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Enterprise Linux, Subscription Sales Power Strong Red Hat Quarter

Red Hat's Enterprise Linux operating-system and software subscription sales soared over the past three months, leading the company to strong revenue growth and profits for its fiscal 2005 second quarter.
Red Hat Inc.'s Enterprise Linux operating-system and software subscription sales soared over the past three months, leading the company to strong revenue growth and profits for its fiscal 2005 second quarter, ended Aug. 31. Red Hat on Monday reported a profit for the quarter of $11.8 million, or 6 cents per share, on $46.3 million in revenue.

Sales included 144,000 subscriptions to its Red Hat Enterprise Linux software, up substantially from the 26,000 subscriptions sold during its second fiscal quarter a year ago. During that quarter, the company reported a profit of $3.6 million, or 2 cents per share, on $29 million in revenue. Of the 144,000 subscriptions sold during the most recent quarter, 115,000 were for enterprise IT services, including both new subscriptions and renewals. The remainder was new subscriptions sold to the users of high-performance computing servers and desktops.

Many of Red Hat's Linux subscription sales came at the expense of Unix, particularly Sun Solaris, the company said. One chip developer replaced 3,000 Sun Solaris servers with systems running Red Hat Linux, Red Hat CEO Matthew Szulik said during Monday's teleconference to report quarterly financials. Szulik didn't mention the customer by name. He also said that Red Hat sold 10,000 desktop Linux subscriptions to a European retailer, again without disclosing the customer's identity.

Challenges remain for Red Hat. The company faces a highly competitive selling environment in the United States, as Red Hat Linux competes with Microsoft and the various incarnations of Unix that have arisen over the past few decades. Szulik acknowledged Monday that transactions are taking longer to close these days. Linux has moved squarely into the competitive crosshairs of both Microsoft and Sun Microsystems, and Novell has expanded into the Linux market through its acquisitions of Ximian and SuSE Linux.

During the quarter, Red Hat also introduced its Red Hat Application Server, replaced CFO Kevin Buckley with Charlie Peters, and said it would begin recognizing revenue on a daily, rather than monthly, basis. This change in strategy caused the company to restate its audited financial statements for the fiscal years ended Feb. 29, 2004, Feb. 28, 2003, and Feb. 28, 2002, as well as its unaudited financial statements for the fiscal quarter ended May 31, 2004.