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Red Hat shakes off economic meltdown

Q3 profits better than expected

Bridging the IT gap between rising business demands and ageing tools

While commercial Linux distributor Red Hat has not grown enough to justify the ridiculous valuations that Wall Street put on the company when it went public a decade ago, the company is more or less on track to break $1bn in sales in the next couple years.

In the third quarter of fiscal 2009 ended November 30, which had the global economic meltdown smack dab in the middle of it, Red Hat reported software subscription sales of $135.5m, up 17 per cent, with training and services sales of $29.9m, up 52.1 per cent. Overall sales rose by 22.1 per cent to $165.3m, and despite larger operating costs compared to the third quarter of fiscal 2008, net income rose by 18.7 per cent to $25.1m.

For the first nine months of the fiscal year, Red Hat's sales came to $486.4m, up 27.5 per cent, and net income was $65.4m, up 14 per cent.

Red Hat said in its financial statement that foreign exchange rates whacked sales by $6.9m, and reduced expenses by $4.8m. The company generated $59.1m in cash and after buying back 2 million of its own shares and retiring $285m in convertible debentures, still had $1.1bn in cash and equivalents in the bank.

Red Hat's board has authorized the repurchasing of an additional $250m in company shares, which thanks to the economic meltdown are cheaper these days than they might otherwise be. (Red Hat's shares hit a 52-week peak of $24.84 back on June 2, and traded at just under $12 a pop as the market closed today, giving Red Hat a market capitalization of $2.3bn. That's one-tenth of where Red Hat was trading in late 1999 when it went public in the heady days of the dot-com boom.)

In any event, the company is also pretty pleased that it booked $193m in billings in the quarter and has $505.1m in deferred revenues in the bank, up 20 per cent from the year-ago quarter.

In a conference call with analysts after the market closed today, Jim Whitehurst, Red Hat's president and chief executive officer, bragged that Red Hat was able to weather the economic storm by being a provider of "low cost, high value" software and services, and said that the company renewed the top 25 accounts that were up for renewal.

He added that with companies looking around to cut costs, as they did when Red Hat was a relative youngster back in the 2001 IT recession, Red Hat was in better shape since it had a much broader and deeper product line, as well as a global company with operations in 65 offices in 28 countries.

And then Whitehurst threw out another rapid fire line of stats: the company has 2.5 million subscriptions in its installed base (a number Red Hat has not given out before), more than 3,000 certified applications running on Red Hat Enterprise Linux, and more than 4,200 hardware platforms certified to run RHEL.

Whitehurst also said that Enterprise MRG 1.1, the next iteration of its messaging, realtime, and grid variant of RHEL, would come out early next year and that the Solid ICE desktop virtualization product that Red Hat got when it acquired Qumranet for $105m earlier in the quarter is available now through an early adopter program and is being readying for launch as well.

Charlie Peters, Red Hat's chief financial officer, said that 82 per cent of Red Hat's sales are recurring, since they are driven by subscriptions that eventually renew. In fiscal Q3, 45 per cent of sales came from outside the United States, with 58 per cent coming from the wider Americas region, 25 per cent from EMEA, and 17 per cent from Asia/Pacific.

Looking to the current quarter, which ends in February 2009, Peters said that Red Hat expects sales to come in between $166m to $167.5m, and that non-GAAP earnings per share would range from 19 cents to 20 cents. He added that Red Hat would retire the remaining $285m in convertible debt it has on January 15. That will take some shares out of the market and bolster its balance sheet, too. ®

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