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Red Hat Has Another Rocking Quarter, Looks Toward Better Economic Times

While the economy is showing only slight signs of recovery, Red Hat continues to turn in stellar financial performance. Yesterday, the company announced its second quarter results, which were quite strong, and this morning Red Hat's stock is up 13 percent. Red Hat's revenues for the quarter were $184 million, a 12 percent increase over last year's comparable quarter. Earnings came in at $28.9 million for the quarter, up from $21.1 million a year earlier.

One of the really notable things about Red Hat's report is that, as has been true for many quarters in a row, all 25 of its biggest accounts renewed, at subscription prices that were 20 percent higher. Red Hat continues to demonstrate that providing support and services for open source software is a winning business model, and that has to give confidence to small startups focused on the same model, including Cloudera and Acquia.

According to Red Hat CEO Jim Whitehurst:

"IT organizations continue to move ahead with purchases of high value solutions, and Red Hat is capitalizing on this demand as a result of our strong customer relationships and proven value proposition. These factors contributed to our better than expected total revenue in the second quarter, and drove annual subscription revenue growth of 15% for both the quarter and first half of fiscal year 2010. We continue to be optimistic about Red Hat's future and believe the company is well positioned when the economic and IT spending environment improves."

Indeed, as the economy improves, Red Hat stands to do even better. Companies such as The Gap have learned to save hundreds of thousands of dollars annually by working with Red Hat, but IT spending still isn't healthy overall.

Red Hat has shown that it has both pricing power over and loyalty from its existing customer base. Not only did all 25 top accounts renew last quarter, but they were willing to pay more. Additionally, customers were willing to lengthen their existing subscriptions for support and services.

At a certain point, it won't be a good strategy for Red Hat to just raise prices and deliver longer subscription contracts. It needs to get new customers, and is working on several channel-oriented initiatives to achieve that. Still, as we've noted before, Red Hat achiveves diversification by soundly investing alongside its software and support efforts. This latest quarter's report included news that the company has bought back $47 million of its own shares. That implies a fair amount of confidence from one of the few public companies focused entirely on open source.

• linux
• Red Hat
• The Gap

by Rich Sharples on Sep. 24, 2009

I don't think that means the "subscription prices that were 20 percent higher" (ie. Red hat have raise prices). I believe it means that the customers re-signed and also bought more stuff.

To quote Charlie Peters from the transcript [1] :

"I am pleased to report that for the sixth consecutive quarter, all of our top 25 deals that were up for renewals not only renewed but did so at a total of over 120% of the prior year’s value."

and Jim when asked what was driving the 120% renewal :

"It was regarding what is driving the 120% on the renewal -- it really is a mix. Most customers continue to expand their footprint of REL in their environment, so there’s some just unit volume growth but we actually are seeing increases in the cross-sell at JBOSS, which is good, and especially AP."

I'm not speaking officially for Red Hat - just pointing out an error in your analysis.

[1] http://seekingalpha.com/article/163086-red-hat-f2q10-qtr-end-8-31-09-ear...

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by Sam Dean on Sep. 24, 2009

@Rich, good point that the 120% figure comes from a mix of drivers. Cross-selling and the like contributed, but Red Hat has definitely been selling longer contracts and the like. What I'm really getting at is that the company can really benefit from new customers, and I think it is actually pursuing good initiatives for getting them.

Sam

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