Foolish Forecast: Sour Grapes for Citrix

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Citrix Systems (Nasdaq: CTXS) reports results for its 2007 fiscal year Wednesday night. Does the application-delivery expert have a virtual lock on success? Read on to find out.

What Fools say:
Here's how Citrix's CAPS scoring rates against some of its peers and competitors.

	Market Cap (millions)	Trailing P/E Ratio	CAPS Rating (Out of 5)
Microsoft (Nasdaq: MSFT)	$297,130	20.8	***
International Business Machines (NYSE: IBM)	$139,210	13.9	***
Oracle (Nasdaq: ORCL)	$104,270	22.2	****
VMware (NYSE: VMW)	$28,720	150.0	***
Citrix	$6,180	29.5	*****

Data taken from Motley Fool CAPS on 1/22/08.

Given the valuation differential, it's not hard to see why our CAPS players like Citrix better than they do VMware. At equal price-to-earnings ratios, the two companies would carry about equal market caps, and VMware's speedier growth isn't quite enough to make up for the difference.

Two all-star players support the five-star rating of Citrix with an "oversold" tech market and Street skepticism of software-as-a-service businesses. There hasn't been a negative CAPS comment on this stock since last February, and even then it was on loose grounds.

What management says:
When Citrix acquired open-source virtual server specialist XenSource this fall for about $500 million, CEO Mark Templeton waxed poetic about the meeting of minds: "The combination of Citrix and XenSource brings together application, desktop, and server virtualization to deliver more innovation, choice, and flexibility to the market, including our installed base of more than 200,000 customers worldwide. As application delivery becomes a top issue for IT and the world becomes more dynamic, we find it important to be sure we are providing customers the most cutting-edge technologies out there."

What management does:
Of course, you won't see any effect from that acquisition in these trends, because the deal closed in mid-October. Citrix sans XenSource has been on a slow southward slide, with contracting margins and slower income growth. Is this the vitamin injection the company needed?  

Margins	6/30/06	9/30/06	12/31/06	3/31/07	6/30/07	9/30/07
Gross	93.7%	93.3%	93%	92.8%	92.7%	92.3%
Operating	21%	19.5%	18%	16.5%	16.1%	16.3%
Net	18%	17.4%	16.1%	15.2%	15.1%	15.6%
FCF/Revenue	27.1%	24.5%	24.4%	25%	26.6%	25.7%

Y-O-Y Growth	6/30/06	9/30/06	12/31/06	3/31/07	6/30/07	9/30/07
Revenue	26.6%	26.7%	24.8%	22.3%	20.4%	21.4%
Earnings	18.1%	17.9%	10.5%	6.3%	1.1%	8.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
At the very least, XenSource brings a new direction to a high-growth sector, along with another respectable customer list. You can already buy server systems from Hewlett-Packard (NYSE: HPQ) and Dell (Nasdaq: DELL) that come with XenServer virtualization software pre-installed.

On the other hand, it looks like virtual leader VMware has come around to appreciating what Citrix does best -- delivering virtual applications one by one rather than an entire operating system. We'll have to wait and see whether that move sparked industry interest in that approach, but Citrix would more likely benefit from the increased attention than suffer under new competition. Again, that's a question for future quarters, though a little bit of investment research now could yield big benefits later.

What this quarter will show is two months of post-XenSource results. Management expects a million or two in new revenue and $4 million to $5 million extra expenses in this two-thirds of a quarter -- but $50 million XenSource revenue in fiscal year 2008 and $200 million in 2009. Call me crazy, but those growth projections sound unreachable -- even in a hot sector like virtual server software.