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Red Hat Scores First Operating Profit

Red Hat Scores First Operating Profit

Red Hat came in with its first operating profit in its fiscal second quarter ended August 31, a period that's historically soft. Not that it came to much: $240,000 as against a loss of $1.1 million in Q1 and a loss of $4.7 million in Q2 last year, but progress however modest. Revenues rose 6% sequentially and 36% year-over-year to $28.8 million. Earnings came to $3.3 million, or two cents a share, beating the Street's outlook by a penny and another first. It never did more than a cent. The quarter before, Red Hat earned $1.5 million, or a penny a share, and had a net loss of $1.9 million, or that same penny per share, in the same quarter a year ago. The company generated $10.4 million, or six cents a share, in positive cash flow from operations, representing an 89% sequential increase and its fifth consecutive quarter of positive cash flow from operations. Sales of annual subscriptions to the company's Enterprise Linux products increased sequentially by 2,300 to about 26,000 new sales from 1,700 new customers. It says it won't have any idea about renewals until its fourth quarter. It rejects the idea that since Linux is supposedly so hot its sales should be galloping. Subscription revenues from enterprise technologies increased 21% sequentially and 123% year-over-year to $18.5 million divided among enterprise ($14.9 million), retail ($3.1 million) and embedded ($500k). The ASP was $585. Subscriptions were 66% of its business, a tad short of the 70% it wants. Service accounted for the rest and totaled $10.3 million, $9.2 million from the enterprise market, $1.1 million from embedded. Red Hat said its flagging embedded business was up a bit because of a couple of large telecom contracts. The gross margin for the quarter was a record 72%. Red Hat claims the number shows the scalability of its subscription business model. However, the jury's still out about that. The company ended the quarter with $307 million in the bank, a sequential increase of $7 million and a year-over-year increase of $18 million. Red Hat says sales are increasing going into the broad market and are growing more strategic, which is very different from 18 months ago when it was still edge of network. The growing availability of serious apps is a factor. Since it's ousting Unix, Microsoft by default is competing in most transactions because accounts are deciding between the Linux and Windows environments. It also said it was seeing a shift in its European business. More was coming from large companies and governments. Red Hat management is projecting Q3 sales of between $31 million and $31.6 million, up 8%-10%, with $17.1 million-$17.4 million coming from subscriptions, up 14%-16% and $9.6 million- $9.8 million coming from services, up 4%-6%. The company expects to have the 3.0 version of its widgetry out the middle of next month. It will not include the next-generation 2.5 Linux kernel, which has yet to be released though it's been promised. The rev will however have something like 350 new features.

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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