Wednesday, December 31, 2008

Red Hat (RHT) Thrives During Recession

Red Hat (RHT), the open source Linux and middleware company, reported a very good quarter (3rd fiscal quarter ending November 30, 2008) on December 22, 2008. I've written extensively on Red Hat (See my Red Hat page) as a company whose time has come. With a 22% revenue increase since the similar quarter last year, it is doing what many other technology companies said they would do during a recession.

The basic tech stock pitch from management in 2008 was "My company's products offer a high return on investment, so if anything a recession will increase our sales as our customers seek to cut costs." As 2008 progressed more and more companies that took this line saw their sales slow or even go into reverse.

Red Hat has a solid base of subscribers who use its Red Hat Enterprise Linux (RHEL). It now has a strong middleware offering in JBoss. It costs a lot less to run a server farm on RHEL than on UNIX or Windows Server operating systems. Not every enterprise is in a position to switch every day, but every year since the 2001 tech crash Red Hat has gained substantial ground. Early investors in Red Hat, including those who bought at IPO prices, got burned, but buying at 2003 or later prices has worked out well for investors.

Guidance for fiscal Q4 ending February 28, 2009 is for only a slight increase in revenue. Fortunately Red Hat is already profitable on a GAAP, non-GAAP, and cash flow basis at this level. Management seems to understand that being a value proposition company, they should keep their own expenses down. General and administrative expense for the quarter was $24.8 million, or 15% of revenues of $165.3 million. R&D expense, while substantial, is somewhat alleviated by the open source nature of the Linux project.

Red Hat offers products that are of proprietary quality (some would argue they are better than products from companies like Microsoft, Oracle, and SAS) at prices that are substantially lower than their rivals. I know, because I have experienced, the foot-dragging nature of institutional technological change. When all you know is Windows, and you have paid for a lot of proprietary software or programming to work with it, switching to Linux is daunting. There are some advantages to Windows programming; Microsoft Visual Studio makes application-level programming relatively easy. But at the enterprise level paying for Windows licenses can really add up. So I see no reason for Red Hat not to continue to get traction in the enterprise market.

A new area for Red Hat is the MRG platform, which has already begun to sell. MRG ("merge") integrates real time, messaging, and grid technologies. Red Hat claims it can run enterprise level computing 100 times faster (though they don't say than what).

For more on Red Hat's Q3 see my summary of the 12/22/2008 Red Hat Analyst Conference.

See also:
open source software

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