Join        Login             Stock Quote

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.

iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article image3 Small Companies Targeted By Legendary Gurus

The nation's leading hedge fund managers tend to target mid-to-large-sized companies. An investment in read on...

article imageDeflation, Growth & The Next Recession

Deflation risk seems to be making a comeback… again. Germany yesterday sold five-year government notes at a read on...

article imageS&P 500: Short-term Correction Is Near

The S&P 500 index rose to all-time highs but performance remains weak. It is possible that this was the read on...

article imageThe DOL Gets a Homework Assignment

The skinny on the White House's plans to apply the fiduciary standard to any investment professional read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.