Red Hat subscriptions beat expectations

LAS VEGAS--Red Hat's renewal rate for support subscriptions to its high-end Linux product was more than 90 percent in the company's most recent quarter, well above the 75 percent rate the company tells analysts to expect.

The Raleigh, N.C.-based company sells its Red Hat Enterprise Linux operating system software as an annual subscription that includes updates and technical support. A key measurement for the success of the company's model is how often customers renew their subscriptions. Red Hat began the RHEL subscription plan last year in an attempt to convert the popularity of Linux into profitability, which had eluded the company.

Red Hat signed up 500 new customers and shipped 26,000 Linux packages in the latest quarter, which ended in August, Chief Financial Officer Kevin Thompson said Tuesday during an interview at the Comdex trade show here. Thompson also provided information on the renewal rate for Red Hat's annual subscriptions.

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RHEL costs can vary widely. For $349 per year, a customer gets a version to run on a server with two Intel Xeon processors, as well as technical support during business hours. For $2,499 per year, a customer can run the software on a four-processor machine with round-the-clock support, while $18,000 annually permits use on an IBM zSeries mainframe with round-the-clock support. Red Hat has been aggressively pushing customers toward RHEL from the previous Red Hat Linux product line, for which technical support is ending soon.

Red Hat also gives away a version called Fedora Core, which changes quickly to satisfy enthusiasts but includes only short-term support. The split in the product line has irked some customers accustomed to Red Hat's previous practice of providing free products and support.

Red Hat had to modify its RHEL strategy once, introducing a lower-priced version called RHEL ES for dual-processor Intel-based servers. The higher-priced RHEL AS product works on machines with four or more processors and on several other server types: IBM's pSeries Unix servers, iSeries midrange servers, zSeries mainframes and systems using Intel's Itanium chip or Advanced Micro Devices' Opteron chip.

Before introducing ES, Red Hat had already effectively offered the version by offering deep price discounts on AS, Thompson said, but that applied only in situations in which Red Hat sold software directly to customers. "We could do that directly, but the channel couldn't."

Sales partners Dell, IBM and Hewlett-Packard are now beginning to pick up the ES products, Thompson said.

Red Hat also sells a version of RHEL called WS for workstations. With the lowest annual subscription cost, it's the version often used on clusters of servers joined to form a large supercomputer. When Red Hat ships large quantities of WS for such uses--for 3,000 or so servers--it discounts the product from $299 per year to about $99 per year, Thompson said.

The discount is a financially sound choice for Red Hat, because the software is typically identical on each node of the cluster, making management much simpler and support much cheaper than for a typical installation, he said.

Red Hat's challenge now is to put its new revenue to judicious use, such as investing in a new call center in Australia to support Asian customers. The company can't simultaneously tackle major new initiatives such as pushes into China, the embedded computing market or desktop computer software, he said.

Linux became a business product for use on servers, but Red Hat has begun work to make it a better desktop operating system as well.

"We're seeing more of a desire on the part of customers to have a conversation" about desktop Linux, Thompson said. "It's not turning into money, but we weren't having those conversations 15 to 18 months ago."

Thompson also said he isn't worried about the Linux plans of Novell, a server software seller whose star faded after losing the market to Microsoft. Novell announced a plan earlier this month to acquire SuSE Linux for $210 million by January.

Red Hat believes Novell's arrival in the Linux market will boost the operating system overall and that Red Hat hopes to profit from it.

"Novell has some advantages SuSE doesn't have which will make them better: They have cash and a channel," Thompson said.

Thompson said he hopes Novell will open the source code of its server software, in particular its directory software for recording data such as username-password pairs, printer network addresses or employee telephone directories. Making those programs open-source software would make open-source allies a more effective competitor with Microsoft, he said.

Novell declined to comment on its plans. "Novell has open-sourced some technologies, for example, our UDDI server. We're always looking at the best option for promoting our technology and solutions, and that can include open source," spokesman Bruce Lowry said Tuesday. "But I can't comment on specific future plans regarding specific technologies."