Equity Research United States
Citrix Systems
CTXSRDB Marks Foray Into
Desktop Virtualization
Introducing Remote Desktop Broker (RDB). We have learned that
Citrix Systems will release a new solution, dubbed Remote Desktop Broker, to address the virtual desktop market within the next few weeks. RDB combines Citrix Systems’ existing technologies (e.g., Presentation Server, Web Interface, Citrix Access Gateway, etc.) with partner solutions (e.g., Microsoft Virtual Server, VMware ESX). Residing on Presentation Server, RDB software manages and dynamically provisions virtual machines containing unique Windows desktop images to end users—marking Citrix Systems’ first foray into the emerging virtual desktop infrastructure market.
Strong Strategic Fit with Presentation Server. We believe that
Citrix Systems is uniquely positioned with its broad portfolio of infrastructure technologies to provide the crucial middleware “glue” to hold all various systems of a virtual desktop infrastructure together. Presentation Server represents the cornerstone of Citrix Systems’ strategy, and we believe that through combining Presentation Server’s unmatched application publishing capabilities and ICA protocol with the soon-to-be-released RDB solution, Citrix Systems can address an even broader end-market than its traditional roots in server based computing.
More to Come: Virtual Desktop Utility (VDU). We believe that the
concept of utility computing and, more specifically, the use of virtualization can be applied to the corporate desktop environment to improve performance, increase flexibility, and reduce operating and capital expenses. Combining virtualization technologies to separate the three primary components of the traditional desktop infrastructure stack can produce what we have dubbed a “Virtual Desktop Utility.” We believe that RDB marks only the beginning of Citrix Systems’ advances in the VDU market—with our expectation for Project Tarpon and other components to be integrated over the course of the next twelve months.
Outlook. We have been encouraged by Citrix Systems’ expanding
product portfolio, which we believe positions the company to redefine itself from just “the MetaFrame guys” to a broader access solutions vendor. With the combination of the product cycle potential of PS4 and strong new product traction, we reiterate our Outperform rating and our target price of $42.
IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS AND INFORMATION ON TRADE ALERTS AND ANALYST MODEL
PORTFOLIOS ARE IN THE DISCLOSURE APPENDIX. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.credit-suisse.com/ir or call 1 877 291 2683 or email [email protected] to
research team
Philip Winslow, CFA Research Analyst 212 325 6157
Dennis Simson Research Analyst 212 325 0930
Rating
OUTPERFORM* [V]
Price (14 Aug 06) 28.69 (US$)
Target price (12 months) 42.00 (US$)
52 week high - low 45.50 - 23.06
Market cap. (US$ m) 5,494.14
Region / Country Americas / United States
Sector Software
Analyst's Coverage Universe Software & Services Weighting (vs. broad market) OVERWEIGHT
Date 15 August 2006
* Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. [V] = Stock considered volatile (see Disclosure Appendix).
Price / Indexed S&P 500
22 27 32 37 42
Aug-05 Nov-05 Feb-06 May-06 Daily Aug 15, 2005 - Aug 11, 2006, 8/15/05 = US$23.46
Price Indexed S&P 500
On 08/11/06 the S&P 500 index closed at 1,268.41
Year 12/05A 12/06E 12/07E
EPS (CS adj., US$) 1.17 1.09 1.22
Prev. EPS (US$)
P/E (x) 24.5 26.3 23.5
P/E rel. (%) 146.7 179.2 177.0
Q1 EPS 0.24 0.27
Q2 0.27 0.26
Q3 0.29 0.26
Q4 0.36 0.30
Number of shares (m) Price/Sales (x)
191.5 4.7
BV/Share (Current, US$) P/BVPS (x)
— —
Net debt (Current, US$ m) Dividend (Current, US$)
-899.5 —
Dividend yield
— —
Year 12/05A 12/06E 12/07E
Revenue (US$ m) 908.7 1,128.8 1,286.7
EBITDA (US$ m) 266.2 333.2 378.5
Net debt (12/05A, US$ m) -617.9 — —
OCFPS (US$) 1.43 1.90 2.04
P/OCF (x) 20.1 15.1 14.1
Executive Summary
Within the emerging market of the “Virtual Desktop Utility,” which we describe in detail in the following section, we believe that Citrix Systems is uniquely positioned with its broad portfolio of infrastructure technologies to provide the crucial middleware “glue” to hold all various systems together.1 In our opinion, Presentation Server represents the
cornerstone of Citrix Systems’ strategy in this marketplace, as this technology is the most widely deployed presentation server for centrally managing heterogeneous applications and delivering their functionality as a service to workers on any device at any location.
Citrix Systems’ installed base of more than 160,000 customers utilize Presentation Server to run applications on a central terminal server and then allow end users desktop access to that server—a solution that addresses upwards of 85-90% of the total desktop application end user community. However, power users (e.g., software developers or financial traders) need more performance, data isolation, desktop personalization, and control (e.g., remote reboot) than can be provided by a traditional server based computing solution, such as Presentation Server.2 We believe that through combining Presentation Server’s unmatched application publishing capabilities and ICA protocol with the soon-to-be-released Remote Desktop Broker (RDB) solution that dynamically provisions virtual machines containing unique desktop PC images, Citrix Systems can address an even broader end market—satisfying nearly 100% of all desktop user requirements and deployment scenarios. Specifically, Citrix Systems’ broad product portfolio can provide multiple access scenarios based on the end users’ specific requirements. For example, a secretary might only need a published desktop through Presentation Server; a trader would need a complete virtual desktop through Remote Desktop Broker; an outsourced software programmer might also require a virtual desktop to be delivered through RDB via the Citrix Access Gateway; if a “road warrior” needs to access applications offline, Streaming Server can stream those applications onto his/her corporate laptop for disconnected use; and/or a partner might need access to a specific client/server application that could be published to Presentation Server and presented to the user through Web Interface.
Investment
Analysis
Introducing the Concept of the Virtual Desktop Utility
Conceptually rooted in the mainframe, the idea of “utility” or “grid” computing has been around for years,3 but implementation has not been widespread—particularly in the desktop computing environment. The utility computing paradigm aims to optimize IT investments by pooling resources and enabling the network to tap additional capacity on an as-needed basis to meet demand swings. Utility computing is the belief that
information technology can be turned into a service—always on, on demand, and readily quantified. A key component of utility computing is the concept of virtualization for creating “pools” of on demand computing resources.
We believe that the concept of utility computing and, more specifically, the use of virtualization can be applied to the corporate desktop environment to improve performance, increase flexibility, and reduce operating and capital expenses. In our opinion, combining virtualization technologies to separate the three primary components of the traditional desktop infrastructure “stack”—operating system, application, and user interface (as illustrated in Exhibit 1)—can produce a Virtual Desktop Utility (VDU) that parallels the theme of utility computing.
Exhibit 1: Virtual Desktop Utility (VDU) Stack and Virtualization Layers
Source: Credit Suisse
In a Virtual Desktop Utility environment, application components can execute on whichever backend systems they need in a grid-like way, and presentation components can be displayed and consumed wherever they are needed—either internally to the corporate intranet or externally for partners and/or remote access over the Internet.1 We believe that the
The three virtualization technologies utilized in a virtual desktop utility include:
• Operating System Virtualization: OS virtualization technology is an abstraction layer that decouples the operating system from the underlying physical hardware.
Virtualization allows heterogeneous operating systems to run in isolation, side-by-side on the same physical machine. Each virtual machine has its own set of virtual
hardware (e.g., RAM, CPU, NIC, etc.), upon which an operating system is loaded.4 • Application Virtualization: Application virtualization technology is an abstraction layer
that separates applications from the underlying operating system. Applications execute within “virtual sandbox” environments that protect the host operating system from being altered by the applications—enabling applications to run on any
compatible computer without the need for installation and configuration. Within a virtual application sandbox, each application has its own set of configurations so they do not depend on the configuration of the host, a situation completely opposite of traditional software deployment, and because of this, any application can run side-by-side with any other application without conflicts.5
• User Interface Virtualization: User interface virtualization technology is an abstraction layer that separates application execution from the interface or presentation layer. The presentation layer dictates how and where the end user interfaces with the
application. With this technology, the application intelligence runs on one piece of hardware while a virtualized interface is presented to the user on any device at any location.
Where Are We Now?: Remote Desktop Broker (RDB)
As a first step to begin to address the concept of a Virtual Desktop Utility, we have learned that Citrix Systems will release a new solution, dubbed Remote Desktop Broker (RDB), within the next few weeks. The Remote Desktop Broker application provides a mechanism to manage connections to Windows desktop images on virtual machines or PC blades and feeds parameters into Microsoft’s Remote Desktop Protocol (RDP) client, which is installed on Presentation Server.6
Remote Desktop Broker combines Citrix Systems’ existing technologies (e.g.,
Presentation Server, Web Interface, and Citrix Access Gateway) with partner solutions (e.g., Microsoft Virtual Server, VMware ESX, etc.)—enabling two of the three
virtualization technologies that we presented in the previous section (i.e., operating system virtualization and user interface virtualization) to provide a centrally-managed, virtual desktop image to end users.
Exhibit 2: Remote Desktop Broker (RDP) and Presentation Server Environment
Source: Credit Suisse
The following infrastructure components describe how this new solution will deliver centrally-managed, virtual desktops to users outside of the corporate firewall: • Microsoft Virtual Server/VMware ESX: The first step of the process is to build a
Microsoft Virtual Server or VMware server. The virtualization layer divides the server into numerous individual virtual machines with each VM running the Windows XP operating system and the necessary applications to be delivered to the end users based on their division or function (i.e., outsourced programmers in India require different applications than a financial trader). Windows XP’s built-in RDP client on the VM then provides remote access to that virtual desktop image.1,7
• Remote Desktop Broker (RDB): Remote Desktop Broker sits directly on top of the Citrix Access Suite with the RDB client installed on Presentation Server managing the pools of Windows XP images for common users.6 The application will communicate with an RDB database that contains connection information for the pooled desktop images available on a Microsoft Virtual Server or VMware ESX server. As pooled resources are employed, RDB will note in its data warehouse that a particular desktop image is “in use” and unavailable, and as such, the next user attempting to connect will be redirected to an available virtual machine image.6 Once a session is closed, RDB has the data from the VM stored, and the VM is wiped clean and goes back into the pool.7
• Citrix Access Gateway with Advanced Access Control: Since the RDB solution will be most attractive in implementations for outsourced labor (e.g., software programmers), ensuring secure remote access is a necessity. The basic idea is that the end user needs a simple yet secure method for accessing the VM image without requiring client software on that end device, such as an IPSec VPN client.7 The end user can connect to the Citrix Access Gateway to establish a clientless SSL session into Presentation Server. The Advanced Access Control (AAC) feature ensures endpoint integrity before granting access to the network and continuously scans endpoints to ensure that the requisite antivirus and personal firewall programs are running, and if they are not, then access to the network is denied.
Combining Remote Desktop Broker with the existing Citrix Access Suite enables flexible remote access policies through Citrix’s Smart Access technology. The unique Advanced Access Control option provides organizations with the ability to grant the same users different levels of action rights (i.e., view, print, edit, save, etc.), depending on their access scenario (i.e., who they are, where they are, the device they are using, how it is configured, and the connection through which they are accessing the network).8 By exerting granular control over applications deployed through Citrix Presentation Server based on a user’s access scenario, the Citrix Access Suite can determine if a virtual desktop or a Presentation Server published desktop and/or application represents the most appropriate access methodology (as illustrated in Exhibit 2). Furthermore, the VM images can be reduced in size by having Presentation Server applications presented to that desktop in a server based computing structure.
The Future?: A Virtual Desktop Utility
While the Remote Desktop Broker technology described in the previous section offers a solid initial solution for providing virtual desktops, we believe that several more
Exhibit 3: Virtual Desktop Utility (VDU) and Citrix Systems’ Future?
Source: Credit Suisse
We believe that Remote Desktop Broker marks only the beginning of Citrix Systems’ advances in this market, as we expect the company to introduce other components over the course of the next twelve months that will extend Remote Desktop Broker’s
functionality. Three advances that we believe could increase the value of Remote Desktop Broker include:
• Streaming Server (aka Project Tarpon): During iForum 2005 in Las Vegas, Citrix Systems unveiled Project Tarpon, which the company positioned as its version of desktop application streaming/virtualization technology, and the company anticipates releasing the product in late 2006 under the name Streaming Server. Project Tarpon derives from the Application Isolation Environment (AIE) feature released in
Presentation Server 4.0. AIE provides a virtualized environment for access to files, registries, and named objects, which enables applications that are incompatible with each other to run simultaneously. AIE also allows applications that were previously unable to run in a multi-user environment to run on Presentation Server.9 Project Tarpon’s virtualization and streaming technologies could serve as key components of a Virtual Desktop Utility architecture. For example, instead of creating pools of Windows XP images on an MS Virtual Server/VMware ESX server with static
applications installed on those VMs, a more efficient pooling of processing resources would be to create one pool of “blank” Windows XP images. When a user logs in through Presentation Server, Remote Desktop Broker will provision an available VM and instruct Streaming Server to load that user’s relevant applications based on the user profile stored in the Citrix Access Suite. When a user logs out, the applications, which never actually made changes to the Windows registry, DDLs, and other shared settings but rather ran on top of application isolation environment, can be “thrown out;” the user’s data and disk image including personal network shares (e.g., My
Documents, etc.) can be saved back to a storage area network (SAN);10 and the VM We believe that Citrix
which still maintains a clean operating system (since the applications were never installed on the operating system and, as such, never altered any registry files that could create future application conflict) can be added back into the pool to be reprovisioned to any user regardless of their department, function, or application requirements. Without Project Tarpon’s streaming and virtualization abilities, each VM image would have a distinct set of programs statically-installed that must be patched individually, and as such, enterprises lose some of the value of virtual desktops from an administrative perspective and a utility computing “resource pool” standpoint. Many contend that AIE and Project Tarpon do not provide true application virtualization but rather application redirection, as these two technologies do not support applications that rely on Windows services, COM/DCOM objects, etc. Rather Project Tarpon redirects registry keys, files, folders, and some system objects from common locations to isolated locations (i.e., applications are still installed and write to the registry and the file system but in isolated environment).11 In the future, we believe that Citrix Systems will add more true virtualization features into the product or even potentially license Softricity’s SystemGuard from Microsoft and then utilize Project Tarpon’s streaming and application management tools as an extension of that technology (i.e., similar to how Presentation Server extends the functionality of Terminal Services).12 • Independent Computing Architecture (ICA): One of the issues with the existing form of
Remote Desktop Broker is the double-hop of the RDP session running over ICA. When a user connects over ICA from India to London, for example, and subsequently uses RDP on a London Presentation Server with Remote Desktop Broker to connect to a London XP desktop image, all works well until latency is introduced (something like 500 milliseconds). ICA offers more robust performance than RDP over latent networks and, therefore, is more useful for branch office and outsourcing
deployments. ICA’s SpeedScreen technology to contend with latency does not work when running RDP over ICA—probably because Presentation Server does not understand the RDP desktop as a “Windows application” and instead recognizes RDP as a bitmap stream. Additionally, ICA provides stronger graphical performance and multi-monitor support than RDP.10 Citrix administrators, with whom we have spoken, believe that decoupling the ICA stack and having it reside on the Windows XP image represents the most appropriate solution to the double-hop problem. Having an ICA stack resident on the Windows XP image would thereby eliminate the double-hop issue of running RDP over ICA by enabling the key differentiating features of ICA versus RDP, such as SpeedScreen, Session Reliability, virtual channel control, etc. • Management Tools: While keeping track of pooled VM resources and their availability
represents a key feature of Remote Desktop Broker, we believe that more robust administration tools will be required to fully leverage the Virtual Desktop Utility vision. For many organizations, identifying the root cause of virtual server problems and rectifying them remains largely a manual process. As the number of virtual machines in the data center increases, solving those problems in an automated way becomes more urgent.13 As such, Citrix Systems may look to integrate the EdgeSight
technology from its acquisition of Reflectent into its Remote Desktop Broker solution to extend monitoring and management capabilities to virtual desktops. Additionally, more robust management tools needed to administer and provision virtual desktops on the fly include: connection brokering, load balancing, provisioning, session brokering, image management, and printing.7 For example, after a 30 minute idle While the processes
period when the user’s session is disconnected, the session could remain active on the server for four hours before the virtual machine is suspended and its memory contents dumped to a storage area network (SAN). At this point the virtual machine is consuming no server resources and can stay suspended, but when the user comes back, the session is retrieved from disk and restored to any available server—allowing the user to pick up wherever he/she left off.1 While the processes involved in creating a Virtual Desktop Utility are undoubtedly complex, Citrix Systems actually has experience managing many of these issues in the Presentation Server world.1
Advantages of Virtual Desktop Utility
IT Cost Reduction
A Virtual Desktop Utility lowers the total cost of ownership of IT with reduced hardware depreciation costs, reduced costs associated with moves and changes; and reduced remote data center and business continuity charges. VDU provides more effective cost management with increased centralization and utilization of large data centers.
Overhead savings could also be realized with reduced desktop support headcount and reduced packaging and distribution charges.14 Specifically, rapidly falling IT hardware prices have allowed corporations worldwide to significantly lower their internal IT capital expenditures. However, desktop computing acquisition costs typically account for only 20-30% of the total cost to the customer over the life of that hardware, while the remaining 70-80% consists of IT maintenance costs, such as moves/add/changes (MACs) of employees, repairs and fixes, and upgrades.15 Furthermore, if a Virtual Desktop Utility is deployed for both internal and external access, administering 500 servers costs significantly less to manage in both time and money than 5,000 desktop instances across an organization.
Increased Flexibility and Mobility
The Virtual Desktop Utility paradigm provides an architecture capable of extending to remote sites without the need for extensive capital expenditures and it provides the capability to efficiently provide external entities or newly merged entities access to applications without the need for application or server installation. The centrally
managed virtual desktop system also enables simplified remote access and roaming for intra-office personal desktops for mobile employees.14 The ability to connect to a single desktop image whether sitting at one’s cubicle, logging in remotely, or traveling to a branch office through Citrix System’s Smooth Roaming technology as a component of a Virtual Desktop Utility enables hot desking and worker mobility.
Improved Disaster Recovery
Complete desktop environments are encapsulated inside virtual machines and maintained in the corporate data center where, in the event of a disaster, they can be instantly recovered and redeployed. Moreover, if one user’s desktop crashes, it will not affect another user’s desktop or application because it’s running in a separate virtual machine.4
Increased Scalability
numerous desktop images from the server room as opposed to deploying individual machines at each user’s cubicle. Furthermore, partitioning a large server into VM images represents a more cost-efficient solution to PC blades. Efficient use of existing capacity enables scale to grow without additional investments at each incremental point of scaling.14
Simplified Operational Management
Organizations with branch offices, remote workers, or offsite facilities can manage and standardize their desktop environments and applications in the corporate data center, where backups, upgrades, and complete maintenance can be performed from one central location. VDU simplifies software image updates—both operating system and application—because the entire software image resides on one file on the server.
Rapid Deployment of Applications
Within the Virtual Desktop Utility architecture, new applications are applied once to the streaming server, and each user is updated instantly upon next invocation. This model also enables full and detailed accounting of licenses consumed, and unused licenses are automatically identified and re-harvested. Furthermore, an estimated 20-40% of Windows application installations conflict with each other.16 However, unlike the compatibility problems associated with other application deployment solutions, the Virtual Desktop Utility—through its application virtualization technology—runs any off-the-shelf, legacy, or custom application without any modifications or regression testing.4
Reduced Support
If a VM desktop image fails, that image is automatically replaced by another from the same, shared pool. Furthermore, based on VDU’s applications streaming and virtualization components, if an application crashes or a user deletes important application files, that application or the missing components can be automatically repaired through restreaming to the VM image. Help desk calls and in-person support costs would be reduced through greater automation.
Desktop Customization/Personalization
A Virtual Desktop Utility can provide a unique environment for each and every user, and each of these environments can be completely customized with different applications and settings without impacting other users. Furthermore, users can be granted more control of their own “virtual” desktop to allow them to install and modify applications if needed.7
Increased Security and Compliance
Virtual Desktop Utility + Citrix Systems = Access
Infrastructure
Through combining Presentation Server, Streaming Server, Citrix Access Gateway, NetScaler, WANScaler, and further improvements to the soon-to-be-released Remote Desktop Broker solution, Citrix Systems can convey a message of application access and optimization across Web, client/server, and desktop applications—from both external and internal access perspectives (as illustrated in Exhibit 3 and Exhibit 4, respectively).
Exhibit 4: The Future of Citrix Access Infrastructure (Intranet Architecture)?
Source: Credit Suisse
By maintaining such a broad base of access solutions, we believe that Citrix Systems can provide effective technologies targeted to the current state of an organization’s IT department. For example, if an organization is not yet ready to move to a fully internal thin computing architecture, Citrix Systems can offer Presentation Server to present published applications to the desktop and/or Streaming Server (aka Project Tarpon) to stream applications to virtual environments on desktops. Conversely, Citrix Systems can enable an enterprise that wishes to transition internal desktops to thin clients by
enabling internal/external access to virtual desktop images running on backend servers delivered via Remote Desktop Broker, Presentation Server, Streaming Server,
outside the corporate firewall with less-than-optimal security settings, provide that user with read-only capabilities in a published application on Web Interface; etc.).
Additionally, with a more complete product portfolio, Citrix Systems can provide multiple access scenarios based on the end user’s demands. For example, a secretary might only need a published desktop through Presentation Server; a trader would need a complete virtual desktop; an outsourced software programmer might also require a virtual desktop to be delivered through Remote Desktop Broker via an SSL connection through the Citrix Access Gateway; if a “road warrior” needs to access applications offline, Streaming Server can stream those applications onto his/her corporate laptop for disconnected use; and/or a partner might need access to a specific client/server
application that could be published to Presentation Server and presented to the user through Web Interface.
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Exhibit 5: Citrix Actual and Projected Quarterly Income Statement
US$ in millions, unless otherwise stated
Fiscal 2005 by Quarter Fiscal 2006 by Quarter Fiscal Year Ends December
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06E Dec-06E 2004 2005 2006E 2007E
Total revenue $ 201.9 $ 211.2 $ 226.9 $ 268.7 $ 260.0 $ 275.5 $ 281.6 $ 311.7 $ 741.2 $ 908.7 $ 1,286.71,128.8 $
Software licenses and products 90.1 92.0 97.3 130.1 114.2 117.8 119.5 141.6 369.8 409.4 493.1 549.9
% of revenue 44.6% 43.5% 42.9% 48.4% 43.9% 42.8% 42.4% 45.4% 49.9% 45.1% 43.7% 42.7%
Software license updates 77.2 80.5 84.5 89.0 93.9 99.8 102.0 105.6 271.5 331.1 401.2 461.0
% of revenue 38.2% 38.1% 37.2% 33.1% 36.1% 36.2% 36.2% 33.9% 36.6% 36.4% 35.5% 35.8%
Services 34.7 38.8 45.2 49.6 51.9 57.9 60.1 64.5 99.8 168.2 234.4 275.8
% of revenue 17.2% 18.4% 19.9% 18.4% 20.0% 21.0% 21.3% 20.7% 13.5% 18.5% 20.8% 21.4%
Citrix Online 20.4 23.8 26.2 28.7 31.6 35.1 37.6 39.6 44.1 99.1 144.0 178.5
% of revenue 10.1% 11.3% 11.5% 10.7% 12.2% 12.8% 13.4% 12.7% 6.0% 10.9% 12.8% 13.9% % of services revenue 58.8% 61.5% 57.9% 58.0% 60.9% 60.7% 62.6% 61.4% 44.2% 58.9% 61.4% 64.7%
Other services 14.3 15.0 19.0 20.8 20.3 22.8 22.4 24.9 55.7 69.1 90.4 97.3
% of revenue 7.1% 7.1% 8.4% 7.8% 7.8% 8.3% 8.0% 8.0% 7.5% 7.6% 8.0% 7.6% % of services revenue 41.2% 38.5% 42.1% 42.0% 39.1% 39.3% 37.4% 38.6% 55.8% 41.1% 38.6% 35.3%
Total cost of revenue 5.9 7.6 11.4 16.2 16.7 19.2 19.7 22.0 20.3 41.1 77.5 98.9
Gross profit 196.0 203.6 215.5 252.5 243.3 256.3 261.9 289.7 720.9 867.6 1,051.3 1,187.8
Gross margin 97.1% 96.4% 95.0% 94.0% 93.6% 93.0% 93.0% 93.0% 97.3% 95.5% 93.1% 92.3%
Operating expenses:
Sales and marketing 94.4 92.0 96.1 109.0 104.2 111.1 114.3 126.4 337.6 391.5 456.0 521.6
% of revenue 46.8% 43.6% 42.3% 40.6% 40.1% 40.3% 40.6% 40.5% 45.5% 43.1% 40.4% 40.5%
Research and development 25.1 26.4 27.1 28.5 30.0 33.5 36.0 37.8 86.4 107.0 137.3 156.2
% of revenue 12.4% 12.5% 11.9% 10.6% 11.5% 12.2% 12.8% 12.1% 11.7% 11.8% 12.2% 12.1%
General and administrative 27.3 30.1 31.8 35.7 35.9 37.7 38.4 38.9 106.5 124.8 150.8 158.6
% of revenue 13.5% 14.2% 14.0% 13.3% 13.8% 13.7% 13.6% 12.5% 14.4% 13.7% 13.4% 12.3%
Total operating expenses 146.8 148.5 154.9 173.2 170.0 182.3 188.7 203.0 530.4 623.4 744.0 836.4
Operating income 49.2 55.1 60.6 79.2 73.3 74.0 73.2 86.7 190.4 244.2 307.3 351.4
Operating margin 24.4% 26.1% 26.7% 29.5% 28.2% 26.9% 26.0% 27.8% 25.7% 26.9% 27.2% 27.3% Stock options compensation expense - - - - 11.5 14.1 14.1 14.1 - - 53.8 56.3
% of revenue NM NM NM NM 4.4% 5.1% 5.0% 4.5% NM NM 4.8% 4.4% Other - - - - - - -Interest and other income 5.1 5.0 5.6 5.4 6.5 10.3 10.1 10.4 12.7 21.0 37.3 44.7 Pretax income 54.3 60.1 66.2 84.6 68.2 70.3 69.3 83.1 203.1 265.2 290.8 339.8 Pro forma taxes 12.3 12.3 13.9 17.9 18.7 20.5 20.2 24.2 42.0 56.4 83.6 99.2
Effective tax rate 22.6% 20.5% 21.1% 21.2% 27.4% 29.2% 29.2% 29.2% 20.7% 21.3% 28.8% 29.2%
Pro forma net income $ 42.1 $ 47.8 $ 52.2 $ 66.7 $ 49.5 $ 49.7 $ 49.1 $ 58.8 $ 161.0 $ 208.8 $ 207.2 $ 240.6
Pro forma net margin 20.8% 22.6% 23.0% 24.8% 19.1% 18.1% 17.4% 18.9% 21.7% 23.0% 18.4% 18.7%
Pro forma EPS (fully-diluted) $0.24 $0.27 $0.29 $0.36 $0.27 $0.26 $0.26 $0.30 $0.92 $1.17 $1.09 $1.22
Pro forma EPS (fully-diluted, ex ESO) $0.24 $0.27 $0.29 $0.36 $0.33 $0.33 $0.33 $0.38 $0.92 $1.17 $1.37 $1.52
FD shares outstanding, (000s) 175.9 175.1 178.2 182.8 186.0 191.5 192.3 193.8 174.6 178.0 190.9 197.6
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Exhibit 6: Citrix Growth Rate Analysis
Fiscal 2005 by Quarter Fiscal 2006 by Quarter Fiscal Year Ends December
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06E Dec-06E 2004 2005 2006E 2007E Sequential growth
Revenue -5.6% 4.6% 7.4% 18.4% -3.2% 6.0% 2.2% 10.7% 25.9% 22.6% 24.2% 14.0%
Software licenses and products -15.2% 2.1% 5.7% 33.8% -12.3% 3.2% 1.4% 18.5% -1.2% 10.7% 20.4% 11.5%
Software license updates 2.5% 4.3% 5.0% 5.3% 5.5% 6.3% 2.3% 3.5% 60.9% 21.9% 21.2% 14.9%
Services 6.7% 11.9% 16.4% 9.7% 4.8% 11.5% 3.7% 7.4% 119.2% 68.5% 39.4% 17.6%
Citrix Online 21.5% 17.1% 9.7% 9.8% 10.1% 11.0% 7.1% 5.3% NM 124.7% 45.3% 23.9%
Other services -9.1% 4.6% 27.2% 9.6% -2.6% 12.2% -1.5% 10.8% 22.3% 24.1% 30.9% 7.6%
Gross Profit -5.9% 3.9% 5.8% 17.1% -3.6% 5.3% 2.2% 10.6% 26.8% 20.4% 21.2% 13.0%
Sales and marketing -5.6% -2.5% 4.4% 13.4% -4.4% 6.7% 2.9% 10.6% 33.6% 16.0% 16.5% 14.4%
Research and development 7.5% 5.3% 2.5% 5.4% 5.2% 11.7% 7.5% 4.9% 34.0% 23.9% 28.2% 13.8%
General and administrative -1.7% 10.1% 5.7% 12.5% 0.4% 5.1% 1.7% 1.4% 24.3% 17.2% 20.8% 5.2%
Total operating expenses -2.9% 1.2% 4.3% 11.8% -1.8% 7.2% 3.5% 7.6% 31.7% 17.5% 19.4% 12.4%
Operating income -13.8% 11.9% 10.0% 30.7% -7.5% 0.9% -1.0% 18.4% 14.8% 28.2% 25.8% 14.4%
Pro forma pretax income -11.5% 10.6% 10.1% 27.8% -19.4% 3.0% -1.4% 19.9% 18.2% 30.6% 9.7% 16.8%
Pro forma net income -16.7% 13.6% 9.3% 27.7% -25.7% 0.4% -1.4% 19.9% 19.9% 29.7% -0.8% 16.1%
Year-over-Year growth
Revenue 25.2% 18.5% 21.0% 25.6% 28.8% 30.4% 24.1% 16.0%
Software licenses and products 3.0% 4.9% 10.0% 22.5% 26.8% 28.1% 22.9% 8.8%
Software license updates 31.0% 20.1% 20.0% 18.2% 21.6% 24.0% 20.7% 18.7%
Services 131.2% 64.3% 57.3% 52.6% 49.9% 49.3% 33.0% 30.1%
Citrix Online 628.4% 128.1% 85.7% 71.4% 55.4% 47.3% 43.8% 38.0%
Other services 17.2% 13.7% 30.0% 32.6% 42.1% 52.4% 18.1% 19.4%
Gross Profit 24.8% 17.4% 18.3% 21.2% 24.1% 25.9% 21.5% 14.8%
Sales and marketing 27.3% 13.9% 16.3% 9.0% 10.3% 20.7% 19.0% 16.0%
Research and development 31.7% 19.1% 23.9% 22.3% 19.7% 26.9% 33.1% 32.4%
General and administrative 10.3% 8.0% 21.5% 28.6% 31.3% 25.4% 20.8% 8.9%
Total operating expenses 24.5% 13.5% 18.6% 14.6% 15.8% 22.8% 21.8% 17.2%
Operating income 25.8% 29.5% 17.5% 38.8% 48.9% 34.3% 20.8% 9.5%
Pro forma pretax income 31.0% 32.6% 20.5% 37.8% 25.6% 16.9% 4.7% -1.8%
Pro forma net income 28.4% 34.9% 23.4% 32.0% 17.8% 4.1% -6.1% -11.8%
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Exhibit 7: Citrix Actual and Projected Quarterly Balance Sheet
US$ in millions, unless otherwise stated
Fiscal 2005 by Quarter Fiscal 2006 by Quarter Fiscal Year Ends December
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06E Dec-06E 2004 2005 2006E 2007E Current assets
Cash and cash equivalents 120.9 207.7 508.2 484.0 423.2 344.6 371.5 450.0 73.5 484.0 450.0 743.4 Marketable securities 189.7 183.3 - 18.9 157.1 276.2 276.2 276.2 159.7 18.9 276.2 276.2 Accounts receivable 85.5 98.9 111.1 142.0 116.4 136.2 137.9 164.8 108.4 142.0 164.8 187.4 Inventories - - - - 4.0 4.8 - - - - - -Prepaid and other current assets 76.2 75.6 76.3 81.5 80.8 100.9 93.2 93.2 85.0 81.5 93.2 93.2
Total current assets 472.3 565.5 695.7 726.5 781.5 862.7 878.8 984.2 426.6 726.5 984.2 1,300.3
Long-term investments
Restricted (cash) investments 147.2 145.6 63.7 63.7 63.7 63.8 63.8 63.8 149.1 63.7 63.8 63.8 Long term (cash) investments 147.4 148.3 51.3 51.3 95.4 214.9 214.9 214.9 184.0 51.3 214.9 214.9 Property and equipment, net of depreciation 68.2 69.4 70.1 73.7 76.3 81.3 83.5 85.8 69.3 73.7 85.8 97.3 Other assets 11.3 15.8 19.7 37.1 39.1 42.2 42.2 42.2 8.6 37.1 42.2 42.2 Intangibles assets, net 443.8 439.2 712.5 729.3 720.8 727.1 727.1 727.1 448.6 729.3 727.1 727.1 Total assets 1,290.2 1,383.7 1,612.9 1,681.7 1,776.9 1,991.9 2,010.2 2,117.9 1,286.1 1,681.7 2,117.9 2,445.5
Current liabilities
Accounts payable and accrued expenses 120.0 150.1 160.1 159.9 155.0 160.4 172.1 185.5 131.3 159.9 185.5 195.2 Accrued liabilities - - - - -Accrued royalties - - - - -Deferred revenue 216.4 227.7 239.3 266.2 274.2 290.1 295.9 327.0 210.9 266.2 327.0 390.6 Convertible subordinated debentures - - - -
-Total current liabilities 336.5 377.8 399.3 426.1 429.2 450.5 468.0 512.4 342.2 426.1 512.4 585.8
Long term liabilities - - -
-Long-term portion of deferred revenue 13.6 15.0 16.2 19.8 18.3 20.6 21.0 23.2 14.3 19.8 23.2 27.8 Other long-term liabilities 4.5 1.7 76.3 32.3 1.4 1.4 1.4 1.4 4.7 32.3 1.4 1.4 Total liabilities 354.6 394.5 491.9 478.2 448.8 472.5 490.4 537.1 361.2 478.2 537.1 615.0
Stockholders' equity
Total shareholders' equity 935.7 989.3 1,121.1 1,203.5 1,328.1 1,519.5 1,519.8 1,580.8 924.9 1,203.5 1,580.8 1,830.6 Total liabilities and shareholders' equity 1,290.2 1,383.7 1,612.9 1,681.7 1,776.9 1,991.9 2,010.2 2,117.9 1,286.1 1,681.7 2,117.9 2,445.5
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Exhibit 8: Citrix Actual and Projected Quarterly Statement of Cash Flows
US$ in millions, unless otherwise stated
Fiscal 2005 by Quarter Fiscal 2006 by Quarter Fiscal Year Ends December
Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06E Dec-06E 2004 2005 2006E 2007E
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) 38.6 27.9 41.0 58.9 44.7 46.5 47.8 57.4 131.5 166.3 196.3 235.4
Depreciation and amortization 10.5 11.1 13.2 15.5 15.3 15.2 12.2 14.1 33.6 50.4 56.7 55.1
Realized (gain) loss on the repurchase of conv sub debentures - - - - - - - - 7.2 - -
-Stock options compensation expense - - - - 11.5 14.1 14.1 14.1 - - 53.8 56.3
Realized gain on the termination of interest rate swap - - - - - - - - (0.3) - -
-Loss on abandonment of fixed assets - - - - - -
-Other-than-temporary decline in mkt value of investments - - (0.7) 0.7 - - - - (0.5) - -
-In-process research and development - - 7.0 - - - - - 19.1 7.0 -
-Write-down of technology - - - - - -
-Provision for doubtful accounts receivable (0.7) 3.2 1.6 (4.0) 1.8 1.4 - - 1.1 0.1 3.2
-Provision for product returns 1.0 (1.0) - 6.0 - - - - 6.7 6.0 -
-Provision for inventory obsolescence 0.0 (0.0) 0.2 0.1 - - - - 0.4 0.4 -
-Deferred income taxes - - - (14.3) - - - - (2.4) (14.3) -
-Accreation of original issue discount and amort of financing cost - - - - - - - - 4.3 - -
-Other non-cash items (0.1) 0.4 1.3 2.8 0.1 0.9 - - 0.7 4.4 1.0
-Changes to assets and liabilities: 19.6 14.1 6.2 (5.4) 22.0 (17.9) 28.7 19.8 43.0 34.6 52.6 55.3
Accounts receivable 22.6 (15.6) (6.1) (29.4) 23.8 (20.3) (1.7) (26.9) (25.3) (28.4) (25.0) (22.7)
Inventories - - - (1.7) (0.0) 0.0 4.8 - - (1.7) 4.8
-Prepaid taxes - - - - - -
-Other prepaid and current assets 3.1 (3.2) 2.7 (0.1) (4.4) (16.9) 7.7 - 9.7 2.5 (13.7)
-Other assets (1.1) 1.0 0.4 0.0 (0.7) (0.2) - - (0.5) 0.2 (0.9)
-Deferred tax assets (0.2) (3.2) (0.0) 5.6 (1.2) (1.3) - - 12.2 2.1 (2.4)
-Accounts payable and accrued expenses (9.5) 25.3 (19.0) 12.1 (2.0) 2.8 11.7 13.4 1.8 8.8 25.9 9.7
Deferred revenue 4.8 12.7 7.3 30.0 6.4 17.9 6.2 33.3 54.1 54.9 63.9 68.2
Income taxes payable and other liabilities (0.1) (2.8) 21.0 (21.9) 0.0 0.1 - - (9.1) (3.9) 0.1
-Net cash provided by operating activities 68.9 55.7 70.0 60.2 95.3 60.1 102.8 105.4 244.4 254.8 363.6 402.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (86.0) 86.0 (160.4) (22.9) (185.1) (273.1) - - (192.7) (183.2) (458.2)
-Proceeds from sales and maturities of investments 91.7 (78.7) 521.2 4.0 2.8 33.6 - - 414.1 538.2 36.3
-Cash paid for acquisitions, net of cash acquired - - (136.7) (31.7) - (13.4) (50.0) - (140.8) (168.3) (63.4)
-Acquisition of property and equipment, net (4.3) (7.7) (4.7) (9.7) (8.9) (12.5) (8.4) (9.4) (24.4) (26.4) (39.2) (38.6)
Cash paid for licensing agreement - - - - - - - - (16.8) - -
-Proceeds from termination of interest rate swap - - - - - -
-Purchase of trademark - - - - - -
-Other - - - - (0.5) 0.5 - - -
-Net cash used in investing activities 1.3 (0.3) 219.5 (60.2) (191.8) (265.0) (58.4) (9.4) 39.3 160.3 (524.6) (38.6)
Net Free Cash Flow 64.6 48.0 65.3 50.5 86.4 47.6 94.4 96.0 220.0 228.4 324.4 363.5
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 12.7 23.6 24.6 40.7 92.2 104.3 - - 63.5 101.6 196.5
-Tax benefit related to stock options 4.5 9.4 5.4 19.0 14.5 20.2 - - 20.9 38.3 34.6
-Cash paid under stock repurchase programs (40.0) (1.6) (94.0) (38.8) (40.1) (17.5) (17.5) (17.5) (121.9) (174.4) (92.6) (70.0)
Proceeds from issuance of convertible debentures - - - - - -
-Cash paid to repurchase convertible subordinated debentures - - - - - - - - (355.7) - -
-Proceeds from sale of put warrants - - - - - -
-Other - - 75.0 (45.1) (31.0) 19.3 - - - 29.9 (11.7)
-Net cash provided by financing activities (22.7) 31.3 11.1 (24.2) 35.6 126.3 (17.5) (17.5) (393.2) (4.5) 126.9 (70.0)
Net change in cash and cash equivalents 47.5 86.7 300.6 (24.2) (60.8) (78.6) 26.9 78.5 (109.5) 410.6 (34.1) 293.5
Sources
1. Brian Madden – “Providing Windows Applications to Users: Nine Different Theories and Architectures?”
2. www.leostream.com
3. Andrew McCullough – “Keeping Store,” February 1, 2005 4. www.vmware.com
5. www.softricity.com
6. Ron Ogelsby – “Citrix plans to enter VDI space: An analysis of their solution” 7. Ron Ogelsby – “Virtual Desktop Infrastructures (VDI): What's real today, what's not, and what's needed”
8. www.citixsystems.com
9. Citrix Systems – “Maximizing the Value of Your Citrix Investment—Why Upgrade to Citrix Presentation Server 4.0”
10. Brian Madden – “Providing Desktops to Users: Centralized Virtual Machines or Terminal Server Desktops?”
11. Brian Madden – “Limitations of Citrix's Application Isolation Environments” 12. www.thethin.net
13. www.virtualization.info – “Virtualization lacks of management tools”
14. IBM Global Financial Markets – “A Total Economic Assessment (TEA) of the Impact of Server Based Computing (SBC)”
15. Hewlett Packard – “HP Remote Workstation Software” 16. Doug Brown – “To Install or Not Install”
17. Brian Madden – “Providing Desktops to Users: Centralized Virtual Machines or Terminal Server Desktops?”
Companies Mentioned (Price as of 14 Aug 06)
Citrix Systems (CTXS, $28.69, OUTPERFORM [V], TP $42.00, OVERWEIGHT) EMC Corporation (EMC, $10.67, OUTPERFORM, TP $14.00, MARKET WEIGHT) Microsoft Corporation (MSFT, $24.53, NEUTRAL, TP $24.00, OVERWEIGHT)
Disclosure Appendix
Important Global DisclosuresI, Philip Winslow, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for CTXS
29
23
27.5 28 29.5
32.5 36 44 48 42 20-Dec-04 26 O R N 15 20 25 30 35 40 45 8/15 /03 10/1 5/03 12/15/ 03 2/15/ 04 4/15 /04 6/15 /04 8/15 /04 10/15/ 04 12/1 5/04 2/15 /05 4/15 /05 6/15 /05 8/15 /05 10/15/ 05 12/15/ 05 2/15 /06 4/15 /06 6/15 /06
Closing Price Target Price Initiation/Assumption Rating USD
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
CTXS Closing Price Target Price Initiation/
Date Price (US$) Price (US$) Rating Assumption
10/21/03 26.2 29
12/18/03 22 RESTRICTED
3/2/04 20.32 NEUTRAL
3/3/04 20.01 23
3/25/04 22.19 26 OUTPERFORM
12/20/04 X
1/28/05 21.6 27.5
7/27/05 23.83 28
10/20/05 26.15 29.5
1/12/06 30.36 32.5
1/19/06 32.38 36
4/7/06 37.59 44
4/20/06 41.95 48
7/20/06 29.97 42
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Price Target: (12 months) for (CTXS)
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