Many telecommuters know Citrix Systems (CTXS) for its programs that let them access their office applications from home. That arcane bit of software represents steady, profitable sales that investors love; the company’s stock has risen nearly 70 percent in the past year. But the future of the tech business isn’t PCs, it’s cloud computing—running applications on distant servers rather than on the machine in front of you—a fast-growing business where Citrix has made little headway. Now it’s embarking on a new push in that market.
On July 12, Citrix paid what Chief Executive Officer Mark B. Templeton says was less than $200 million for Cloud.com, a startup that helps companies manage data traffic on their servers. Instead of assigning computing tasks to specific machines, Cloud.com’s software, CloudStack, can split the work among pools of computers, pulling them in when needed and freeing them up for other jobs when done. CloudStack also makes it easier for companies to quickly roll out new applications to users worldwide rather than forcing them to wait for a technician to do the work. The Cloud.com deal “is about technology, the team, and market momentum,” Templeton says. Citrix’s shares fell 3.6 percent following news of the acquisition, recovering some on July 13.
While three-year-old Cloud.com remains far behind rivals VMware (VMW), Microsoft (MSFT), and leader Amazon.com (AMZN), the purchase gives Citrix a toehold in an important new business. Citrix declined to discuss Cloud.com’s revenues. Researcher IDC expects the segment that Cloud.com competes in to jump to $11.5 billion by 2014, from $4.5 billion last year. “Like everyone else, they’re trying to pivot into the broader infrastructure business,” says VMware CEO Paul Maritz.
An earlier Citrix foray into a related market, virtualization software that lets companies run more programs on fewer servers, has been something of a disappointment, analysts say. In that business “VMware has a huge lead,” says Matthew Hedberg of RBC Capital Markets in Minneapolis. The day after VMware’s $957 million initial public offering in 2007, Citrix paid $500 million for XenSource, which made a rival program. Today, Citrix’s XenServer has less than 8 percent of the North American virtualization market, vs. 77 percent for VMware, according to Forrester Research (FORR). Citrix executives argue that the purchase brought in important technology that has been used in other products. “We’ve been thrilled with the XenSource acquisition, and it goes beyond the pure financials,” says Citrix Group Vice-President Sameer Dholakia.
Investors haven’t punished Citrix for its shortfall in virtualization, mostly because the company gets so much revenue from its older programs. “They have a lot of legacy businesses,” says Brian Marshall, an analyst with Gleacher & Co. in San Francisco. Analysts predict Citrix’s profit may climb 16 percent, to $2.41 a share, this year as sales rise 15 percent, to $2.16 billion, Bloomberg data show.
Founded in 1989 by a former IBM (IBM) engineer, the Florida company grew quickly with its signature software that lets PCs access programs located on distant servers. Then in 1997, Microsoft threatened to incorporate a similar program into Windows, which would have taken a huge bite out of Citrix’s business. After months of negotiations, Microsoft instead agreed to license Citrix technology.
Analysts are betting on two trends that may allow Citrix to continue to thrive. It has a lead over VMware in an application that lets companies store copies of Windows on servers and push them out to PCs, which saves money by letting users run newer versions of the operating system on older machines, according to brokerage Robert W. Baird. And Cloud.com’s CloudStack can cost companies half to one-tenth as much as comparable cloud products from VMware and Microsoft, says James Staten, an analyst at Forrester Research. “If you build your cloud on VMware or Microsoft,” he says, “you’re sharing your profits with them.”