Guild Companies

Commercial Linux distributor Red Hat announced its fourth quarter and fiscal 2003 financial results last week. Revenues were up by 40 percent to $25.9 million in Q4, with a loss of $56,000. This was a lot better than the $42.3 million loss it racked up in last year's fiscal fourth quarter. For the full year, Red Hat booked $90.9 million in sales, an increase of 15 percent, and a net loss of $6.4 million, which is a lot better than the $140.2 million loss it booked in fiscal 2002.

So what is the big difference between fiscal 2002 and 2003 for Red Hat? Linux Advanced Server for one, and the increasing adoption of Linux in the data center. The two work hand in hand. As companies try to figure out where to deploy Linux, they want the same level of service they are used to from their Unix supplier or their Windows supplier, Microsoft. They may love Linux because it is open source, but they sure don't want to support it themselves. So companies are buying subscriptions to the Red Hat Network to support their desktops and servers. While service subscription revenues were up by 43 percent in the quarter, sales Enterprise Linux AS (what used to be called Advanced Server) services and related enterprise products (such as databases and content management software) were up by 73 percent. Red Hat said that it sold 16,500 Enterprise Linux AS subscriptions in the fourth quarter, 4,500 more than it shipped in the third fiscal quarter ended in November 2002. That's an increase of 38 percent sequentially from the third fiscal quarter. Subscription revenues across all products were up by only 10 percent sequentially. Red Hat also said that it shipped 5,000 licenses of its Enterprise WS license for workstations, which just started shipping. These enterprise products had a gross margin of 81 percent, which is about as good as it gets in the IT business.

While Red Hat didn't say it, what has been apparent for the past year is that the $2,499 annual Red Hat Network subscription service for Enterprise Linux AS was too steep for a lot of budgets, which is why the company rolled out a stratified Enterprise Linux family two weeks ago. Now the company offers four different service levels and price points for two different Linux server environments: Enterprise Linux ES for basic infrastructure workloads and Enterprise Linux AS for four-way and eight-way application and database processing. It's a lot easier to acquire a basic license to the ES license on business day support for $349 than it is to justify shelling out $2,499 for the ruggedized AS license. While Red Hat will probably have to sell seven of the basic ES subscription licenses to make up for one premium AS subscription license, the company is undoubtedly betting that it can make it up with volume. This is a good bet, and this time next year it would not be surprising to see Red Hat talking about Enterprise Linux license sales being up by enough to show the kind of revenue growth it has shown this year--and maybe even more.

Red Hat, which went public in 1998 in what can only be described as an explosion, still has close to $300 million in the bank to ride out this experiment. In fact, it has slightly more cash in the bank than it had in February 2002, and that is saying something in the IT market these days.