Red Hat revenue jumps 32 percent in Q1

Red Hat continues to impress with strong financial performance, delivering an impressive Q1 2009. Not bad when you consider the company gives away its products for free.

Red Hat pulled in $156.6 million in its Q1 (fiscal year 2009), a 32 percent increase over Q1 2008 and 11 percent growth over Q4 2008. Red Hat's operating income was also up 33 percent over the same quarter in 2008. But it's perhaps the deferred revenue (i.e., subscriptions and other services booked but not yet recognizable as revenue because they have yet to be delivered) that is most impressive: Up 36 percent to $491.8 million.

Clearly, Red Hat is doing something right. Many things right, in fact.

I asked the company specifically about JBoss performance, as rumors have swirled that JBoss has lagged under Red Hat's guidance. Quite the opposite. While there were initial hiccups in bringing the JBoss brand under the Red Hat umbrella, the unit is firing on all cylinders now, contributing a healthy amount to the Red Hat top and bottom lines. Red Hat wouldn't give specific numbers, but I heard the JBoss confidence from a range of different sources within Red Hat.

What about the cost side of the equation? Here there is perhaps even more cause for optimism, but also a creeping concern.

Interestingly, Red Hat increased R&D costs by 33 percent (to $28.9 million), which dragged on its profit. Presumably this rising R&D cost will pay off in increased sales down the line, which seems to already be in swing as Red Hat reported that existing customers are deepening their financial commitments to the company.

Of concern? It's costing more to hit Red Hat's numbers. Sales and marketing expenses jumped to $59.3 million, an increase of 28 percent. Red Hat long ago stopped relying on incoming leads fed by open-source downloads. Can it keep bookings and profit out in front of the increasing costs of selling a more complex, diversified product suite? This remains to be seen, but I suspect that it will take some time for Red Hat to perfect the art of selling middleware alongside its operating system, something that competitors like Oracle seem to have figured out a long time ago.

Red Hat has time. Red Hat CEO Jim Whitehurst has indicated he intends to focus the company on operational excellence with its existing product line before making any forays out into applications, which might load Red Hat's costs even higher. But as Oracle, Microsoft, and IBM increasingly vacuum up IT dollars with their expansive product portfolios, Red Hat will arguably need to start to respond at some point in order to avoid being squeezed out of deals.

Indeed, Whitehurst perhaps hinted at this in his comments to Reuters:

We see strength across the board internationally and across the country. There's so much opportunity in the developing world for us. We are fighting a bit of an upward battle in the developed world, where there are established players.

Guess what? Each of the major software vendors is seeing growth in developing markets. Oracle has found a way to also win in developed markets: Buy beachheads into new customers by buying adjacent products to its database and other products. John Donne once speculated that "No man is an island, entire unto himself," and the same holds true for software vendors: "No software company can be an operating system, entire unto itself."

Today's market demands an ecosystem, a suite. While I don't know that Red Hat should be charging into applications any time soon, complementary products like Hyperic's IT management tools, MuleSource's enterprise service bus, Puppet's IT automation product, etc. make sense.