Red Hat gains operating system share at Sun's expense

Red Hat's fiscal second quarter results were solid across the board as the company continues to poach operating system market share even though server sales are weak.

Simply put, you can't extrapolate Red Hat's results to other enterprise software vendors. Red Hat's continued growth is at the expense of other players.

The company reported net income of $28.9 million, or 15 cents a share, on revenue of $183.6 million, up 12 percent from a year ago. Subscription revenue was up 15 percent from a year ago to $156.3 million. Non-GAAP earnings excluding a tax benefit were 16 cents a share, a penny better than expectations (statement).

Red Hat CEO Jim Whitehurst was asked on Red Hat's earnings conference call whether customers were buying more servers or just leaving other operating systems like Solaris. Whitehurst said:

At this point, it still looks like (we're) taking share from other operating systems vendors. I would say we are seeing some signs of life out there as customers are talking a bit more about new projects but I don’t think we actually saw that in new volume in the second quarter. I think it’s mainly taking share still at this point.

Also see: Red Hat: Quiet winner amid Sun's server apocalypse?

However, there are some bigger projects being considered by enterprises. Whitehouse added:

I think for the results you are seeing in the second quarter, we are taking share and therefore our results have diverged from a lot of other vendors. I think the dislocation around Sun has certainly been helpful, [the fill] we are beginning to reap some benefits around JBOSS post the WebLogic deal last year, so that deal has taken a long time. That said, I would say from our sales force, I am hearing anecdotal evidence that there is finally discussion of new projects out there, which obviously we feel good about because we do -- generally do better on new projects than replacing things that already exist. But that’s still very early but I think we are at least starting to engage companies in dialog about new projects versus just basically holding down the fort, which is good news.

Indeed, Whitehurst added that the pipelines for Red Hat Enterprise Linux and JBoss remain strong.

J.P. Morgan analyst John DiFucci notes that Red Hat does appear to be bucking industry trends. He says in a research note:

We would not extrapolate Red Hat’s results to other enterprise software vendors’ license performance for the September quarter. Red Hat’s relative success still appears to be coming from operating system share gains versus improving server sales volumes.

Piper Jaffray analyst Mark Murphy adds:

Our customer survey work continues to indicate that Red Hat is gaining a greater share of IT budgets and taking market share from the competition.