Earning Scorecard: Citrix Systems (CTXS)

Future Outlook is flat for Citrix Systems Inc. (CTXS). The company reported mixed financial results for the second quarter 2010. While revenue handsomely beats the Zacks Consensus Estimate, EPS falls below it. The recent earnings estimate revision trend is also showing a mixed opinion among the analysts.

Surprisingly, the company has raised its previous guidance of fiscal 2010 revenue by 2.5% although EPS guidance remains weak.

Second Quarter Highlights

Quarterly net revenue was $458.4 million, up 17% year over year and well ahead of the Zacks Consensus Estimate of $437 million. Citrix continues to grow its top line mainly due to desktop business, which includes both Application and Desktop Virtualization solutions. Desktop business generated $290 million of quarterly revenue, up 15% year over year. Total XenDesktop revenue was $60 million in the same quarter.

GAAP net income in the second quarter 2010 was $47.6 million or 25 cents per share compared with a net income of $42.5 million or 23 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the reported quarter was 31 cents, which fell below the Zacks Consensus Estimate of 33 cents.

Agreements of Analysts

Of the 13 analysts covering the stock, in the last 30 days, 9 of them revised their estimates upward for the ensuing third quarter and 8 of them revised their estimates upward for the following quarter. However, during the same time period, 2 analysts reduced their estimates for the third quarter and 4 analysts reduced it for the following quarter.

Furthermore, 4 and 7 analysts raised their estimates for full fiscal 2010 and 2011, respectively, during the same time period, while 6 analysts reduced their estimates for fiscal 2010 and 3 analysts reduced it for fiscal 2011.

We believe the positive sentiment mainly comes from the global virtualization market, which will continue to flourish with desktop virtualization as its central point. Business enterprises are opting for virtualization solutions as a cost effective method.

The negative opinion primarily comes from the highly competitive nature of the virtualization market. Citrix is facing stiff challenges from both VMWare Inc. (VMW) and F5 Networks Inc. (FFIV). Demand for Citrix’s desktop virtualization product is yet to reach inflexion point. We also remain cautious regarding the economic recovery of European regions.

Currently, the Zacks Consensus EPS Estimate for the third quarter is 38 cents. If that materializes it would result in a substantial growth of 30.8% year over year. Similarly, for fiscal 2010, the current Zacks Consensus EPS Estimate of $1.45 is also indicating a gain of nearly 7.6% year over year.

Magnitude of Estimate Revisions

In synergy with the mixed estimate revision trend, the Zacks Consensus Estimate has moved up by 2 cents, in the last 30 days, for the ensuing third quarter and also moved up by just 1 cent for the following quarter. However, for fiscal 2010, the Zacks Consensus Estimate remains static in the last 30 days whereas for fiscal 2011 Zacks Consensus Estimate also moved up by 5 cents.

Our Recommendation

The company is benefiting from the trend toward globalization and the virtual office. The desktop virtualization market is expected to accelerate further in 2010. While server virtualization currently has an addressable market size of approximately 35 million servers worldwide, desktop virtualization has the potential to impact more than 600 million desktop users in corporate environments alone.

On the other side, Citrix was not able to snatch market share from VMWare and most of its growth came from the existing small & mid-sized business market segment. Citrix is quickly loosing its share in the server virtualization market. The server virtualization market is intensely challenging and is increasingly becoming commoditized. Citrix is steadily cutting the prices of its XenServer product line and as a result, most of its offerings are free now.

We thus maintain our long-term Neutral recommendation for Citrix. Currently, it is a Zacks #3 Rank (Hold) stock.

CITRIX SYS INC (CTXS): Free Stock Analysis Report
VMWARE INC-A (VMW): Free Stock Analysis Report
F5 NETWORKS INC (FFIV): Free Stock Analysis Report

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