Red Hat soars into the data center clouds on rising revenues

Profiting in spite of -- or maybe even because of -- the grim economy, open source software leader Red Hat this week posted an annual revenue increase of 25 percent for fiscal 2009.

"Our value proposition continues to resonate with customers who are looking to cut costs and achieve a rapid ROI (return on investment)," declared Red Hat CEO Jim Whitehurst, delivering the company's financial results for his first full year as the company's chief.

"Our price performance proposition is highly attractive during good times, and we believe it is even more compelling during difficult economic times," Whitehurst said during a call with financial analysts last night.

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Over the year ahead, the Linux and open source distributor will keep building on its growing success as an "enterprise company," while placing a bigger focus on virtualization and the data center, the CEO said.

Red Hat's total revenues for the 2009 fiscal year amounted to $653 million. Even for the final quarter of the fiscal year, a time frame stretching from December through February, Red Hat reported revenues of $166.2 million, a gain of 18% over the same period the year before.

Whitehurst contended that enterprises are growing increasingly interested in open source software due to new budgetary constraints.

"We are not a real player in the consumer space," he responded, when asked by one analyst to talk about where netbooks fall in Red Hat's technology roadmap.

Instead, Red Hat will keep working on driving "mainstream" adoption of its Red Hat Enterprise Linux (RHEL) operating system (OS), JBoss middleware, and other commercial software products, with an increasing emphasis on sales through channel players such as systems integrators and value-added resellers (VARs).

The company will also integrate technology obtained through its recent buyouts of KVM, Qumranet, and Amentra into its software line-up. The KVM virtualization hypervisor will be released as both a standalone "small footprint" product and as part of the upcoming RHEL 5.4.

"We've [also] seen benefits on Amentra on increased sales in the JBoss business, and the capabilities added from Qumranet have improved our position in virtualization," noted Whitehurst.

In the fourth quarter, a total of about 56% of Red Hat's software sales were now accomplished through channel partners, as opposed to direct sales, representing an increase over the past, said Charlie Peters, Red Hat's executive VP and CFO, also during the call.

At the same time, uncertainty continues to loom over the enterprise computing picture, and life isn't entirely easy for anyone these days, including Red Hat.

None of the analysts on the call asked the executives to comment on industry speculation that software giant Oracle might be buying Red Hat, gossip that spurred Red Hat's stock price to skyrocket earlier this week.

But one analyst did inquire about the potential impact of a possible merger between IBM and Sun, two companies reportedly now in talks along those lines.

"In regards to the rumors on IBM and Sun, at this point [they are] rumors," said Red Hat's Peters. "We have relationships with both IBM and Sun. But right now we are worried about serving our customers. And we will see what happens there as we get more time free."

"Yes. It's a hypothetical question. We will have to deal with it whenever [an IBM-Sun deal] comes to fruition," Whitehurst added.

The Red Hat officials also acknowledged that some customers have been paying for fewer software licenses than they're actually using, citing this as one of a number of reasons behind a new "free-to-paid" or "free-to-fee" customer conversion program instituted a few months ago.

Under the program, Red Hat is upgrading people who are using free open source software from Red Hat and other sources to fee-based service subscriptions.

The executives also suggested that many of the 40,000 new customers added over the past year are still testing the open source waters, with only limited deployments of between one and ten copies of software downloads each.

Yet Red Hat's strength over the past year was not only "broad with thousands of new customers [but] deep with many large deals," Peters said. "Here is some color on our top 30 deals. Three were greater than $5 million. Eighteen were greater than $1 million."

In addition, 70% of those deals included Red Hat's high-end RHEL Advanced Platform (AP), and more than 30% had a JBoss middleware component.

Red Hat accomplished these feats even in the face of competition from free software from many other open source software providers -- even arch rival Novell, Whitehurst suggested.

The executives were also asked how Red Hat's pricing strategy dovetails with that of Novell.

"We compete against free all the time, and [it] doesn't get anymore aggressive or cheaper than free in the case of the Microsoft/Novell arrangement," Whitehurst replied.

Essentially, Novell is still distributing software certificates to customers which are prepaid by its partner Microsoft, according to Red Hat's CEO.

"So I'm not clear how to get more aggressive than that," Whitehurst maintained. "I think the rest of our results kind of speak for themselves."

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