Red Hat narrows loss, meets estimates

The company reported a loss of $4.3 million, or 3 cents per share. Excluding unusual charges, Red Hat had a net loss of $829,000, breaking even on a per-share basis and meeting the estimates of analysts surveyed by First Call.

Red Hat's revenue declined 7 percent, from $21.4 million in the year-ago quarter to $19.5 million for the first quarter of fiscal 2003, ended May 31. Sequentially, the company's revenue increased 5 percent compared with the quarter ended Feb. 28.

The revenue beat expectations from Thomas Weisel Partners' Sanjay Puri, who predicted $19 million, and SoundView Technology Group, which predicted $19.1 million.

Red Hat's larger-than-expected revenue is "no real big upside surprise, nothing that would get us to change our view," said SoundView Technology Group analyst Victor Raisys. "At these levels, we think the stock is overvalued."

The company's top priority is to persuade more software companies to make sure their products work well with Red Hat Linux, Chief Executive Matthew Szulik said on a conference call. "Applications, applications, applications," Szulik said, in an allusion to Microsoft CEO Steve Ballmer's exhortations to focus on "developers, developers, developers."

Red Hat faces more competition from Microsoft's Windows and Sun Microsystems' Solaris operating systems than it does from competitors such as SuSE and Caldera International. Those other Linux companies have banded together in an effort called UnitedLinux, but analysts don't expect the move to hamper Red Hat's dominance.

Linux, a clone of the Unix operating system, began as a hobby nearly 11 years ago but has become a serious software product backed not only by Linux companies but also computing giants such as Intel, IBM, J.D. Edwards, Oracle and Veritas.

Red Hat is focusing on big-business customers, in particular trying to persuade them to exchange their Sun servers running Solaris with Linux servers using Intel processors. That "enterprise" segment of Red Hat's business increased 8 percent sequentially, the company said.

At the end of the last quarter, Red Hat introduced its Advanced Server version of its software, which changes less rapidly than the company's other products, costs more, and comes with higher-end features to help keep computing services up and running even when individual servers get overloaded or crash.

Red Hat has embarked on an effort to persuade its high-end customers, including Credit Suisse First Boston, to move to the new version, Thompson said.

"Red Hat continues to execute financially, technically and operationally to build a sustainable, global business," Chief Financial Officer Kevin Thompson said in a statement.

Migrating to Linux provides "tangible savings for companies in terms of hardware, software and support costs," said Goldman Sachs financial analyst Thomas Berquist in a report last week. Many companies, though, aren't making the move now because of the spending and technical problem solving such migrations require.

Indeed, spending by corporate customers is tough. "The information technology spending environment remains tight," said Chief Operating Officer Tim Buckley. The company expects revenue for the second fiscal quarter to increase to a range of $21.8 million to $22.4 million, Thompson said on the conference call.

"We expect to generate positive cash flows for the second quarter," Thompson said. "We think we're going to have a good quarter."

Red Hat, which gets half its revenue from services, will face a challenge in regard to increasing its profitability given that services typically require many employees and therefore are an expensive operation, Raisys said. In addition, IBM, including its gigantic Global Services division, is pushing hard to make money from Linux.

Red Hat's gross margins stayed about level at 63 percent, with enterprise sector gross margins at 66 percent, Red Hat said.