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2HRS2GO: Red Hat model is old hat

You know you're living in a new world of business when you hear a CEO describe revenues as "earnings" and a CFO use "net losses" as "net income" interchangeably.



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Presumably they were just slips of the tongue by Red Hat CEO Bob Young and CFO Manoj George during today's quarterly conference call. "I should point out an idiosyncracy, a bad habit we have around Red Hat, of taking a short cut," Young said in "explaining" George's notes. "When we refer to earnings per share or income, because we've been very clear in our planning that we intend to invest in a wide variety of infrastructure and expansion purposes, Manoj's numbers were actually losses per share and total losses, just to be very clear on that point."

No one bothered to correct Young's earlier mistake.

At any rate, the fact that Red Hat habitually confuses income and losses does reflect the attitude of people surrounding new tech companies: top line growth matters, profit doesn't. Given that Red Hat's organization building yielded gross margin percentages down by nearly half year-over-year, you can see why the company didn't spend much time focusing on the bottom line.

But it is a new world as far as Red Hat is concerned. "We are building the operating system platform for the 21st century," Young said.

Hmm. And here I was naive enough to think that it was the community of unpaid Linux developers building the OS that Red Hat distributes.

This morning's Red Hat discussion made it easy to understand why the Linux grassroots folks are becoming leery of Red Hat. Not once did the Red Hat get tipped in the direction of the larger developer community, although Young did mention them in passing at the very end of the conference call; if you had never heard of Linux until listening to Red Hat executives today, you would have come away with the impression that Red Hat owns Linux.

"We are extremely well positioned to provide all of those to the marketplace," Young said. "We plan to build in our rapidly marketshare, our leadership in the open source space."

But this is an open source OS, so plenty of sources offer the same no-cost product. Leadership comes from the package surrounding the system.

That's why Red Hat ultimately expects much of its corporate revenue coming from services such as training and consulting. "We're very much in the services and support business," Young said "In effect we give away the software in our product and we end up with a very big opportunity to make that software work for our customers' applications, in effect, turning what amounts to some very sophisticated and very large server technology into great solutions both for our customers and the customers of our partners."

Services, support, solutions. This isn't so much a software company as it is IBM Global Services, Andersen Consulting, or the Digital business acquired by Compaq. Some of those groups are Red Hat partners, but the company admitted there is overlap.

So perhaps it's not such a new world at all, which could be why the stock is falling today. Technicians would point out the stock was due for a fall, considering its climb since the IPO. But from an investment point of view, it's also hard to justify a high value for anything in the not-so-new field of IT services, let alone a small company not expected to post earnings (that's earnings, not revenues) for the next several quarters.

Other issues:

  • Motorola Inc.
  • (NYSE: MOT) The wireless equipment maker landed a $250 million deal to provide handsets for Sprint PCS. Hope Motorola can deliver them on time.

  • Fairchild Semiconductor International Inc.
  • (NYSE: FCS) Taiwan has put a damper on the most of the chip sector, but Fairchild's punishment today is unfair, since it has no Taiwanese manufacturing operations. Besides, the company just reported strong first quarter results.

    CS First Boston -- having carried out its underwriter duties perfectly by setting the initial bar low enough to make Fairchild look stellar -- today more than doubled its fiscal 2000 earnings estimates to $1.20 per share from 57 cents. CS First Boston analyst Tim Mahon also boosted his Fairchild price target to $36 from $32 and reiterated a "strong buy" rating.

    Market indices were higher in the afternoon. The Nasdaq Composite Index was up 25.00 to 2846.10, the S&P 500 higher by 6.84 to 1314.42, and the Dow Jones Industrial Average up 5.07 to 10603.54. 22GO>