December 22, 2004 2:57 PM PST

Red Hat pulls out a profit

Linux seller Red Hat reported on Wednesday that its third-quarter net income jumped 155 percent year-over-year to $10.8 million as its software business matured.

That income meant the company earned 6 cents per share for the fiscal third quarter ended Nov. 30, matching the average expectations of analysts surveyed by Thomson First Call.

Red Hat also announced quarterly revenue of $50.9 million, an increase of 55 percent over the same period last year, but less than the $51.8 million analysts expected.

The Raleigh, N.C., company's stock closed at $15.07 on Wednesday, but in after-hours trading dropped 49 cents, or 3 percent, to $14.58.

Red Hat, a top advocate of the collaborative open-source programming philosophy, competes chiefly with Novell, Microsoft and Sun Microsystems. Its software is used mostly on powerful networked computers called servers, but the company is expanding to desktop computers as well.

Red Hat sold 132,000 subscriptions to its Red Hat Enterprise Linux product in the quarter. Of those, 119,000 were for use on business servers and 13,000 were for technical computing clusters or Web sites. Cluster and Web customers typically buy software in higher volumes and pay less per copy.

However, that wasn't as many subscriptions as the company hoped. "We expected the unit volume to be higher," Chief Executive Matthew Szulik said in a conference call. The reason: Red Hat wasn't willing to yield on price just to close a deal by the end of the quarter.

The company will continue to report quarterly subscription tallies, but because of a change to daily rather than monthly recognition of that revenue, Szulik believes revenue is a better measurement of success. "If (a sale) occurs on the 29th of November, there is no material impact to our revenue," he said in a later interview. "Why do something economically foolish to satisfy a near-term metric for Wall Street?"

Szulik preferred to tout deferred revenue--the subscription money that customers have pledged to pay but that Red Hat hasn't yet recognized. Deferred revenue increased to $121.4 million in the quarter, a 22 percent increase of $99.7 million from three months earlier and a 170 percent increase from $45.1 million from the year-earlier quarter.

Red Hat now includes desktop Linux subscription sales within its tally of shipments for high-performance computing and Web site sales. Although that number wasn't high, Red Hat did announce one new customer for desktop software, Riu Hotels and Resorts.

In its earnings announcement, Red Hat said it had expanded its work force by 10 percent to 800 over the quarter, chiefly by hiring new sales and support staff in an international expansion.

The company is aggressively seeking a stronger Indian presence, with support for languages used in India, 55 local software development partners and 100 authorized training partners, Szulik said.

Next on the agenda is China, where Red Hat just opened a Beijing office. In a November visit to China, company representatives met with Chinese Linux seller Red Flag, Szulik said.

"We tried to figure out what is the size of the Linux marketplace, what are the distribution channels, what is the market opportunity," Szulik said of the Red Flag visit. "We really went there to explore. How big is Red Flag really?"

 

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