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Channel the hero in Q2

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Commercial Linux and middleware distributor Red Hat continued to grow at a nice clip in its second fiscal quarter ended on August 31, with sales up 19.7 per cent to $219.8m. But even after keeping cost growth under this level, a much higher tax bill compared to the year-ago quarter walloped the company's net income, which fell by 18.2 per cent to $23.7m.

In the quarter, software-subscription revenues across all of Red Hat's product lines accounted for $186.2m, up 19.1 per cent, while training and services revenues hit $33.6m, up a slightly better 22.7 per cent. Red Hat had a one-time tax benefit in the year-ago quarter worth 4 cents per share, which made for a tough compare this time around. If you exclude this and look at non-GAAP net income, then Red Hat's profits were up 19 per cent, almost in line with revenue growth.

For the last six months, Red Hat's sales are up 19.8 per cent, to $428.9m, but net income is only up six-tenths of a per cent to $47.7m. Wall Street will probably shake this off since the bottom line was not as bad as many had expected, and because president and CEO Jim Whitehurst said that the company posted its best billings growth rate in two years — up 20 per cent to $233m — providing a window into future revenues. Oh, and it doesn't hurt that Red Hat is raising guidance for the fiscal year based on some trends it is seeing.

First the trends, then the guidance.

Whitehurst said on the call with Wall Street analysts that Red Hat had strong renewals and saw continued spending on new projects, and that perhaps more importantly that the Linux operating system and JBoss middleware have reached a tipping point, moving from early adopters in the telecommunications, service provider, financial services, and government verticals and moving out into manufacturing, distribution, and retailing.

Whitehurst also said that of the top 25 deals that were up for renewal in the quarter, all of them renewed and they renewed at 120 per cent of their original value (more or less matching the rate for revenue growth overall).

The largest renewal in the quarter was actually a free-to-pay conversion from Fedora, who converted to properly supported Enterprise Linux licenses three years ago and this time around renewed at 250 per cent of the value of the original contract as it replaced other Linuxes and even some Windows platforms with RHEL licenses this time around.

Whitehurst added that it did one private cloud deal worth in excess of $1m in the quarter, and now has over 300 customers using its Enterprise Virtualization hypervisor, a commercial version of the open source KVM hypervisor, some in proof-of-concepts and some in production.

In general, Whitehurst said that its customers were buying larger numbers of subscriptions and spending more money on the contracts, as well, which is what is pushing up revenues. The company added more than 5,000 new customers in the quarter.

Charlie Peters, Red Hat's chief financial officer, said that 10 of the top 30 deals Red hat did in the quarter had a middleware component, and a third had a services component. He also reiterated that Red Hat still expected for JBoss middleware revenues to grow at twice the rate of the company overall in fiscal 2011. Peters said Red Hat had a dozen deals worth over $1m in the quarter, with one coming in at over $5m. The free-to-pay efforts, Peters said, are still generating a couple of million dollars in incremental revenues each quarter, as well.

In the quarter, Red Hat's channel really picked up the ball and ran, generating 67 per cent of bookings compared to 54 per cent in the first fiscal quarter. The Americas generated 60 per cent of bookings in Q2, compared to 20 per cent for EMEA and 20 per cent for Asia/Pacific.

Given all of this, Peters said that Red Hat is raising its guidance for the full fiscal year. It was previously somewhere between $835m to $850m, but now Red Hat thinks it can get to somewhere between $877m and $885m. Non-GAAP earnings per share for the year are expected to come in at between 76 and 77 cents.

Red Hat exited the second fiscal quarter with a deferred revenue backlog of $649.6m, up 12 per cent from a year ago, and has $1.05bn in cash and equivalents. There are worse positions to be in. Such as the one that rival Novell finds itself in. ®

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