| Is Red Hat in trouble? |
Sep. 27, 2006
Red Hat Inc's total revenue for its fiscal 2007 second quarter may have grown, but when the second-quarter profit slipped 34 percent because of stock compensation expenses, the stock-market had a fit and Red Hat's stock dropped 23.21 percent to $20.21 a share.
Was the news really that bad? It doesn't look like it was that awful.
Red Hat's total revenue for the quarter was $99.7 million, an increase of 52 percent from the year-ago quarter and 19 percent from the prior quarter. Subscription revenue was $84.9 million, up 56 percent year-over-year and 19 percent sequentially. JBoss-related revenue of $7 million was at the top of management's previously provided guidance. Red Hat Enterprise Linux OEM (original equipment manufacturer) revenue grew 90 percent year-over-year.
The net income for the quarter was $11.0 million or $0.05 per diluted share, compared with $16.7 million or $0.09 per diluted share for the second quarter of the last fiscal year. Due to differences in the accounting treatment for taxes and stock compensation expense between fiscal 2006 and 2007, net income is not directly comparable between these periods. After adjusting for these accounting differences, non-GAAP (Generally Accepted Accounting Principles) adjusted net income for the second quarter of fiscal 2007 was $23.7 million, or $0.11 per diluted share. This compares to non-GAAP adjusted net income of $17.7 million, or $0.09 per diluted share in the second quarter of the last fiscal year.
"Our better than expected revenue and earnings per share speak to the ongoing demand for open source solutions that we continue to see worldwide," said Dion Cornett, VP of investor relations. "Moreover, the particular strength we saw in hardware OEM revenue growth stands in stark contrast to the reported weakness experienced by server suppliers this past quarter."
"The second quarter was one of intense focus on integrating our recent acquisitions in Argentina, Brazil, India, and, of course, JBoss," stated Charlie Peters, Red Hat's executive VP and CFO. "We are pleased with the pace and progress of our integration work and believe that results in subsequent quarters will benefit from the investments in employee time and expense made in Q2. Revenue grew nicely and we expect the recent introduction of the [Red Hat Application Stackstory] will help continue that trend. We expect operating results and cash flow will improve in the second half of fiscal 2007 since much of the heavy integration work is behind us already."
All true, based on the numbers, but the market had expected more, much more, from Red Hat.
The problem, according to Illuminata principal IT adviser Gordon Haff, was that "From Wall Street's perspective, Red Hat's sin is that they didn't continue to walk on water. When expectations are as high as they've been set for a company like Red Hat, it's hard to keep pleasing. By more rational standards, Red Hat is still growing quite nicely -- albeit more on the top line than the bottom one."
Tim Klasell, of Thomas Weisel Partners, an investment bank specializing in the growth sectors of the economy, admitted that while Red Hat's customer "bookings exceed our estimates," he was disappointed with the cash-flow.
"What happened to cash flow?" Klasell asked. "The most important metric for Red Hat, cash from operations, was $43.9-million in the quarter, down from $52.3-million in the previous quarter and below our estimate of $53-million."
Still, that's not that big a deal. Klasell went on, "While we believe this will most likely cause some investor concern, we note that $6-million of the shortfall was due to a rise in DSOs (Days Sales Outstanding, a measurement of the time it takes to turn receivables into cash) from 52 to 58 due to the assumption of J-Boss receivables, which have a longer duration." In short, "We do not believe it should be interpreted as a leading indicator for a major slowdown in business."
Jason Kraft, an analyst with Susquehanna Financial Group, a financial institution, however, sees Red Hat's second-quarter results as having "showed a deceleration in its core business." Therefore, "For us to get interested in RHAT shares, we need either to gain comfort of an acceleration in the core business to pay a premium multiple over cash flow growth, or wait for the shares to pull back once investors have acknowledged that Red Hat's maintenance stream (Linux subscriptions) should be intrinsically valued less than it is currently. For now, we remain on the sidelines."
Raven Zachary, open-source senior analyst and practice head for The 451 Group, an independent technology industry analyst company, doesn't see any slow-down in Red Hat's, or enterprise Linux, growth. "There is still considerable opportunity for growth. We have to remember that adoption comes in phases -- we may be reaching a slow period during this phase. As deployments expand, as new customers consider migrations, and as old systems are EOL'ed (end-of-lifed), we will see more movement."
That said, "The other important point to consider here is that as enterprise customers become more comfortable with Linux, they have a greater willingness to use alternative distributions, especially when it comes to non-production systems. We are seeing some mix and match deployments in the enterprise, and this may have an impact on both Red Hat and Novell's projections," said Zachary.
Haff agreed that as enterprises become more comfortable with running Linux without have their hands held by a major Linux distributor, non-enterprise distributions like Ubuntu and Debian are getting business attention.
"Pricing pressure could well accelerate. We see, for example, increased interest in Debian and other 'community' distributions. This reflects the increasing maturity of Linux and, therefore, less of a perceived need for premium 'Enterprise' product for some types of uses.
-- Steven J. Vaughan-Nichols
Do you have comments on this story?
Talkback here
NOTE: Please post your comments regarding our articles using the above link. Be sure to use this article's title as the "Subject" in your posts. Before you create a new thread, please check to see if a discussion thread is already running on the article you plan to comment on. Thanks!
(Click here for further information)
|
|
|
7 Advantages of D2D Backup
For decades, tape has been the backup medium of choice. But, now, disk-to-disk (D2D) backup is gaining in favor. Learn why you should make the move in this whitepaper.
4 Legal Reasons to Control Internet Access
The Internet is obviously a valuable resource for many organizations. However, many are exposed to legal liability concerns because they fail to control Internet access. Learn if you're safe in this white paper.
Rapidly Resolve J2EE Application Problems
Whether you are in the process of building J2EE applications or have J2EE applications already running in production, you must ensure that they deliver the expected ROI. Learn how in this white paper.
Load Testing 2.0 for Web 2.0
There are many unknowns in stress testing Web 2.0 applications. Find out how to test the performance of Web 2.0 in this white paper.
Build Better Games Online
For the game infrastructure providers, life is complex. Making money from games has become more complicated. Why? Find out in this white paper.
Building a Virtual Infrastructure from Servers to Storage
This white paper discusses the virtual storage solutions that reduce cost, increase storage utilization, and address the challenges of backing up and restoring Server environments.
Gaining Faster Wireless Connections with WiMAX
Welcome to what is quickly becoming the hyperconnected world where anything that would benefit from being connected to the network will be connected. Learn more in this white paper.
Is Your Desktop a Security Threat?
The new wave of sophisticated crimeware not only targets specific companies, but also targets desktops and laptops as backdoor entryways into those business’ operations and resources. Learn how to stay safe in this white paper.
Increasing SAN Reliability by 100 Percent
Storage area networks (SAN) are a strong part of storage plans. Learn how to increase your reliability and uptime by 100 percent in this case study.
|
|
|
|
|
news feed