Red Hat Revenue Up 18% In 3Q

Red Hat's revenue in the third quarter ended Nov. 30 was $194.3 million, up 18% from the same quarter a year ago. Subscription revenue, often acquired by customers in three-year increments and an indicator of future financial health, was up 21% at 164.4 million.

In a severe recession, Red Hat is one of a handful of software success stories in the technology industry. Oracle is another; its revenue was up 4% in its recently closed second quarter of 2010.

Red Hat's operating income was $19.8 million, including a previously announced charge of $8.8 million in a litigation settlement, compared to $21 million a year ago, according to generally accepted accounting principles. Net income was $16.4 million or $.08 per share compared with $24.3 million or $.12 per share a year ago. Net income was reduced $.03 per share by the settlement, said Charlie Peters, CFO. The GAAP operating margin was 10.2%; gross margin was 85.8%, up 8% over the year before.

Jim Whitehurst, CEO, said in the Dec. 22 announcement that Red Hat's continued growth "in the current economic environment was driven by our compelling value proposition." Red Hat has been ranked number one among software vendors on value five times out of six by IT executives participating in the annual CIO Insight Study.

Red Hat's primary product lines are Red Hat Enterprise Linux and JBoss middleware. In November, it added Red Hat Enterprise Virtualization for server and desktop virtualization based on KVM in the Linux kernel.

As of Nov. 30, the company had a deferred revenue balance of $618.7 million, an increase of 23% over the same period a year ago. Red Hat has no debt. Total cash and cash equivalents as of Nov. 30 were $959.1 million after repurchasing $1.9 million shares or $52.3 million of common stock. Peters said the company's performance had led to its third upgrade in debt rating in 20 months by Standard and Poor. It was raised to BB+ on Nov. 9.

A consensus opinion predicted Red Hat revenue coming in at $188 million or $.16 cents per share, which had been the assessment of Steven Ashley, analyst at Robert W. Baird & Co., an asset management firm in Milwaukee. The stronger than expected performance "was driven in part by improved performance in the United States."

Ashley said Red Hat's results were due to the JBoss middleware sales growing faster than the core Linux business, and a shift in the core business from Enterprise edition, an $800 a year product, to Advanced Platform edition, a $1,500 a year product.

"Historically, the majority of Red Hat Enterprise Linux sales were of the Enterprise Edition, with more modest demand for the high-end Advanced Server, now called Advanced Platform," Ashley wrote in a research note. With more customers purchasing the Advanced Platform edition, "the top deal in Fiscal 09 renewed at an average of 127% of the previous contract value," he said.

He warned that the core operating system business is growing only in low to mid single digits "in a normalized environment." He didn't say so, but implied that once the recession is over, there may be fewer conversions of Unix to Linux, which are currently leading to Linux market-share gains. Oracle has entered the Linux market with Oracle Enterprise Linux, a rebranded version of Red Hat. This has caused less disruption than first predicted, but Oracle "creates a degree of headline risk," he wrote.

Worries over a Novell Suse Linux competing more effectively with Red Hat have abated somewhat after an initial push by Microsoft to subsidize support through Novell for Suse. Ashley also said there appeared to be less risk that there would be any patent enforcement action by Microsoft.

Red Hat is expected to finish its fiscal 2010 in its coming quarter with total revenue of $743-$745 million versus what had been a consensus assessment of $736.9 million.