Red Hat Revenues, Earnings Survive Economic Buffeting

Subscription revenue, which provides some guarantee of continued stable income, was up 17% over the same quarter a year ago.
Red Hat on Monday reported revenue of $165.3 million for its third quarter, up 22% over the same period a year ago and within its guidance for the quarter that ended Nov. 30.

Subscription revenue, which provides some guarantee of continued stable income, was up 17% over the same quarter a year ago.

In a quarter where gains by the dollar reduced the value of foreign currency holdings and overseas sales, Red Hat said that resulted "in a negative impact on operating income of $2.1 million," Red Hat's announcement said.

"Significant devaluations in most foreign currencies depressed our reported revenue," CFO Charlie Peters said in a prepared statement on the results. But, he added, "a combination of focused cost management and natural currency hedging enabled the company to deliver better-than-expected operating margin." Red Hat's operating margin on GAAP income was 12.7%.

Red Hat's operating margin is lower than some proprietary companies' in part because of its subscription business model, which defers money up front into annual subscription payments over a multiyear period. Oracle at the end of the its second quarter for 2009 last week reported GAAP operating income margins of 35%.

Red Hat's net income was $24.3 million, or 12 cents per share, compared to $20.3 million, or 10 cents per share, a year ago, according to generally accepted accounting practices.

"Our solid financial results reflect our strong market position as the low-cost, high-value provider of infrastructure solutions," president Jim Whitehurst said in a prepared statement on the results. "Purchasing decisions for IT have changed dramatically for CIOs. In this budget-constrained environment, IT professionals are adopting open source, and more specifically, Red Hat, to save money..."

Red Hat's operating cash flow was down slightly at $59.1 million for the quarter, compared with $59.6 million the year before. By Nov. 30, Red Hat's total deferred revenue balance was $505.1 million, an increase of 20% over the year before. The company's total cash, cash equivalents, and investments as of Nov. 30 were $1.1 billion, after retiring $285 million of convertible debentures and repurchasing 2 million shares of common stock. The board of directors has authorized a subsequent repurchase of additional $250 million worth of common shares.

Peters said the repurchase took 11 million shares of common stock off the market, or 6% of the total. The repurchased shares then gained $4.1 million in value in the quarter.

During the quarter, Red Hat announced an agreement with Fujitsu to provide Linux support services that are designed for quicker response times and extended support periods for certain Linux systems under the Red Hat Advanced Mission Critical Program. Fujitsu mainframe expertise is paired up with Red Hat's Linux expertise under the program.

Red Hat chairman Matthew Szulik was named Ernst & Young's winner of its 2008 national Entrepreneur of the Year award.