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Red Hat Breaks Even

Red Hat Breaks Even

Linux major Red Hat reported a modest profit of $305,000, breaking even per share, on revenues of $24.3 million in its fiscal third quarter ended November 30. It lost $1.5 million on operations.

Revenues were up 14% sequentially and 21% year-over-year. Red Hat reported a loss of $2 million, or a penny a share, in its second quarter and a loss of $15.1 million, or nine cents a share, year-over-year.

Revenues were slightly higher than the Street's forecast of $23.43 million while the bottom-line numbers were in line with expectations.

The third quarter marks the first time that Red Hat has reported a positive net income on GAAP basis. It also marked the second consecutive quarter of positive cash flow from operations - amounting to $1 million in Q3 and $600,000 in Q2.

The gross margin for the third quarter hit 66% compared to 64% in both Q2 and the third quarter last year. The operating margin was a negative 6.1%.

Enterprise revenues grew 15% sequentially to $22.5 million. Enterprise subscription revenues came in at $12.45 million and enterprise service revenues at $10 million.

Enterprise subscription revenues, which were up 29% sequentially and 32% year-over-year, were supposedly positively impacted by the company recognizing revenues from sales of Advanced Server subscriptions in Q2. After two quarters of solid growth, enterprise service revenues slowed down and were up by just $80,000.

Total embedded revenues were $1.76 million in the quarter, $709,000 of which came from subscription sales and $1.05 million from services. In Q2, embedded subscription revenues came to $761,000 and embedded services $845,000.

The enterprise market accounts for 92% of Red Hat's revenues, up from 78% a year ago.

"Sales of Red Hat Advanced Server continue to trend positively," Red Hat CEO Matthew Szulik said on the earnings call Tuesday.

According to Szulik, enterprise customers, led by the financial services concerns, were transitioning from pilots to strategic deployments in areas such as application development, web and database serving and compute-intensive applications like options trading.

Apparently, Advanced Server sales continue to exceed expectations. Red Hat said it sold 12,000 Advanced Server subscriptions during Q3 compared to 8,000 in Q2.

Red Hat expects to exceed its goal of selling 30,000 Advanced Server subscriptions by the end of its fiscal year in February. Prudential thinks that means 15,300 units shipping this quarter.

Migration of existing Red Hat customers to Advanced Server reported contributed to the adoption numbers.

On average Advanced Server subscription rates in Q2 and Q3 have gone for $800-$900 a year. Red Hat expects the figure to drop to $600-$800 in future quarters offset by an increase in market opportunities and expanded revenue opportunities in other areas.

Red Hat said it acquired about 1,000 new customers for Advanced Server in the quarter.

Prudential figures the Q3 Advanced Server results "make the monetization of the Linux opportunity by Red Hat more likely in our view, but at these levels the shares are at least fully valued." The stock was trading after hours Tuesday at $6.26.

This quarter, Red Hat expects to sell 2,000 subscriptions of the 64-bit version of Advanced Workstation, which run on Itanium machines.

Revenues from international operations contributed to 31% of total revenues, up 15% from Q2.

Red Hat Network Management services reportedly have a million servers under management, a point the company is likely to make much of going forward.

The company ended the quarter with $287 million in cash and investments.

For this quarter, Red Hat CFO Kevin Thompson projected a net income of $1.3 million-$2.5 million (a penny EPS) on revenues of $26.5 million-$27.5 million, a bit under the $28.7 million Prudential, at least, had in its model, but in line with consensus. Enterprise revenues are forecast to come in between $25.3 million and $26 million and embedded revenues between $1.2 million and $1.6 million. Enterprise subscription revenues are projected to account for 55%-58% of total enterprise revenues.

The company had nothing to say about next year.

Szulik said Red Hat was interested in acquisitions primarily in two areas - managed services and security.

More Stories By Maureen O'Gara

Maureen O'Gara the most read technology reporter for the past 20 years, is the Cloud Computing and Virtualization News Desk editor of SYS-CON Media. She is the publisher of famous "Billygrams" and the editor-in-chief of "Client/Server News" for more than a decade. One of the most respected technology reporters in the business, Maureen can be reached by email at maureen(at)sys-con.com or paperboy(at)g2news.com, and by phone at 516 759-7025. Twitter: @MaureenOGara

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