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Red Hat hits the top and bottom numbers in fiscal Q1

Billings look a bit weak

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Everybody seems to be a bit jumpy about the global economy these days, and Red Hat will be giving Wall Street a case of the jitters when the market opens on Thursday even though it exceeded its revenue and profit targets in its first quarter of fiscal 2013.

In the period ending May 31, Red Hat's support contract subscriptions for Enterprise Linux, JBoss, and a slew of related open source software came to $272.6m, up 20.9 per cent from the year-ago quarter. Training and other professional services added up to $42.2m in the first quarter, up a more modest 7.5 per cent.

Total revenues were $314.7m, rising 18.9 per cent, and net income was $37.5m, up 15.4 per cent. Perhaps more significantly, net income represented 11.9 per cent of top-line sales, a few tenths of a point lower than the ratio in Q1 fiscal 2012 and something that Wall Street will probably be looking at.

The other number that Wall Street will be examining is billings, which came in at $310m in the quarter, but according to a report in Reuters, Abhey Lamba, an analyst at Mizuho Securities USA, said the street was expecting billings of $319m.

In the first quarter of last fiscal year, Red Hat's billings rose $58m, or 28 per cent, to hit $266m, and that was the best growth in the first quarter for billings that Red Hat had seen since the Great Recession began.

It's not that the 16.5 per cent billings growth that Red Hat got this time around is bad, it is just that people think of billings as a leading indicator and they will jump – perhaps incorrectly – to conclusions about the economy. On a conference call with Wall Street analysts after the markets closed, Charlie Peters, CFO at Shadowman, said that if you take out the effects of foreign exchange rates, which have been volatile during this quarter, then billings grew by 20 per cent.

The channel boosted Red Hat in the quarter, with 64 per cent of sales coming from channel partners and 36 per cent coming from the direct Red Hat sales force. About 55 percent of bookings came from the Americas region, 25 per cent came from EMEA, and 20 per cent came from Asia/Pacific, and CEO Jim Whitehurst reminded everyone on the call that Red Hat manages to bookings, not billings.

Whitehurst added that all of the top 25 renewal deals that came up during Q1 all renewed, and did so at an average of 120 per cent of their original value, and generally they are adding additional licenses and some cross-selling involved. "A lot of it is absolute unit expansion as a lot of people are in the early innings of Unix to Linux migration," said Whitehurst.

Peters walked through the top 30 overall deals (renewal or not), and said that the company set a new record with 25 of the deals being in excess of $1m, compared to the 14 millionaire deal count a year ago. There were two deals in fiscal Q1 that were worth more than $5m, and one of the biggest deals in the quarter was a Windows-to-RHEL migration at an unnamed European financial services company that operates in 20 countries, using Linux in a number of different areas where Windows used to be.

Among the top 30 deals, 40 per cent of them (meaning a dozen) had a middleware component, and three of them were middleware-only deals. And if you are thinking that EMEA was weak, sales were up 20 per cent on a constant currency basis and 11 of those top 30 deals were done in EMEA. Peters said that Red Hat is looking at EMEA as more as an opportunity to peddle against Unix and Windows as it might be a troubled market in which to try to sell anything.

In the meantime, Red Hat is keeping a lid on payroll costs by only adding 200 employees in the quarter. The company exited Q1 fiscal 2013 with $913m in deferred revenue, up 16 per cent (22 per cent at constant currency) and has $1.3bn in the bank as cash and equivalents. It has plenty of cash to ride out any economic storm and to do targeted acquisitions to expand its products and services.

Looking ahead, Peters said that Red Hat has shaved its revenue guidance for the second fiscal quarter ending in August due to the weakening of currencies against the US dollar. Revenues are anticipated to be between $320m and $322m and non-GAAP earnings per share is expected to come in between 28 cents and 29 cents. With the tweak to currencies, Red Hat is now expecting full year revenues in the range of $1.32bn and $1.34bn, with the subscription and training/services split for the entire year being about the same as in Q1. ®

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