Red Hat's Numbers Called 'Impressive'

This week, Red Hat (NYSE: RHT) seems to have weathered every senior executive's nightmare: The CFO resigns just days before the company is to report its financial results. What do you do?

Red Hat prereleased enough good news in advance of its earnings call to calm down fears of possible scandal or bad numbers, and after yesterday's evening call, investors seem satisfied with the company's performance.

"They had stellar results in terms of revenue and profit growth," said Brooks Gray, senior analyst at Technology Business Research, headquartered in Hampton, New Hampshire.

"It's enterprise product line has clearly benefited from the migration from proprietary Unix and RISC-based systems to more standards-based computing. Dell (Nasdaq: DELL), for instance, has been pushing Linux as a platform for database solutions," he said.

Resignation of CFO Thompson

Does the resignation of CFO Kevin Thompson still raise concerns for Gray?

"No, he gave personal reasons, and there's nothing noticeably wrong with their financial statements," said Gray. "They took a portion of their bookings in this quarter, and then deferred the revenues into the future," he said, alluding to the increasingly popular practice in software companies of deferring revenues.

Such accounting techniques tend to present less spectacular results in the near term, but result in a more stable picture of a company's results over time.

Red Hat Numbers Impressive

Even so, Red Hat's numbers were impressive, said analysts. The company's revenue for the first quarter of fiscal 2005 was US$41.6 million, a sequential increase of 13 percent compared to $37.0 million in the fourth quarter of fiscal 2004, and a year-over-year increase of 53 percent.

For the first quarter of fiscal 2005, the company reported net income of $10.7 million, or $0.05 per share. This represents an increase of 113 percent over net income of $5.0 million, or $0.03 per share, in the prior quarter, and an increase of 603 percent over net income in the same quarter a year ago.

The company generated $30.1 million, or $0.16 per share, in positive cash flow from operations during the first quarter. The company ended the quarter with a cash-and-investments balance of $964.4 million.

In the first quarter of fiscal 2005, the company increased its deferred revenue balance to $86.1 million, a sequential increase of $15.2 million, or 21 percent, as compared to the fourth quarter of fiscal 2004.

Highlights from the First-Quarter Results

Sales of subscriptions to Red Hat Enterprise Linux continued to outpace the growth rate of the Intel-based server market, reaching 98,000 subscriptions in the first quarter, a sequential increase of 13 percent. This is comprised of 75,000 subscriptions sold into the enterprise IT market and 23,000 subscriptions sold into the HPC and hosting markets.

Renewal rates for subscriptions sold to Red Hat Enterprise Linux in prior years remained strong at approximately 85 percent.

Gross margins increased to record levels, with blended gross margins at 80 percent and gross margins of enterprise subscription technologies at 93 percent.

Operating profit, excluding stock-based compensation, increased to $6.5 million, or 16 percent of total revenue. This represents a sequential increase of 43 percent on an adjusted basis and 93 percent on a GAAP basis, as compared to the fourth quarter of fiscal 2004.