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Red Hat Sells More, Makes Less

Red Hat Sells More, Makes Less

Red Hat trotted out its new CFO Charlie Peters - you know, the "big company" dude it's been praying for - for the first time Monday for its quarterly conference call with Wall Street and his debut was not exactly what anyone would call an auspicious beginning, since Mr. Peters declined to answer any questions of any substance - particularly on the sensitive subject of ASPs.

He begged off by saying he's only been at Red Hat for four weeks. Evidently it takes more than four weeks to find out what the company's installed base is.

Mr. Peters' arrival at Red Hat was supposed to reduce the uncertainty that Red Hat engendered some months ago by botching the departure of its old CFO and having to restate several years worth of results.

So far he hasn't had that effect.

Red Hat came up light of the stock market's expectations on the revenue side for the quarter it was reporting, missing its guidance number for the second time in a row, distressed analysts when it said it's not going to break out subscription renewals any more and guided to lower revenues than the market expected this quarter. Its stock immediately slipped in after-hours trading on news of the conservative Q3 projection, a trend that continued into Tuesday and the rest of the week.

Aside from that everything's ducky.

Red Hat seems to be pleased enough with itself. Its bosses called the company's execution "solid" and the quarter "strong."

Wall Street collectively expected Red Hat to do $47.5 million in the quarter ended August 31. Prudential, which has been on Red Hat like a June bug on a ripe fig, thought it was good for $47.8 million.

Instead it turned up with revenues of $46.3 million, up 11% sequentially - but $1.2 million below the low end of guidance - with earnings of $11.8 million, six cents a share, up 8% sequentially and in line with what Prudential said it would do, but a penny better than the broader market figured.

Naturally, Red Hat didn't recognize all the money in Q2. It now recognizes revenues on a daily basis, a Peters innovation. It deferred $11 million in revenues in the quarter - bringing the total to $99.7 million - and generated $30.8 million, or 16 cents a share, in cash flow.

The company's deferred revenue growth is on a downward cycle. At the end of last year Red Hat socked away $31 million in deferred revenue. In the first calendar quarter the number dropped to $14 million, in the second it hit $12 million and now it's at $11 million. Meanwhile, cash flow was flat.

The company said it sold a total of 115,000 enterprise server subscriptions during the summer, surprising even itself, it seems, because the August quarter is generally slow. Red Hat had originally guided towards 85k-89k and Novell's SuSE sales look picayune by comparison.

Red Hat did not break out enterprise renewals from new subscriptions on the theory that September began the second year of renewals and with people adding to their base subscriptions it's getting harder to distinguish new from renewed. The analysts weren't happy since the number is one of the three figures besides units and ASPs that they use in their models.

Red Hat said the average collective selling price was $425, a bit shy of the $430 figure it gave in Q1, and way below last year's $585. Prudential translated Red Hat's silence on how ASPs broke out into meaning that its ASPs on new subscriptions, which Wall Street estimates came to maybe 86k or 87k, was only around $401, roughly a 7% decline quarter-over-quarter, and off 31% year-over-year.

Obviously Red Hat is ramping unit volumes faster than the ASP is declining and has to keep doing that. Its new CFO indicated the company is laying down the "infrastructure for global growth;" it's added 10% to its workforce.

Red Hat CEO Matthew Szulik told us after the conference call that he regards ASP numbers as "irrelevant." He has opted for market share if the discounting doesn't get downright silly.

Red Hat reminded folks that a couple of years ago it had no position in the enterprise and was merely a struggling retailer. Now, it preened, 300 hardware products are certified for Red Hat.

There was no word on Red Hat's new application server, which started shipping recently. Otherwise it said it did 29,000 new HPC/hosting and desktop subscriptions in fiscal Q2 at an indiscriminate ASP of $42.

Roughly half of those 29k units were desktop and Red Hat said it nailed its first big desktop order covering 10,000 units from a European retailer.

Peters described the quarter as back-end loaded, particularly for large deals, and Szulik said sales cycles are lengthening and deals are being signed at higher and higher levels. He also mumbled something about all competitors being represented in the US, his way of remarking on the price pressure, one imagines, particularly in new accounts. 

Szulik also denied pundit claims that Linux conquests were slowing and said Red Hat's business is still largely Unix replacement.

The analysts were so distracted by being denied the renewal rate, described only as "substantial" and "in line" with Q1's, that no one commented on the fact that 55% of Red Hat's business in fiscal Q2 was indirect thanks to OEMs, particularly in Asia. The company was faulted the quarter before because the number was only 45%. Eventually it wants to do 70% of its business indirect.

The company has managed to stash close to a tidy billion dollars in the bank, $997.7 million to be exact, up $33 million sequentially.

Red Hat offered no guidance on enterprise shipments, ASPs or earnings. Peters would only say that Red Hat should do $50 million-$52 million in revenues this quarter, $2 million or $3 million less than Wall Street thought. Credit Suisse figures the projection means flat quarter-over-quarter bookings. It also thinks Charlie is just being cautious.


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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LnxAddict 09/24/04 10:49:16 AM EDT

I would recommend anyone to read blogs.redhat.com daily and see what's going on over at redhat. In particular, you can read Havoc Pennington's blog.

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