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Making a Citrix U-Turn


Is it time for a Citrix time-out?

Shortly after my "all clear" Buzz regarding Citrix Systems' (CTXS) quarter I had a great, if odd, chat with Prof. Adam Katz about it. Great because Adam has forgotten more about software than I'll ever learn, and odd because I found myself in the awkward position of playing Hoofy.

Adam made a very persuasive argument that the price paid for XenSource was not just puzzling, but outright silly, and that from current prices, CTXS stock would have serious problems marching on and overcoming the headwinds of integration and competition against VMWare (VMW). When I hung up the phone a few things had become clearer:
  • CTXS had indeed overpaid for XenSource.
  • XenSource integration would likely be more challenging than I initially thought.
  • CTXS other businesses would have to scream ahead to make up for the XenSource's drag.
  • Was I ignoring that since I first jumped on the CTXS' bandwagon, the 35% rise in the stock had discounted a lot of the potential good news?

However, what I was not yet convinced of was that the stock was tapped out. Unfortunately, that changed a few minutes ago as I finished reading the earnings call transcript. Mind you there was nothing horrible on the call; I still maintain that the opportunity in the server and desktop virtualization business is huge, and for now the race in that space is between VMW and... VMW; hence CTXS has everything to gain in penetrating that market.

Unfortunately, I've listened to enough calls by enough companies to be convinced that when management repeats half a dozen times that – and I paraphrase – "the coming year will be one of focus on aggressive investments for new opportunities", what it is really saying is that at best the benefits of revenue growth will be gulped down by increased spending, and at worst there may be some serious margin risks to profitability.

One of the hardest lessons I've had to face in this business has been to accept that a great story (as CTXS was 10 months ago) can quickly change to a mere "ok" story, worth watching but not playing, or at least playing smaller. Conversely I've found it even harder to deal with great stories that were only getting better, hence leaving behind some pretty sizable change. (If you want some suggestions on how to avoid the latter mistake tape this piece by Prof. Krueger on your screen and read it... often.)

Right or wrong, the way I read the tea leaves and the welcome guidance by Prof. Katz, require an audible response. I am shedding the better part of my CTXS position and will take a time-out until the momentum behind server/desktop virtualization becomes clearer. Perhaps I'll miss a few bucks on the upside, but as we all have learned "opportunities are made up much more easily than losses."

Position in CTXS.
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