Citrix shakes off Microsoft worries

Despite worries that Microsoft will encroach on its turf, the company continues to deliver strong results.

Larry Dignan
4 min read
Citrix Systems delivered another strong quarter, but the company continues to be dogged by rumors surrounding Microsoft and whether it will decide to take Citrix's turf.

That's life when you're one of the few companies that has been able to dance successfully with Microsoft--an 800-pound gorilla that always has an eye on entering new markets.

The Citrix-Microsoft relationship goes back years, and Citrix has benefited greatly, growing earnings and revenue at a rapid clip.

Citrix makes software that allows corporations to port Windows and other operating systems to "thin clients" over a network. Citrix's software essentially builds on top of Microsoft's Window Terminal Services (WTS) product, a part of Windows 2000.

Citrix's software, which can deliver and manage applications, can save customers money because it can cut information-technology administration and support costs.

With remote access and efforts to create a virtual workplace more important than ever since the Sept. 11 terrorist attacks, Citrix is thriving.

The company's third-quarter results and outlook showed that it continues to do well despite an economic downturn. Citrix reported third-quarter earnings of $27.8 million, or 14 cents a share, on revenue of $153.2 million, up 35 percent from a year ago.

More importantly, Citrix reiterated its outlook for the fourth quarter and 2002, predicting revenue growth in the mid-20 percent range and earnings growth in the mid- to upper-20 percent range.

"We are optimistic about our prospects, but respectful of the worldwide economic conditions," said Chief Executive Mark Templeton, in a conference call with analysts.

Citrix shares gained $3.35, or 15.68 percent, to close at $24.72 Wednesday.

New Moon, new threat?
It's a good thing Citrix produced a good quarter; rumors of competition from a pre-initial public offering start-up that was getting cozy with Microsoft sent shares reeling earlier this week.

The worries stemmed from a Lehman Brothers report that surmised that a privately held company, New Moon Systems, was "making aggressive steps to build a relationship with Microsoft."

Citrix stock
Stock price from October 2000 to present.  

Source: Prophet Finance
While noting New Moon is pre-IPO, Lehman analyst Michael Stanek said the company could become more competitive in the future. Microsoft could partner with, or buy, New Moon to use its technology and utilize the software giant's sales channel.

Microsoft executives weren't available for comment.

Marc Lowe, CEO of New Moon, said that with New Moon's help, Microsoft can compete directly with Citrix: Microsoft can deliver applications with WTS, but can't manage them without New Moon or Citrix software.

"Our relationship with Microsoft is very positive," Lowe said. "I think they have a lot of respect for our product."

For his part, Templeton said Citrix's biggest threat to its growth is inertia in corporate IT departments, adding the company "takes and evaluates all competition seriously."

Although a slew of analysts said Stanek's talk about competition from New Moon and Microsoft was "overblown," they acknowledge that even though the software giant is Citrix's main partner it can also become a rival at anytime.

"Microsoft is obviously an 800-pound gorilla, and since that isn't going to change, everyone has to walk around with an eye on the gorilla," said Brent Williams, an analyst with McDonald Investments.

Citrix: Microsoft partnership strong
Citrix executives said on the company's earnings conference call that its relationship with Microsoft is as strong as ever.

In fact, Citrix will show off some new features for its core MetaFrame product at its user conference next week. Templeton said Citrix was ".Net-ifying" its products to take advantage of Microsoft's .Net strategy.

Analysts said Templeton's comments about Microsoft were reassuring, but some remain wary because of a little recent history.

In 1997, Microsoft and Citrix had a spat over Windows NT compatibility and Citrix shares plunged. A few months later, the companies reworked their pact and shares rebounded. Ever since then, Citrix shares have gyrated along with the latest Microsoft rumor.

And for good reason. Some Microsoft partners such as FTP Software stick around only long enough to be subsumed. Microsoft partnered with FTP until it decided that its core business made a nice addition to Windows.

"Microsoft is always a competitor, using partners as long as they need to," said Gartner analyst Peter Lowber.

Analysts say Citrix has been able to avoid FTP's fate because it moves fast and enhances its products at a rapid clip. That fact has helped it stay ahead in the "co-opetition" game--in which companies cooperate and compete.

According to Lowber, the next Microsoft-related worry for Citrix will come in May when a licensing agreement ends. Microsoft pays Citrix roughly $10 million a quarter for code it uses for WTS, he said.

"I doubt anything will happen with Microsoft, but the real worry is what happens to Citrix when that $10 million a quarter disappears," said Lowber.

Stanek acknowledges that Citrix is executing flawlessly, but said he is still "concerned that Microsoft will enter the market that Citrix dominates."

"The gating factor between us and our typical stance on Citrix shares is resolution as to Microsoft's intent," he said.