Red Hat: JBoss picks up steam, but were the earnings that great?

Red Hat reported strong fourth quarter results and indicated that it was managing through economic adversity well. More importantly, Red Hat indicated that its JBoss middleware business may be gaining at the expense of Oracle.

The Red Hat conference call Thursday relative to Oracle's was an interesting contrast in styles. Red Hat seemed to be optimistic. Oracle was also optimistic, but had a tempered view. Red Hat CEO James Whitehurst delivered the following messages:

• Open source is gaining traction;
• Red Hat has a good lineup;
• Red Hat wasn't getting hit with a spending slowdown;
• JBoss is on track with a little help from Oracle's purchase of BEA.

Whitehurst's comments and the financial picture--Red Hat beat estimates by a penny for its fourth quarter and delivered a solid fiscal 2009 outlook--led to a good bit of cheerleading. But let's get real about this Oracle conquest thing. Sure, Red Hat is making money. And yes, Red Hat is showing that it has fixed JBoss. But there is one small nit: Red Hat's financial results are way smaller than Oracle's so you can hardly make the "Red Hat is slaying Oracle" argument. Red Hat's results were solid, but hardly worth the cheerleading from some Linux die hards. Oracle's results presented a caution flag, but we're not talking Armageddon here. The truth on both counts is somewhere in the middle and comparing Oracle's billions in revenue to Red Hat's millions is a bit of an apple and oranges thing.

By the numbers, Red Hat reported fourth quarter earnings of $22 million, or 10 cents a share, on revenue of $141.5 million, up 27 percent from a year ago. For the year, Red Hat had $523 million in revenue, up 31 percent from a year ago, with earnings of $76.7 million, or 36 cents a share.

Red Hat predicted fiscal 2009 revenue to be between $665 million to $680 million. That outlook was roughly in line with expectations. UBS analyst Heather Bellini recapped Red Hat's outlook in a research note:

FY09 cash flow outlook was better than expected; revenue guidance was inline but margin and EPS came in below expectations. The company expects its FY09 operating margin to remain flat y/y, which compares with our below consensus view of 0-50bps of expansion.

But Bellini also noted that Red Hat's quarter had a "more of the same" quality to it. Other analysts were more optimistic, but not by that much.

"JBoss growth appears to be starting to reach management's expectations. While EPS guidance for FY09 was below our expectations on higher investments, the company's revenue growth and GAAP cash flow expectations exceeded our forecast," says Oppenheimer analyst Brian Denyeau.

Simply put, Red Hat had a nice quarter, but there were a few mixed elements in there. To hear Steven J. Vaughn Nichols tell it Red Hat cured cancer last night on the way to selling a few middleware subscriptions. He wrote:

Anyone under the delusion that you can't make money from open source and Linux should have been on Red Hat's 2008 fiscal year earnings call on March 27.

The biggest takeaway from the call was JBoss. Among the notable comments from Whitehurst:

• I am particularly pleased with the improvements we see in our middleware business. Our middleware business delivered its best quarterly and annual bookings performance ever. In North America, a third of our top 25 deals contained middleware products. We are now more frequently selling our platform and middleware product as a solution for large enterprises. In the fourth quarter, we also closed three exclusive middleware deals in excess of $1 million. The middleware business exceeded the target we set by growing two times faster than the platform business in the quarter.
• We still think the opportunity is very large and I would just remind people that at JBoss World, we announced that there are over 20 million free downloads of JBoss out there today. The number of customers we have for JBoss is still quite low relative to that metric and there's an awful lot of opportunity to convince existing JBoss users to move to paid support.
• I will say we saw a substantial spike in our downloads of JBoss the day the Oracle BEA deal was announced.

The key for Red Hat will be to turn those JBoss downloads into customers. We'll see if the BEA effect is a lasting one.