Red Hat Q2 results on target

Linux's first IPO shows strong financial results -- a loss, but an expected loss.
Written by Larry Dignan, Contributor

In its first earnings report as a public company, Red Hat, reported a fiscal second quarter loss in line with expectations Wednesday as sales jumped 95 percent from a year ago.

The newly-public Linux software and services company reported a net loss of $3.1m (£2m), or 9 cents a share, on sales of $4.4m for the quarter ending 31 August. Had Red Hat's initial public offering been completed at 1 June, the company would have reported a loss of a nickel a share to match First Call estimates. The IPO changed the number of shares outstanding and the earnings per share figure. In the same quarter a year ago, Red Hat reported earnings of $100,000, or a penny a share, on sales of $2.3m.

According to Renaissance Capital, an IPO research firm, Red Hat is among the top 10 IPO performers this year with a gain of 703 percent. Red Hat priced its offering at $14 on 10 August and closed at $112 on Tuesday.

The company also said the open-source Linux movement is gaining steam in the corporate market. (The conference call is available at VCall.) "We doubled the number of Red Hat's enterprise customers to 34 this quarter compared to 17 for the first quarter of this fiscal year," said Bob Young, CEO of Red Hat.

The company said it was working to diversify its revenue with subscription-based products, services, and its portal. Red Hat has been moving to a subscription-based revenue model for its software. "The company's shift to a subscription model in providing products to its customers has been well received," said Young. Product revenue provided 74 percent of the company's revenue in the quarter. The company also inked key partnerships with tech giants such as Compaq, Dell, IBM and Oracle.

On a conference call with analysts, Red Hat execs said they see big growth abroad. The company opened an office in Japan and appointed a general manager for its European operation. Red Hat has staffed its Europe office and said it was "generally pleased" with its progress. Officials said Red Hat will be able to offer 24/7 support in Asia and Europe in the next month.

Young said the company's plan for now is simple: take advantage of its capital and first-mover advantage and build its infrastructure. Officials said Red Hat is on a hiring binge. Red Hat has recently hired someone to formulate a merger and acquisition strategy and editors and tech support for its Redhat.com open-source portal.

Red Hat recently acquired Atomic Vision, a Web site development company, to add employees and bolster its Redhat.com site. Red Hat's site had 33.3 million page views in the second quarter. The company said also plans to incorporate e-commerce into its site.

So far revenue from web advertising is minimal at $105,666 for the second quarter, up from $80,000 in the first quarter. But executives expected that revenue to improve because advertisers are "showing lots of interest".

Red Hat executives also indicated that the company was comfortable with Wall Street's expectations for the fiscal year. According to First Call consensus estimates, Red Hat is expected to lose 4 cents a share in the third quarter and 3 cents a share for the fourth. For fiscal 2000, Red Hat is expected to lose 16 cents a share. In 2001, analysts expect Red Hat to lose 7 cents a share for the year, but post a slight profit in the fourth quarter of that year.

Officials noted that Red Hat is more interested in building its business than turning a profit. Young also said the company is on the lookout for "interesting acquisition opportunities".

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