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8/15/2007
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With XenSource, Citrix Sees A Two-Pronged Virtualization Strategy

The company outlines its product vision, which includes a separate one for Xen and one for Microsoft Viridian.

Citrix is paying $300 million in Citrix stock and $200 million in cash in the fourth quarter this year to acquire fledgling XenSource, a startup with 80 employees.

Part of the purchase price is intended to generate $100 million for stock options with which to attract and retain employees for a rapid ramp-up into the server and desktop virtualization markets.

XenSource is burning through $15 million a year in expenses, while garnering "a few million in revenues," according to Citrix CFO David Henshall. By adding XenSource as a new division to the company, Citrix expects to add $50 million to its revenue in 2008 while incurring expenses of $60 million to $70 million.

On the face of it, the acquisition might not look like a good deal. But Mark Templeton, president and CEO of Citrix, was undaunted. The acquisition "opens up a fantastic new market for Citrix," he said in a Wednesday morning briefing announcing the deal to financial analysts.

XenSource employs 20 in its sales and marketing departments, noted Henshall. "It's obvious we have a lot of hiring to do to add some muscle" in those areas, he said during the conference call.

Templeton said XenSource "is a perfect fit" for Citrix's existing product line, and by 2009, XenSource will be adding $200 million to Citrix's revenue.

Citrix offers a suite of software that allows end users to access desktop applications on central servers. Its flagship product is Presentation Server, which extends the reach of Microsoft's Office and other desktop applications by invoking a Citrix virtual display protocol, ICA, which allows hundreds and thousands of users to work with the applications at the same time.

The XenSource deal will allow Citrix to offer an "end-to-end virtualization infrastructure" from servers to end users. While Citrix can manage applications for end users on central servers, or even stream them off central servers to end users, the addition of a hypervisor software will give it additional server and desktop options. One goal, said Templeton, was to make it possible for users to have the desktop they want, "regardless of where they choose to live, work, or play."

That notion says that in the future, Citrix will provide products that all desktop services to be sent over the Internet or downloaded during a brief connection to the Internet, such as passing through an airport.

The analysts' briefing emphasized that Citrix sees itself as continuing to work in close partnership with Microsoft after it completes the acquisition of XenSource. The small firm is the employer of a number of key developers on the open source Xen hypervisor project.

XenSource itself had built a close relationship with Microsoft -- it maintains a separate lab in Redmond to insure interoperability between Windows and Xen. It has sought to make Xen the hypervisor of choice for Windows users.

As such, XenSource threatened to one day contend with VMware for the Windows virtualization market, but VMware proved canny at competing with open source and started offering the low end of its product line for free as Xen emerged. IDC reports VMware is the virtualization market leader, and on Tuesday, VMware launched a successful IPO for 10% of the company, raising $957 million. VMware professes operating system neutrality and has built ties to the open source Linux community as well as Windows and Sun Solaris. In a two-pronged strategy, Citrix will offer virtualization and virtualization management products that work on top of both the Xen open source hypervisor and the Windows Longhorn Viridian hypervisor after the acquisition, Templeton said.

"We've been doing this balancing act for quite a while. It's not a problem," said Peter Levine, XenSource president, during the call.

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