Sunny, the debate on CTXS is about their ability to continue growing at the current rate and also about the validity of the current earnings. I will address both issues.
Almost all CTXS revenue has come from Winframe product which is a multi-user version of Windows NT. CTXS has license to use NT version 3.51 for this purpose, all versions of Winframe including the latest release are NT 3.51 which is now obsolete as everyone is migrating to NT 4.0. Many recent software releases will not function correctly under Winframe because they require NT 4.0 or Windows 95 features not available in Winframe.
The Winframe revenue stream was doomed last Spring when MSFT refused to give CTXS a license for later NT versions and announced that MSFT would sell its own multi-user version in 1998. The CTXS stock price crashed bigtime. Thus the earning potential of Winframe became limited to a one year window, no one will buy Winframe after the MSFT version is available. In my opinion, the Winframe sales peaked in the 4th quarter and are now on the decline. CTXS is developing some add-ons to the MSFT upcoming version, but it is unclear about the value add and lifetime of these products as MSFT will not want their product to be dependant on 3rd party add-ons. (Look at history of STAC)
After long negotiations last Spring, CTXS sold the Winframe technology to MSFT for $75 million plus a maximum of $100 million in royalties. Now this was the CTXS major asset and intellectual property, there is notmuch left. And they have to do a lot of work for MSFT to receive this money. Compare the value received to the CTXS market cap. In my opinion MSFT did not really need the Winframe technology but threw CTXS a bone to avoid conflict.
Now comes my point #2. CTXS did not treat the Winframe asset sale to MSFT as an asset sale, but is booking it as quarterly earnings thus inflating earnings. One-time sales should not be treated as regular earnings and included in PE calculations. The sale of Winframe is a one time event that can not be repeated.
In my opinion, CTXS should be given a low PE based on earnings minus the MSFT money and the likelyhood of decreasing earnings. The MSFT money should be treated as a bottom line cash asset and nothing more. It is interesting that when CTXS made some acquisitions they chose to exclude it from normal earnings, obviously they are using smoke and mirror accounting to inflate earnings.
Also there are two big lies being circulated about the Winframe product:
Lie #1. A server running Winframe can support hundreds of users. Not true. Winframe does not create any processor power, it only time shares the processor between users. A 200 mhz pentium with 128 megs of memory will give two simultaneous users the equivalent of a 75 mhz pentium with about 48 megs of memory each due to overheads. There is no free lunch. Yes it can serve 100 users if 98 are on sick leave.
Lie #2. Winframe allows you to purchase only one copy of expensive software (MS Office for example) and share it among users with a single license. It is true that Winframe physically allows this, but it is strictly illegal. If the server shares the software to 10 users, you are required by law to have 10 licenses for the software. There is no free lunch.
If you read back over the history of the CTXS thread you will see several enthusiastic new investors appear as their companies are buying Winframe. But they disappear about the time Winframe is up and running on their system and reality sets in. Before you make a large investment in CTXS, I would suggest that you buy the software and test its features for yourself. Also read the 8k filing from last Spring.
Roger |
