Red Hat beats analyst estimates

The seller of Linux software and services beats analyst estimates for the third quarter by a penny, posting revenue of $22.4 million.

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Stephen Shankland
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Red Hat, a seller of Linux software and services, beat analyst estimates for the third quarter by a penny Thursday, posting revenue of $22.4 million and an adjusted net loss of 1 cent per share.

Analysts surveyed by First Call/Thomson Financial had expected a loss of 2 cents per share for the company's third fiscal quarter, which ended Nov. 30.

Revenue increased 112 percent from $10.5 million in the year-ago quarter to $22.4 million, while the company's net loss slimmed from $5.4 million to $900,000, the company said.

Including expenses such as amortization of goodwill, stock-based compensation and merger and acquisition costs, Red Hat had a net loss of $21.4 million, or 13 cents a share.

Red Hat hasn't been affected by the slowdown in PC sales that has afflicted Dell, Compaq, Intel, Microsoft and others, chief executive Matthew Szulik said in an interview. Red Hat is insulated from those woes because customers are adopting Red Hat software in favor of more expensive competing products, Red Hat has revenues from all parts of the globe and from several product categories and the popularity of Linux means the company has lower sales expenses.

Durham, N.C.-based Red Hat, Caldera Systems and VA Linux Systems are established Linux companies, each trying to use the popularity of the open-source operating system to carve a niche in the computer industry.

Linux, which is available for free or at a very low cost, is rapidly spreading in popularity, yet that acceptance hasn't translated into instant wealth for Linux companies.

In addition, as Linux becomes more mainstream, it has drawn more attention from established companies such as IBM. Big Blue this week said it will spend $1 billion on Linux development in 2001.

In a conference call, chief operating officer Ken Buckley said Red Hat has won over customers previously using Unix computers, including data storage giant EMC, pizza chain Papa John's and AutoZone. Unix, of which Linux is a clone, exists in different versions from Hewlett-Packard, Sun Microsystems, Compaq, IBM and others.

Red Hat's relationship with Dell Computer has helped Red Hat revenue as well, the company said. A Dell Linux server sale typically means $800 to $900 in revenue for Red Hat, the company said, and Dell has become the fifth-largest Unix or Linux server seller, market research firm International Data Corp. said Wednesday.

Red Hat has been a part of Dell server sales to NASA, Ford Motor, Lockheed Martin, Synopsis and Ariba, chief operating officer Tim Buckley said in a conference call.

Red Hat is edging closer to profitability. Chief financial officer Kevin Thompson predicted that the company's operations will earn more money than it spends in the first quarter of calendar 2001. In the full fiscal year 2002, which begins in March, the company expects to have after-tax net income of $7.6 million.

ABN AMRO analyst Keith Bachman said in a report Tuesday that he has "many concerns" about Red Hat.

"We want to see more evidence that companies are interested and willing to pay for the Red Hat Network," a subscription service in which customers pay for automatic updates to their software, Bachman said.

"While we feel the Red Hat Network is a good strategy, we also feel that it could take a few quarters for Red Hat to realize a significant financial impact."

In the third quarter, the company earned significant revenue from the market for non-PC "embedded" computing devices. Among other deals, Red Hat won a $1 million contract to translate programming software to the Samsung Calm line of low-power chips.

Gross margin, a measure of profitability, improved to 60 percent from 41.5 percent in the year-ago quarter, the company said.

The Red Hat Network currently has 60,000 users, but no revenue will be generated until February 2001, when the Red Hat ends the free trial period, the company said.

Szulik said the Red Hat Network will become vastly more important to the company as it adds more support options to the service, including the ability to manage Red Hat software running on IBM's zSeries (formerly S/390) mainframes. Eventually, Red Hat hopes to offer many sophisticated services through the network, taking over more and more information technology duties.

The company also is expanding its international push. There are 165 sales and support personnel outside the U.S. now, the company said, and the Asia-Pacific region accounted for $5.9 million of the company's revenue this quarter. In fiscal 2002, about 30 percent of Red Hat's revenue will be from international business, the company predicted.