Markets & Finance

Getting to Know Citrix


By Scott Kessler Ever heard of Citrix Systems (CTXS)? It's one of the largest independent software developers in the U.S., with revenues of $591.6 million in 2001. It's also a component of both the S&P 500 and Nasdaq 100 indexes. Nonetheless, many people don't know the name, let alone what it does.

On Mar. 7, Citrix convened its first-ever analyst meeting, in part to educate the investment community about its business and its prospects. We at Standard & Poor's have followed Citrix since January, 1999, and believe it's a very solid company -- and a compelling investment opportunity. Citrix carries S&P's highest equity ranking of 5-STARS, or buy.

The Fort Lauderdale (Fla.) company is a leading provider of so-called thin client/server software. Plainly stated, its products enable a variety of devices, from PCs to handhelds (the clients), to access and use robust applications by connecting to powerful enterprise computers (servers). Although the concept sounds quite simple, Citrix has created and dominated this important segment of the software industry, mainly through its flagship MetaFrame product, and it has become very profitable in the process.

REFOCUSED STRATEGY. Citrix' technology is used primarily for three important business functions: virtual workplace access, application deployment, and business continuity. In the aftermath of the September 11 attacks, easy and cost-efficient anytime access to software has become increasingly important, so Citrix has refocused its sales strategy around these specific business solutions.

Tens of millions of workers use virtual workplace solutions, for which companies typically spend well over one-third of their information-technology budgets. Branch-office access, telecommuting, and remote and mobile connectivity are all enabled by Citrix technology. Organizations use its software to more easily and inexpensively deploy software applications, fixes, and upgrades across an enterprise. Citrix products also help customers maintain continued operations even in the face of interruptions due to planned or unexpected downtime.

Boston Consulting Group has estimated that the size of the market served by Citrix' MetaFrame products (which account for a majority of the license revenues that contributed 87% of Citrix' total in fourth-quarter 2001) amounts to $7.7 billion. We project that this market could grow at a compounded annual rate of up to 30% through 2005. But Citrix is hardly satisfied with just the projected revenue potential associated with MetaFrame.

SECURE ACCESS. In February, 2000, it introduced NFuse, portal infrastructure software that allows for the integration, publication, and use of interactive applications using a common Internet browser. Leveraging technology acquired through the May, 2001, acquisition of Sequoia Software, Citrix is readying the launch of NFuse Elite. This new product, expected by July, 2002, will be the first mass-market portal infrastructure software available to enterprises.

Nfuse Elite will enable secure access to content, services, and applications through the creation of easily configured virtual Web sites. Citrix has already amassed nearly 500 partners to help promote and distribute this new product. International Data Corp. (IDC) has projected that NFuse's market opportunity will grow at a compounded annual rate of 57% through 2005, to $2.6 billion.

S&P projects that Citrix will achieve annual revenue growth of more than 20% per year over the long term. The reasons? It can provide customers with compelling business solutions that quickly deliver a return on investment (ROI). But Citrix also has a significant opportunity to keep penetrating existing large customer accounts -- and win new business with small and midsize enterprises and government entities. More than 90% of the Fortune 500 and half of the Financial Times FT 500 are already Citrix customers.

GOVERNMENT PUSH. Citrix is acutely aware that selling to existing clients, especially with the current uncertain economy, is considerably easier than winning new ones. However, the company is also increasingly focused on its enormous potential to win business with the vast majority of government and small and midsize business customers that aren't Citrix clients. These organizations could benefit significantly from Citrix' high-ROI business solutions. To make a dent in that market, the company recently hired a new head of federal government sales.

We believe that Citrix offers a unique combination of growth and value characteristics that make it a compelling investment. Amid a woeful U.S. economy, Citrix generated revenue growth of 26% in 2001, with operating margins of 31.2%. Our projections call for similar annual results over the long-term. And the balance sheet is strong. As of December, 2001, it had $746.7 million ($3.98 per share) in cash and investments. Even accounting for convertible debt that comes due in 2004, Citrix had net cash and securities worth $400.5 million ($2.13 per share) in December, 2001.

The company expects to use this cash for general operating needs, small technology acquisitions, and stock repurchases to reduce the amount of outstanding shares and offset dilution (from the grant of employee stock options). In fact, Citrix has been actively buying back shares over the past few years.

CONVINCING ARGUMENT. Despite its solid earnings performance and financial position, the company recently traded at a mere 20 times our estimate for 2002 EPS of $0.87. The price-earnings-to-growth ratio is a very attractive 0.87. But the most convincing argument for investing in Citrix might be our discounted cash flow analysis, which indicates that the stock recently traded at 48% less than our calculated estimate of its intrinsic value.

All in all, S&P believes investors have a number of reasons to strongly consider Citrix Systems. With such notable growth prospects and an attractive valuation, it probably won't remain obscure for much longer. Analyst Kessler follows Internet software and services stocks for Standard & Poor's


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