InformationWeek

November 24, 1997

Takin g Stock: Much Ado About Citrix

Software maker rides growth in Windows NT deployment but could see Microsoft become one of its biggest competitors

have been getting a lot of questions about Citrix Systems Inc. lately. But as with any complex company and its product, the answers are never straightforward. Why the interest? Citrix's primary product, WinFrame-an enhanced version of Windows NT 3.51 server software-enables multiuser access to 32-bit applications residing on NT servers. More important, the software makes it possible to run Windows 32-bit applications on non-Windows devices-Macintoshes, personal digital assistants, and network computers-and on legacy operating systems, such as 16-bit Windows 3.1 and MS-DOS.

IS managers have seen the importance of this technology as they make the transition to network computing. Eventually, this will facilitate the shift to thin-client computing, a move that is justified in terms of cost and simplicity.

The huge growth in Windows NT deployments hasn't hurt Citrix. This growth, combined with ever-expanding networks and the drive to lower costs of ownership, has put Citrix in the spotlight. The company has become the leader in multiuser NT technology through its Independent Computing Architecture (ICA) protocol and WinFrame software. ICA has almost become the standard for distributed Windows application processing. By licensing to original equipment manufacturers such as IBM, Microsoft, and Sun Microsystems, Citrix has extended its reach to an estimated 1 million ports.

At Comdex/Fall last week, Citrix announced support from Compaq Computer, Digital Equipment, and Hewlett-Packard, as well as from five terminal manufacturers. At the same show, Microsoft released a beta version of Hydra (its Windows-based Terminal Server) to 1,000 sites as part of its thin-client strategy. Simultaneously, Citrix released pICAsso, its load-balancing software option pack.

Even though Citrix currently has the support of Microsoft (which owns 6% of it), Citrix will eventually see the group in Redmond as one of its biggest competitors. For now, Microsoft has agreed to license Citrix technology for incorporation in future versions of Windows NT Server 4.0 and 5.0.

In addition, for another two years, it will promote Citrix's ICA protocol for non-Windows devices. In return, Citrix can license WinFrame, which is based on Windows NT 3.51, until September 2001.

To understand the risk in Citrix stock, one only has to look at the 75% share price decline earlier this year, when Microsoft announced the potential production of a competitive product prior to its May agreement. It could easily happen again. If Microsoft's Hydra product is delayed, then Citrix's revenue, in the short term, could be negatively affected.

Citrix received an advance of $75 million from Microsoft to be recognized over five years. In the most recent quarter, revenue was $34.9 million, up 200% over the same quarter a year earlier, with earnings per share of 44 cents. WinFrame sales accounted for 70% of total revenue and represented sequential quarterly revenue growth of 64%. Sales to equipment makers represented 16% of the total, while Microsoft R&D payments and other services made up 10% and 4%, respectively. Almost 50% of sales are related to the remote computing market, while cross-platform sales represent about 25% of sales. For a typical 15-user configuration, software pricing is about $6,000. Operating margins expanded to 49.5% from 43.6% in the prior quarter. The balance sheet has more than $7.50 per share in cash ($221 million).

The company is priced around $78, with a 52-week range of $10 to $80. My earnings estimate for 1998 is about $2.10 per share on revenue of about $190 million, up from an estimate of $1.50 per share in 1997. With a growth rate like that, it's no wonder that the market places such a high premium on this stock. The share value is a little lofty today, but the next technology market downturn may represent a buying opportunity.

William Schaff is chief investment officer at Bay Isle Financial Corp. in San Francisco, which manages the InformationWeek 100 Stock Index. You can reach him at bschaff@bayisle.com .

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