How to Profit From Free Software, the Citrix Way

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Citrix Systems (Nasdaq: CTXS  ) is on a roll these days. The company is beating expectations left and right, sending the stock to a beautiful 87% return over the last year. And it's all thanks to a bold move into virtual computing that has made Citrix a giant in the related cloud computing space.

To find out more about the company's virtual future, I sat down for a phone chat with data center and cloud CTO Simon Crosby, who was a co-founder of the XenSource virtual machine project and joined Citrix when the company bought Xen.

Bold moves in the cloud
Before that acquisition, Citrix was mostly known for its remote application solutions WinFrame and MetaFrame, where you could run Microsoft (Nasdaq: MSFT  ) Windows applications on a central server but control it from a workstation or thin client at your desk. Adding the Xen platform to that mix was a good fit for that presentation philosophy, but it was also a life-changing moment in Citrix history.

"I think the company has changed pretty profoundly," Crosby said. "In terms of a broader strategic thrust, the endgame of getting toward cloud is reached by innovating at multiple layers of the virtualization stack. It is critical to our success."

A long-standing partnership with Microsoft makes the whole Xen platform run smoothly with a much smaller code base than competitor VMware (NYSE: VMW  ) maintains. Intel (Nasdaq: INTC  ) and Advanced Micro Devices (NYSE: AMD  ) are big contributors to the Xen code, ensuring that new processor features get supported by the software at the drop of a hat. Much like Linux vendor Red Hat (NYSE: RHT  ) , Citrix draws on a large community of independent developers, some of whom work for other companies, to enhance its software.

Give away the handle, make a killing on razor blades
That open-source philosophy is another central ingredient in the Citrix recipe for success: "It is absolutely critical that the Xen project not be biased by any vendor, including Citrix. That is, it runs according to an absolutely open development and the best feature set wins."

Despite paying $500 million for XenSource back in 2007, Citrix still runs the development of the system as an open-source project and gives away most of the software for free. The value of Xen for the company lies in selling enhanced support tools and services around the core of Xen hypervisor and virtual machine software.

"We draw from, I think, 26 different open-source projects to produce the platform and the final product," Crosby said. The hard work behind the scenes consists of assembling a coherent platform out of all these separate pieces and selling a supportable package to the customer.

Virtual nuts and bolts
The end result is a whole new take on how to run IT operations. "Ask a CIO, 'Why do you buy servers anymore?'" Crosby said to emphasize the argument. "You can rent them from a cloud provider, so virtualization transforms the entire infrastructure."

VMware and Microsoft are working on the same thing; VMware with a radically different approach and Microsoft with similar tools but a different development approach. In the end, Citrix hopes to win contracts by offering a thinner, more open, and more secure platform than its competitors. Last quarter's results showed evidence that the approach is already working.

I've been asking Citrix to pick up the Linux operations of Novell (Nasdaq: NOVL  ) , but this conversation with Crosby firmly derailed that train of thought. Having a complete end-to-end platform is nice and all, but the current state of Xen is to act as a virtual Switzerland of the data center, patently neutral to all vendors on both the server and client sides. Even Microsoft doesn't get any special treatment from the horde of independent developers, lengthy partnership or not. And that's a fine way to run a business, too.

Now what do I do?
I hope you now have a deeper understanding of where Citrix came from and where it's going. I still like what VMware is doing, but have a newfound respect for Citrix thanks to this deep dive into its cloud operations.

The stock has absolutely crushed the market lately, and I understand if you think it's a bit expensive at these levels. If a real-money investment seems unreasonable, you can do what I'm doing and stick an "outperform" rating on the stock in our CAPS system or just add Citrix to My Watchlist. There are many ways to skin a cat, virtualize a server, or follow a stock.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel and Microsoft are Motley Fool Inside Value recommendations. VMware is a Motley Fool Rule Breakers choice. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Intel and Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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  • Report this Comment On September 24, 2010, at 3:25 PM, qnetter wrote:


    "who was a co-founder of the XenSource virtual machine project and joined Citrix when the company bought Xen."

    ...should be:

    "who was a co-founder of the *Xen* virtual machine project and joined Citrix when the company bought *XenSource*.

    Xen is a project. XenSource was a company. Citrix did not buy the project -- it is still open source.

  • Report this Comment On September 27, 2010, at 7:50 PM, basilm17 wrote:

    Been listening to Crosby's ramblings for several years. He never really says anything of substance - and his predictions are nearly always wrong. (Check out his ramblings from Synergy 2008....) "Free" is not a sustanable business model in anyones world Simon.

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