Does Citrix’s Soaring Subscription Cloud Strategy Leave Less Room for MSPs, VARs?

A recent installment of Zero One Blog spoke to the owner of a $60 million car dealership in Oregon who dumped his third-party IT consultant, upset at what he felt was bad advice about holding onto his aging on premise system.

When it broke down – as it often did – or reached capacity, the consultant would get paid again in break-fix fees or by reselling and reconfiguring new gear.

On the advice of an in-house CTO, the blog states, the dealership dumped the IT consultant and went all in on the new subscription Citrix Cloud.

“We wasted a lot of money, and that’s money we’re saving now,” Clint Newell, president of Clint Newell Auto Group, is quoted as saying. “Part of our budgetary forecast was to eliminate those outside services.”

In many ways, the early success of Citrix’s evolving market approach illustrates how – for better or worse – new, cloud-centric business models are threatening to disrupt long-held relationships of the channel ecosystem.

It’s also resurrecting niggling questions about whether cloud adoption ultimately means greater opportunity or a threat to managed IT services providers, resellers and others.

“What we are doing is providing an integrated approach for administration, identity, authentication, provision and management,” Citrix CEO David Henshall told investors during an Oct. 25 earnings call. “Citrix is hosting the management layer, while the customer gets the choice where to run the workload, from any clouds or from any on-premise datacenter.

“We integrate the administration and control across all of these environments, allowing them to embrace the hybrid-cloud architecture, while reducing their need for specialized IT skills.”

The Citrix Cloud management platform – launched in 2015 – is at the heart of the company’s strategy, which calls for less reliance on sales of gear and a much greater focus on recurring revenue from subscriptions for a dizzying array of new cloud products.

It seems to be working.

Last week, Citrix announced Q3 earnings that showed accelerating growth, with the fastest-growing part of the business, Citrix Cloud, becoming an increasing driver of revenue and profitability.

Most importantly for Citrix, revenue from subscriptions rose 30 percent in the quarter to $81 million, and now comprises 19 percent of total revenue, up from 12 percent a year ago.

The company estimates the percentage of its revenue that comes from Citrix Cloud subscriptions will grow to 60 percent in just the next three years.

“Moving to a subscription model provides significant economic benefits for Citrix,” Henshall told investors. “The model increases customer lifetime value while the new cloud services expand our use case opportunity…This should increase the number of fees and usage of our products over time.”

Citrix plans for virtually all of its income to come from recurring revenue.

“Currently our business is about 70 percent coming from recurring sources,” Henshall said. “Our non-ratable revenue (of) 30 percent is made up of perpetual licenses of workspace services and networking.

“We expect that most of the non-ratable revenue will move to recurring over time, as licenses are sold under the new model,” he said.

In the meantime, Citrix is making a business out of supporting modern organizations as they manage the complicated transition to cloud.

“To understand the context behind our strategy, you need to step back and look at the infrastructure from a customer’s point of view,” Henshall said. “They are adopting cloud services and SaaS applications on a broad basis.

“Many of our customers are juggling multiple cloud providers and dozens of new SaaS apps, yet over 90 percent of organizations expect that they will still have the majority of workloads running on prem for five years.”

“When you combine this increased complexity with mobility and the new work styles, it’s a fragmented user experience (that) provides an increase in security risks, and most IT teams are just struggling to keep up,” the CEO went on. “These challenges require a new approach and create this opportunity for Citrix to provide simple, secure and unified solutions, helping our customers address these challenges and simplify the roadmap.

That strategy deftly positions Citrix to sail around secular headwinds from cloud adoption that are beginning to buffet some of the big networkers.

But like the old IT consultant at Clint Newell Auto Group, can Citrix partners and other channel companies expect to see more customers eschewing third-party IT service and solutions providers to engage directly with the vendor?

Should IT services firms worry that accelerating innovation in user-friendly IT tools will hit an inflection point where more organizations will feel confident enough to go it alone?

Will resellers of Citrix products also have to evolve their own businesses?

A message to Citrix seeking comment about the potential impact of its new strategy on channel partners was not immediately returned.

We also reached out to more than a dozen IT services firms who partner with Citrix.

We’ll follow up if and when we hear back.

Read the full transcript of Citrix CEO David Henshall’s Q3 earnings call or view the entire webcast at the Citrix Investor Relations website.

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