The Starting Line: Citrix winning over Wall Street again

Software maker Citrix Systems is a rare bird in the tech sector these days--its earnings and revenue are still improving--but a few Wall Street analysts remain wary following a series of miscues in the last year.

Call it a perception gap. Citrix is executing well and delivering strong financial performance. But a series of investor-relations gaffes has put the company on the bad side of some Wall Street analysts.

But that could be changing. Many analysts cheered Citrix's second-quarter earnings this week and noted the company is executing better than many of its peers. Citrix makes software that allows companies to port Windows applications to non-Windows computers, information appliances and handhelds from a central server to create what it calls "the virtual workplace."

The company reported second-quarter earnings of $36.3 million, or 19 cents a share, excluding charges, on sales of $147.3 million. The results topped estimates, but more importantly Citrix maintained its outlook for the remainder of the year. Those forecasts put earnings growth in the upper 20 percent range and revenue growth at 20 percent. Citrix even noted that business in Europe was holding up well.

Not bad considering many tech companies aren't giving any outlook due to the weak economy.

On a conference call, some analysts had to do a double take.

"You beat the number and did not take your guidance down. Did I hear that right?" asked Michael Cristinziano, an analyst with Gerard Klauer Mattison.

When he was told that he heard right, Cristinziano noted he was double-checking. "That's the first time I heard that sort of thing this quarter."

Predictably, many analysts cheered the results, but UBS Warburg analyst Don Young stuck with his "hold" rating. He upped his price target from $27.50 to $40 and said he wants to "see further evidence of consistent execution."

Doubting Templetons
Why is Young skittish? Young, who doesn't speak to the press, said in a research note that he has his doubts about management. Citrix may be delivering the goods, but it's just a year removed from a major blowup.

	Citrix Systems Stock price from July 2000 to present.
	Source: Prophet Finance

Citrix's perception problems started in June 2000 when Chief Financial Officer John Cunningham canceled an appearance at an investment conference held by PaineWebber, which was Young's firm before it was acquired by UBS Warburg. "Personal reasons" were cited, but Wall Street doubted that explanation and dumped shares.

The hunches were right, and Citrix issued a profit warning just days later citing a transition from a "shrink wrap" software model to electronic licensing.

The fallout prompted Citrix to demote Chief Executive Mark Templeton to president and launch a yearlong search for a high-profile CEO. A year later, Templeton was renamed CEO much to the chagrin of some analysts, who complained that the announcement of Templeton's return was awkward at best.

Young was most critical of Citrix's move to rename Templeton as CEO. He cut Citrix to a "hold" from "strong buy" after Templeton was named CEO again. Young wondered why Citrix couldn't find an outsider to come in and why the company would demote a CEO only to promote him 12 months later.

"In light of the painful experience for investors last year, we feel the board is showing poor judgment with this move," Young said in a research note in May. "Everyone should get a second chance, but not necessarily at the same company."

Templeton, who was in South Africa at a customer conference, wasn't available for comment. "It's great to be the leader of the Citrix team again," he said on a conference call with analysts this week.

Joe Horine, a spokesman for Citrix, said the company wanted to "strengthen its management bench" following the June 2000 profit warning and part of that included a new CEO at the time. But as Citrix's operations improved and the company pulled off the acquisition of Sequoia Software, it became clear to the board of directors that Templeton was the best choice, Horine said.

Horine acknowledged that doubts remain, but said the "only thing we can do to change perception is to deliver every quarter."

And the company notes that the team surrounding Templeton is stronger. Citrix has changed its internal operations and hired a new chief information officer, chief technology officer and head of sales in Europe, Horine said.

Meanwhile, Citrix's flagship product, dubbed MetaFrame, is selling well, largely because it reduces costs for customers. That fact makes it a strong seller even in an economic downturn. Citrix is using the MetaFrame beachhead to branch out to other areas, including the small to mid-sized business market.

Solid performance
Brendan Barnicle, an analyst at Pacific Crest Securities, said Citrix is doing as well as can be expected. He also brushed aside the awkward reappointment of Templeton and added that the announcement could be a sign that business is good.

"The board wouldn't have thrown him under the bus again," Barnicle said. "He's not Bill Gates or Steve Ballmer, but (Templeton) deserves some credit for turning things around."

Analysts said Citrix's results prove that management is on the right track. Credit Suisse First Boston analyst John Rizzuto said business is likely to improve over the next two quarters. "This company is in a much better position than it was a year ago," he said.

However, those business improvements don't mean that you still won't see some awkward investor-relations moves. Ahead of Citrix's earnings report, executives told Wall Street analysts that it was cutting 65 jobs out of roughly 1,700. One of those employees heading for the exits was Scott Davidson, an investor-relations manager and a favorite with analysts.

The move was designed to give Wall Street a heads up so the analysts wouldn't be surprised on the conference call, Horine said. Instead, the news made Wall Street worry about Citrix's second quarter, which turned out to be fine.

"All that call did was get people jittery," said Barnicle, who was curious about the preannouncement, but forgiving. "At the end of the day these guys generate cash."