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Red Hat slips into the red

The Linux seller slips into the red and below analyst expectations for its most recent quarter but reports revenue growth and progress in selling its premium business products.

Red Hat said Tuesday that it slipped into the red and below analyst expectations for its most recent quarter, but the Linux seller reported revenue growth and progress in selling its premium products for business customers.

The company had a net loss of $56,000, breaking even on a per-share basis, on revenue of $25.9 million for its fourth quarter of fiscal 2003, which ended Feb. 28. Analysts surveyed by First Call expected net income of 1 cent per share on $26.8 million in revenue. The revenue was a 39 percent increase from the year-ago quarter's $18.6 million.

However, the Raleigh, N.C.-based company said more customers are adopting the premium Red Hat Enterprise Linux product line, which brings the company revenue for an entire year after purchase and not just in the initial quarter. Red Hat has been aggressively steering customers toward the premium line, which comes with support from hardware and software business partners and includes a subscription to basic Red Hat Network services.

"Revenue is light, and they missed our (earnings-per-share) number and street consensus," said Katherine Egbert, a securities analyst with C.E. Unterberg, Towbin. On the other hand, the number of shipments of Red Hat's premium Linux server product "looks strong," she added.

In a conference call, Red Hat Chief Financial Officer Kevin Thompson attributed the lack of profitability to unfavorable exchange rates in foreign countries, which cost the company $900,000 in the quarter, and to slower than expected sales of retail versions of the company's software, which meant that about $1 million in revenue didn't materialize.

Revenue for the current quarter, which ends May 30, is expected to be between $27 million and $27.5 million, about 4 percent to 6 percent higher than in the fourth quarter of fiscal 2003. That should be enough to push the company back into profitability, with earnings per share of 1 cent, Thompson said.

In the most recent quarter, the company sold 5,000 versions of its newly released Enterprise Linux WS version, which initially supported only Hewlett-Packard computers using Intel's Itanium 2 processor but which now is available for more mainstream Pentium and Xeon machines as well.

In addition, Red Hat sold 16,500 subscriptions to Enterprise Linux AS, formerly called Advanced Server, an increase over the 12,000 sold in the previous quarter. Red Hat is expecting a revenue boost when current Enterprise Linux AS customers re-subscribe for future years of support beginning in June.

The average selling price of the premium server product was about $650 per server per year, Thompson said, and Red Hat expects that figure to stay within a range of $600 to $800 for the current fiscal year. For customers seeking high levels of support, the average selling price increased to $1,000 to $1,100 per server per year, he added.

The premium workstation product has an average selling price of $100 to $125 per workstation per year, Thompson said.

New customers for the Enterprise Linux product line included AOL Time Warner, J.P. Morgan and Citibank, said Chief Operating Officer Tim Buckley.

More than 30 percent of customers who had bought lower-end versions of Red Hat Linux are upgrading to the Enterprise Linux line, Szulik said.

Red Hat stock closed at $6 on Tuesday, but sunk to $5.72 in after-hours trading.

Red Hat is the leading seller of the Linux operating system, according to market share analysts at IDC, but much of the money being spent on adoption of the Unix-like operating system is going to other companies. IBM and Hewlett-Packard, for example, claim to have earned $1.5 billion and $2 billion in Linux-related revenue in 2002.

Red Hat generated $3 million in cash from operations, the company said.

For the overall year, Red Hat's revenue increased 15 percent from $78.9 million in fiscal 2002 to $90.9 million in fiscal 2003, while its net loss decreased from $140.2 million to $6.4 million.

Sales of Red Hat's lower-end products should pick up in this quarter with the release of Red Hat Linux 9, the latest in the company's nonpremium products. With the availability of the premium Enterprise Linux line for conservative business customers, Red Hat has begun using its lower-end product as a tool to more rapidly advance the latest improvements from the open-source programming community.

Even though that product will boost Red Hat revenue, the company's attention will remain on the premium product, Chief Executive Matthew Szulik said in an interview. "You're not going to see any aggressive promotion with it," he said. Advertising and promotion might increase sales, but it also increases expenses "in a business that is not that interesting to the company," Szulik said.