Following a shaky 2013, Citrix Systems (NASDAQ:CTXS) seems to be getting back on track in the first quarter of this year. Revenue is up, networking is doing well, and there is the promise of growth on the software-as-a-service, or SaaS, side.
Still, there are some worrying issues, such as the decrease in desktop and mobile license sales. Also, the competition looks threatening, with VMware (NYSE:VMW) making constant moves in end-user virtualization, and the complex relationship with Microsoft (NASDAQ:MSFT) always shifting between partner and competitor. What's in store for Citrix down the line?
Networking and SaaS are healthy
Citrix's networking and cloud division was the company's star performer in 2013, and it continues to do well this year. Revenue for the segment, which forms 22% of Citrix's total for the quarter, was $167 million, up 13% year over year. Growth was driven by strong sales of NetScaler, Citrix's application delivery controller, which is often bundled with other Citrix products.
The company's SaaS offerings, such as the conference call service GoToMeeting and the file-sharing ShareFile, are also doing well, with 14% growth year over year. Subscriptions for cloud-based services currently account for approximately 20% of the company's revenue, but COO David Henshall suggested that Citrix might be working on new initiatives that could make SaaS a bigger part of its future. Given the opportunity to reach a broader market while getting reliable subscription revenue, it certainly seems like a good idea.
A drop in desktop and mobile licenses
Much of the concern in 2013 was over Citrix's desktop and mobile business, as the company struggled to integrate its new XenMobile product while maintaining sales of its core offerings, XenDesktop and XenApp. In particular, mobile and desktop license revenue was down 8% year over year in the fourth quarter of 2013 -- a worrying statistic, since licenses drive maintenance fees down the line.
The good news for the current quarter is that total mobile and desktop revenue was up 7% year over year, and XenMobile sales were up over 100% from the same time last year. However, the company also reported a $7.4 million decrease in sales of desktop and application virtualization products. Since XenMobile still forms only a small part of Citrix's revenue, this means that the 7% in growth was due more to maintenance than to new licenses -- a continuation of the worrying trend from above.
What's behind these license decreases? Part of the answer might be the growing pains that occur when introducing new products, while upgrading and modifying existing ones. However, a more troubling explanation might be that the competition, which has trailed Citrix for a long time, is starting to catch up.
Who's the aggressor?
Citrix's biggest competitor in the desktop and application virtualization market is VMware. VMware's core business is server-side virtualization, but it's been investing heavily over the last several years into its end-user computing business, which competes directly with Citrix.
VMware CEO, Patrick Gelsinger, has stated that, "in the end-user space, competitively we are the aggressor and we are winning share." Citrix has repeatedly stressed that its solutions continue to lead the market and that they are far ahead of the competition. On the other hand, Citrix CEO, Mark Templeton, recently admitted that his company is "taking a number of direct shots from competitors."
Templeton might have been referring to VMware's acquisition of mobile-device-management provider AirWatch in February, which will allow VMware to compete with Citrix's XenMobile. Or, perhaps he was thinking of the announcement that VMware will soon support NVIDIA's virtual GPU technology (something Citrix has done since last November) and will, therefore, be able to compete for virtualization of graphics-intensive workstations. Citrix's solutions might still be leading the market, but VMware is closing the gap.
Then there's Microsoft
Since Citrix made its business virtualizing Windows applications, it has traditionally had a strong relationship with Microsoft. However, with its "mobile-first, cloud-first" strategy, Microsoft is gradually introducing products that might eventually compete with Citrix.
This May, Microsoft announced Azure RemoteApp, which will deliver Windows applications from Microsoft's Azure cloud. For now, Azure RemoteApp seems to be a good complement to Citrix's Workspace Services, which allows for the management of mobile workspaces in the cloud. Still, there is no guarantee that as Microsoft continues to develop its cloud offerings, it won't start to take business away from Citrix.
Citrix's first quarter was a mix that included increased revenue, but a continuing decrease in mobile and desktop licenses. Also, the company's main virtualization competitor, VMware, seems to be closing the gap, which could slow top-line growth in the long term.
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Srdjan Bejakovic has no position in any stocks mentioned. The Motley Fool recommends Apple and VMware. The Motley Fool owns shares of Apple, Microsoft, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.