Can Citrix Systems Counter VMware's Increasing Threat?

Cloud and virtualization services provider Citrix Systems (NASDAQ: CTXS  ) got off to a sluggish start in 2014, but the company has made a solid comeback after releasing its first-quarter results in April. Citrix shares have gained almost 12% since the results release, although it saw some weakness at the end of June when OTR Global downgraded it to a "negative" rating.

OTR cited increasing competition from VMware (NYSE: VMW  ) as the reason behind Citrix's downgrade. To counter the threat, Citrix is making a number of impressive moves to gain share in the virtualization and cloud markets.

Mobile focus
Citrix's prime focus is on mobile. It is trying to deliver a secure, managed, mobile workspace by mobilizing apps, data, and people through its infrastructure and cloud services. Citrix is investing to develop cutting-edge technology across physical and virtual networking platforms to drive innovation in the data center. 

Driven by its focus on product development, Citrix recorded 43 transactions valued at more than $1 million each in the first quarter; this was up from 41 a year earlier. Of these 43 transactions, 22 were from the desktop & mobile business, including two for its XenMobile solutions. The average value of its large orders increased more than 20% year over year. 

Citrix is working with its customers to upgrade their enterprise systems to enable a mobile work style. Its XenMobile products are acting as catalysts for mobile growth. Citrix is focusing on bolstering enterprise mobility with mobile device management (MDM), mobile apps, virtual apps, and desktop and data in a unified, secure solution.

In fact, 85% of its mobile platform customers have selected the complete solution, which highlights the value of an integrated offering as against stand-alone MDM technologies. Driven by the company's focus on driving mobile growth, revenue from the mobile platform increased more than 100% year over year in the first quarter. 

Virtualization moves
In the first quarter, Citrix also delivered products that include hybrid cloud provisioning through which customers can provision and deliver desktops and applications from the Citrix CloudPlatform, Amazon.com's Web Services, and Microsoft Azure. This will enhance data center flexibility, disaster recovery, burst capacity, and other business processes. Citrix has also integrated its AppDNA capabilities to minimize the cost and complexity of switching from physical to virtual servers. 

Citrix relaunched XenApp in March for Windows app virtualization. The new app implements the FlexCast Management Architecture, which reduces the cost and complexity of virtualizing five generations of Windows apps. FlexCast delivers the apps to users on any mobile, desktop, or "Thin-Client" device.

The XenApp technology is also utilized by Citrix service providers to deliver apps and desktop as a service, and it has seen rapid growth. Its subscriptions expanded more than 50% year-over-year in the previous quarter to over 360,000 users.

Citrix's cross-sell desktop attach initiatives have helped it land more than 500 virtualization and mobile orders. Impressively, the company transacted with more than 2,100 different customers in the first quarter, up from about 1,900 in the year-ago period, thereby expanding its base.

Citrix is expanding the reach of its solutions in enterprise accounts by integrating data into its emerging mobile platforms. Citrix is also improving its workforce to improve market penetration and support. It added a total of 95 new people to its team during the first quarter for expanding market reach and customer interaction, mainly for the networking business. The company is also investing to expand its documents, cloud, and mobile platform team.

The VMware threat
Evidently, Citrix is trying its best to tap the virtualization market by focusing on mobile. However, the company faces stiff competition from VMware in this space. VMware acquired AirWatch last year to bolster its presence in enterprise mobile management and security solutions. As a result of this acquisition, VMware gained around 12,000 customers.

Driven by the AirWatch acquisition, VMware saw a 35% year-over-year jump in license bookings in the previous quarter. Moreover, VMware is about to integrate NVIDIA's virtual GPU technology into its platform. Citrix has been supporting this technology since November last year, and VMware's move might erode its competitive advantage to some extent.

However, as compared to VMware, Citrix is cheap. VMware has a trailing P/E ratio of 41, while Citrix is cheaper with a ratio of 35. On a forward P/E basis, Citrix is cheaper at a multiple of just 17. In comparison, VMware has a forward P/E of 23. Moreover, it looks like more investors are betting against VMware than Citrix. VMware's short float is more than 19%, while Citrix's short float is just over 11%. 

The bottom line
Despite Citrix's recent downgrade, the company's growing client base and the increasing adoption of its mobile platform should work in its favor. Moreover, its stock is cheap compared to its industry peer, and this is another reason investors should take a closer look at Citrix.

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