As I get back to reading through my emails and blog posts after holiday and week long meetings I find myself scratching my head over Citrix’s Q4 earnings call – especially as it relates to XenSource. For those not living under a rock Citrix bought a startup called XenSource in late 2007. XenSource is a good little company with a good initiative in the open source community. What amazed me is the price Citrix paid for it – $500 million. That’s just crazy!
Wait a minute….you’re telling me this is crazy but VMware was purchased for $635 million by EMC a few years earlier. OK. I see your point. Let’s look at the numbers though. Unfortunately I can’t disclose what VMware was doing revenue wise at the time but I can say that is was a LOT more than what XenSource was doing when Citrix bought them. In Q4 of 2007 XenSource did $2 million in revenue with expenses around $5 million (article). So basically they lost Citrix a couple of million. Ouch. Don’t worry, the future looks brighter, or does it. For 2008 Citrix expects revenue to hit $50 million for XenSource but expenses will be around $60 million. Another loss. So why did Citrix buy this company again?
Maybe there’s good news for Citrix partners and that’s why they snatched them up. After all Citrix partners are good at selling virtualization. That’s primarily what they’ve been doing for years. A quick listen to the analyst call provides some interesting facts. In Q3 XenSource announced 1,000 customers. On the call they said they added another 400 customers. Good growth! That puts the total at 1,400 customers. Then came the partner count – 1,817 partners certified to sell XenSource. Hmmm. So now we have 1,817 partners trying to get business from the 1,400 customers that total $2 million in revenue (that’s $1,100 in revenue per partner). Good days to be a Citrix partner.
OK. So Citrix didn’t buy XenSource for the revenue. They didn’t buy XenSource for their partners to get rich. Maybe they bought them for the products and to be the #1 virtualization company in the world (that’s VMware’s goal). Well, Mark Templeton (CEO of Citrix) said it himself:
We’ll be the third player in server virtualization after VMware and partner Microsoft.
Third player? Jack Welsh, the former chairman of GE, always said he wanted to be #1 or #2 in a market or get out of the business. That’s interesting. Exiting the business. We haven’t tried that angle yet. Citrix has been renaming all of their apps to the XenSource brand. Presentation Server is now XenApp even though it has no XenSource code in it. XenSource has also stated several times that it is a “stepping stone” to Microsoft’s Hyper-V when it gets released.
OK. So the strategy is go and spend $500 million on a company that’s losing money, switch all of your current successful products and branding over to the losing company, and then exit the market when your larger partner moves into the market. Is this the end of Citrix then? Terminal Services in Windows Server 2008 closes the gap pretty nicely. Virtual Desktops are also taking large chunks of market share. Time will tell where Citrix ends up.
I guess you could also ask, is this the end of XenSource? Things in KVM land (another open source virtualization solution) are heating up again as Ubuntu has just included KVM over XenSource in their distribution. Between Citrix moving everyone from XenSource to Hyper-V later this year and Ubuntu starting the Linux vendor migration to KVM the future looks pretty bleak for XenSource.
And that’s where we’re at. I’m still scratching my head on why Citrix paid all of that money for XenSource. Time will tell if it’s a smart move. In the mean time, if I were Simon Crosby I’d start cashing out some of my vested Citrix shares.
UPDATE (aka my response):
I seem to have awoken the Citrix crowd. That’s good. I like it when people leave comments. I did want to set the level straight on a few things.
1) While I do work for VMware this is a PERSONAL blog and the thoughts and opinions on here are my own and are NOT representative of VMware in any way shape or form. That goes for everything I post here. If you want official comments or thoughts from me or anyone else at VMware on behalf of VMware then you’ll need to contact the VMware PR department and they’ll be more than happy to set that up.
2) I can come across a little strong or “passionate” in my posts. That’s just my nature. It’s nothing different than you’ll get reading stuff from other bloggers or technology people. We’re all passionate about things that matter to us. Heck, you can see that clearly in the comments from this post. You’ll also see it in posts from Ashlee Vance at the Register, Simon Crosby at Citrix (formerly XenSource), and Ben Rudolph at Parallels. These are just 3 examples of very passionate people that come across strong at times.
For those needing a reminder I wrote about my passion and the fact that everything here is a personal thought in my into. I’ll link to it here in case you want to go back for a reminder.
3) What really got my thoughts going on this subject were things that other bloggers and journalists had already written. This isn’t just me with some of these thoughts and questions out there. Even Citrix’s own Directors call into question what the company is up to. Take Phil Montgomery’s comments in the ZD Net blog:
“Citrix is not a virtualization company,” said Phil Montgomery, Senior Director of Citrix’s Virtualization and Management Division. “We’re not trying to be another VMware. Citrix is an application delivery software company.”
So for all of those out there flamming me for beating up on Citrix I’m just taking the lead from the person who’s leading the company. Supposedly they’re not competitive with VMware. Supposedly they want to be #3 in the market behind VMware and Microsoft and later just push everyone to Microsoft’s product. That has to get the head scratching on the business strategy and that’s what started to get me thinking and blogging.
4) That brings me back to the business side. Personally I think XenSource has some good technology. I question the execution and decisions they make sometime but overall they’re pretty good. However, this post was not about the technology. This post was a Citrix shareholder (yes I am and have been for a number of years) questioning the business decision to first purchase a loss leading company for $500 MM and then essentially bury the technology and provide a public phase out plan for its existence. To me as a shareholder it just doesn’t make any sense at all. It’s a dumb business move. Interestingly enough, not one comment posted here has provided for any insight or reason why this wasn’t a bad move. All we have instead is a bunch of emotional responses saying that VMware is horrible. So, I’ll leave you all with that….what’s the business sense for the moves being made here and WHY was it worth $500 MM to make this move. That’s the question and the reason for the post. Any answers to that?
Tags: acquisition, Citrix, xensource
February 14th, 2008 at 7:00 pm
I couldn’t tell if this was written the by the “virtualization market leader” or a spoiled 5 year old. This isn’t how professional companies act. Grow up.
February 14th, 2008 at 7:24 pm
Has it not occurred to anyone that this is a personal blog? Mike does have the right to speak his mind.
February 14th, 2008 at 8:55 pm
VMware has OWNED the virtualization space for too long. MSFT made one weak effort, and Hyper-V is yet another. XEN is obviously the heir to the throne. PV is a superior technology, and VMware is flogging a seven-year-old code base.
Citrix is a BELOVED and scandal-free veteran with enormous loyalty from customers and the channel partners.
There is no better commercial enterprise to bring the Open-Source XEN mojo to the market than Citrix. When was the last time you heard of them screwing anyone ??
XEN is virtualization 2.0 and you may see some minor players jump to KVM and other “niche” answers. XEN has the following of HP, IBM, Intel, AMD, the CIA,NSA, DoD etc.
Better that Xen be led by an honorable group of contributors than leave virtualization in the hands of a single revenue-hungry vendor.
February 14th, 2008 at 10:11 pm
“I couldn’t tell if this was written the by the “virtualization market leader” or a spoiled 5 year old. This isn’t how professional companies act. Grow up.”
“Has it not occurred to anyone that this is a personal blog? Mike does have the right to speak his mind.”
…
Well we all have the right to steer clear from sites like this one!
February 14th, 2008 at 10:13 pm
“I couldn’t tell if this was written the by the “virtualization market leader” or a spoiled 5 year old. This isn’t how professional companies act. Grow up.”
- Couldn’t agree more….
“Has it not occurred to anyone that this is a personal blog? Mike does have the right to speak his mind.”
- Well we all have the right to steer clear from sites like this one!
February 14th, 2008 at 10:49 pm
Hey Mike, I guess sometimes “a little truth” hurts. These anonymous commentors were probably Patriot fans too.
February 15th, 2008 at 8:55 am
I wanted to clarify my last comment. The truth hurts those who do not want to hear it. Keep up the personal opinion posts. More so than most, you truly have the resources and experience to set the record straight.
February 15th, 2008 at 9:09 am
While Mike seems to be calling it like it is, the tone of the message does seem a little harsh and sarcastic. Personal blog or not, he is representing VMware, and I would think that this post could have been written with a different tone. It’s one thing to state the “facts” or personal observations…it’s another thing to berate someone else.
One could read into this post a little further and wonder if VMware is feeling threatened by Citrix. Rome wasn’t built in a day. Citrix and Microsoft will catch up. VMware, no doubt, is the market leader in the virtualization space right now…and has been for the last several years. I guess when you’re the best at what you do, and you’ve been the only real option for so long, you can be a little arrogant. People like rooting for the underdog. VMware has played the underdog card for a long time…and people enjoyed someone else getting theirs instead of Microsoft all of the time. Microsoft was “the man”…and VMware was sticking it to them. VMware is not the underdog anymore, Citrix is…and I feel a great disturbance in the force coming.
Everywhere I go, I hear VMware partners growing very tired of how they are being treated…how VMware is a very difficult partner to work with. Unless this feeling changes, when Citrix or Microsoft’s virtualization platform matures enough, VMware partners will be more than ready to move over to the alternative(s). Just the very idea that Citrix has 1400 clients already says something. Their clients would rather choose an “inferior” product than use VMware. When Citrix starts taking away clients from VMware, it will be too late. VMware has to start acting now. Being feature rich is not enough to stay on top. You have to become the most popular. Microsoft already knows how to do this very well.
It is a shame that VMware has been around for 10 years now…and only a small percentage of servers has been virtualized. VMware has been going after the big clients and ignoring everyone else until recently. There is still a large number of potential clients to be reached. Education, partner relationships, and pricing will dictate who stays on top.
February 15th, 2008 at 9:50 am
I also feel that VMware has been acting lately like a spoiled cat, and this blog is another example.
Their prices are way way higher than anyone else’s, to pay the sky-high salaries to the people they have poached from other companies, and Diane Greene refuses to lower them to meet the demand from SMBs.
The only good things about VMware ESX are:
1) the VMware forums, which many people think are better than VMware’s own product support;
2) ESX runs on “old” 32-bit x86 hardware, whereas the newer software typically only runs on 64-bit hardware with various things properly turned on.
The new VMware Server 2.0 is so bad in beta that most posts to the forum talk about things that don’t work.
Citrix has a more unified plan and they will eventually beat out VMware.
It doesn’t help that VMDK is a proprietary format, whereas everyone else has standardized on VHD.
Tom
February 15th, 2008 at 11:45 am
VMW is getting their comeuppance. Guidance for next year has already been lowered. VMW is lowering sales thresholds for registrations, etc.
WE LOVE THE UNDERDOG! Citrix has a strong dedicated channel, their partners have supported them consistently. VMW has added on partners who can “fog a mirror”. I’ve seen better profit deals selling Xen or VI vs. VMW over the last 6 months. VMW has become a defacto loss leader with some PO takers going in at 7 points. My guess is that Citrix, with Xen, will generate enough rev over the next three years to justify. Keep in mind, Citrix is farther along in the app virtualization than VMW, recently buying Thinclient. What’s happening with server virtualization will pale in comparision to app virtualization. And Citrix has a better pricing model than VMW to generate recurring revenue. Yes, Citrix may look like they’re losing a battle, but I bet they may win the war….
February 18th, 2008 at 8:51 pm
Citrix has a lot more Customers and a lot more partners than VMWare, just because they aren’t Xen Customers today doesn’t mean they can’t be tomorrow. Also is Mike Daft? 1,817 partners going after 1,400 customers? Those Partners are going after NEW customers, or does VMW only sell to existing customers?
February 19th, 2008 at 12:39 am
“Guest” wrote:
Also is Mike Daft? 1,817 partners going after 1,400 customers? Those Partners are going after NEW customers, or does VMW only sell to existing customers?
I’ve never been called “Daft” before. First time for everything. The point I’m making here, Guest, is that Citrix currently has 1,400 sales (customers) that came from somewhere under 1,817 customers. VMW has over 100,000 customers from somewhere north of 4,000 partners. Simple math shows more revenue per partner there. I guess I could have worded it differently saying they are (present tense) fighting over the same pie. I should have said they did (past tense) fight over the same pie. I hear the case made a lot that XenSource partners stand to make more money but with this type of saturation it’s a hard bet to make.
February 19th, 2008 at 10:21 am
I love this math. Is this standard math for VmWare? Do you think the plan is to only sell XenServer to existing XenSource customers? Perhaps you are not aware of the 200,000 or so cusotmers running Citrix Presentation Server (and its variants) on about 800,000 servers world wide? Is it possible Citrix is planning to get a few of them to virtualize their CPS servers on XenServer? Maybe there is a good reason one of the features of XenServer 4.1 has CPS scalability as a new feature? Could Citrix be planning to build more integrations to help those existing customers, many of which have over tens of thousdands of concurrent users (and quite a few over 100,000 concurrent users)? Would you advise Citrix to go after that market? Perhaps you should consider the possibility…
February 19th, 2008 at 11:32 am
OK. Speaking of passion…
I keep hearing this voice in my head (repeating passionately) “VMWare is the new Novell”
February 19th, 2008 at 11:34 am
OK. Speaking of passion…
I keep hearing this voice in my head (repeating passionately) “VMWare is the new Novell”
February 19th, 2008 at 1:59 pm
I think everybody here should calm down a little bit. Mike…. sorry….. thumb down for the original article… you have your opinions and everybody should respect them but it clearly came across a bit strong / rude (more than “passionate”). I have to agree though that Simon Crosby is as “passionate” on his blog….
Massimo.
May 8th, 2008 at 8:29 pm
Wow, nice article and a lot of strong opinions. I know the virtualization market has exploded recently and I find it strange that I never heard of Vmware up til about 6 months ago. I heard about citrix years ago and I find that a little interesting. It does seem that VMware is the leader in virtualization technology but I believe in the long run the price bug is going to kill them. There is no doubt VI offers just as much at a standard level compared to the Flag Ship of WMware ESX in price and functionality. Anyways, I like them all and I think the more the merrier because it makes companies more competitive but I know that if VMware would shoot for a price level with that of VI it would definitely kill any competitor. It will be interesting to see how things turn out in the next couple months and next year.
May 8th, 2008 at 8:30 pm
Wow, nice article and a lot of strong opinions. I know the virtualization market has exploded recently and I find it strange that I never heard of Vmware up til about 6 months ago. I heard about citrix years ago and I find that a little interesting. It does seem that VMware is the leader in virtualization technology but I believe in the long run the price bug is going to kill them. There is no doubt VI offers just as much at a standard level compared to the Flag Ship of WMware ESX in price and functionality. Anyways, I like them all and I think the more the merrier because it makes companies more competitive but I know that if VMware would shoot for a price level with that of VI it would definitely kill any competitor. It will be interesting to see how things turn out in the next couple months and next year.
December 7th, 2008 at 2:17 pm
[...] I originally wrote about this in February Simon Crosby (CTO of Citrix) accused me of trying to prove that I passed high school math. Well, [...]