Citrix Has a Yen for Xen

Since mid-August, Citrix Systems' (Nasdaq: CTXS  ) shares have soared about 30%. But the move has been more than just a benefit of the tech rally. Investors are also excited about Citrix's recent $500 million deal for XenSource, a player in the red-hot virtualization market.

Of course, Citrix's healthy core business doesn't exactly hurt that share price. Fiscal Q3 revenue totaled $350 million, up 26% over the past year. Sales showed strength across all business segments; Web-based application revenue increased 43% to $56 million, thanks to the success of Citrix offerings like GoToMeeting.

In the third quarter, Citrix posted net income of $61 million, or $0.33 per share. That's up from $44 million, or $0.23 per share, in the year-ago period. More importantly, Citrix knows how to translate the growth into operating cash flows, which have amounted to about $415 million for the past 12 months.

Citrix's virtualization push harnesses technology that increases the speed and utilization of desktops and servers, generally creating large cost savings for customers.

XenSource's technology is gaining popularity, with the company's customer base recently topping 1,000 -- not bad for a firm which held its first round of venture funding in 2005. XenSource also thrives through a partnership with Microsoft (Nasdaq: MSFT  ) to provide virtualization for Windows servers.

Citrix can apply XenSource's tools to its massive base of 200,000 customers, including relationships with companies like IBM (NYSE: IBM  ) , Dell (Nasdaq: DELL  ) , and Hewlett-Packard (NYSE: HPQ  ) .

Aggressive spending on XenSource will doubtlessly put some pressure on Citrix's margins. But virtualization is a megatrend, as the torrid growth of VMware (NYSE: VMW  ) demonstrates. If you doubt the importance of this space, note that Intel (Nasdaq: INTC  ) and Cisco (Nasdaq: CSCO  ) invested a combined $368 million in VMware before the IPO.

The acquisition of XenSource, combined with Citrix's thriving online business and prodigious cash flows, should provide investors with a very pleasant story indeed.

Further virtual Foolishness:

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