Red Hat: Channel Drove Majority Of Higher Q2 Sales

Red Hat's second quarter was a solid one, with revenue increasing 28 percent to $127.3 million and net income reaching $18.2 million on strong Linux subscription sales. Channel partners contributed heavily to that success, Red Hat CEO Matthew Szulik said Tuesday in a conference call with analysts following Red Hat's earnings release.

"It wasn't long ago that the majority of Red Hat sales were direct. In Q2, 52 percent of sales were indirect," Szulik said.

Red Hat wants to increase that number over time to 60 percent. While the company plans to continue handling its largest sales deals directly, it relies on its channel for volume business, executives said.

Red Hat's results edged past analyst expectations, an important metric for a company that has suffered a beating on Wall Street this year. Red Hat's shares currently trade about 20 percent lower than they did before the company released its first-quarter earnings report in late June.

Red Hat, based in Raleigh, N.C., is in the process of reorganizing around three lines of business: infrastructure, middleware and online services, a unit that will include new offerings like the Red Hat Exchange (RHX) network of partner applications that Red Hat introduced in March.

Red Hat's core business is strong and its Red Hat Enterprise Linux 5 product introduction cycle is on track, according to Szulik. While Red Hat doesn't break out its various product lines in its financial results, its overall subscription income for the quarter was $109 million, up 29 percent from last year's second quarter.

One weak spot for Red Hat is its middleware line, anchored by the JBoss application server technology Red Hat acquired in June 2006. JBoss sales are more solutions-oriented and involve more consulting and services work than Red Hat is accustomed to, Szulik acknowledged.

"We are understanding and learning the requirements of that market," he said. "It's a much more consultative sale ... In the middleware space, customers want something more than just technology enablement."

To compensate, Red Hat is adjusting its hiring and selling practices to cultivating more of a solutions focus in its middleware sales organization. It's also seeking more partnerships with VARs who understand the market.

"We are actively adding channel partners, particularly for our middleware business," Red Hat CFO Charlie Peters said.

One analyst who follows Red Hat would like to see it step up its channel enticements.

"Our field checks continue to show lackluster demand for JBoss," Citigroup analyst Brent Thill wrote in a research note ahead of the earnings report. "We believe that in addition to increasing its R&D investments for JBoss in FY08, Red Hat will also need to invest in channel education and marketing to create more awareness of its offerings."