Citrix Systems Management Remains Focused on Improving Execution

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Last week we hosted investor meetings with Citrix’s Vice President of Investor Relations Eduardo Fleites and came away with a better understanding of the company’s near- and long-term challenges and strategies. Investors continue to focus on the company’s CEO search, margin profile, and ability to reaccelerate growth within the XenDesktop business, as well as drive increased interest and adoption of new products, such as XenMobile and ShareFile.

While there have been several execution factors and a somewhat challenging macro environment in the first half of last year, we believe the primary reasons for the muted top-line growth in the desktop solutions business were a lack of product integration and sales execution challenges, as well as a renewed competitive threat. Given the focus on mobile device and application management, the company took its eye off the core XenApp/XenDesktop business, which was also likely impacted by VMware’s (VMW $105.50; Market Perform) renewed focus on the market. While Amazon’s (AMZN $373.74; Outperform) WorkSpaces offering concerned investors, we do not believe it materially impacted decision-making at any account over 1,000 seats.

Consequently, we believe 2014 is a year of renewed focus on R&D to integrate offerings and enhance XenDesktop, to complete integration of XenMobile and build awareness around the mobile application market (while at the same time continuing to offer commoditized or free mobile device management), and to continue to increase sales spend on the NetScaler and ByteMobile offerings. We believe the company has a fairly compelling set of assets:

NetScaler continues to be the primary application delivery controller/global load balancing application for Internet-centric companies and should incrementally benefit from the recent OEM agreement with Cisco (CSCO $21.35; Outperform). ByteMobile has also benefited from some large wins recently, and while only a small portion of the business, it remains a key component as wireless providers are seeing increased video demand over their network infrastructure.

The company’s XenApp and XenDesktop products provide the best virtual desktop experience. While VMware has narrowed the gap, in our view, Citrix still provides the most-compelling ROI and low-latency offering in the market. The competitive gap (we estimate that Citrix was probably 3-5 years ahead in 2011), especially on the virtual desktop and application delivery side, has narrowed somewhat over the last few years. That said, the renewed focus on XenApp and enhancements to XenDesktop should help the company rebuild its competitive differentiation. Win rates remain at 90% in deals over 1,000 seats, according to management.

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