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Red Hat delivers strong earnings in weak economy

While demand for its open-source products remains red hot, a drop in net income suggests that selling the Red Hat value proposition increasingly demands heavy lifting.

Update (8:13 PM on 3/25/09): Savio Rodrigues offers a more compelling reason than I do below for Red Hat's precipitous drop in net income: "interest income (on money sitting in bank) went from roughly $18 million down to roughly $5 million year-over-year." This follows on Rodrigues' excellent analysis of why Red Hat's net income is so far out-of-whack with its peers. Definitely worth reading.

Update (6:17 AM on 3/26/09): I heard back from Red Hat on the reason for the drop in net income. "The drop was due to both interest income down and the fact that we had a one-time gain last year on the sale of MySQL." Sorry for any confusion my misreading of the financial tea leaves may have caused. The drop in net income does not stem from heightened costs of selling due to the recession.

Red Hat's fourth-quarter earnings suggest that while demand for its open-source products remains red hot, selling the Red Hat value proposition increasingly demands heavy lifting as the economy worsens.

Red Hat reported a 27 percent drop in its net income over the same quarter last year, dropping to $16 million from $22 million. That's the bad news, as it suggests that Red Hat is having to spend more money to earn income.

The good news is that Red Hat profit beat analyst expectations, landing at 22 cents per share instead of the expected 20 cents per share, as Reuters reports.

The even better news is that revenue grew to $166.2 million, an 18 percent increase from the year ago quarter, but only 1 percent from the prior quarter. Of this revenue, subscription revenue accounted for $139.4 million, up 14 percent year-over-year and 3 percent from the prior quarter.

In the earnings call, Red Hat highlighted significant achievements, despite the challenging environment:

  • Billings exceeded $200 million;
  • More than 100 deals greater than $250,000;
  • Fiscal year 2009 revenue hit $652.6 million;
  • In fiscal year 2009, Red Hat notched 25 percent revenue growth, 24 percent non-GAAP operating income growth, and operating cash flow of $236 million;
  • The company ended its fiscal 2009 with cash and cash equivalents and investments of $846 million and essentially no debt;
  • Red Hat renewed 100 percent of its top 25 customers each quarter in fiscal 2009.

These are very impressive achievements. Along with Oracle and IBM and few others, Red Hat is demonstrating that it can swim upstream in a sluggish economic climate. The economy continues to separate wheat from chaff, and Red Hat clearly qualifies as the former.

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