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Red Hat mocks Meltdown in Q2

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Commercial Linux distributor Red Hat continues to buck the economic meltdown, reporting sales up 11.7 per cent to $183.6m in the second quarter of its fiscal 2010 and net income up 36.9 per cent to $28.9m. The sales were above the high end of Red Hat's guidance.

Business is so good that the juggernaut of the Linux business felt comfortable enough to shell out a staggering $47m to buy back 2.3 million of its own shares from Wall Street, pushing up earnings per share by 50 per cent to 15 cents. (Red Hat has spent $94m buying back stock in fiscal 2010).

From these numbers - and this financial engineering on EPS - it looks like Red Hat has already been acquired by IBM, a move that Big Blue surely must be contemplating as it watches a dangerous and stubborn Oracle acquire a Sun Microsystems it could have had itself earlier this year.

Red Hat said that its subscription sales in the second quarter of fiscal 2010 ended August 31 came to $156.3m, up 15.2 per cent. As with other application and systems software suppliers in recent quarters, training and other professional services revenues were down at Red Hat in Q2, falling 4.6 per cent to $27.4m. By keeping a tight rein on cost of sales, Red Hat was able to bring a slightly larger bit of the revenue increase to the bottom line.

Jim Whitehurst, president and chief executive officer at Red Hat, said that all of the top 25 deals in the quarter that came up for renewal, all 25 renewed and did so at a revenue level that was 20 per cent higher than what they had paid in their prior contracts because they are more widely deploying Linux subscriptions and other Red Hat software.

Of the top 30 deals that Red Hat did in fiscal Q2, two were for over $5m in software subscription sales, and ten were larger than $1m. Significantly, 23 of the 30 deals were for the high-end, unlimited virtualization that comes through Enterprise Linux Advanced Platform, and five deals included some JBoss middleware components.

Over the past six quarters that Red Hat has been talking about its top 25 deals each quarter, only three have not renewed, and two of them eventually came back to the fold. One of them, said Whitehurst, got some free coupons to get a Linux, which no doubt means Novell's SUSE Linux via Microsoft, and after a while, decided to more back to Red Hat Enterprise Linux.

Whitehurst said that he believed that Red Hat was growing right now mainly because it is taking operating system market share away from competitors, not because it is getting more than its share on new server shipments. While companies are talking about projects that need new servers and new operating systems. this is largely just a lot of talk right now as far as Whitehurst can see.

During the quarter, two of the biggest deals involved so-called free-to-pay shops, which are using freebie versions of RHEL or Fedora and which decide to get paid-for support from Red Hat because they can't take supporting it themselves any more. Red Hat is hopeful that this will be an increasingly larger portion of its sales from this flip.

As Red Hat exited the quarter, it still had $493m in cash and equivalents in the bank and $228.4m in debt and equity securities. The company does not have any debts to speak of and has $580.9m in deferred revenues (up 17 per cent from a year ago) and $112.8m in accounts receivable. There are far worse positions to be in out there in IT Land. Like over at rival Novell, which is struggling to grow its SUSE Linux business faster to fill in the gaping hole left by the collapsing NetWare business, just to name one.

Charlie Peters, Red Hat's chief financial officer, said that Red Hat's direct sales accounted for 31 per cent of total sales in the quarter, with the channel partners such as Hewlett-Packard, Dell, IBM, Fujitsu, and others pushing 41 per cent of sales. That was roughly in line with the 61/39 split in the first quarter, but backsliding against a trend that Red Hat wants to push so it is getting more sales through its channel.

By geography, the Americas region accounted for 56 per cent of sales in Q2, compared to 25 per cent for the EMEA region and 19 per cent for the Asia/Pacific region. Peters said that sales to the government accounted for 15 per cent of sales and that the pipeline for deals was strong.

Looking ahead to the third fiscal quarter, Peters said that Red Hat expected sales to be somewhere in the range of $187m to $189m, that operating margins would be more or less the same as in Q2, and that non-GAAP earnings per share would come in between 15 and 16 cents. Peters is not giving guidance for Q4 at this time. ®

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