By Mark Boslet
Of Dow Jones NewsWires

PALO ALTO, Calif. (Dow Jones)-Citrix Systems Inc. (CTXS) is benefiting from a three-year strategy of expansion through acquisition, and more mergers may be on the way.

The Fort Lauderdale, Fla., technology company has been growing consistently since 2004, averaging a 26% rise in quarterly revenue over the past eight quarters. Second-quarter sales expected Wednesday should show more of the same: a 25.6% rise to $265.6 million, according to consensus estimates. The steady growth is due in part to a strategy of entering rapidly emerging neighboring markets. A series of mergers culminating with the $300 million purchase of NetScaler Inc., a Web traffic accelerator, in 2005 allowed the mid-cap company to quickly mine markets it wouldn't have participated in as easily on its own.

"I think they've acquired where the market is going," says Rob Owens, an analyst at Pacific Crest Securities. "They've been smart acquisitions of new technology."

Citrix shareholders have already seen the reward. The shares are up 60% over the past year, while the Dow Jones Software Index is down 9.5%. Investors willing to wait through the market's recent downturn should see them go higher. The stock has a trailing price/earnings ratio of 36.

Chief Executive Mark Templeton says the acquisitions "give us the opportunity to be an early entrant" in markets that complement the company's core business. The market for NetScaler, in particular, "is very early stage and has tremendous, tremendous upside over the next five years," he told Dow Jones. He declined to discuss future acquisition plans or second-quarter expectations but said Citrix is open to purchases and sees itself as a consolidator of some of the fragmented markets that surround its core business.

Speculation Of Talks

One nearby market Citrix appears to be interested in complements NetScaler with a product designed to improve traffic flow in long distant, or wide area, networks, says Joe Skorupa, a research vice president at Gartner Inc.

"They are clearly talking to prospects," says Skorupa. "We hear rumblings around the industry that they are talking to somebody."

Among the possible candidates are privately held Riverbed Technology Inc. of San Francisco; San Mateo, Calif.-based Orbital Data Corp.; Expand Networks Inc. of Roseland, N.J.; and Mountain View, Calif.-based Silver Peak Systems Inc., Skorupa says. Citrix remains guarded about possible talks. "We can't comment on specific ideas we are (considering) or have considered," Templeton says. But traffic-optimization gear for the WAN is one market the company could move after, he said. "There are quite a few others we are considering as well."

Citrix's success is "really a lot of things coming together," says Steven Ashley, an analyst at Robert W. Baird & Co. who doesn't own stock in the company and whose firm doesn't perform banking business for Citrix.

The company's revival began with a bulking up of its sales force and an expansion of efforts to get resellers to handle its products. It also upgraded its flagship software with Presentation Server version 4, a product that allows a centrally deployed Windows application to be used across a corporation and by non-Windows machines. The upgrade was a big step, fixing problems customers had with tasks such as printing from a computer, where the previous product had consumed a lot of bandwidth, or network capacity.

Citrix also swept the product into a suite of companion software for the first time and stopped supporting an older version of the product, MetaFrame XP, at the end of 2005. Both decisions helped spark demand for the new product.

The new version has been able to capitalize on trends within corporations to replace older servers reaching the end of their useful life and to adopt Windows Server 2003 in advance of Microsoft Corp.'s (MSFT) release of its successor, Longhorn.

Citrix also reached out for acquisitions. While NetScaler may be Citrix's most high-profile deal, the company also has purchased Expertcity in 2004, Net6 in 2004 and Teros Inc. in 2005. The NetScaler acquisition, which was criticized at the time for being expensive, brought products designed to accelerate Web traffic going to and from corporate servers.

Expertcity's products assist desktop computer users who collaborate on projects and sign into networks from locations outside the office. Net6 gear is used to create virtual private networks for securely accessing corporate networks. Teros makes an application firewall, adding extra security to individual applications or servers.

Owens says Citrix's traditional products still account for between 70% and 80% of sales and are growing at a pace in the "high single digits." This pace doesn't match the 40% to 50% annual growth of the new products, but the boost to sales from version 4 has staying power, says Owens, who doesn't own Citrix stock and whose firm doesn't conducting banking business with the company.

The new product cycle should last through 2007, longer than many investors expect, he says. Owens has a 12-month price target of 42, which would mean a 21% increase for the stock.

The company also addresses a big market with NetScaler, Skorupa says. The market will grow at a healthy pace of more than 10% annually for the next five years, to about $3 billion from about $1.6 billion this year.

Citrix has been expanding its share, but still trails market leader F5 Networks Inc. (FFIV) and second-place Cisco Systems Inc. (CSCO). A product such as NetScaler frees corporate servers from many traffic duties, allowing an organization to buy fewer servers.

Despite the company's strong first quarter, investors were spooked when NetScaler competitor F5 missed second-quarter financial targets in April because of a slowdown in North American business. The F5 news hasn't dissuaded investors such as Douglas Whitman, principal at Whitman Capital LLC, who holds the shares. "NetScaler has turned out to be even more successful that the Citrix people believed," he says.

In fact, some claim the company's prospects aren't fully appreciated by Wall Street. Second-quarter financials may help change this. With respect to the quarter, Ashley says, "the checks I've made (with resellers) have been encouraging."

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