Citrix Works On Its Image
By Len Grzanka , Inter@ctive Week
Special To Inter@ctive Week
July 17, 2000 8:31 AM ET
Investing in Citrix Systems of Fort Lauderdale is not for the faint of heart. In March, just before announcing record results for the first quarter, Citrix shares hit a high of $122 on Nasdaq. Two months later, the company's chief executive was boasting to reporters that Citrix would hit $5 billion in revenue within five years.
But on June 12, the roof caved in. Citrix revised its second-quarter earnings estimate to between $105 million and $110 million vs. $94.4 million in 1999's second quarter. While that represented a year-over-year increase, it only amounted to 9 cents to 11 cents per share, much less than the analyst consensus of 16 cents per share.
Citrix's stock tanked below $19, and a half-dozen law firms announced class-action shareholder suits.
Heads also rolled. Within two weeks, Citrix announced the resignation of Edward Iacobucci, founder, chairman and director "to pursue his vision of software as a service in cooperation with Citrix and other industry leaders." Roger Roberts, former CEO, took over as chairman, and Mark Templeton, president and former CEO, took the reins as chief operating officer, as the company launched a search for a new CEO. Michael Brown also resigned from the board.
Investor reaction to the earnings advisory stunned Citrix management. "We announced an earnings shortfall due to a lack of execution in certain areas," says David Weiss, vice president of marketing. "We did not announce that our market is shrinking, that our product is defective or that we're being eaten up by our competition. Those are the real tough situations to deal with. We announced that there were changes to our business model and we've identified the critical issues."
Joyce Becknell, managing director at Aberdeen Group, a Boston research firm, agrees. "They haven't done anything wrong. Change came faster than they anticipated. This is not about Citrix going away or dying. It's about Citrix transitioning."
Becknell cites investor uncertainty over high-tech stocks as a factor that accelerated the steep decline in Citrix's market capitalization. "Investors are punishing stocks that don't perform well," she says, "but, for Citrix, the problem would be if they can't execute their business model."
Greg Blatnik, vice president at Zona Research in Redwood City, Calif., agrees that market sentiment was more to blame for the fallout. "They surprised Wall Street and Wall Street doesn't like surprises," he says. "They got caught not being able to react to perturbations in their sales-order flow. It's correctable and it's been a target for the company for some time."
Weiss says the earnings shortfall was partly a result of the company's shift from selling shrink-wrapped software through distributors and resellers, where revenues are recorded when the product enters the distribution channel, to "paper licensing." With paper licensing, the reseller does not order product until the volume sale is closed, so no software sits in inventory. Citrix books the revenue when the software is shipped directly to the user.
Weiss also attributes the shortfall to slower sales than anticipated in Asia, particularly Japan, where the company has made a considerable investment to expand. "Our core business is solid," he says. "We need to address issues related to our sales cycle, licensing and inventory. We have new products coming out and we have to execute on new markets. These are things that are under our control."
Another factor creating investor confusion was Microsoft's late June announcement of intentions to introduce an Internet version of its Windows operating system within two years. Citrix's MetaFrame technology allows multiple PCs to run applications on Windows NT, Windows 2000 and Sun Solaris Servers. When delivered, Microsoft's product could become a major competitor, yet Microsoft, an early investor in Citrix, is also a major customer.
"Our relationship with Microsoft is difficult for people to get their arms around," Weiss says. "We call it co-opetition. They don't consider us competition. Every time we sell a system, their cash register rings."
The Santa Cruz Operation (SCO) has also announced a competing product, Tarentella. "They're more smoke than fire," Weiss counters. "We don't feel we're losing business because of it."
Aberdeen's Becknell also discounts competition from SCO. "Tarentella is past its prime," she says. Citrix saw the same thing happen to its stock three years ago, when Microsoft announced plans to develop a competing product that allowed multiple PCs to interoperate with applications on remote servers. Citrix's stock dropped 60 percent after the announcement. But Iacobucci flew to Redmond and negotiated with Microsoft, which ended up licensing Citrix's technology.
Citrix subsequently became a widely recommended, high-flying stock. Citrix says Iacobucci voluntarily resigned, but will not provide contact information. Attempts to reach him were unsuccessful. Becknell surmises that "Iacobucci voluntarily got out of the way so they can bring in someone who could execute the new business model."
Hype about application service providers (ASPs) also impacted Citrix, which provides technology to the niche. "[MetaFrame] is a leading technology, and they are creating a significant strategic position for themselves in the ASP market," says Zee Aganovic, president and CEO of CyLex Systems, a Boca Raton, Fla., ASP and Citrix business partner.
Blatnik says the ASP market was "way overheated in terms of anticipation and unrealistic projections," but concedes that applications written for Internet access will expand dramatically, in terms of revenue, in the future. Nevertheless, Weiss says ASP revenue is not significant enough now to impact Citrix's overall quarterly revenue figures.
Citrix's customers and analysts predict that the company's problems are short-term.
"If we didn't read the financial press, we wouldn't know they are having problems," Aganovic says. |
