Red Hat Reports Strong Q2 Results

Red Hat reported a profitable quarter for its leading Linux operating system at the expense of Sun and other Unix companies.

Red Hat Inc. Monday announced an increase in revenues for its second quarter, ending August 31.

Red Hat reported that its revenues for the second quarter of its fiscal 2005 were $46.3 million. This was 60 percent higher than last years second quarter and a sequential increase of 11 percent compared with $41.8 million in the first quarter of this year.

Much of this revenue was driven by subscription sales of RHEL (Red Hat Enterprise Linux), which reached 144,000 units—up almost 64 percent from last quarters 98,000 subscriptions—at an average price of $425 per subscription. Red Hat sold 115,000 new and renewed server subscriptions, and 29,000 new subscriptions to high-performance computing/hosting marketplace and desktops.

According to Red Hats CEO, Matthew Szulik, Red Hat continues to see strong growth worldwide. Much of RHELs growth has come at Unixs expense and Szulik sees this trend continuing. In particular, Szulik mentioned several Red Hat wins that came at the expense of Sun Solaris.

This is the first quarter that Red Hat reported results using its new accounting rules. In July, Red Hat had to restate its earnings for the last three fiscal years and its unaudited financial statements for the first fiscal quarter of 2005.

This summer, Red Hat changed how it recognized revenues for some of its subscription agreements. Instead of recognizing revenue for subscription agreements on a monthly basis—the method it had used before—Red Hat now starts recognizing revenue on a daily basis over a particular contracts term. In addition, rather than recognizing revenue on the first day of a month, Red Hat will now recognize it on the last day. Red Hat made this change on the advice of its auditors, PricewaterhouseCoopers.

This accounting change resulted in more than a dozen law firms looking for clients to file class-action suits against the Raleigh, N.C.-based Linux company. Results such as this last quarters, however, may slow down angry investors.

For the second quarter of fiscal 2005, Red Hat reported net income of $11.8 million, or $0.06 per share. This represents an increase of 225 percent over net income in the same quarter a year ago, and an increase of 8 percent over net income of $10.9 million, or $0.06 per share, to the prior quarter.

The company generated $30.8 million, or $0.16 per share, in cash flow from operations during the second quarter of fiscal 2005. The company ended the quarter with cash and investments totaling $997.7 million.

"We continue to see strong demand for our offerings, as reflected in our results. The company executed successfully across the global business," Charlie Peters, Red Hats newly appointed chief financial officer, said in a statement. Specifically, Peters said he expects next quarters gross revenues to be in the $52-million range.


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