Red Hat revenue up, profit down

Rising expenses--including the JBoss acquisition--cut into Linux seller's revenue; net income drops 25 percent.
Written by Stephen Shankland, Contributor
Revenue continued its steady increase for Linux seller Red Hat's most recent quarter, but net income dropped 25 percent.

For the final quarter of its fiscal 2007, which ended February 28, Red Hat reported revenue growth of 41 percent to $111.1 million. But the company's net income declined to $20.5 million, or 10 cents per share, from $27.3 million, or 13 cents per share, in the year-earlier quarter.

Red Hat's net income was pushed down by operating expenses that increased from $45.6 million a year earlier to $77.1 million. Part of those expenses stemmed from the company's acquisition last June of JBoss, a seller of open-source Java server software.

Expenses rose because of JBoss and five other acquisitions as well as Red Hat's international expansion, Chief Executive Matthew Szulik said in an interview.

Analysts surveyed by Thomson First Call expected, on average, for Red Hat to report a little more revenue--$112.5 million. And, factoring out various expenses, they expected earnings of 15 cents per share. On that basis, Red Hat met the analyst expectations.

"This past year was characterized by solid execution, rapid growth and global expansion. We have invested in people, systems and technology to continually add value to our customers," Chief Financial Officer Charlie Peters said in a statement.

The revenue was light because Red Hat overestimated the size of its training business, Peters said on a conference call. Subscription revenue, where the company makes the bulk of its money, was on target, he said.

JBoss revenue was the fastest-growing category for the company, but it didn't meet internal goals that would have meant an additional payout for JBoss shareholders, Szulik said. Among the financial milestones the company had set was revenue of $22 million to $27 million by the end of February.

Szulik was still bullish about JBoss. "It was a key enabler in a number of large, seven-figure transactions in the last two quarters," he said.

The company generated $56.5 million in cash from operations for the quarter and $217.5 million for the full year, Red Hat said. Deferred revenue--money customers have paid for software support subscriptions but that Red Hat recognizes only gradually throughout the term of the subscription--increased 52 percent from the previous year, to $338.6 million.

In after-hours trading, Red Hat stock dropped 64 cents, or 3 percent, to $22.50.

Red Hat launched its latest flagship product, Red Hat Enterprise Linux 5, earlier this month. Its JBoss acquisition gives it a major opportunity to extract more revenue from its sizable customer base, and it also plans to launch this year a program called the Red Hat Exchange to sell open-source software allies' products.

The Raleigh, N.C.-based company also faces competition from Novell's Suse Linux Enterprise Server and now Oracle's Unbreakable Linux, a clone of Red Hat's software.

One prominent Oracle Linux customer is Yahoo. Szulik, however, said during the conference call that he spoke with Yahoo on Wednesday about his company's continuing presence.

"They selected Oracle to run a number of Oracle database servers, but expect currently and in the future to have a successful relationship with Red Hat," Szulik said of Yahoo's plans. "Also, they're in discussions of expanding their Red Hat Enterprise Linux footprint with us."

Szulik said Red Hat hasn't changed its pricing or customer-engagement strategy since Oracle's arrival in the marketplace.

Szulik also said the company plans to release new details about its product plans for JBoss server software and for Linux on desktop computers in coming weeks.

"Before the Red Hat Summit in May, we will communicate advancements and plans in the JBoss and middleware space in the late April time frame," Szulik said. "In May at the Red Hat Summit, Red Hat will communicate its client and desktop strategy to customers and partners."

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