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Red Hat accelerates through $1bn in sales

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"We think of Linux as a competitor in the student and hobbyist market but I really don't think in the commercial market we'll see it in any significant way." Bill Gates, 2001

You can't blame Red Hat for wanting to rub it in a little bit as it busted through its first $1bn year. Yes, El Reg knows that numbers are not barriers, but they are milestones, and even if you want to be a party pooper, Red Hat has just become the first company based on open source code and the delivery of support services for that code to reach that pinnacle. It is a remarkable achievement and perhaps even unexpected, as BillG would probably point out today.

In the fourth quarter of fiscal 2012 ended on February 29, Red Hat had software support subscription sales of $255.2m, up 21.9 per cent compared to a very good period a year ago. Training and other services revenues (including consulting) rose by 17.9 per cent, to $41.8m, better than usual due to a mix shift to higher cost training and higher attach rates on consulting services.

But as Charlie Peters, Red Hat's CFO, explained during a conference call with Wall Street analysts after the market closed, going forward the company expects for services revenues to go back down to slightly lower – and historically normal – growth rates in the low teens.

Add it all up, and Red Hat booked $297.1m in revenues in fiscal Q4, up 21.3 per cent. While net income rose by only 7.3 per cent to just under $36m, none of the analysts on the call seemed to think that Red Hat should be working to cut costs to bring more to the bottom line.

For the full fiscal year, Red Hat had $965.6m in subscription sales (up 24.8 per cent) and $167.5m in services sales (up 23.3 per cent). Shadowman brought $146.6m to the bottom line, and increase of 36.7 per cent over last fiscal year. You see now why Wall Street is not wailing and gnashing its teeth.

Jim Whitehurst, Red Hat's president and CEO, said on the call that the company's billings rose by 31 per cent in the quarter, to a record level of $418m, the highest growth rate for billings that Red Hat has seen in five years. Deferred revenues were up 23 per cent, to $947m. While the quarter exceeded the top-end of Red Hat's guidance of $289m to $292m, perhaps more significant is the fact that Red Hat has grown sales for 40 straight quarters.

During the quarter, Red Hat closed 24 out of the 25 top customer accounts where subscriptions had come up for renewal, and for the year 99 out of 100 closed – and those that renewed had budgets 130 per cent higher than their original contracts both for the quarter and for the year. Among the deals that closed in Q4, one was with a big bank for eight-figures, and Whitehurst said that the number of million-dollar-plus deals was up by 50 per cent compared to a year ago.

As far as the free-to-pay effort goes, Red Hat had one customer using its software shell out seven figures for support contracts on licenses it already had installed but was giving Shadowman zilch for, and another customer did a six-figure free-to-pay contract.

As he usually does, Peters drilled down a bit into the top 30 deals that Red Hat closed. All 30 of the deals were above $1m, and a number of deals that didn't make the top 30 cut were also in excess of $1m, said Peters. The company had three deals in excess of $5m among those top 30, and 40 percent of them had a JBoss middleware component of some sort. Middleware and Linux platform revenues across all customers (not just the top 30 deals) had about the same growth rate in the quarter.

The RHEV 3.0 server virtualization hypervisor and management system that Red Hat started shipping in mid-January, which is based on KVM, did not have any material impact on revenues in the quarter, and none was expected, said Whitehurst. He added that many customers were doing proof-of-concept projects with RHEV.

The Gluster clustered storage system that Shadowman will sell as Red Hat Storage 2.0 just went into beta testing last week and will become generally available "in the not too distant future," according to Whitehurst. "We have a very strong pipeline for high performance computing and big data."

The channel contributed about 59 per cent of Red Hat's revenues in Q4, with direct sales pushing the other 41 per cent. This is more or less in synch with the 60-40 split that Red Hat had for the year and that has been its long-term goal for many years. About 60 percent of the company's sales came from the Americas, with 26 per cent from EMEA and 14 per cent from Asia/Pacific.

Red Hat added a little more than 800 employees in fiscal 2012, ending the year with 4,560 employees, and said today on the call that it planned to add 1,000 more in fiscal 2013. The company normally spends $50m a year in capital expenditures, for IT facilities and human facilities, but Peters said this year that the build out of its cloud and storage businesses as well as the addition of all those employees would force Red Hat to spend about $100m on capital expenses in fiscal 2013. The office build out will happen in its Raleigh, North Carolina headquarters and its Boston, Massachusetts, and Brno, Czech Republic development labs.

During the quarter, Red Hat spend $76m to buy back its own shares and blew $133m on shares for the whole fiscal year, "returning value to its shareholders" like other tech giants. The authorization from the board to continue buying Red Hat shares on the open market expires on March 31, so the board went ahead today and authorized the company to buy up to $300m in shares over the next two years. Red Hat ended the fiscal 2012 year with $1.3bn in cash and investments, so it certainly has the dough.

Looking ahead, Red Hat figures it will post sales of between $307m and $311m in the first quarter of fiscal 2013 ending in May (up 16 to 17.5 per cent), with non-GAAP earnings per share of around 25 to 27 cents. For the full year, expect Red Hat's sales to rise by 18 to 20 per cent to somewhere between $1.34bn and $1.36bn. The company expects full-year operating cash flow to be in the range of $440m and $460m – and that's a big fat bulge in the back pocket. ®

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