Red Hat Posts $10.7M Profit Amid 53% Increase In Sales

For the quarter ended May 31, the Raleigh, NC Linux software company reported net income of $10.7 million, or 5 cents per share, up from $1.5 million during the first quarter of 2004. The 10-year-old company reported its first profit in early 2001.

Sales rose to $41.6 million, nearly a 53 percent bump from $27.2 million during the same quarter a year ago. Enterprise subscriptions for the first quarter generated $30 million in sales, while enterprise services revenues accounted for $11.2 million. Revenue jumped 13 percent sequentially from the previous quarter's $30 million.

Red Hat reported its first quarter earnings several days after its Chief Financial Officer Kevin Thompson tendered his resignation. During Thursday's call, Red Hat CEO Matt Szulik applauded the CFO for a job "well done" and said Thompson would continue in that role until the company names a successor before the next earnings call in September.

During the last quarter, the Linux company recorded 98,000 enterprise subscriptions, responsible for a 93 percent increase in gross margins. Red Hat generated only one-third of that -- 33,000 enterprise subscriptions -- in early 2003, Thompson noted. Company executives said the 13 percent sequential increase in both revenue and enterprise subscriptions enabled the company to roughly meet Wall Street expectations but acknowledged that some deals took longer than expected to come in. These delays carved out $800,000 from Red Hat's target. Some analysts had expected revenue to come in at $43 million for the fiscal first quarter of 2005. "We had strong bookings in the quarter, it just came in late," Thompson said.

Red Hat expects revenue to increase 14 to 16 percent next quarter, to $48 million. Sales in North America account for 69 percent of sales, with 31 percent from Europe.

Szulik told analysts Red Hat continues discussions with systems integrators, but provided little detail on channel momentum during the quarter.

One analyst expressed disappointment with the number of subscriptions generated through Red Hat's OEM and reseller channels and its embedded and retail efforts, but said the rest of the company's mainstream business is ramping up steadily.

"The core Red Hat Enterprise business looks intact," said Dion Cornett, managing director of Decatur Jones, a Chicago-based equity research firm. Cornett said he believes Red Hat's new desktop business and appointment of a new CFO will help drive stock value.

"I believe that they'll be able to bring in a big hitter [for CFO], which should help the stock during the quarter."