Citrix Systems plans to acquire open source virtualization software vendor XenSource for $500m, adding to the buzz around virtualization following VMware’s initial public offering.
The acquisition of Palo Alto, California-based XenSource adds desktop and server virtualization capabilities to Fort Lauderdale, Florida-based Citrix’s existing application delivery portfolio and is a complementary move according to Citrix president and CEO, Mark Templeton.
This is moving Citrix into adjacent the server and desktop virtualization markets, he said. Virtualization is all about separating the physical from the logical. The opportunity is in providing the infrastructure that dynamically couples these in real time. This clearly positions us as the only vendor providing application, desktop and server virtualization.
Earlier this week XenSource released version 4.0 of its server virtualization software giving it blow for blow competitiveness with market leader VMware, according to chief technology officer, Simon Crosby.
Given that VMware’s successful debut on the New York Stock Exchange this week saw its market value raise to $20bn, the $500m Citrix is paying for XenSource might seem like small change, but it is a high price for a vendor with annual revenue of a few million dollars and annual costs in the region of $15m according to Citrix’s CFO, David Henshall.
The company defended the purchase price, as Templeton said it was based on the marketplace opportunity combined with Citrix’s game plan to rapidly grow the business. We’re going to invest to generate the level of growth we’re looking for, he said.
Henshall added that Citrix was expecting XenSource to add about $1m to Citrix’s revenue in the fourth quarter, with cost of revenue and operating expenses of about $3m, excluding the impact of acquisition charges. For fiscal 2008, Henshall predicted revenue of $50m and cost of revenue and operating expenses of between $60m and $70m.
From there, the company is looking for an aggressive expansion in XenSource fortunes based on the exploitation of Citrix’s existing channel partners. Templeton said there was the potential of $200m in revenue in 2009.
With the finishing touches still being put on the deal Henshall said about 60% of the $500m purchase price would be in the form of stock. Citrix noted that $107m of the $500m purchase price is for unvested stock options in XenSource that it is taking over to ensure it retains as many of XenSource’s 80 employees as possible.
The deal is expected to close in the fourth quarter and will see XenSource form the core of a new Virtualization and Management Division within Citrix, led by current XenSource CEO, Peter Levin, who will report directly to Templeton.
One of the focuses for the new division will be to encourage the adoption of desktop virtualization. Citrix said it planned to combine XenEnterprise 4.0 with its recently released Citrix Desktop Server desktop delivery and management software.
The company also plans to boost XenEnterprise with its EdgeSight end user experience monitoring software, Access Gateway application access software and WANScaler branch office delivery software, amongst others.
Desktop virtualization is the great untapped opportunity as far as the acquisition is concerned, although Templeton added that the company was underestimating desktop growth compared to some industry watchers and was banking on server virtualization for initial growth.
The new division will also work closely with Microsoft to create virtualization management products that run on top of the Microsoft’s forthcoming Viridian virtualization hypervisor, as well as XenSource’s existing virtualization technologies, according to Levine.
Our product focus is to provide the best Microsoft virtualization experience on the market, he said. We are committed to the delivery of a product suite that is compatible with Microsoft’s future virtualization products.
We will be building dynamic virtualization services and management tools on top of Viridian, he added. We will build the same set of products we’ve built on top of Xen for Viridian. We’ve already hired a team to go do that up in Redmond.
XenSource started out life at the University of Cambridge in the UK as it was founded by the team that created the open source Xen hypervisor project. It has had an interesting relationship with Microsoft over the years.
While Microsoft was an early supporter of the project, the use of the GNU General Public License, combined with Microsoft’s acquisition of Connectix virtual server technology saw close links created with the Linux community.
Xen is included in both Red Hat Enterprise Linux and Novell SUSE Linux Enterprise Server, amongst others, while it is scheduled to be included in the core Linux kernel with version 2.6.23, which is expected in October.
In the meantime, XenSource, which creates commercially licensed virtualization technologies on top of the Xen engine, has rekindled its relationship with Microsoft. In July 2006 the company’s struck a deal that will eventually see Windows supporting Linux running on XenEnterprise.
In August the company announced that XenSource was setting up a new office in Microsoft’s hometown of Redmond, Washington to help design and develop the products that will fulfill the co-development agreement.
The new office is focusing on joint development of technology to enable Windows Server 2008 to run Linux on XenEnterprise as well as interoperability between XenEnterprise and Microsoft’s Viridian virtualization hypervisor, which is due some six months after Windows Server 2008 arrives in February next year.
While XenSource has a significant lead on Viridian given that the company already boasts 650 paying customers, there can be little doubt that Viridian will catch up fast in terms of adoption levels, and the message from Citrix is that XenSource will add value on top of Viridian in the same way that Citrix has done on top of Microsoft’s Terminal Server software.
By innovating on both we can bring innovations to the market place that are seen as value-add to Microsoft and also offer a full stack ourselves, said Templeton. There are opportunities for deeper technology and go-to-market [partnerships] between the companies.
Asked how the company would balance a relationship with Microsoft on one side and the Xen open source community on the other, Levine said there were Chinese walls between the two, but added that the company is working on developing procedures for the independent oversight of the project.
The open source [project] is run by the community, there’s really very little interaction between what we do with open source and what we do with Microsoft, he said. We’ll be working on an independent body to take over some of the Xen project.
That project is currently led by XenSource co-founder, Ian Pratt, but before the acquisition closes procedures will be put in place ensuring that it continues to operate with full transparency, fairness and vendor neutrality according to Citrix.
With regard to Citrix’s recent financial accounting issues, Henshall said he expected the company to file its accounts ahead of the closure of the XenSource acquisition.