Citrix is a software company best known for its Presentation Server product, first released circa 2001. Presentation Server, now known as XenApp, allows software applications to be hosted on a server and accessed remotely. Lacking growth in its core software business of Application Virtualization, Citrix is seeking fresh growth areas to revitalize its top line. The most promising is Desktop Virtualization, a product area long hyped as the “next-big-thing” with little to show for it—until now. Citrix acquired XenSource for around $500 million in October 2007 which develops server and desktop virtualization tools; at the time of acquisition, XenSource generated minimal revenue.

Desktop virtualization decouples the Operating System (OS) from a desktop PC, and allows the OS to be loaded from a network server. This adds complexity to an IT environment, but also gives managers more control over applying patches and keeping computers secure. Desktop Virtualization also enables Thin Client computing, a system where Desktop PCs are stripped of hardware such as hard drives and major computing power. Data is stored and processing is conducted at the centralized server, ensuring that sensitive data is closely monitored and controlled.

Citrix emerged as a leader in Q4, generating $30 million in desktop virtualization revenue for the quarter. Combined with its server virtualization product Citrix Essentials, growth in the segment was 150 percent on a year over year basis. The company strongly established itself as the leader of the pack, although it faces stringent competition. Server virtualization pioneer and leader VMware is looking to build on its success and deep enterprise relationships. Similarly, Microsoft and Red Hat are building desktop (and server) virtualization tools, hoping to build from server operating system roots.

As enterprise PC upgrades continue, particularly on the heels of Microsoft’s Windows 7 release, desktop virtualization is a tool that corporations will closely evaluate. Leaking of sensitive data is becoming a major cost to companies and organizations, and well managed desktop virtualization could play a crucial role in mitigating the problem.

Desktop virtualization could be a major growth opportunity for Citrix and it appears that the acquisition of XenSource is beginning to pay off. If the company’s Q4 performance becomes a trend, the stock could be viewed as undervalued and ripe for appreciation.