Red Hat revenue, profits ratchet upward

The top Linux seller continues its steady growth, but some see bumps in the JBoss server software road.

Update: I added some detail about Red Hat's disappointment with JBoss revenue and executive changes.

Red Hat reported another quarter of reasonably steady financial growth on Tuesday, with net income that grew 12 percent to $18.2 million and revenue that grew 28 percent to $127.3 million.

Excluding stock-option compensation and other factors, net income was $36.9 million, or 17 cents per share, meeting the average expectation of analysts surveyed by First Call. Revenue was a smidgen above their estimate of $125.1 million, and its stock rose 77 cents, or 4 percent, to $19.66 in after-hours trading.

This isn't generating piles of money on the scale of Microsoft, but the Redmond, Wash., rival might take note of Red Hat's capitalistic advances before further declarations that "the open-source development model has yet to demonstrate the ability to support profitable software businesses that can drive the coordinated research and testing necessary to sustain innovation."

The company sells support subscriptions to its Red Hat Enterprise Linux operating system and, more after an acquisition in 2006, to its JBoss open-source Java server software. Of Red Hat's revenue for its second quarter of fiscal 2008, which ended August 31, $109.2 million was from subscriptions, a 29 percent increase.

However, not all believe the JBoss deal is going swimmingly. Credit Suisse analyst Jason Maynard downgraded Red Hat from "outperform" to "neutral" Monday. "We believe our thesis of improved field execution and meaningful JBoss acceleration won't materialize and deliver the anticipated upside to our forecast," he said. "Our checks indicate that the organization continues to be in a state of flux as the company struggles through its transition to a multi-product company."

In a conference call Tuesday, Chief Executive Matthew Szulik said he wasn't happy with the JBoss revenue, either.

"The rate of JBoss bookings and revenue to date has not met my expectations," he said. The company expected it to grow at twice the rate its core RHEL business has, but so far, it's about the same. "We know we can do much better...We will accelerate JBoss growth in the second half of the fiscal year.

Red Hat also has changed its marketing. The former vice president of corporate marketing, Tim Yeaton, is no longer with the company, Szulik said in an interview. His successor is Michael Chen, who spent the last three years setting up Red Hat's Chinese operations.

In sales, marketing and finance, Red Hat over the past two years has moved to a more decentralized model in which regional general managers are responsible for their respective areas.

In the technology realm, Red Hat is making further changes, dividing operations into three areas: infrastructure such as file systems and the operating system, middleware such as JBoss, and online work such as the Red Hat Exchange software partnerships. The latter is led by Donald Fischer, Szulik said, and the other executives probably will be announced in the next 30 days.

Red Hat generated $63.7 million in cash flow from operations, with total cash and cash equivalents now at $1.3 billion. Red Hat might dip into that reserve though: the Raleigh, N.C.-based company said its board authorized spending up to $250 million to repurchase stock and debentures.