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Red Hat out of the red in 2001 – CEO

Promise made on the back of major revenue growth

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The smart choice: opportunity from uncertainty

Linux specialist Red Hat said it will start turning a profit sometime next year, following a sharp rise in the company's quarterly revenues.

Reporting its Q2 2000 results, yesterday, Red Hat said its revenues rose 95 per cent year-on-year for the three months to 31 May, reaching $16.0 million from $8.2 million. Quarter-on-quarter growth hit 22 per cent - in Q1 Red Hat recorded revenues of $13.1 million.

Red Hat's loss for quarter fell to $2.5 million, but that doesn't take into account acquisitions and other one-off expenses, which when added in take the Q2 2000 loss to $14.9 million. For the same period last year, Red Hat lost $14.1 million.

Gross margins reached 54 per cent during the quarter, up 6.6 per cent on Q1.

Essentially, Red Hat continues to spend in order to accrue, and the revenue growth the company is experiencing suggests the plan is working. From its beginnings as a Linux distributor, Red Hat now styles itself a specialist in "open source Internet infrastructure solutions", as it shifts its business to focus on the area of the open source world that can make money.

So the company is targeting hardware vendors - most notably IBM, Dell and Compaq - to get its Linux distro installed on their servers on the back of which it can sell consultancy, support and other services. During the quarter, Red Hat beefed up its own support offerings with a an annual subscription-based 24x7 per-server product.

Meanwhile, Red Hat is building up through acquisition and VC-style funding a stack of open source server management products and tools, again which can be used as a loss-leader to sell support and service products. The quarter's purchase of server performance software firm Bluecurve is a case in point. And it was bought with stock worth $33 million, so Red Hat hasn't had to touch its cash reserves.

Red Hat's other line is to target the lucrative embedded market, primarily through its eCos Linux-based OS and Embedded DevKit software development package. Red Hat this week bought embedded developer WireSpeed, but the effects of the purchase won't be felt until Q3.

Expect more acquisitions like WireSpeed and Bluecurve while Red Hat continues to spend money on developing its business. Provided revenues continue to grow at around 22 per cent a quarter - and there's no reason why they shouldn't - Red Hat should indeed be in a position to go into the black next year.

President and CEO Matthew Szulik's target of profitability sometime "in calendar 2001" gives him plenty of room to manoeuvre to choose the best time to declare a profit. ®

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