Citrix Malfunctions

With a burst of M&A deals and good news from companies like Oracle (Nasdaq: ORCL  ) , the software sector has rallied since August. Citrix (Nasdaq: CTXS  ) has been no exception, with shares surging from $27 to $35 in that time. Investors may have been too optimistic, though -- the company's latest earnings news sent the stock plunging nearly 20%, to $28.15. Nonetheless, I'm seeing a fairly strong performance in the numbers.

In the third quarter, revenues increased 22% to $278 million, and net income was $0.25 per share, up from last year's $0.23 per share. Cash from operations in the third quarter was $70 million. (The company has generated cash flows of $305 million over the past 12 months.)

Citrix builds technologies that help companies secure and access information from every member of an organization. Its innovation is a concept known as virtualization, a more efficient way of delivering data. Citrix's technology stores a software application's logic on a central server, with desktop computers providing only the program's menus and reporting. Ultimately, virtualization is more cost-effective than more traditional approaches.

Citrix's software is definitely in demand. In the third quarter, Citrix posted a 17% increase in license revenues, to $113 million. It seems investors expected even more growth. Keep in mind, however, that software sales are often lumpy, and Citrix's sales efforts in the first part of 2006 may have siphoned sales from its third quarter.

But this is mostly short-term noise. In the long term, Citrix is well-positioned for growth. For example, sales of its online products, which let customers easily hold virtual meetings, Web-based seminars, and other online gatherings, grew 49% to $39 million in the third quarter. The company is now moving these products into foreign markets.

Citrix's NetScaler product, which helps website infrastructure adjust to increasing usage, is also gaining significant traction. In the third quarter, it snagged customers like Netflix (Nasdaq: NFLX  ) , Facebook, and Google's (Nasdaq: GOOG  ) YouTube. As long as the Internet continues to grow, companies will need products like NetScaler.

Citrix's purchase last year of Orbital Data looks like another smart move. The technology improves critical performance of wide-area networks (WANs). Through acquisitions and outsourcing, many firms have operations spread across the globe, but they need to send data efficiently to manage their far-flung projects. Wide-area networks are definitely a red-hot sector, as seen with the recent IPO of Riverbed Technology (Nasdaq: RVBD  ) .

In future guidance, Citrix expects revenues of $307 million to $315 million in the fourth quarter, and earnings of $0.27 to $0.28 per share. For the full year of 2006, revenue is forecast between $1.12 billion and $1.128 billion, with earnings of $1.37 to $1.38 per share.

Over the next year or so, Citrix should also see stronger sales of products that fit with Microsoft's (Nasdaq: MSFT  ) new Vista operating system. While investors were disappointed with the short-run results, Citrix still looks attractive over the next couple of years. It's probably smart to let the stock price settle down before you consider investing, but Citrix remains a stock to watch.

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Microsoft is aMotley Fool Inside Valuepick. Each month, Philip Durell digs out two of the best stocks carelessly tossed into Wall Street's bargain bin. See all his valuable recommendations with a free 30-day trial.

Fool contributorTom Taullidoes not own shares of companies mentioned in this article. Netflix is a Stock Advisor pick. The Fool has a disclosure policy.

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