Volume 3, Number 25 -- July 11, 2006

Red Hat Continues Booming Growth in Fiscal Q1

Published: July 11, 2006

by Timothy Prickett Morgan

Just after we went to press with the prior issue, commercial Linux distributor Red Hat reported its financial results for its first quarter of fiscal 2007 ended May 31, and it has turned in another high-growth, high-profit quarter. Red Hat's acquisition of middleware supplier JBoss only closed on June 2, so none of its results are in the numbers for the fiscal first quarter. This is probably a good thing, for now, since JBoss, while growing even more explosively than Red Hat, is not yet profitable.

For the quarter, Red Hat reports software subscription sales of $71.5 million, up 45 percent compared to the prior year's first quarter and up 7 percent from the fourth quarter of fiscal 2006. Sales of training and other services accounted for $12.5 million, up only 8 percent. Total sales during the quarter were $84 million, an increase of 38 percent compared to the year ago period. Matthew Szulik, Red Hat's chairman, chief executive officer, and president, said in a conference call with Wall Street analysts that the company was able to renew 25 out of the top 25 accounts during the quarter, and that 99 out of 100 of the top accounts in the past four quarters have renewed their subscriptions to Red Hat's Linux and other products. This is an enviable renewal rate. (The company had a single deal that brought in more than $5 million.) Perhaps more importantly, Szulik said in the call that Red Hat had added more than 10,000 net new customers in the quarter, which obviously drives a lot of its growth. About 61 percent of its sales came from channel partners like IBM and Hewlett-Packard. About 57 percent of its sales came from the Americas, 22 percent from EMEA, and 21 percent from Asia/Pacific.

On the profit side of the Red Hat books, the company had an enviable 84 percent gross profit margin (an increase of 5 points over the year ago period), and after stock compensation, taxes, and other costs, Red Hat brought $14.7 million, or 7 cents a share to the bottom line. Net earnings were only up 5 percent in the quarter, which was the first time Red Hat booked stock-based compensation. With Red Hat explaining that JBoss is not profitable and will impact earnings in the remaining quarters of fiscal 2007, it remains to be seen how happy Red Hat's investors and Wall Street analysts will be with profits flat. Red Hat ended the quarter with $1.1 billion in cash and equivalents, and had deferred revenue of $254.7 million, up 61 percent.

Looking ahead, Red Hat's chief financial officer, Charlie Peters, raised his revenue guidance for fiscal 2007 based on the JBoss acquisition. Originally, before the JBoss deal, Red Hat was forecasting sales of $370 million to $375 million. With three quarters of JBoss sales added to the mix, Peters says Red Hat should hit $400 million to $405 million in total sales--hitting the high end of the original Red Hat numbers--and that the JBoss products would bring in $22 million to $27 million in sales. JBoss is expected to be cash flow negative for the next two quarters and maybe flip to cash flow positive in the final quarter of Red Hat's fiscal year. Szulik reiterated that Red Hat would continue to support JBoss middleware Novell's SUSE Linux Enterprise Server as well as Microsoft's Windows.

Peters also provided some guidance for the second fiscal quarter, saying that he expected that Red Hat would book $96 million to $98 million in sales, an increase of between 46 to 49 percent from fiscal 2006's second quarter. This will be the first quarter with JBoss numbers in it.

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Editor: Timothy Prickett Morgan
Contributing Editors: Dan Burger, Joe Hertvik, Kevin Vandever,
Shannon O'Donnell, Victor Rozek, Hesh Wiener, Alex Woodie
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