| Red Hat posts gaudy Q4 gains |
Mar. 28, 2006
Red Hat Inc.'s fourth-quarter earnings report, which ended February 28, can be described in one word: great.
The Raleigh, N.C.-based company reported that its annual subscription revenue was up 53 percent from the prior year, while quarterly cash flow was up 64 percent from the prior year, with quarterly operating income up 165 percent year-over-year.
The total revenue for the quarter was $78.7 million, an increase of 37 percent from the year ago quarter and 8 percent from the prior quarter. Of that, subscription revenue was $66.7 million, up 44 percent year-over-year and 11 percent sequentially. For the full fiscal year, 2005, Red Hat's total revenue was $278.3 million, an increase of 42 percent over fiscal 2005 revenue, and subscription revenue was $230.4 million, up 53 percent from the prior year.
The company reported operating income of $19.8 million for the quarter and $58.1 million for the year, representing increases of 165 percent over the fourth quarter of fiscal 2005 and 116 percent over the full fiscal year 2005. Net income for the quarter was $27.3 million, up 131 percent year-over-year and 18 percent sequentially.
The quarterly gross margin improved to 84 percent from 81 percent in the year ago period. At the same time, quarterly operating margin improved to 25 percent versus 13 percent in the year ago period.
For the full year, net income rose 75 percent to $79.7 million over the prior fiscal year. The earnings per diluted share more than doubled to $.13 for the fourth quarter, versus $.06 in the year ago quarter.
These highly positive numbers are based in part on Red Hat holding on to its top customers. Matthew Szulik, Red Hat's CEO, said that out of the company's 100 biggest support contracts, 99 out of 100 have renewed during the year.
At year end, Red Hat's total deferred revenue balance was $223.5 million, an increase of 63 percent on a year-over-year basis and 12 percent sequentially. At the end of the fiscal year, the company's total cash, cash equivalents, and investments as of Feb. 28, 2006 were $1.1 billion.
"This past year's results affirmed our ability to scale for growth," said Charlie Peters, Red Hat's executive VP and CFO. "Margins continued to expand even as we built out our infrastructure through investments in headcount and systems."
Specifically, Szulik said that Red Hat would be hiring about 100 more employees per quarter going forward. Most of these will be in engineering, sales, and marketing. At this time, the company has 1,200 employees.
Red Hat is still growing its business, and it expects to be doing so for several years to come. Eventually, Peters said, Red Hat hopes to focus more on increasing its profit margin to Oracle-like levels (40 percent), but for now, the focus is growth -- both in terms of head count and with improving its own IT infrastructure.
Dion Cornett, Red Hat's VP of investor relations, said: "We are pleased to report continued market momentum. Fiscal year 2006 was a great year in that we outgrew leading industry analysts' estimates for Linux market growth and substantially outpaced rivals, thus implying continued market share gains."
In short, not only is Linux gaining market traction in general, but within the Linux market, Red Hat is getting the lion's share of customers.
Additionally, Red Hat is continuing to gain customers from Unix. OpenSolaris on AMD Opteron, according to Cornett, has not had an impact on Red Hat sales.
However, it's not just that Linux is taking what Unix once had. Szulik said that ISVs (independent software vendors) are now targeting Linux, so customers are now buying Linux systems on which to run applications. In addition, Linux is beginning to grow in the SMB sector. Finally, customers are building their own internal applications with Linux.
"Customers who five years ago claimed that they'd never build around the LAMP (Linux, Apache, MySQL, PHP/Perl) stack are now doing just that," said Szulik.
Szulik also said that Red Hat is now beginning to win Windows customers from the non-U.S. markets. With Vista's delays, he also expects domestic Windows users to start switching to Red Hat.
Red Hat also expects virtualization to eventually become a very profitable business. Peters, however, pointed out that virtualization must be done carefully to be successful. "It will be a complicated matter for large enterprise customers," he said.
In other words, it will be a while before Xen virtualization's growth has a measurable positive impact on bottom line.
-- Steven J. Vaughan-Nichols
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