I listened to the Red Hat (RHT) analyst conference call on fiscal Q1 ending May 28th, 2011, yesterday. My detailed summary is at Red Hat Q1 2012 analyst call.
I recently read about the increased resilience of modern software, with Microsoft as the example. That matches my own experience. It has been years (maybe even a decade) since I have seen the Windows operating system itself crash on my computers. Occasionally I see application programs crash (especially older ones), but always the solution is to just restart them. That is resilience.
Red Hat is showing resilience for its investors. While the price to earnings ration is high, lately revenues and profits have been ramping fast enough to justify the hopes that high PEs are based on. It is still small potatoes when you compare its revenues and profits to Microsoft, or Apple, or even Google or Facebook. Long ago it was priced as the next Microsoft. Now Red Had Enterprise Linux and its brothers-in-arms JBoss and RHEV virtualization are a highly respected solution for servers, datacenters, and the cloud. It is nice to see a business software paradigm based on high quality with low prices. It is a huge benefit to the American economy.
I don't currently own Red Hat, but I bought some when it was near bottom during the late recession, so I did real well with it.
See also http://www.redhat.com/
Showing posts with label Linux. Show all posts
Showing posts with label Linux. Show all posts
Thursday, June 23, 2011
Tuesday, December 29, 2009
Red Hat (RHT) analyst conference summary
Red Hat
RHT
conference date: December 22, 2009 @ 2:00 PM Pacific Time
for quarter ending: November 30, 2009 (3rd quarter fiscal 2010)
[at the time this is written] See also "I Sell Red Hat"Forward-looking statements
Overview: Another excellent quarter for revenue for the commercial Linux leader, but earnings continue to lag.
Basic data (GAAP) :
Revenue was $194.3 million, up 4% sequentially from $183.6 million, and up 18% from $165.3 million year-earlier.
Net income was $16.4 million, down 43% sequentially from $28.9 million, and down 32% from $24.3 million year-earlier.
EPS (diluted earnings per share were) were $0.08, down 47% sequentially from $0.15, and down 33% from $0.12 year-earlier.
Guidance:
Assuming stable currency exchange rates: Q4 revenue $191 to $193 million. Services and training expected down $2 to $3 million due to holidays. 23.8% non-GAAP operating margin. Non-GAAP EPS $0.15 to $0.16 per share. Cash flow expected up.
Conference Highlights:
Subscription revenue was $164.4 million, up 21% y/y. Training and services revenue was $29.9 million, flat y/y.
Towards the end of the quarter RHEV virtualization software was released. Interest is strong among established customers. Cloud initiative is attracting clients.
There was an $8.8 million charge for litigation settlement in GAAP numbers. Non-GAAP operating income was $46.1 million, up 20% y/y; operating margin 23.7%, up 50 basis points y/y. Non-GAAP net income was $33.5 million (down from $36.9 million year-earlier), for EPS of $0.18.
Operating cash flow was $54.1 million, down from $59.1 million year-earlier. Accounts receivable increased $24 million y/y due to record billings in the quarter. Total cash, equivalents and investments ended at $959 million, up $47 million sequentially. $52.3 million was spent repurchasing stock.
Bookings were particularly strong in North America.
Cost of revenues was $29.6 million, leaving $164.7 million in GAAP gross profit. Operating expense of $145.0 million consisted of: sales and marketing $71.5 million (up $13 million y/y), R&D $36.8 million, general and administrative $26.1 million, and the $8.8 million litigation settlement. Leaving $19.8 million income from operations. Interest and other income was $5.5 million. Income tax provision was $8.8 million. Some of the expense increase was due to the October Red Had summit.
Linux is now 18 years old. Red Hat remains the number one contributor to the kernel.
All of the largest 25 deals that were up for renewal did renew, at a total value of 120% of last-year's value. 14 deals in the quarter were for over $1 million. 8 deals included JBoss.
Deferred revenue was up 23% y/y to $619 million. Average deal length was 22 months.
Q&A:
Economy effects? We are beginning to see some recovery in certain markets, like the financial sector. Does not think this is generally a year-end budget flush, instead there are indications of optimism from COOs.
JBoss? Continues to grow at a faster pace than the main business. The pipeline looks strong.
Lower earnings on higher revenues? Exchange rate pushed operating expenses up in quarter; Red Hat summit expense; launch of RHEV expenses. We continue to invest in the future, including hiring new employees.
Implication that a lot of billing was right at the end of the quarter? The quarter was similar to most other quarters, 20/20/60 linearity. This is why we don't forecast cash flow by quarter. There was a 21% increase in unleveraged quarterly cash flow y/y.
Goal is to find another 100 basis points (1%) in operating margin each year.
We are growing because of an ASP benefit as we add products, we are picking up market share from other Linux providers, and server shipments are improving.
Geographic? Strong Americas performance. Asia Pacific and Europe are solid. This quarter Americas is picking up more quickly than EMEA.
RHEL AP is not just for the largest customers, it is useful to smaller customers as well.
Earlier in the year we invested a lot in sales training globally, which has had a positive effect.
Red Hat Investor Relations Page
OpenIcon Red Hat main page
Tuesday, September 8, 2009
I Sell Red Hat (RHT)
Today I sold all of my Red Hat (RHT) stock at $24.51 per share. I bought about half at $17.91 per share on January 21, 2008 and half at $10.86 on November 14, 2008.
This is in no way a reflection of lost optimism about Red Hat the company. I think they will continue to gain share in the server operating system and middleware markets. They have a great product (Linux Enterprise Edition) and serve their customers well.
Nevertheless, I do not like to bet on market psychology or price momentum. By the numbers Red Hat's stock price has gotten ahead of itself, especially compared to other technology stocks that have not run up as much. Last quarter revenues (not profits) were $175 million. So at a flat run rate 2009 revenues will be $700 million. Yet the market capitalization for the stock is $4.6 billion. There is a lot of optimism built into that market cap number. My guess is that in 2 years Red Hat will easily justify that number, but today I would rather have the cash.
I am going to continue to do analyst conference summaries for Red Hat. If the price dips, or if revenues and profits accelerate faster than I am assuming, I could buy back in. I watched Red Hat a long time before buying in; it is one of my favorite stock stories.
The next Red Hat results and analyst conference is scheduled for September 23.
See also Red Hat's site.
And keep diversified!
This is in no way a reflection of lost optimism about Red Hat the company. I think they will continue to gain share in the server operating system and middleware markets. They have a great product (Linux Enterprise Edition) and serve their customers well.
Nevertheless, I do not like to bet on market psychology or price momentum. By the numbers Red Hat's stock price has gotten ahead of itself, especially compared to other technology stocks that have not run up as much. Last quarter revenues (not profits) were $175 million. So at a flat run rate 2009 revenues will be $700 million. Yet the market capitalization for the stock is $4.6 billion. There is a lot of optimism built into that market cap number. My guess is that in 2 years Red Hat will easily justify that number, but today I would rather have the cash.
I am going to continue to do analyst conference summaries for Red Hat. If the price dips, or if revenues and profits accelerate faster than I am assuming, I could buy back in. I watched Red Hat a long time before buying in; it is one of my favorite stock stories.
The next Red Hat results and analyst conference is scheduled for September 23.
See also Red Hat's site.
And keep diversified!
Saturday, March 28, 2009
Red Hat (RHT) Runs Through Open Field
Red Hat (RHT) is my favorite company to watch because of all the stocks I know its history most clearly demonstrates the need to differentiate between the stock value and the finances of the underlying company. I became interested in Red Hat in the last years of the last century. I am now invested in the company, so you might want to take that into account in case I fall into the cheerleading for my own stocks trap.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
Investors often talk of overvalued and undervalued company stocks. Typically one looks at the market capitalization of the company: the value of the stock shares times the number of the shares. This gives a total value for the company. Then one looks at the "true" criteria, which typically is some measure of future profits the company can generate, times some multiplier of how much capital it would typically take to generate those profits. If the market capitalization is higher than the "true" value, the company is overvalued.
Red Hat was one of many companies billed by Wall Street as a "next Microsoft" during the technology boom of the 1990's. Given that Red Hat was already establishing leadership in commercializing the Linux operating system, this was not an altogether dismissible line of reasoning. After all, the Microsoft empire was built around its original operating system, MS-DOS, which later evolved into Windows. The problem was that the stock was bid up to prices implying that being the next Microsoft was a done deal.
Several easily discernable obstacles stood in the way of Red Hat becoming the new Lord of the Computerverse. First, it really did not have very many paying clients in the year 2000. Second, Linux is Open Source, and can be had for free, which really cuts into profit margins compared to a proprietary system like Windows. Third, there was a lot of competition within the Linux space for the few commercial dollars available to it.
Red Hat stock took a big plunge in 2002. In retrospect, that was the time to buy. The stock was almost free. Investors did not want it. Partly they finally understood the three points I made above, but mostly investors don't like to buy stocks that are falling in price.
This week, on March 25th, Red Hat reported on its fourth quarter of fiscal 2009 that ended on February 28. Red Hat is still not the next Microsoft. But it is a highly profitable company with a secure niche in the computing space. Red Hat Enterprise Linux (RHEL) is the gold standard for Linux. Other closely related open source spaces are now attached to it, notably virtualization software and JBoss middleware. In addition, Red Hat has a huge cash reserve. Its profits on a cash basis are typically far above its profits on a GAAP basis.
It is a good company, and its earnings per share are a lot higher than what you can get on T-Bills right now. So it is not too late to buy in. But it is not the next Microsoft. Open Source people just don't bring the predatory hunger to the table that Bill Gates and crew had in their first couple of decades. Red Hat will continue to grow because it enhances the business goals of its customers. It will run profitably, but it won't be able to create the kind of monopoly profits Microsoft has been able to create.
I expect that as soon as IT budgets loosen up again, a lot of enterprises are going to make the shift to Red Hat products. But how big of an income and profit bump that will provide is not easy to predict.
So keep diversified.
And see my Red Hat Q4 fiscal 2009 analyst conference summary for details on the latest quarter.
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:
www.redhat.com
open source software
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:
www.redhat.com
open source software
Tuesday, December 9, 2008
Novell and Microsoft: Risk Assessment
Open source advocates are unhappy with Novell because of its relationship with Microsoft regarding Linux licenses. Investors in Novell (NOVL) are not terribly happy with its track record these last few years, but the Microsoft relationship is seen as a plus. Should it be?
You can get a good picture of where Novell is financially from my summary of the Novell analyst conference of December 4, 2008. Let's say Novell tends to lose traction here while gaining traction there.
A couple of years ago Novell was a cash play. They had a lot of cash, but were losing money each quarter. Now the bulk of the cash is gone (the one billion that remains is healthy, but not enough to do cash buy backs safely in this climate). So investors need to look at the underlying business.
It isn't that Novell has not been trying hard, even undergoing a fundamental market transformation. The question is, was it the right transformation?
Novell used to be a specialist in local area network (LAN) software. But that was the sort of thing that Microsoft (and Apple, and Linux) could provide as part of the operating system. Novell, of course, featured up their offerings, but the decline in marketability was clear a decade ago and they never really did much about it until maybe 2005 or so.
Novell sold proprietary software, but I guess they could not find a proprietary area where they thought they could compete (or make an acquisition that made financial sense). So they dove into open source software, including Linux itself. Everyone admits their SUSE Linux is good. Novell's clients were happy with it, but the pricing is a problem. Open source software just can't be priced like proprietary software. Red Hat has proven that you can make money selling support expertise on Linux, but it took them over a decade to get to where they are now. There are a lot of Linux versions out there. When you go with a particular brand of Linux you are basically chosing how much support you are going to get.
Microsoft wants its customers who have mixed systems - Linux and Windows - to use Novell SUSE Linux. That makes life easier for Microsoft to support its customers. It also undercuts Red Hat, which is the greatest threat the Microsoft's lofty operating system profits.
Maybe Novell would like to be independent of Microsoft (see my Microsoft Analyst Conferences page), maybe they have some plan for weaning themselves away in the future. At present a big chunk of their revenues come from Microsoft. Three things could jeapardize this. Microsoft could release its own Linux - that would not be a big deal for Microsoft, though it would certainly raise some questions in the Linux community. Or Microsoft could switch partners. Or Microsoft could face a customer rebellion - we'll chose our Linux without your help, thank you.
In any of these scenarios Novell would be off on its own again as far as picking up Linux customers. Not a cheery thought.
Even so, the revenues that were booked for its Open Solutions segment were a mere $36 million in the quarter, of which $33 million was for Linux.
Workgroup revenue, which is the legacy business, was still the main money maker at $92 million for the quarter, down 6% from year-earlier. There are two other segments, Identity and Security Management with revenues of $37 million, and Systems and Resource Management, with revenues of $45 million. Service revenue was $34.6 million.
On the optimistic side, the variety of products is a safety feature, and only the Workgroup and Service segments had declining revenues. The acquisitions of Platespin and Managed Objects should help Novell keep close to the cutting edge in 2009.
I would like to see Novell do well, and am tempted to buy the stock at this price. But after watching it for years, I am not enthusiastic. Without the Microsoft deal Novell would have looked pathetic this last year and would not be a serious Linux contender. With the Microsoft deal, it looks pretty good, but with the dangers I stated above.
Which reminds me to keep diversified.
More data:
My Novell analyst conference summaries page
www.novell.com
I own some Red Hat stock and do occasional freelance work for Microsoft. I use Microsoft Vista (which I think is great) for my client OS running on AMD chips and my outsourced web servers run on Linux.
You can get a good picture of where Novell is financially from my summary of the Novell analyst conference of December 4, 2008. Let's say Novell tends to lose traction here while gaining traction there.
A couple of years ago Novell was a cash play. They had a lot of cash, but were losing money each quarter. Now the bulk of the cash is gone (the one billion that remains is healthy, but not enough to do cash buy backs safely in this climate). So investors need to look at the underlying business.
It isn't that Novell has not been trying hard, even undergoing a fundamental market transformation. The question is, was it the right transformation?
Novell used to be a specialist in local area network (LAN) software. But that was the sort of thing that Microsoft (and Apple, and Linux) could provide as part of the operating system. Novell, of course, featured up their offerings, but the decline in marketability was clear a decade ago and they never really did much about it until maybe 2005 or so.
Novell sold proprietary software, but I guess they could not find a proprietary area where they thought they could compete (or make an acquisition that made financial sense). So they dove into open source software, including Linux itself. Everyone admits their SUSE Linux is good. Novell's clients were happy with it, but the pricing is a problem. Open source software just can't be priced like proprietary software. Red Hat has proven that you can make money selling support expertise on Linux, but it took them over a decade to get to where they are now. There are a lot of Linux versions out there. When you go with a particular brand of Linux you are basically chosing how much support you are going to get.
Microsoft wants its customers who have mixed systems - Linux and Windows - to use Novell SUSE Linux. That makes life easier for Microsoft to support its customers. It also undercuts Red Hat, which is the greatest threat the Microsoft's lofty operating system profits.
Maybe Novell would like to be independent of Microsoft (see my Microsoft Analyst Conferences page), maybe they have some plan for weaning themselves away in the future. At present a big chunk of their revenues come from Microsoft. Three things could jeapardize this. Microsoft could release its own Linux - that would not be a big deal for Microsoft, though it would certainly raise some questions in the Linux community. Or Microsoft could switch partners. Or Microsoft could face a customer rebellion - we'll chose our Linux without your help, thank you.
In any of these scenarios Novell would be off on its own again as far as picking up Linux customers. Not a cheery thought.
Even so, the revenues that were booked for its Open Solutions segment were a mere $36 million in the quarter, of which $33 million was for Linux.
Workgroup revenue, which is the legacy business, was still the main money maker at $92 million for the quarter, down 6% from year-earlier. There are two other segments, Identity and Security Management with revenues of $37 million, and Systems and Resource Management, with revenues of $45 million. Service revenue was $34.6 million.
On the optimistic side, the variety of products is a safety feature, and only the Workgroup and Service segments had declining revenues. The acquisitions of Platespin and Managed Objects should help Novell keep close to the cutting edge in 2009.
I would like to see Novell do well, and am tempted to buy the stock at this price. But after watching it for years, I am not enthusiastic. Without the Microsoft deal Novell would have looked pathetic this last year and would not be a serious Linux contender. With the Microsoft deal, it looks pretty good, but with the dangers I stated above.
Which reminds me to keep diversified.
More data:
My Novell analyst conference summaries page
www.novell.com
I own some Red Hat stock and do occasional freelance work for Microsoft. I use Microsoft Vista (which I think is great) for my client OS running on AMD chips and my outsourced web servers run on Linux.
Wednesday, December 3, 2008
Can Marvell Smash the Atom?
Marvell Technology Group (MRVL) stock is way up today partly because investors had been overly pessimistic about its results for the October quarter (its fiscal third quarter of 2009). But the big news is that Marvel is going into the Netbook market. Which means competing with the Intel Atom processor. This is really cool. This is really exciting for investors, consumers, and gadget freaks.
Despite revenues that dropped to $791.0 million from $842.6 million in the 2nd quarter, Marvel kept its Net income high at $71 million and its free cash flow amazingly high at $246 million. For a in-depth summary of the results and what management said see my Marvell Analyst Conference Summary for December 2, 2008.
The Netbook market could be called the sub-notebook PC market. Netbooks don't have the full-powered Intel or AMD Turion processors or graphics capabilities of notebook computers, but they are cheaper. They are designed mainly to run a Web browser and do e-mail. I've seen a lot of false advertising recently, with one ad describing the Intel Atom processor in a netbook as "powerful."
But when you think about building a good Netbook from the ground up, any smart engineer would say, why Microsoft Windows for the operating system, and why Intel Atom for the processor. The only answer is that they are what people are used to. On the other hand consider a netbook not as a smaller PC, but as a larger smart phone. Suddenly there are many hardware and software choices, some of them found in devices like the Apple iPhone or the Blackberry Bold. And what you will find in many of these devices is Marvell semiconductor chips. And non-Microsoft operating systems like Linux.
Normally going up against Microsoft and Intel, even if you have better products, is not a very good business strategy. Intel in particular, in its competition with AMD, has shown a willingness to use heavy-handed tactics to maintain and extend its market share. Even its ability to subsidize advertisements for its products when people open catalogs or Web merchant sites insures that the playing field is not even. Should investors cheer Marvel tilting up against Intel?
The outcome is in doubt, so hedge your bets. But there is good reason to believe Marvell will at least carve out some good profitable market share, aside from their history of consistently entering new fields and turning the fields.
Marvell already has most of the intellectual property in place to build a single chip that can run the entire netbook. Netbook manufacturers will supply the display, case, and connectors; one chip shall rule them all. The cost will be far lower than Intel can compete with profitably. Intel will probably try to differentiate its products by saying they run Windows, but the reality is they don't really run Windows in the sense that a dual-core notebook processor runs Windows.
If you have not been following Marvell, you may not know what they already do. They specialize in combining digital and analog circuitry in a single chip. They got started by supplying chips that make hard drives capable of storing more data faster. They now dominate the drive chip industry. They branched out to a number of areas, including chips for printers. They also bought Intel's old XScale cell phone processor division, which I believe the Intel guys are going to be kicking themselves over in about October, 2009. Intel was losing money on the division, Marvell is making money.
Marvell also makes superfast chips for physical and wireless internet connections. They make video chips for DVD players and large screen TVs. Their Sheeva processor, combining technologies from ARM, XScale, and in house, runs super fast on super low amounts of power.
By building a netbook from the bottom up, based on a processor that is ultra-green because it was meant to run cell phones, incorporating all the necessary circuits on a single chip, Marvell will enable netbook manufacturers to sell their products for well under $300. Marvell says $200, then $100 is possible.
Will people mind not being able to run Windows? Some people will, but the Netbooks can't run the really cool Windows stuff, like games and Adobe design products. What Linux enables for netbooks is the ability to do email and Web browsing, plus low-overhead tasks designed for the netbook. The competitive advantage of open-source software running on Linux will really shine on a netbook.
With a Sheeva processor from Marvell running applications much faster than an Atom processor, and consuming far less power, it may be hard to keep the Win-tel team alive in this particular market. AMD's decision to stick to notebooks, where its graphics superiority over Intel gives it an advantage, may be just the right thing to do.
Of course, this is speculation about the future. Marvell is the David in this battle. But I have seen Marvell's slingshot, and I would not want to bet on the Goliath, Intel, in this market, even thought it dominates the field at the moment.
It should be noted that Marvell believes the netbooks based on the Marvell chip will open up the Internet to a new global market of between 1 and 2 billion people. Based on what I know about global income demographics, that sounds about right.
As always, keep diversified.
Despite revenues that dropped to $791.0 million from $842.6 million in the 2nd quarter, Marvel kept its Net income high at $71 million and its free cash flow amazingly high at $246 million. For a in-depth summary of the results and what management said see my Marvell Analyst Conference Summary for December 2, 2008.
The Netbook market could be called the sub-notebook PC market. Netbooks don't have the full-powered Intel or AMD Turion processors or graphics capabilities of notebook computers, but they are cheaper. They are designed mainly to run a Web browser and do e-mail. I've seen a lot of false advertising recently, with one ad describing the Intel Atom processor in a netbook as "powerful."
But when you think about building a good Netbook from the ground up, any smart engineer would say, why Microsoft Windows for the operating system, and why Intel Atom for the processor. The only answer is that they are what people are used to. On the other hand consider a netbook not as a smaller PC, but as a larger smart phone. Suddenly there are many hardware and software choices, some of them found in devices like the Apple iPhone or the Blackberry Bold. And what you will find in many of these devices is Marvell semiconductor chips. And non-Microsoft operating systems like Linux.
Normally going up against Microsoft and Intel, even if you have better products, is not a very good business strategy. Intel in particular, in its competition with AMD, has shown a willingness to use heavy-handed tactics to maintain and extend its market share. Even its ability to subsidize advertisements for its products when people open catalogs or Web merchant sites insures that the playing field is not even. Should investors cheer Marvel tilting up against Intel?
The outcome is in doubt, so hedge your bets. But there is good reason to believe Marvell will at least carve out some good profitable market share, aside from their history of consistently entering new fields and turning the fields.
Marvell already has most of the intellectual property in place to build a single chip that can run the entire netbook. Netbook manufacturers will supply the display, case, and connectors; one chip shall rule them all. The cost will be far lower than Intel can compete with profitably. Intel will probably try to differentiate its products by saying they run Windows, but the reality is they don't really run Windows in the sense that a dual-core notebook processor runs Windows.
If you have not been following Marvell, you may not know what they already do. They specialize in combining digital and analog circuitry in a single chip. They got started by supplying chips that make hard drives capable of storing more data faster. They now dominate the drive chip industry. They branched out to a number of areas, including chips for printers. They also bought Intel's old XScale cell phone processor division, which I believe the Intel guys are going to be kicking themselves over in about October, 2009. Intel was losing money on the division, Marvell is making money.
Marvell also makes superfast chips for physical and wireless internet connections. They make video chips for DVD players and large screen TVs. Their Sheeva processor, combining technologies from ARM, XScale, and in house, runs super fast on super low amounts of power.
By building a netbook from the bottom up, based on a processor that is ultra-green because it was meant to run cell phones, incorporating all the necessary circuits on a single chip, Marvell will enable netbook manufacturers to sell their products for well under $300. Marvell says $200, then $100 is possible.
Will people mind not being able to run Windows? Some people will, but the Netbooks can't run the really cool Windows stuff, like games and Adobe design products. What Linux enables for netbooks is the ability to do email and Web browsing, plus low-overhead tasks designed for the netbook. The competitive advantage of open-source software running on Linux will really shine on a netbook.
With a Sheeva processor from Marvell running applications much faster than an Atom processor, and consuming far less power, it may be hard to keep the Win-tel team alive in this particular market. AMD's decision to stick to notebooks, where its graphics superiority over Intel gives it an advantage, may be just the right thing to do.
Of course, this is speculation about the future. Marvell is the David in this battle. But I have seen Marvell's slingshot, and I would not want to bet on the Goliath, Intel, in this market, even thought it dominates the field at the moment.
It should be noted that Marvell believes the netbooks based on the Marvell chip will open up the Internet to a new global market of between 1 and 2 billion people. Based on what I know about global income demographics, that sounds about right.
As always, keep diversified.
Thursday, September 25, 2008
Red Hat (RHT) Opportunities, Dangers
Red Hat is doing well navigating its dangers and opportunities.
Yesterday Red Hat (RHT) released their numbers and held the analyst conference for their fiscal 2nd quarter 2009, which ended August 31, 2008. Revenue was $164.4 million, up 5% from $156.6 million in Q1 and up 29% from $127.3 million year-earlier.
For more financial details, management comments, and answers to questions posed by analysts, just go to my Summary of the Red Hat September 24, 2008 Analyst Conference.
Red Hat is now the best known, and largest in terms of revenues, open source software company. Its two best known products are Red Hat Enterprise Linux and JBoss middleware (which helps Java software applications run and interconnect with clients).
In one sense Red Hat is still a small company. Proprietary software companies like Oracle and Microsoft have quarterly revenues in the multiple billions of dollars, dwarfing Red Hat revenues.
There are really only two major operating systems fighting for market share, Linux and Microsoft Windows [caveat: there are also Sun Solaris and Apple OSX, but they are closely related to Linux]. There is only one Microsoft, but there are many Linux vendors, so Red Hat has to fight for its share of the Linux market, which is smaller to begin with.
Linux is open source, which means you can get it for free and run it without a license. That may not seem like much of a business model. The Linux companies Like Red Hat make their money from offering support for their clients. There just aren't enough Linux experts to go around, and it makes sense to centralize certain tasks. Most corporations that use Red Hat say they are getting a bargain when they get reliable, tested solutions from Red Hat and pay for support. Support includes upgrades and security and bug fixes and the ability to get a question answered by experts.
Microsoft has the advantage of being able to spread out its research and development costs over a large number of installed systems. Red Hat and other Linux companies in effect spread out their development costs by sharing code innovations, and by getting free inovations from clients and independent Linux coders.
Companies that make money from technical support now offer Linux support that competes with Red Hat. This includes hardware vendors like HP and IBM, as well as software vendors like Oracle. The Oracle case is particularly interesting. Oracle claims that it provides its customers with a duplicate of Red Hat Enterprise Linux for free, and then charges for support. Two years ago when this was announced Wall Street thought Red Hat was doomed.
In fact, Oracle had endorsed the Red Hat product. You can bet that Oracle software runs well on Red Hat Linux. And while Oracle has great products, it has angered plenty of competitors and clients over the years. Corporations may not want the convenience of having a single software vendor when it comes with a price tag that may be jerked up, leaving them no alternative but to pay. Red Hat, especially now that it provides an enterprise version of JBoss Java middleware, provides a highly reliable alternative to being married to Oracle (or IBM, or HP).
The use of open source software is growing rapidly, especially for server operating systems, datacenters, and Internet computing. Red Hat continues to capture a significant share of this growth.
Sometimes computer giants simply crush smaller companies that they cannot buy by underpricing them. But underpricing Red Hat to capture its smallish market share would mean a major devalutation for Microsoft or Oracle. Red Hat has $1.4 billion in cash, a tremendous amount of money considering their overall size. Its clients appear to be very loyal.
It may take another year to completely get JBoss revenues rolling in. If I were Red Hat, my next acquisition would undercut one of the main selling points of Microsoft, Oracle, IBM and Sun. I would buy an open source, database system and make it enterprise-ready. Given the stiff pricing of Oracle and Microsoft database software, I am sure many businesses around the world would appreciate that.
I own some Red Hat stock. All technology companies are subject to competition and should be treated as risky (even when they have great potential). So ...
Keep diversified
More data:
My Red Hat analyst conferences page
www.redhat.com
Yesterday Red Hat (RHT) released their numbers and held the analyst conference for their fiscal 2nd quarter 2009, which ended August 31, 2008. Revenue was $164.4 million, up 5% from $156.6 million in Q1 and up 29% from $127.3 million year-earlier.
For more financial details, management comments, and answers to questions posed by analysts, just go to my Summary of the Red Hat September 24, 2008 Analyst Conference.
Red Hat is now the best known, and largest in terms of revenues, open source software company. Its two best known products are Red Hat Enterprise Linux and JBoss middleware (which helps Java software applications run and interconnect with clients).
In one sense Red Hat is still a small company. Proprietary software companies like Oracle and Microsoft have quarterly revenues in the multiple billions of dollars, dwarfing Red Hat revenues.
There are really only two major operating systems fighting for market share, Linux and Microsoft Windows [caveat: there are also Sun Solaris and Apple OSX, but they are closely related to Linux]. There is only one Microsoft, but there are many Linux vendors, so Red Hat has to fight for its share of the Linux market, which is smaller to begin with.
Linux is open source, which means you can get it for free and run it without a license. That may not seem like much of a business model. The Linux companies Like Red Hat make their money from offering support for their clients. There just aren't enough Linux experts to go around, and it makes sense to centralize certain tasks. Most corporations that use Red Hat say they are getting a bargain when they get reliable, tested solutions from Red Hat and pay for support. Support includes upgrades and security and bug fixes and the ability to get a question answered by experts.
Microsoft has the advantage of being able to spread out its research and development costs over a large number of installed systems. Red Hat and other Linux companies in effect spread out their development costs by sharing code innovations, and by getting free inovations from clients and independent Linux coders.
Companies that make money from technical support now offer Linux support that competes with Red Hat. This includes hardware vendors like HP and IBM, as well as software vendors like Oracle. The Oracle case is particularly interesting. Oracle claims that it provides its customers with a duplicate of Red Hat Enterprise Linux for free, and then charges for support. Two years ago when this was announced Wall Street thought Red Hat was doomed.
In fact, Oracle had endorsed the Red Hat product. You can bet that Oracle software runs well on Red Hat Linux. And while Oracle has great products, it has angered plenty of competitors and clients over the years. Corporations may not want the convenience of having a single software vendor when it comes with a price tag that may be jerked up, leaving them no alternative but to pay. Red Hat, especially now that it provides an enterprise version of JBoss Java middleware, provides a highly reliable alternative to being married to Oracle (or IBM, or HP).
The use of open source software is growing rapidly, especially for server operating systems, datacenters, and Internet computing. Red Hat continues to capture a significant share of this growth.
Sometimes computer giants simply crush smaller companies that they cannot buy by underpricing them. But underpricing Red Hat to capture its smallish market share would mean a major devalutation for Microsoft or Oracle. Red Hat has $1.4 billion in cash, a tremendous amount of money considering their overall size. Its clients appear to be very loyal.
It may take another year to completely get JBoss revenues rolling in. If I were Red Hat, my next acquisition would undercut one of the main selling points of Microsoft, Oracle, IBM and Sun. I would buy an open source, database system and make it enterprise-ready. Given the stiff pricing of Oracle and Microsoft database software, I am sure many businesses around the world would appreciate that.
I own some Red Hat stock. All technology companies are subject to competition and should be treated as risky (even when they have great potential). So ...
Keep diversified
More data:
My Red Hat analyst conferences page
www.redhat.com
Thursday, June 26, 2008
Red Hat (RHT) Accelerates Growth
Red Hat's stock price plunged today with most of the rest of the tech stocks. Perhaps RHT investors were overly optimistic about quarter results released yesterday, or they did not think Red Hat's guidance was robust enough. I think Red Hat is doing great. That said, it has a relatively high price/earnings (PE) ratio for this market. If growth flattens, that PE will need to come down.
However, if anything Red Hat growth is accelerating. It may even have been helped rather than hurt by the current macroeconomic environment. Its Red Hat Enterprise Linux operating system and JBoss middleware offer great value propositions for companies using a lot of data servers; the more servers, the greater the savings over competitors. We have a growing server market combined with Linux variations continuing to win market share from Unix and Microsoft OSs. It is a pretty rich field to plow.
View my summary of the Red Hat June 25, 2008 analyst conference and fiscal Q1 2009 results for more details; here I'll analyze the data.
Q1 revenue was $156.6 million, up 11% sequentially from $141.5, and up 32% from $118.9 million year-earlier.
Look back further and it gets more interesting. From my summary of the RHAT June 27, 2007 conference:
Q1 2008 revenues were $118.9 million, up 7% sequentially and up 42% from year earlier.
Two things: annual growth slowed to a mere 32% from 42% for the quarter year-earlier. On the other hand sequential growth (Q4 to Q1) increased from 7% to 11%.
You could read too much into such figures since Red Hat revenues are still small enough to be impacted by single deals, or income recognition that slips from the end of one quarter into the beginning of the next. But the 11% sequential growth is better than recent annual growth rates in a quarter that is not normally a strong quarter.
I think Red Hat has an ideal combination of high-quality, robust, easy to manage products and low pricing compared to rivals. There is plenty of competition for Linux server software, but Red Hat has established itself as the premium brand without charging premium prices.
With IT departments desperately needing to innovate to keep pace with the data explosion (driven in part by audio and video data), Red Hat offers open source solutions that are at least as well-tested and capable as proprietary solutions. With IT budgets strained and CEOs demanding high returns on investment, Red Hat software begins to look like a bargain.
The main danger to Red Hat is the possibility of a larger company using its financial muscle to sell competing software and services at uncompetitive prices. Microsoft (MSFT) could afford to do this, as could Oracle (ORCL), but they are locked in struggle with each other as well as SAP and IBM. Novell (NOVL) is treading in Red Hat's footsteps, but they don't have any profits to fight with. Sun (JAVA) is becoming an open source powerhouse, but their profits come from their hardware arm, which is still struggling.
So Red Hat is a risky stock and is not dirt cheap right now. It was cheaper when I bought some earlier this year. It has its risks, but I believe over a 2 to 3 year time horizon the risks are minimal and their is a great potential upside. Management seems to think the main constraint lately has not been demand, but the ability of its sales force to keep up with demand. That is not a bad problem to have.
More data:
www.redhat.com
Red Hat investor relations
Red Hat summary at NASDAQ
However, if anything Red Hat growth is accelerating. It may even have been helped rather than hurt by the current macroeconomic environment. Its Red Hat Enterprise Linux operating system and JBoss middleware offer great value propositions for companies using a lot of data servers; the more servers, the greater the savings over competitors. We have a growing server market combined with Linux variations continuing to win market share from Unix and Microsoft OSs. It is a pretty rich field to plow.
View my summary of the Red Hat June 25, 2008 analyst conference and fiscal Q1 2009 results for more details; here I'll analyze the data.
Q1 revenue was $156.6 million, up 11% sequentially from $141.5, and up 32% from $118.9 million year-earlier.
Look back further and it gets more interesting. From my summary of the RHAT June 27, 2007 conference:
Q1 2008 revenues were $118.9 million, up 7% sequentially and up 42% from year earlier.
Two things: annual growth slowed to a mere 32% from 42% for the quarter year-earlier. On the other hand sequential growth (Q4 to Q1) increased from 7% to 11%.
You could read too much into such figures since Red Hat revenues are still small enough to be impacted by single deals, or income recognition that slips from the end of one quarter into the beginning of the next. But the 11% sequential growth is better than recent annual growth rates in a quarter that is not normally a strong quarter.
I think Red Hat has an ideal combination of high-quality, robust, easy to manage products and low pricing compared to rivals. There is plenty of competition for Linux server software, but Red Hat has established itself as the premium brand without charging premium prices.
With IT departments desperately needing to innovate to keep pace with the data explosion (driven in part by audio and video data), Red Hat offers open source solutions that are at least as well-tested and capable as proprietary solutions. With IT budgets strained and CEOs demanding high returns on investment, Red Hat software begins to look like a bargain.
The main danger to Red Hat is the possibility of a larger company using its financial muscle to sell competing software and services at uncompetitive prices. Microsoft (MSFT) could afford to do this, as could Oracle (ORCL), but they are locked in struggle with each other as well as SAP and IBM. Novell (NOVL) is treading in Red Hat's footsteps, but they don't have any profits to fight with. Sun (JAVA) is becoming an open source powerhouse, but their profits come from their hardware arm, which is still struggling.
So Red Hat is a risky stock and is not dirt cheap right now. It was cheaper when I bought some earlier this year. It has its risks, but I believe over a 2 to 3 year time horizon the risks are minimal and their is a great potential upside. Management seems to think the main constraint lately has not been demand, but the ability of its sales force to keep up with demand. That is not a bad problem to have.
More data:
www.redhat.com
Red Hat investor relations
Red Hat summary at NASDAQ
Friday, March 28, 2008
Red Hat Tricks
Red Hat (RHT) reported it results for its fiscal Q4 2008, which ended February 29, 2008, on Thursday. Analysts were particularly interested in seeing if any slump in sales occurred in January or February due to the turmoil in the mortgage security market and its effects on the U.S. economy. For a detailed report on results and answers to analysts' questions, see my summary of the Red Hat (RHT) analyst conference on March 27, 2008.
Red Hat distributes and supports the Linux open source operating system and the complimentary middleware, JBoss. It clients are mainly large corporations that have datacenters running large numbers of servers.
From Red Hat's point of view, the economy is doing just fine. Revenues were $141.5 million, up 5% sequentially from $135.4 million in the November quarter and up 27% from $111.1 million in the year-earlier quarter.
Usually rapidly growing, profitable companies have a high price-to-earnings (PE) ratio. But there are different ways to calculate earnings. The safest bet is usually (but not always) GAAP earnings per share (EPS). GAAP means Generally Accepted Accounting Principles. But there are other measures worth looking at if you are trying to value a stock.
Red Hat's GAAP EPS were $0.10, flat sequentially from $0.10 and from $0.10 in year-earlier quarter. Which would seem to mean profits are flat despite growing revenues, which is usually a negative sign.
Non-GAAP EPS measures have been used unscrupulously at times in the past to inflate the value of a stock. But some times they are more realistic than GAAP measures; it just depends on what you exclude from GAAP EPS and why. Red Hat reported non-GAAP EPS of $0.20, up sequentially from $0.19 in Q3 and up from $0.16 year-earlier. That is 25% annual growth.
Difference with GAAP numbers is due to stock-based employee compensation of $10.0 million and $10.7 million difference in provision for income taxes. These are not cash expenses, but the stock-based employee compensation does tend to dilute the shares of people already owning stock.
If you want to exclude history and see how a firm really did in a quarter, a good indicator is cash gains. Operating cash flow was $71.6 million, or about 50% of revenue. That is $0.32 per share. In addition, the company has $1.3 billion in cash and equivalent securities on its balance sheet.
How do we choose? Red Hat is a relatively new company that has had high startup costs. Under GAAP, many of the cash expenses of yesteryear show up in today's profit and loss statements. So the money, which came from venture capitalists and those who bought into the IPO, was spent long ago. But the money coming in today is real. As long as everything is kept in perspective, I think the cash is the leading indicator in this situation.
Take the low extreme and you have a company generating GAAP earnings of $0.10 per share per quarter, or $0.40 per year, and not growing profits. Even in normal times you would not want to pay more than about $8.00 per share for its stock.
Keep your eye on the cash and you have $0.32 per share per quarter or $1.28 per year, and rapid growth. A ratio of 30 in that situation would be considered conservative in a bull market, plus you would add in the $1.3 billion. That would make Red Hat worth about $38 per share. But of course we are not in a bull market.
Any price between those extremes $8 and $38 per share is arguable. Red Hat stock ended trading today at $18.49 per share, up over 5% during the day on a day the stock market fell considerably.
I own Red Hat. My portfolio rules allow me to buy more, and I might, but there are a lot of undervalued stocks to choose from right now.
Keep diversified.
More data:
www.redhat.com
Red Hat investor relations page
My Red Hat (RHT) page (with links to past analyst conference summaries)
Red Hat distributes and supports the Linux open source operating system and the complimentary middleware, JBoss. It clients are mainly large corporations that have datacenters running large numbers of servers.
From Red Hat's point of view, the economy is doing just fine. Revenues were $141.5 million, up 5% sequentially from $135.4 million in the November quarter and up 27% from $111.1 million in the year-earlier quarter.
Usually rapidly growing, profitable companies have a high price-to-earnings (PE) ratio. But there are different ways to calculate earnings. The safest bet is usually (but not always) GAAP earnings per share (EPS). GAAP means Generally Accepted Accounting Principles. But there are other measures worth looking at if you are trying to value a stock.
Red Hat's GAAP EPS were $0.10, flat sequentially from $0.10 and from $0.10 in year-earlier quarter. Which would seem to mean profits are flat despite growing revenues, which is usually a negative sign.
Non-GAAP EPS measures have been used unscrupulously at times in the past to inflate the value of a stock. But some times they are more realistic than GAAP measures; it just depends on what you exclude from GAAP EPS and why. Red Hat reported non-GAAP EPS of $0.20, up sequentially from $0.19 in Q3 and up from $0.16 year-earlier. That is 25% annual growth.
Difference with GAAP numbers is due to stock-based employee compensation of $10.0 million and $10.7 million difference in provision for income taxes. These are not cash expenses, but the stock-based employee compensation does tend to dilute the shares of people already owning stock.
If you want to exclude history and see how a firm really did in a quarter, a good indicator is cash gains. Operating cash flow was $71.6 million, or about 50% of revenue. That is $0.32 per share. In addition, the company has $1.3 billion in cash and equivalent securities on its balance sheet.
How do we choose? Red Hat is a relatively new company that has had high startup costs. Under GAAP, many of the cash expenses of yesteryear show up in today's profit and loss statements. So the money, which came from venture capitalists and those who bought into the IPO, was spent long ago. But the money coming in today is real. As long as everything is kept in perspective, I think the cash is the leading indicator in this situation.
Take the low extreme and you have a company generating GAAP earnings of $0.10 per share per quarter, or $0.40 per year, and not growing profits. Even in normal times you would not want to pay more than about $8.00 per share for its stock.
Keep your eye on the cash and you have $0.32 per share per quarter or $1.28 per year, and rapid growth. A ratio of 30 in that situation would be considered conservative in a bull market, plus you would add in the $1.3 billion. That would make Red Hat worth about $38 per share. But of course we are not in a bull market.
Any price between those extremes $8 and $38 per share is arguable. Red Hat stock ended trading today at $18.49 per share, up over 5% during the day on a day the stock market fell considerably.
I own Red Hat. My portfolio rules allow me to buy more, and I might, but there are a lot of undervalued stocks to choose from right now.
Keep diversified.
More data:
www.redhat.com
Red Hat investor relations page
My Red Hat (RHT) page (with links to past analyst conference summaries)
Sunday, March 2, 2008
Novell (NOVL) Nose Up?
Novell had its analyst conference and released its results for fiscal Q1 2008 ending January 31, 2008 last Thursday.
Investors bid up the price of Novell stock almost 14% on Friday. I don't own Novell stock, though I have been watching it for a couple of years now. Of course I first became of Novell back in the early networking era, let's call it the 1980s.
For the quarter numbers and management presentation, you can look at my Novell Analyst Conference Summary for February 28, 2008. In this blog I'll be looking at some peculiarities in the results.
Revenues were Revenues were $231 million, up 6% from $218 million year-earlier. 6% in a year is not exactly rapid growth, but that might already be reflected in the stock price. In the quarter ending 10/31/2008 revenues were $226 million, so sequential growth was 2%. No questions there; revenue is (usually) revenue.
But how profitable was that revenue? There is where confusion reigns.
The best starting point, in my opinion, is GAAP net income. Novell reported that at $16.8 million. That is not much income for $231 million in revenue, but it is a turn-around from the year-earlier number, when Novell reported a loss of $19.9 million for the quarter.
Then you have non-GAAP net income. This is where corporations cheated a lot during the late 1990's. Whenever you look at non-GAAP numbers you want to be sure why they differ with GAAP numbers. In some cases they are a better indicator than current reality than GAAP because they exclude non-cash charges that are more an admission that the past was not as bright as they thought back then than an indicator of current conditions. But in other cases they are just management spin, so beware.
Novell gave non-GAAP net income for the quarter - for continuing operations - as $29 million or $0.08 per share. Which shows they did pretty badly with discontinued operations.
Usually good non-GAAP numbers are paralleled by good cash flow numbers. But they reported cash flow from operations at negative $26 million. They attributed that to heavy interest and restructuring payments.
Interest? But Novell has been sitting on a ton of cash for years; it has been the main prop for the value of its shares. It ended the quarter with cash and equivalents of $1.8 billion. It reported "other income" of $17 million, which usually (for other companies) is mostly interest on the cash.
Which means GAAP net income would be underwater if not for the interest on the cash.
As to the negative cash flow, the main ingredients are, starting with GAAP net income rounded to $17 million, were plus $11 million for (subtracting back out) stock-based compensation expense. Plus $9 million for depreciation and amortization (because it was non-cash). Plus $5 million for using up NOLs (net operating losses carried forward). And minus $66 million for "Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions."
So you have to ask yourself, are there going to be future negative "Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions?" How would one know? If it were a non-cash charge, I would not care very much, but it is a cash charge. It is real.
And you have to ask yourself how much a stock is worth when, if you subtract out the interest on cash, there are no GAAP profits.
And then there are the acquisitions. The Platespin acquisition due to close soon will eat up about $200 million of the cash, but generate no profit in the short run. How much do you want to bet Platespin will generate profit in the long run?
Of course, there are good reasons for optimism. Novell's new open-source, Linux driven strategy is generating growing revenues. Its partnership with Microsoft has helped it a good deal, in addition to infusing cash.
I don't want to put a valuation on Novell stock at this point. The outlook is too murky for me. With market capitalization ending Friday at $2.6 billion, or $800 million above cash, I would say look at the other opportunities available before plunging in. Don't buy on news you don't understand.
And keep diversified.
Investors bid up the price of Novell stock almost 14% on Friday. I don't own Novell stock, though I have been watching it for a couple of years now. Of course I first became of Novell back in the early networking era, let's call it the 1980s.
For the quarter numbers and management presentation, you can look at my Novell Analyst Conference Summary for February 28, 2008. In this blog I'll be looking at some peculiarities in the results.
Revenues were Revenues were $231 million, up 6% from $218 million year-earlier. 6% in a year is not exactly rapid growth, but that might already be reflected in the stock price. In the quarter ending 10/31/2008 revenues were $226 million, so sequential growth was 2%. No questions there; revenue is (usually) revenue.
But how profitable was that revenue? There is where confusion reigns.
The best starting point, in my opinion, is GAAP net income. Novell reported that at $16.8 million. That is not much income for $231 million in revenue, but it is a turn-around from the year-earlier number, when Novell reported a loss of $19.9 million for the quarter.
Then you have non-GAAP net income. This is where corporations cheated a lot during the late 1990's. Whenever you look at non-GAAP numbers you want to be sure why they differ with GAAP numbers. In some cases they are a better indicator than current reality than GAAP because they exclude non-cash charges that are more an admission that the past was not as bright as they thought back then than an indicator of current conditions. But in other cases they are just management spin, so beware.
Novell gave non-GAAP net income for the quarter - for continuing operations - as $29 million or $0.08 per share. Which shows they did pretty badly with discontinued operations.
Usually good non-GAAP numbers are paralleled by good cash flow numbers. But they reported cash flow from operations at negative $26 million. They attributed that to heavy interest and restructuring payments.
Interest? But Novell has been sitting on a ton of cash for years; it has been the main prop for the value of its shares. It ended the quarter with cash and equivalents of $1.8 billion. It reported "other income" of $17 million, which usually (for other companies) is mostly interest on the cash.
Which means GAAP net income would be underwater if not for the interest on the cash.
As to the negative cash flow, the main ingredients are, starting with GAAP net income rounded to $17 million, were plus $11 million for (subtracting back out) stock-based compensation expense. Plus $9 million for depreciation and amortization (because it was non-cash). Plus $5 million for using up NOLs (net operating losses carried forward). And minus $66 million for "Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions."
So you have to ask yourself, are there going to be future negative "Changes in current assets and liabilities, excluding the effect of acquisitions and dispositions?" How would one know? If it were a non-cash charge, I would not care very much, but it is a cash charge. It is real.
And you have to ask yourself how much a stock is worth when, if you subtract out the interest on cash, there are no GAAP profits.
And then there are the acquisitions. The Platespin acquisition due to close soon will eat up about $200 million of the cash, but generate no profit in the short run. How much do you want to bet Platespin will generate profit in the long run?
Of course, there are good reasons for optimism. Novell's new open-source, Linux driven strategy is generating growing revenues. Its partnership with Microsoft has helped it a good deal, in addition to infusing cash.
I don't want to put a valuation on Novell stock at this point. The outlook is too murky for me. With market capitalization ending Friday at $2.6 billion, or $800 million above cash, I would say look at the other opportunities available before plunging in. Don't buy on news you don't understand.
And keep diversified.
Tuesday, January 29, 2008
Red Hat (RHT): I Buy
This morning I bought some Red Hat (RHT). I believe the stock is undervalued, the company is growing rapidly, and in addition this helped diversify my portfolio.
I have watched Red Hat for over a decade, and in a way it is responsible for my being a technology stock analyst and investor today (I warned against buying its stock back then). Red Hat went public in 1999 (See Wikipedia Red Hat article for more history). It was touted as another "next Microsoft." A leader in the commercialization of the "open-source" Linux operating system, the stock flew near the sun despite having tiny revenues and no profits. Along with many Internet related stocks its price crashed in 2000-2001 (See chart.) The stock price is up quite a bit since then, but is only about 1/20th of its peak price in 1999.
Red Hat is now a profitable, rapidly growing company, with reported Q3 revenues of $135.4 million, up 6% sequentially from $127.3 million and up 28% from $105.8 million year-earlier. [That would be their Q3 fiscal 2008, ending November 30, 2007]. See my full summary of the Red Hat December 20, 2007 analyst conference for a wealth of detail.
Like all stocks, buying Red Hat is risky. In Red Hat's case there is an increasing amount of competition in the Linux space. Novell is staking its future on Linux; IBM, and Oracle offer Linux, and Sun Microsystems offers Solaris in direct competition.
Red Hat has been in the Linux business a long time and has a large installed base and a sterling reputation as a service provider. It is still growing on a small base. It has introduced new services like JBoss and virtualization.
It also has a low P/E ratio for a growth stock. GAAP earnings in the latest quarter were $0.10 per share. That would annualize to $0.40. At $17.90 per share that would be a P/E of 45. But a broker trying to get a commission by selling shares would use non-GAAP earnings to get the P/E. Non-GAAP earnings were $0.19 per share, annualizing to $0.76, and giving a P/E of 24.
I believe Red Hat is likely to grow earnings faster than revenues, given their business model and the fact that it has been happening lately. I also believe Red Hat won't be hurt much by macroeconomic weakness because the main thing it is selling is a value proposition to its customers: Red Hat Linux lowers operating costs comparted to UNIX or Windows (which, of course, Microsoft disputes).
Well I could be wrong, but I think it is a good bet.
Keep diversified.
For more data see:
My Red Hat main page
NASDAQ Red Hat summary page
I have watched Red Hat for over a decade, and in a way it is responsible for my being a technology stock analyst and investor today (I warned against buying its stock back then). Red Hat went public in 1999 (See Wikipedia Red Hat article for more history). It was touted as another "next Microsoft." A leader in the commercialization of the "open-source" Linux operating system, the stock flew near the sun despite having tiny revenues and no profits. Along with many Internet related stocks its price crashed in 2000-2001 (See chart.) The stock price is up quite a bit since then, but is only about 1/20th of its peak price in 1999.
Red Hat is now a profitable, rapidly growing company, with reported Q3 revenues of $135.4 million, up 6% sequentially from $127.3 million and up 28% from $105.8 million year-earlier. [That would be their Q3 fiscal 2008, ending November 30, 2007]. See my full summary of the Red Hat December 20, 2007 analyst conference for a wealth of detail.
Like all stocks, buying Red Hat is risky. In Red Hat's case there is an increasing amount of competition in the Linux space. Novell is staking its future on Linux; IBM, and Oracle offer Linux, and Sun Microsystems offers Solaris in direct competition.
Red Hat has been in the Linux business a long time and has a large installed base and a sterling reputation as a service provider. It is still growing on a small base. It has introduced new services like JBoss and virtualization.
It also has a low P/E ratio for a growth stock. GAAP earnings in the latest quarter were $0.10 per share. That would annualize to $0.40. At $17.90 per share that would be a P/E of 45. But a broker trying to get a commission by selling shares would use non-GAAP earnings to get the P/E. Non-GAAP earnings were $0.19 per share, annualizing to $0.76, and giving a P/E of 24.
I believe Red Hat is likely to grow earnings faster than revenues, given their business model and the fact that it has been happening lately. I also believe Red Hat won't be hurt much by macroeconomic weakness because the main thing it is selling is a value proposition to its customers: Red Hat Linux lowers operating costs comparted to UNIX or Windows (which, of course, Microsoft disputes).
Well I could be wrong, but I think it is a good bet.
Keep diversified.
For more data see:
My Red Hat main page
NASDAQ Red Hat summary page
Thursday, September 27, 2007
Red Hat Worth a New Look
I do not own Red Hat stock, but it is now on my list of stocks to consider when I can add a new position. After years in the wilderness, Red Hat has lately proven that it can make profits and grow them rapidly. Strangely, this once red-hot stock has been largely forgotten by investors, so it is reasonably, but cheaply priced.
You can get the latest details in my summary of the Tuesday, September 25, 2007 analyst conference with fiscal Q2 results. But the long-term history of Red Hat is more enlightening. Back around 1999 people were talking about the open source operating system known as Linux as being a Microsoft killer. I got started in technical research after pointing out that Linux was more likely to kill Sun Microsystems and other Unix players than to hurt Microsoft, at least in the short run. I was right: Linux then and now required a great deal of technical expertise to use.
Red Hat was the favorite stock of the Linux and anti-Microsoft crowd back then. It was always a good company with the goal of making Linux an operating system that enterprises could depend on. But you know about investor enthusiasm: Red Had stock was priced as if it was already on the inside track to defeating Microsoft before it had made any profits, even before it had substantial revenue. Recall that Linux is free. Red Hat had to find a way to profit from selling a product that is free, which is not so easy.
Take a look at Red Hat's stock price over the years (at nasdaq.com). You can see that its IPO price was above today's price. It peaked around December 1999. By July of 2001 it had slumped to $3 per share; I wish I had picked some up then! But in fact in 2001 Red Hat was not profitable and revenues were minimal, so $3 was pretty generous.
But while investors did what they do best, betting irrationally, the workers and management at Red Hat trudged on. Their Red Hat Linux gained traction year after year. It is worth it to corporations to buy a version of Linux that is proven to work at the enterprise level, and to be able to get support when they need it.
In Q2 Red Hat's revenues were $127 million. Microsoft's were $13.4 billion. Other major players are competing in the Linux space now, notably Novell and Oracle. But I think it is fair to say that Red Hat is the Linux brand leader. Red Hat is also a good virtualization play and now owns the JBoss brand; I think both of these will be valuable going forward.
Red Hat should now be able to grow revenues faster than costs, so profits should grow faster than revenues (on a percentage basis).
Another plus for Red Hat is its cash. With equivalents it has $1.3 billion. That is a hefty war chest.
Red Hat's main risks going forward are the usual macroeconomic and competitive risks. Microsoft is enormously profitable; it could lower its pricing on its server software if it ever thought Linux or Red Hat were a serious risk.
You can get the latest details in my summary of the Tuesday, September 25, 2007 analyst conference with fiscal Q2 results. But the long-term history of Red Hat is more enlightening. Back around 1999 people were talking about the open source operating system known as Linux as being a Microsoft killer. I got started in technical research after pointing out that Linux was more likely to kill Sun Microsystems and other Unix players than to hurt Microsoft, at least in the short run. I was right: Linux then and now required a great deal of technical expertise to use.
Red Hat was the favorite stock of the Linux and anti-Microsoft crowd back then. It was always a good company with the goal of making Linux an operating system that enterprises could depend on. But you know about investor enthusiasm: Red Had stock was priced as if it was already on the inside track to defeating Microsoft before it had made any profits, even before it had substantial revenue. Recall that Linux is free. Red Hat had to find a way to profit from selling a product that is free, which is not so easy.
Take a look at Red Hat's stock price over the years (at nasdaq.com). You can see that its IPO price was above today's price. It peaked around December 1999. By July of 2001 it had slumped to $3 per share; I wish I had picked some up then! But in fact in 2001 Red Hat was not profitable and revenues were minimal, so $3 was pretty generous.
But while investors did what they do best, betting irrationally, the workers and management at Red Hat trudged on. Their Red Hat Linux gained traction year after year. It is worth it to corporations to buy a version of Linux that is proven to work at the enterprise level, and to be able to get support when they need it.
In Q2 Red Hat's revenues were $127 million. Microsoft's were $13.4 billion. Other major players are competing in the Linux space now, notably Novell and Oracle. But I think it is fair to say that Red Hat is the Linux brand leader. Red Hat is also a good virtualization play and now owns the JBoss brand; I think both of these will be valuable going forward.
Red Hat should now be able to grow revenues faster than costs, so profits should grow faster than revenues (on a percentage basis).
Another plus for Red Hat is its cash. With equivalents it has $1.3 billion. That is a hefty war chest.
Red Hat's main risks going forward are the usual macroeconomic and competitive risks. Microsoft is enormously profitable; it could lower its pricing on its server software if it ever thought Linux or Red Hat were a serious risk.
Thursday, June 28, 2007
Investing in Linux
You could not keep eager investors from bidding sky high prices for Linux companies back in 2000. I tried to explain that Linux was not likely to hurt Microsoft in the short run, and that something that is available for free is a tad difficult to turn a profit on.
Come 2007 and the promise of Linux to make a profit for investors looks much brighter. But the premier Linux stock, Red Hat (RHT), while recovering from $3 lows in 2001, is only worth 1/6th of its January 2000 high. Its main competitor, Novell, is also not getting high P/E ratios for its efforts. The Linux plays that are doing relatively well are seen with companies where Linux plays a supporting role, rather than being a revenue driver itself. Companies like IBM and Oracle.
Is Linux still suffering from fundamental defects in its profit model? Or are investors missing the boat at Red Hat and Novell? How should these stocks be priced?
Let's start with Red Hat, which is a pure open-source play with income primarilly from Linux. It just reported Q2 2007 results that disappointed some investors. [See my summary of the analyst conference.] Revenues were up 47% from year-earlier: sounds like a growth stock to me. Net income was $16.2 million if you like GAAP, and I do; they also claimed non-GAAP net income of $33.7 million.
So what is their market capitalization, end of day today? $4.3 billion. That is pretty hefty. Using GAAP, factoring out the Q2 income to $64.8 annual, you have a ratio of 66. If revenues are up again 47% a year from now, and if economies of scale make earnings grow faster than revenues (or GAAP EPS converge to non-GAAP EPS), the stock will look cheap in retrospect. But projecting rapid growth out more than a year or two in advance is a good way to get taken to the cleaners.
Linux has changed. It is still geek friendly, not general population friendly. But the general population is not running corporate server farms. Linux evolves faster than Microsoft Server or the IBM OS's. And you can charge enough for support and service and bundling features to make a profit. Linux can be had for free, but that works only if you are highly skilled. So corporations are willing to pay for getting a well-tested version and support services.
Oracle has proven, yet again, that it is smarter than we think. Oracle is more of a threat to Microsoft now than at any time in history. Why? Because instead of butting heads with Microsoft it went after weaker, higher-margin opponents. It is killing SAP and shoving IBM around too. Its database system is the jewel, but the strategy of creating a full service ecosystem around the database has given the company new life. Oracle's offering Linux is not so much a danger to Red Hat, or even Microsoft, as a demonstration of what the tech jungle may look like a few years from now. Oracle software runs well on Microsoft Server products. It runs well on Unix and Linux. It plays well with CRM and ERP. And if you are buying most of your stuff from Oracle, there is no need to get your Linux from Red Hat. For more dope on Oracle see my summary of their June 26, 2007 analyst conference.
So far the conversion of Unix to Linux is happening so fast that there is plenty of pie for everyone. Another player is Novell. They have a big pot of cash ($1.8 billion) and a stategy for providing Linux and other services, but have been hard pressed to show a profit on a regular basis. They generate more revenue than Red Hat, but much of that is from legacy products that are clearly in decline. If they find their footing it will probably be through acquisitions.
Another issue for investors is the swarm of small Linux players. There are lots of versions of Linux available, all of them free. Some probably have ambitions to become serious players, and nothing is in place to stop that from happening.
More data:
Red Hat investor relations page
My Red Hat page
Oracle investor relations page
My Oracle page
Novell investor relations page
My Novell page
Come 2007 and the promise of Linux to make a profit for investors looks much brighter. But the premier Linux stock, Red Hat (RHT), while recovering from $3 lows in 2001, is only worth 1/6th of its January 2000 high. Its main competitor, Novell, is also not getting high P/E ratios for its efforts. The Linux plays that are doing relatively well are seen with companies where Linux plays a supporting role, rather than being a revenue driver itself. Companies like IBM and Oracle.
Is Linux still suffering from fundamental defects in its profit model? Or are investors missing the boat at Red Hat and Novell? How should these stocks be priced?
Let's start with Red Hat, which is a pure open-source play with income primarilly from Linux. It just reported Q2 2007 results that disappointed some investors. [See my summary of the analyst conference.] Revenues were up 47% from year-earlier: sounds like a growth stock to me. Net income was $16.2 million if you like GAAP, and I do; they also claimed non-GAAP net income of $33.7 million.
So what is their market capitalization, end of day today? $4.3 billion. That is pretty hefty. Using GAAP, factoring out the Q2 income to $64.8 annual, you have a ratio of 66. If revenues are up again 47% a year from now, and if economies of scale make earnings grow faster than revenues (or GAAP EPS converge to non-GAAP EPS), the stock will look cheap in retrospect. But projecting rapid growth out more than a year or two in advance is a good way to get taken to the cleaners.
Linux has changed. It is still geek friendly, not general population friendly. But the general population is not running corporate server farms. Linux evolves faster than Microsoft Server or the IBM OS's. And you can charge enough for support and service and bundling features to make a profit. Linux can be had for free, but that works only if you are highly skilled. So corporations are willing to pay for getting a well-tested version and support services.
Oracle has proven, yet again, that it is smarter than we think. Oracle is more of a threat to Microsoft now than at any time in history. Why? Because instead of butting heads with Microsoft it went after weaker, higher-margin opponents. It is killing SAP and shoving IBM around too. Its database system is the jewel, but the strategy of creating a full service ecosystem around the database has given the company new life. Oracle's offering Linux is not so much a danger to Red Hat, or even Microsoft, as a demonstration of what the tech jungle may look like a few years from now. Oracle software runs well on Microsoft Server products. It runs well on Unix and Linux. It plays well with CRM and ERP. And if you are buying most of your stuff from Oracle, there is no need to get your Linux from Red Hat. For more dope on Oracle see my summary of their June 26, 2007 analyst conference.
So far the conversion of Unix to Linux is happening so fast that there is plenty of pie for everyone. Another player is Novell. They have a big pot of cash ($1.8 billion) and a stategy for providing Linux and other services, but have been hard pressed to show a profit on a regular basis. They generate more revenue than Red Hat, but much of that is from legacy products that are clearly in decline. If they find their footing it will probably be through acquisitions.
Another issue for investors is the swarm of small Linux players. There are lots of versions of Linux available, all of them free. Some probably have ambitions to become serious players, and nothing is in place to stop that from happening.
More data:
Red Hat investor relations page
My Red Hat page
Oracle investor relations page
My Oracle page
Novell investor relations page
My Novell page
Monday, April 16, 2007
Red Hat (RHT): Growing Value in Linux?
Red Hat (RHT) was the darling of investors in 2000: they paid over $150 per share for it, even though it had not shown a profit and had only a few million dollars in annual revenue. Now it is no longer even part of the Nasdaq 100 index. Is Red Hat an old dog no longer worthy of investor attention? I don't think so. Yet I would not characterize the stock, at this point, as very underpriced.
To get management's current assessment of themselves see my summary of their March 29, 2007 analyst conference.
I think many investors, and sometimes even professional analysts, fail to pay enough attention to history. Going back two or three years in a company's history, or even going back a full decade, can give some real insight into the present and future. Red Hat's past is a glorious example of how investor enthusiasm, or disregard for fundamentals, can affect a stock's price.
Today Red Hat has a market capitalization of $4.3 billion, based on a price of $22.28 per share. Full 2007 revenue was a bit over $400 million, so the stock is valued at over 10 times revenues. GAAP net income was only $20.5 million in Q4 2006. If you believe in Non-GAAP net income, you could use $32.7 million instead. Let's compromise and say 2007 net income will be in the range of $100 million. That gives an EPS of over 40 per share.
So unless you think revenues and profits are going to grow rapidly at Red Hat, you would be better off putting your money in a CD.
But revenues may grow rapidly. They were up 40% between Q4 2005 and Q4 2006. If net income grows in a similar fashion, and you are willing to pay prices now based on projections two or three years out, Red Hat's price today could be proven to be undervalued. I also like the fact that they have $1 billion in cash.
How can you inform a decision where the numbers are unclear? In this case you need to know about technology and about history.
The reason so many investors were buying Red Hat in 1998 (as venture capitalists) and in 1999 and 2000 was simple: it was billed as the new Microsoft (See my Microsoft page). Most investors, including me, regret not buying Microsoft stock when we were young. But there was a reason we did not buy Microsoft: there appeared to be better opportunities available. A whole bunch of companies in some aspect of the microcomputer business in 1983 ended up being nearly valueless by 2000. The big exceptions were Intel, Microsoft, Apple, and Compaq (which is not part of HP).
In retrospect I can be as brilliant as any analyst: I recommend that you buy Red Hat at $3 per share in July 2001. But there were good reasons RHAT did not look to be worth even that at the time. Neither past revenues nor EPS justified it. Only future growth justified it.
Whatever the technological merits of Linux, the problem with it from an investor standpoint is that it is free. If you want you can build your own Linux server package and deploy it to as many servers or clients as you have and not pay anyone a penny. Unlike Microsoft Vista or Server.
But Red Hat is making money. They are able to charge for their support services and do charge for their enterprise Linux distribution. Most companies find it cheaper to pay Red Hat or another Linux provider for their package and expertise than to try to do it "free" in-house because the cost of labor is greater in-house than when outsourced. It does not make sense for hundreds of thousands of IT people around the country to be fiddling with Linux details when one person at Red Hat can do it for them.
It is clear that Linux is a very real competitor to Microsoft. It has mostly driven all other versios of UNIX from the field except for Sun's Solaris.
So the real problem is predicting Red Hat's future growth is their competition within the Linux market. Just as Napster, RealNetworks and others fight over the scraps left from Apple's dominant music download position, a bunch of companies, small and large, fight over the Linux market.
Sun, of course, is a formidable competitor. They recently made their Solaris product free, believing they can make money on support services. Oracle is now in the Linux business; no one says they are not a formidable competitor. Both Sun and Oracle have a lot of clients to cross-sell to gain Linux market share.
So I would not place any big bets on Red Hat unless you know something the rest of us don't. I think, on the whole, it is slightly underpriced, but that assessment jumbles a lot of variables that are hard to quantify. However, if Red Hat continues to grow in 2007 as fast as it did in 2006, then the stock should move up pretty quickly.
See also my Red Hat page.
To get management's current assessment of themselves see my summary of their March 29, 2007 analyst conference.
I think many investors, and sometimes even professional analysts, fail to pay enough attention to history. Going back two or three years in a company's history, or even going back a full decade, can give some real insight into the present and future. Red Hat's past is a glorious example of how investor enthusiasm, or disregard for fundamentals, can affect a stock's price.
Today Red Hat has a market capitalization of $4.3 billion, based on a price of $22.28 per share. Full 2007 revenue was a bit over $400 million, so the stock is valued at over 10 times revenues. GAAP net income was only $20.5 million in Q4 2006. If you believe in Non-GAAP net income, you could use $32.7 million instead. Let's compromise and say 2007 net income will be in the range of $100 million. That gives an EPS of over 40 per share.
So unless you think revenues and profits are going to grow rapidly at Red Hat, you would be better off putting your money in a CD.
But revenues may grow rapidly. They were up 40% between Q4 2005 and Q4 2006. If net income grows in a similar fashion, and you are willing to pay prices now based on projections two or three years out, Red Hat's price today could be proven to be undervalued. I also like the fact that they have $1 billion in cash.
How can you inform a decision where the numbers are unclear? In this case you need to know about technology and about history.
The reason so many investors were buying Red Hat in 1998 (as venture capitalists) and in 1999 and 2000 was simple: it was billed as the new Microsoft (See my Microsoft page). Most investors, including me, regret not buying Microsoft stock when we were young. But there was a reason we did not buy Microsoft: there appeared to be better opportunities available. A whole bunch of companies in some aspect of the microcomputer business in 1983 ended up being nearly valueless by 2000. The big exceptions were Intel, Microsoft, Apple, and Compaq (which is not part of HP).
In retrospect I can be as brilliant as any analyst: I recommend that you buy Red Hat at $3 per share in July 2001. But there were good reasons RHAT did not look to be worth even that at the time. Neither past revenues nor EPS justified it. Only future growth justified it.
Whatever the technological merits of Linux, the problem with it from an investor standpoint is that it is free. If you want you can build your own Linux server package and deploy it to as many servers or clients as you have and not pay anyone a penny. Unlike Microsoft Vista or Server.
But Red Hat is making money. They are able to charge for their support services and do charge for their enterprise Linux distribution. Most companies find it cheaper to pay Red Hat or another Linux provider for their package and expertise than to try to do it "free" in-house because the cost of labor is greater in-house than when outsourced. It does not make sense for hundreds of thousands of IT people around the country to be fiddling with Linux details when one person at Red Hat can do it for them.
It is clear that Linux is a very real competitor to Microsoft. It has mostly driven all other versios of UNIX from the field except for Sun's Solaris.
So the real problem is predicting Red Hat's future growth is their competition within the Linux market. Just as Napster, RealNetworks and others fight over the scraps left from Apple's dominant music download position, a bunch of companies, small and large, fight over the Linux market.
Sun, of course, is a formidable competitor. They recently made their Solaris product free, believing they can make money on support services. Oracle is now in the Linux business; no one says they are not a formidable competitor. Both Sun and Oracle have a lot of clients to cross-sell to gain Linux market share.
So I would not place any big bets on Red Hat unless you know something the rest of us don't. I think, on the whole, it is slightly underpriced, but that assessment jumbles a lot of variables that are hard to quantify. However, if Red Hat continues to grow in 2007 as fast as it did in 2006, then the stock should move up pretty quickly.
See also my Red Hat page.
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