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Red Hat: The first $1-billion-a-year open source outfit (almost)

2011 is the year

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The money just keeps rolling in at Red Hat, and it looks like this year will be even better as the company is poised to become the first open source software company to break through the $1bn mark.

In the fourth quarter of fiscal 2011 ended on February 28, the commercial Linux and middleware distributor posted $209.3m in subscription revenues, up 23.7 per cent compared to the year ago quarter. Training and services revenues rose by 32.9 per cent, to $35.5m. Overall sales increased by a flat 25 per cent, hitting $244.8m. (This was better than the $236m at the high end of Red Hat's guidance from three months ago).

Net income jumped by 43.4 per cent, to $33.5m, or 13.7 per cent of total revenues for the quarter. For a software company - especially one with freebie versions of its own products and clones as well - this is a pretty healthy bottom line.

Red Hat ended the quarter with $624.6 million in cash and $218m on debt and equity securities, about $100m more than it had a year ago. (More of that is held in cash, too).

For the full fiscal year, Red Hat posted $909.3m in revenues, an increase of 21.5 per cent, but net income was $107.3m, up only 23 per cent compared to fiscal 2010.

In a conference call with Wall Street analysts, Jim Whitehurst, president and chief executive officer at Red Hat, said that of the top 30 deals that the company had come for renewal in the quarter, all 30 closed and did so at a rate that was 1.5 times the amount of the earlier contracts at these customers for support. Whitehurst said that the company closed a bunch of "free-to-pay" deals, moving customers who were self-supporting using Red Hat Enterprise Linux to paid-for support from Red Hat. Two of these free-to-pay deals came in at six figures. Of those top 30 deals, five were for JBoss middleware only and eleven had a middleware component, so it is not just RHEL that is bringing in the cash. The company had one deal that was worth over $5m.

Charlie Peters, Red Hat's chief financial officer, said in the call that bookings for the quarter were split 59 per cent from its reseller channel and 41 per cent from direct sales, and for the full year, it had achieved its goal of a 60-40 split for its sales across those two ways it goes to market. Revenues from the Americas region accounted for 57 per cent of the Red Hat pie, while EMEA got 27 per cent and Asia/Pacific brought in 16 per cent. This dicing and slicing by region has been consistent throughout fiscal 2011.

Peters said that the company's offices in Osaka and Tokyo were not damaged in the earthquake two weeks ago, that all of its employees were safe, and that while many Japanese companies were struggling, the effect on Red Hat's subscription business would probably be modest in the first quarter of fiscal 2012. Something on the order of $5m of lost bookings, perhaps, which the company anticipated picking up when customers got back on their feet. Whitehurst cautioned that those estimates of lost bookings do not make any predictions about any possible downward macroeconomic effects that the earthquake and the following tsunami might have on the Japanese economy or the global economy. No one has really sorted this out yet, including the Japanese government.

Whitehurst said that thus far, customers were not giving Red Hat any grief about the new packaging and pricing for its flagship Enterprise Linux 6 distro, which was announced last November and which includes a price hike for like-for-like functionality compared to RHEL 5.

"I think the market has been pretty accepting with what we have done with RHEL 6," explained Whitehurst. "I haven't seen any pushback." But, he added, it is a bit too early to tell in the upgrade cycle to see what the vast installed base of RHEL users thinks.

Looking ahead to the first quarter of fiscal 2012, Peters said that Red Hat expected sales to be in the range of $252m to $255m, which is 21 per cent growth at the midpoint compared to the first quarter of fiscal 2011. For the full fiscal 2012 year, Red Hat is forecasting around 18 per cent revenue growth, with somewhere between $1.05bn and $1.07bn in sales and non-GAAP earnings coming in between 94 and 96 cents per share. Non-GAAP earnings were 83 cents per share in fiscal 2011. ®

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