Open Sources | Rodrigues & Urlocker » Red Hat: Earnings up, customers in, competitors out

December 21, 2006 | Comments: (0)

Red Hat: Earnings up, customers in, competitors out

TAGS: Open Source

Red Hat knocked the ball out of the park again this quarter, especially in light of the competitive pressures from Microsoft/Novell and Oracle. I joined in the earnings call today, and was very impressed.

Revenue, cash flow, billings, bookings were all up. On bookings, Red Hat has the largest pipeline it has ever had, Charlie Peters (CFO) reported. Total revenue for the quarter was $105.8 million, an increase of 45% from the year-ago quarter and 6% from the prior quarter. Subscription revenue was $88.9 million, up 48% year-over-year and 5% sequentially. Overall gross margin was 84%, consistent with last quarter. Peters reported that Red Hat is on track to hit its 2006 annual numbers.

Even profits were effectively up. Yes, earnings dropped to $14.6 million, or 7 cents per share, down from $24.6 million, or 12 cents a share in the same period last year. But if you exclude stock options expenses and income tax provisions, profit totaled $29.6 million, or 14 cents per share.

Where did the money come from?

• 50% from the channel, and 50% from direct sales (vs. 54% and 46%, respectively, last quarter)
  
• Bookings: 60% from Americas; 24% from EMEA; 16% from APAC

Other interesting comments/tidbits:

• 12,000 net new customers (30,000 net new customers, year to date)
  
• Renewing customers are frequently expanding their Red Hat implementations
  
• This quarter ended with more multi-year contracts than Red Hat has ever had.
  
• 98 of the top 100 Red Hat customers have renewed this year, including 24 of 25 (up for renewal) in Q3. It may be that some customers are fickle, but not Red Hat's core customers.
  
• On pricing (in response to a quote from a Morgan Stanley analyst's question): Szulik noted that its operating system and middleware business is about delivering value, not discounts (though the company does discount). Its customers are elevating the importance of the kinds of software Red Hat delivers, and not looking to go on the cheap. (Asay comment: Saving a few pennies on the Oracle dollar, then, is not a priority.)
  
• On JBoss' contribution: The bulk of the integration is behind the company now. [$22-27M of Q4 will be JBoss revenue contributions.]
  
• On the percentage of JBoss' contribution coming from the core application server: Cornett didn't give details, but said people would be surprised by how diversified the JBoss' revenues are (Portal, Application Server, Hibernate, etc.)
  
• Pricing for Q3 (and typical discount levels) did not change. This is surprising (and gratifying) given the fierce pricing pressure from Oracle. It means that Red Hat really is able to sell value, not price, which is good for all open source companies.
  
• One analyst (that had surveyed Oracle's customer base) revealed that Oracle's customers haven't even been able to find how to buy "Oracle's" Linux online, and have found it highly buggy. He speculated that Oracle may withdraw its Linux product from the market. (Red Hat didn't comment, saying that it doesn't waste time thinking about competitors - it's focused on customers.)

"We are a pure open source play building upon a 15-year history of collaboration with the open source community....[In open source] the customer is an active participant in the innovation process." Matthew Szulik, December 21, 2006.

Posted by Matt Asay on December 21, 2006 02:04 PM

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