Revenue Up, But Profits Take a Hit at Red Hat in Q4

Published: April 2, 2007

by Timothy Prickett Morgan

Commercial Linux distributor Red Hat reported its fourth quarter and fiscal 2007 year end financial results late last week, and the company has put the acquisition of open source middleware provider JBoss mostly in its rear view mirror. For the fourth quarter ended February 28, Red Hat posted sales of $111.1 million, up 41 percent, and net income of $20.5 million, down 25 percent.

Red Hat sold $95.9 million in software support subscriptions in the three months ended February 28, up 44 percent compared to the year-ago quarter, while training and services sales increased a more modest 26 percent. For the full year, the company had $400.6 million in sales, up 44 percent, with software subscriptions up 48 percent to $341.2 million and training and other services up 24 percent to $59.4 million. Matthew Szulik, Red Hat's chairman, said in a conference call with Wall Street analysts that the company added 10,000 new customers (which means they did not have Red Hat products before) in the fourth quarter, and that for the full fiscal 2007 year, it added over 42,000 new customers.

Szulik said that 98 of the top 100 Red Hat accounts renewed in 2007, and Charlie Peters, Red Hat's chief financial officer, added that of the top 25 deals that Red Hat did in the fourth quarter, these customers renewed at an average of 120 percent of the revenue they booked in the prior year's final quarter. (These figures are adjusted for one-year contract terms, to do an apples-to-apples comparison.) Peters said that customers are acquiring additional services as well as rolling out new footprints of Red Hat's products, and citing the stats for these top 25 deals was a means of conveying this. The point is, Red Hat's growth is not just from adding new customers, but also from getting existing customers to buy more stuff. Red Hat wanted to be clear that it is not boosting revenue by selling longer-term contracts, and Peters said that the average length of a Red Hat subscription contract remains in the 18- to 21-month range that it has been sitting at for nearly three years.

Szulik said that Red Hat was preparing a means of trying to get Linux on more desktops, and that the upcoming Red Hat Summit in early May would be where the company divulges its plans. In addition to a marketing push for Red Hat Enterprise Linux 5, which was announced on March 14, Szulik explained that the company would be deepening its relationships with its OEM partners and customers, expanding its sales channels, and innovating with customer service--as evidenced by the Red Hat Exchange, a future product to deliver application stacks in partnership with various open source projects under a revenue-sharing arrangement--to boost sales in fiscal 2008.

Obviously, the move to the virtualized RHEL 5 software, which includes an integrated Xen hypervisor for virtual machine partitioning, is a key part of Red Hat's growth. Such capabilities will make Linux more attractive to RISC/Unix shops, that already have virtualization capabilities in their systems. Szulik does not, by the way, think that virtualization will have an adverse impact on the server market. "I don't have the doom and gloom that I have read in a lot of the analyst reports," Szulik said. Red Hat contends that virtualization has only penetrated between 4 percent and 6 percent of the server market, and that this capability will accelerate the move from RISC/Unix platforms to Linux/X64 platforms. Ditto for legacy mainframe environments, which have a much high total cost of ownership.

As for the search engine and e-commerce giant Yahoo, which Oracle chairman, Larry Ellison, had said a week ago adopted its Oracle Enterprise Linux support offering, replacing Red Hat, Szulik said that Yahoo had elected to run a number of Oracle databases atop the Oracle Enterprise Linux offering with Unbreakable Linux support. (Oracle's Linux is a variant of the RHEL 3 or RHEL 4 stack with Red Hat logos and other text removed and replaced with Oracle material, which is perfectly allowed by the GNU GPL license that governs Linux.) In a call with Yahoo executives, Szulik was told that the company had a "successful and positive relationship" with Red Hat, and expected to continue to have one.

Szulik was also asked about where Red Hat stood on the GNU GPL v3 license, which saw its third draft last week and which is causing some controversy because of the provisions in the draft that would make the patent indemnification provisions in a deal that Novell signed with Microsoft last November. Under that deal, Microsoft paid Novell so it could distribute 70,000 SUSE Linux Enterprise Server licenses and agreed not to sue Novell customers for any IP transgressions in SUSE.

Red Hat has not said very much about the Novell-Microsoft deal, or the GPL v3 draft.

"We've been quiet because the team wants to work with the community," Szulik explained. "Like any good open source project, it gets better with each iteration," he added. It remains to be seen if the v3 draft will be accepted as is, and what effect it will have.

In a separate announcement, Red Hat said that Gabriela Gonzales, its controller, voluntarily resigned from the company last Wednesday; Red Hat did not say why. Peters has assumed her responsibilities until a new controller is hired.

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