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Cisco Could Buy Citrix's Networking Unit

 October 15, 2012 01:21 PM

(By Mani) Cisco Systems, Inc. (NASDAQ: CSCO) could acquire networking unit of Citrix Systems, Inc. (NASDAQ: CTXS) if a potential OEM partnership over the NetScaler's application delivery controller (ADC) product bears fruit.

Citrix bought NetScaler back in 2005 for $300 million in cash and stock that boosted Citrix presentation server product, accelerating the remote delivery of applications to client devices. Based on an estimated 2005 revenue run rate of $35 million to $40 million, the deal was valued at roughly 8 times sales.

[Related -Citrix Systems, Inc. (NASDAQ:CTXS): A Look At Opportunities And Threats]

"Our checks indicate that the stage is being set for a potential OEM partnership between CSCO and CTXS for the NetScaler product (as CSCO is exiting ACE)," Oppenheimer analyst Shaul Eyal said in a client note.

If the deal goes well, Cisco could acquire NetScaler, which would allow Citrix to become a leaner company with possible margin expansion as NetScaler's hardware costs would gradually disappear. In addition, Citrix could focus on its core market of virtualization products, ultimately opening the door for Citrix to become a stand-alone virtualization acquisition candidate with a coherent suite of products.

"Based on our FY12E CTXS's NetScaler revenue run rate of ~$300M, the potential deal could be valued at 5x to 7x, or $1.5B to $2.1B," Eyal wrote.

[Related -Cisco Systems, Inc. (NASDAQ:CSCO): What Cisco May Add To Next-Gen UCS?]

Citrix is a leading supplier of access infrastructure software and services. Products include application virtualization salons, Web applications, ssl/vpn, gateways on-demand assistance.

Based on estimates from Dell'Oro Group, NetScaler generated ADC sales of roughly $260 million in 2011. While Cisco's Application Control Engine (ACE) has struggled to keep up, Citrix grew ADC revenue at a roughly 35 percent CAGR from 2009 to 2011, bringing its layer 4-7 revenue share from 15.1 percent in 2009 to 18.6 percent in 2011.

"We believe an acquisition would enable further development in the high-end and a potential expanded relationship with Citrix in other areas. We believe NetScaler is less core to Citrix," Oppenheimer analyst Ittai Kidron said in a client note.

For Cisco, acquiring Citrix' networking unit would fill the product void left from ACE. It would allow Cisco to leverage a share-gaining product in layer 4-7 in the multi-layer switch market. Moreover, the partnership would clear up recent confusion regarding Cisco's ADC strategy as the networking giant has ended development of its ACE application delivery controller after ceding market share to F5 and Citrix.

Meanwhile, the ADC market is forecast to exceed $2 billion in 2016. Sales from virtual appliances are forecast to rise from less than $50 million in 2011 to almost $500 million in 2016, according to a recent report by Dell'Oro Group.

"Within the Application Delivery Controller market, we see increasing strength in virtual appliances and expect this growth to continue throughout our forecast horizon," said Casey Quillin, Senior Analyst of Data Center Appliance Market Research at Dell'Oro Group.

Quillin said virtual appliances can quickly be deployed in production networks as unexpected or unplanned needs arise, such as supplementing existing hardware with a virtual appliance for peak load or surge situations.

Also, most virtual appliances offer a pay-as-you-grow model and don't require a large upfront investment, such as a high end piece of hardware that is only half utilized. This favorable pricing model opens the door to smaller projects, thereby expanding the total available market, Quillin added.

In terms of revenue, the three largest virtual appliance vendors in the Application Delivery Controller market today are: Citrix, F5 Networks, Inc. (NASDAQ: FFIV), and Riverbed Technology, Inc. (NASDAQ: RVBD).

If Cisco acquires Citrix' NetScaler unit, it could hurt the revenue prospects of F5, which provides application delivery networking technology that optimizes the delivery of network-based applications, and the security, performance, and availability of servers, data storage devices.

"From a technology standpoint, we believe NetScaler is a high-quality solution for enterprise/SMBs. And while more R&D would be necessary to attack F5 at the high-end of the market, we feel F5's enterprise/SMB sales (~60% of revenue) could come under pressure. Similarly, Radware could face greater competitive pressures," Kidron added.



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