Citrix Systems experienced an unexpected slowdown in XenApp Server sales in the fourth quarter of 2008 and will cut 10% of its workforce, or 500 employees, in the first quarter of 2009.

The cut will save about $50 million in annualized expenses, CFO David Henshall said during Wednesday's fourth-quarter earnings call.

XenApp is still the core of the Citrix product line and its largest revenue generator. XenApp is the well-established, 20-year-old product formerly known as Presentation Server, which runs a Microsoft application on a central server and sends responses from it over the wire to hundreds or thousands of simultaneous users.

In the fourth quarter, XenApp sales fell 3% compared with the same quarter of 2007. For 2008 as a whole, XenApp sales were up 8%. But the trailing off of license revenue in the final quarter was a warning to Citrix that 2009 would be a difficult year, revenue-wise.

In 2008 XenApp accounted for 68.3% of Citrix $1.6 billion in revenue; XenApp's share of the total was down from 71.1% the year before. CEO Mark Templeton said Citrix's reliance on XenApp will gradually decline as its diversified product line takes hold.

Citrix is pushing into server and desktop virtualization in competition with VMware after acquiring XenSource in August 2007 for $500 million. XenServer and XenDesktop revenue amounted to $48.6 million, or 3.1% of sales for the year.

Templeton said Citrix turned in "an overall solid performance in 2008, especially in an extraordinary world environment" during the fourth quarter. "XenDesktop is rapidly becoming the leading solution for desktop delivery" to end users, he said during the earnings call.

Nevertheless, Citrix projects revenue will be down in its first quarter of 2009 by 5% and flat for the year as a whole.

Citrix cut $2 million out of operating expenses as sales slowed in the fourth quarter. Its cut travel expenses and will delay merit increases, which normally take place during the second quarter, until the fourth quarter. All VPs and officers will get no salary increase, Templeton said.

The company will continue to maintain "a focus on operational efficiency" and strategic investments that improve its product line. One bright spot is its online, collaborative products, such as GoToMeeting and GoToWebinar, which in 2008 represented 16.4% of revenue, or $260.1 million. The previous year, that category was 15.4% of revenue, or $213.7 million. Steven Ashley, analyst with Robert Baird equities in Milwaukee, said the Citrix server revenue decline in the fourth quarter "contrasts with 4thQ server software results from IBM, Microsoft, and VMware," whose revenue held up more firmly.

While overall XenApp revenue was off 3%, the up-front license sales portion, as opposed to XenApp subscription sales, was off 15% year over year in the fourth quarter, he pointed out.

"We now believe that desktop virtualization will be a 2010 event, and that a client-side hypervisor architecture will be required to cross the chasm to knowledge worker adoption" before it can take place. Citrix said earlier this month that it's collaborating with Intel to design a client hypervisor that will work in conjunction with its XenServer architecture. Such a hypervisor is expected to be ready sometime in the second half of the year.