Red Hat Starts Fiscal 2008 with Modest Profit, Big Revenue Growth

Published: July 10, 2007

by Timothy Prickett Morgan

One of the interesting things about being an open source software company that sells services for products is that you don't really have to worry about product upgrade cycles in the same way that proprietary software makers have to. Nothing demonstrates how open source companies like Red Hat are perhaps better suited to the unpredictable nature of software development than its first quarter of fiscal 2008, where the company posted $118.9 million, up 42 percent.

Red Hat was able to grow at this rate for the past couple of quarters even though the company did a major refresh of its Red Hat Enterprise Linux with its Version 5 launch and also updated its JBoss middleware software. It is hard to see any disruption in Red Hat's sales for the past two quarters, although because of the JBoss acquisition and some investments Red Hat has made in getting these new products to market and future ones rolling, profits have been kinda choppy. This time around, in fiscal 2008's Q1, Red Hat's profits rose, rather than declining as they did in the fourth quarter of fiscal 2007. Specifically, Red Hat brought $16.2 million to the bottom line, up only 18 percent. (The only is a joke. Most companies would kill for such an increase.)

Red Hat does not provide much color on what it is actually selling--and that should probably change now, given the diversity of its product portfolio and its juggernaut status in the commercial open source software market--but it did say that subscription sales rose by 44 percent in the quarter to $103 million. The company did not provide any RHEL shipment numbers in its conference call with Wall Street analysts, and it did not give any hard information about how RHEL 5 is being accepted by the market. "We have seen positive uptake of the Advanced Platform, but it is early," said Matthew Szulik, Red Hat's chairman and chief executive officer, referring to the high-end, virtualized, and more expensive variant of RHEL 5 that roughly corresponds (in terms of position) with RHEL 4 ES. He also said that, in general, the download rate for RHEL 5 has been higher than any prior Red Hat Linux release in the company's history. Customers are in the testing and preproduction evaluation stages with RHEL 5 right now, and Red Hat is not comfortable giving out any more specifics at this time.

Szulik is hopeful that the major server manufacturers in the United States will start offering preloaded RHEL 5 on their wares, once they are certified and tested, and hopes this will happen in a quarter or two. He said that a number of server makers in Asia have already begun preloading RHEL 5 on their machines.

Charlie Peters, the company's chief financial officer, said that RHEL 4 ES sold more units than the lighter AS variant, and that the new RHEL 5 product line was engineered to have more people pick Advanced Platform than not. It will be interesting to see if this plays out, given the relatively nascent state of server virtualization on X64 servers in production environments. Peters also said that Red Hat added thousands of new customers in the quarter and that 27 percent of its bookings were for contracts for support that had terms greater than one year.

Red Hat added 100 employees during the quarter, mostly in sales, marketing, research, and development positions. The company exited the quarter with $1.2 billion in cash, and it does not seem intent on spending that down, preferring instead to make small, tactical acquisitions that snap into its strategy of building up a complete software stack.

Looking ahead, Peters said that Red Hat expected sales in the second quarter of fiscal 2008 ending in August to be in the range of $124 million to $126 million. In the second quarter of fiscal 2007, Red Hat had sales of $99.7 million, which means the coming quarter will have revenue growth in the range of 24 percent to 26 percent. (That math was easy.) However, Red Hat's growth, while phenomenal, is slowing. In the year-ago second quarter, Red Hat grew sales by 52 percent, more than twice the expected rate for this year.

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