The Day Ahead: Citrix hopes to take first turnaround steps

Citrix has performed disastrously recently, and lost its chief exec, but a turnaround could now be in the pipeline
Written by Larry Dignan, Contributor

Commentary: No news has been good news this quarter for Citrix Systems. The company hopes to take its first steps to regaining its past glory 18 October when it reports third quarter results.

Amid the flood of profit warnings from high-tech companies, there wasn't a peep out of Citrix in recent weeks. For Citrix investors, that's the first piece of good news from the company in months.

Citrix, whose software allows customers to run any application over any device, was pummelled in the second quarter after the company issued a profit warning and lost its chief executive. Shares stumbled to a low of $14 from a March high of $122. Much of that plunge occurred over the summer (stock chart).

It was a tough fall for Citrix, a former Wall Street darling. Of the seven analysts covering Citrix, four of them rate the stock a "hold." Now Citrix is trying to regain some credibility.

Analysts said the biggest thing for Citrix is execution. The company boosted revenue and customers easily, but lacked the internal processes to handle the growth. The end result was a second quarter debacle, which was magnified by a transition in the way the company sold its software. Toss in management turmoil and Citrix has become the ultimate "show me" stock.

Many Citrix watchers on Wall Street agree that the company's technology and market niche is first rate. Citrix is one of the few companies that can bring legacy systems up on a common platform. Analysts also reckon that Citrix will eventually double its annual revenue to post $1bn in sales.

But first the company has to deliver solid results for the quarter ending 30 September.

Michael Cristinziano, an analyst with Gerard Klauer Mattison, is projecting earnings of 12 cents a share on sales of $111m. His projections are in line with First Call consensus figures.

You're not going to see any quick fixes from Citrix, but there are some clear mileposts to watch. Here's what to look for to gauge a Citrix turnaround.

1. Execution Can Citrix hit current expectations? Cristinziano said he's looking for signs of progress from Citrix's sales force. "They have to sell more effectively to large enterprise customers," he said.

2. Software revenue Citrix's second quarter meltdown was attributed to the transition from selling shrink-wrap software to electronic licensing. Analysts were irked by the fact that the transition "snuck up" on management. As Citrix transitions to a licensing software model, the company's inventory problems should disappear. Cristinziano expects about 20 percent of Citrix's revenue to derive from licensing with that percentage rising to about 80 percent eventually. Analysts said Citrix now has the internal controls in place to manage the transition.

3. A new CEO What happens when a company like Citrix can't make the jump to the big leagues? Executives take the hit. Shortly after Citrix announced its second quarter profit warning, a management shakeup left the company without a chief executive. Company founder and chairman Edward E Iacobucci stepped down. Former chief executive Mark Templeton became president and Roger W Roberts, Citrix chief executive from 1990 to 1998, became chairman.

The company still needs a chief executive. Citrix's search is under way. Analysts said the company has talked to a few candidates, but no one has been presented to the Citrix board of directors. It's a 50/50 chance a chief executive will be named by the end of the year, said analysts.

4. Products Citrix's growth thus far has hinged on its MetaFrame software, which extends the functionality of Microsoft's operating systems and Unix throughout corporations. MetaFrame has at least another two years of solid growth ahead, but analysts want to see Citrix's next hit. The company, which is Web enabling its products, has made a big move into offering corporate portals with its NFuse software.

But the next growth engine for Citrix may be its "Project Vertigo", which is a new user interface used for Web business applications. Analysts aren't ready to proclaim Vertigo as Citrix's next hit, but they are clearly keeping an eye on it.

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