Is Red Hat weathering the downturn better than Oracle?

Oracle and Red Hat both reported solid earnings this week, but Oracle's shares plummeted on fears of recession. Is open source the safer investment bet?

Both Red Hat and Oracle had excellent quarters, but Oracle's was apparently not "excellent" enough for Wall Street's tastes. Its shares and the market went south this week on fears that technology spending is in decline.

In addition, Wall Street apparently didn't notice that Red Hat actually raised its fiscal year 2009 guidance this week.

Consolidation is one way to improve earnings in a down market, but open source may well be a better way as The New York Times opined.

Oracle's total software revenue was up 21 percent, to $4.2 billion. Pretty good. Unfortunately, it was well under the 30 percent growth Wall Street was expecting.

More unfortunately, Oracle's third-quarter application license revenue only increased by 6.6 percent, to $451 million, which was well below the 30 percent growth ($553 million) that Wall Street expected.

As Sarah Friar explains in The Wall Street Journal,

...(C)ompanies typically buy such software when they are embarking on new projects and are likely to dial back such purchases in tough economic times.

But the same affliction isn't showing up in Red Hat's earnings. Red Hat's percentages were roughly the same. Red Hat's quarterly revenue rose by 27 percent over the fourth quarter and annual revenue in fiscal year 2008 was up more than 30 percent. Red Hat's numbers are much smaller compared with Oracle's, of course, but one thing that really stands out is its deferred revenue number, which was up 40 percent.

As I read that number, Red Hat is doing more longer-term deals. Basically, it's sitting on a growing mountain of cash that is just waiting for services to be performed before it can recognize that revenue. It means that Red Hat's future is demonstrably, tangibly bright.

Here are some salient facts from the Red Hat announcement:

Total revenue for the quarter was $141.5 million, an increase of 27 percent from the year-ago quarter and 5 percent from the prior quarter. Subscription revenue for the quarter was $121.9 million, up 27 percent year over year and 5 percent sequentially. For the full year, total revenue was $523 million, an increase of 31 percent over fiscal 2007 revenue, and subscription revenue was $449.8 million, up 32 percent from the prior year.

Oracle is projecting 10 percent to 20 percent sequential quarterly growth. Red Hat, too, needs to find ways to super-charge its growth. But for the moment, I think it's enough for the company to be demonstrating a flight to value in recessionary times. Investors may bemoan the fact that it's harder to mint money with an open-source company, but this may simply be a new reality for the software industry.

We had a few decades of anomalous growth when there was a mismatch between the economics of production and consumption (i.e., write once, manufacture an infinite number of my products for roughly zero cost, but charge customers steep prices as if the economics of digital production didn't exist). Open source and the Web are going to bring things back into alignment.

For now, Oracle is a good bet in the stock market. If any company is going to weather the recessionary storm, I'm betting it will. But for those with a longer-term view on the software industry, it would be wise to bet on open source.

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