to up-sell products to existing customers sounds remarkably coherent and actually believable. If you care to understand what that is, you can find it in the narrative portion of the April 25 call.

  • Presentation Server (PS) will pay the bills (i.e. generate recurring, reliable cash flow) for CTXS for a long time to come. It'll never be a sexy grower again, regardless of new features, so those counting on this product to justify multiple expansion better give up the ghost. Occasionally it will have a quarter or two of better than expected revenue growth (enterprise deployment of Longhorn might be such a catalyst), but they'll be short-lived flashes.

  • In the near term Net/WAN Scaler and related products will continue to drive the growth of the company; as the contribution of these products to total revenues increases, so will the overall growth rate. I am skeptical that they will represent a new opportunity like PS turned out to be, but they will more than make up for PS' slowdown.

  • The same can be said of the "GoTo" family of online services. Cisco's (CSCO) buyout of Webex (WEBX), I think will likely be a non-event for CTXS, since I am growing more and more convinced that the two product lines address altogether different markets.

  • CTXS' "Ace in the Hole" is the nascent "Desktop Server" product. It makes a tremendous amount of sense, and could emerge as the second coming of Presentation Server. This is not even a revenue generator yet, but if it gains traction the size of the opportunity could represent a whole new franchise.

  • CTXS has been dangling the idea that the current M&A mania could bring about a new growth spurt for PS, as the mergers' integration require more and more "virtualization" of legacy systems. Nice try on CTXS' part but I don't buy it. For starters, one would have to assume that the current mergers are something more than financial flipping games, and that the "raiders" will actually pay some attention to operations beyond slashing headcounts.

  • Don't look for CTXS to be a takeover target, at least in the near term. As long as the legacy PS line dominates the income statement, there would be no reason for another company to pony up a large premium. That may all change if "Desktop Server" takes off.

  • Speaking of financials, I would expect CTXS to turn very aggressive on the buyback front as soon as the option-restatement issues are resolved. With $900 mln on the balance sheet, no debt, and free cash from operations of about $75 mln per quarter, the current $300 mln authorization should be just the beginning. And besides, it's the fashionable thing to do.
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Position in CTXS
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