Some people still seem to find it a mystery how one can make money from open-source software. The answer is no further away than leading Linux company Red Hat, which announced outstanding financial results for its second fiscal quarter ended August 31, 2007.
The total revenue for the quarter was $127.3 million, an increase of 28 percent from the year ago quarter and 7 percent from the prior quarter. Subscription revenue was $109.2 million, up 29 percent year-over-year and 6 percent sequentially.
If you are a Red Hat share holder, your company realized net income for the quarter was $18.2 million, or $0.09 per diluted share. That up from last quarter's $16.2 million, or $0.08 per diluted share, and $11 million, or $0.05 per diluted share, in the year ago quarter.
Non-GAAP (Generally Accept Accounting Principles) adjusted net income for the quarter was $36.9 million, or $0.17 per diluted share, after adjusting for stock compensation and tax expense. This compares to non-GAAP adjusted net income of $33.7 million, or $0.16 per diluted share, in the prior quarter and $24.5 million, or $0.12 per diluted share, in the year ago period.
During a press call, Red Hat CEO Matthew Szulik announced that the company would be changing its business structure. This is being done so that Red Hat's can move away from being just a Linux company to a full-service open-source enterprise software and services provider.
On October 1st, the company will split into three sections. These are infrastructure, the core Linux business; middleware, its JBoss middleware lines and online services, which will be the company's service lines. Each will have its own general manager who will be compensated on the profitability of his or her business, Szulik said. General managers will also be responsible for product marketing.
This move may have been, in part, because Szulik, and some financial analysts, have been disappointed. Szulik said he wasn't happy with JBoss revenue.
"The rate of JBoss bookings and revenue to date has not met our expectations," Szulik said. "The company expected it to grow at twice the rate its core RHEL business has, but so far, it's about the same. We know we can do much better [and] we will accelerate JBoss growth in the second half of the fiscal year."
In June of 2006, Red Hat acquired JBoss for $420 million. JBoss founder Marc Fleury left Red Hat earlier this year.
It also appears that Tim Yeaton, Red Hat's senior vice president of worldwide marketing, is leaving Red Hat. The rumor mill at Red Hat has it that he is moving to a start-up. He will be replaced by Michael Chen, who will assume the title of vice president of corporate marketing.
While JBoss may not be doing as well as Red Hat would like, the company's non-GAAP operating cash flow, which totaled $63.7 million for the quarter and up 43 percent from the year ago quarter and 22 percent sequentially, is nothing to sneeze at. Red Hat's total cash, cash equivalents and investments as of August 31, 2007 were $1.3 billion. At quarter end, Red Hat's total deferred revenue balance was $377.0 million, an increase of 33 percent year-over-year and 4 percent sequentially.
How did this happen? In part, it was because Red Hat continued to build its ecosystem by having more than 3,000 applications certified on RHEL (Red Hat Enterprise Linux). While exact numbers of competitors are unavailable, sources close to Red Hat said that they believed that this is well above the number of applications that are certified for Novell's SUSE (SUSE Enterprise Linux Server), the number two business Linux server distribution.
Red Hat also recently released JBoss Enterprise Application Platform 4.2, an enterprise-ready platform on which to migrate legacy applications to an open source architecture. Another factor is that Red Hat managed to cut costs at the same time it was growing its overall bottom line.
"We are pleased to report another solid quarter of strong revenues. I am particularly pleased with the steady improvement in operating margin and operating cash flow. These performance improvements come at a time when we are continuing to invest heavily in our processes and systems as we scale globally," said Charlie Peters, Red Hat's executive vice president and CFO during a press conference. "We continue to see robust demand for our open source solutions and are encouraged by our market position."
In addition, Red Hat today announced that its Board of Directors had authorized the continuation of the Company's stock and debenture repurchase program. Under the program, the Company is authorized to repurchase in aggregate up to $250 million of the Company's common stock and in aggregate up to $75 million of the Company's 0.5 percent Convertible Senior Debentures due 2024.
A company buying back it own stock is usually seen as a vote of confidence in the business' future by its board and executives.
—Steven J. Vaughan Nichols
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