Despite being on vacation, I took notes on the Red Hat conference:
RHT (Red Hat) analyst conference notes, Q1 2013
Showing posts with label Red Hat. Show all posts
Showing posts with label Red Hat. Show all posts
Friday, June 21, 2013
Friday, March 30, 2012
Red Hat Tipping Point?
Red Hat (RHT), in the year 2000, was going to be another Microsoft. Its open source software, would, in a few years, replace the overpriced, proprietary software known as Windows.
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Come Wednesday, when Red Hat reported its fiscal Q4 2012 results (for the quarter ending February 29) and held its analyst call, Red Hat GAAP net income came in at $36 million. Up 7.5% from Q4 2010, to be sure, but dwarfed by Microsoft's Q4 GAAP net income of $6.62 billion.
So Red Hat is still not the next Microsoft. Aside from that, the specialist in open source software is doing very well. Fiscal 2012 marked the first time Red Hat, and the first time a primarily open source software company, showed over $1 billion in annual revenue.
Revenue for the quarter was $297.0 million, up 2% sequentially from $290.0 million and up 21% from $244.8 million year-earlier.
GAAP net income was $36.0 million, down 6% sequentially from $38.2 million but up 7.5% from $33.5 million year-earlier. GAAP EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19, but up 6% from $0.17 year-earlier. Non-GAAP net income was $57.2 million, for EPS of $0.29.
A 21% annual revenue ramp rate amounts to explosive growth in this slow-growth environment. Red Hat Enterprise Linux (RHEL) substantially reduces the cost of doing business and has proven itself for more than a decade it critical business environments. For enterprise data centers, switching to Red Hat is an easy decision to make. Along with Linux most companies are going to want RHEV for virtualization of servers and JBOSS middleware for applications.
Where Linux has not caught on is the corporate or home desktop. For practical purposes Red Hat no longer tries to compete in that space.
Note that net income and EPS did not ramp as quickly as revenue. Normally that might be a warning sign, but it is likely to reverse itself at a later point. Red Hat bought a storage software company last fall and has devoted a lot of R&D to getting the product ready and certified for sale. They are also in the midst of a rapid international expansion. There is a lag between setting up an office in a new nation and seeing significant revenues.
It is certainly possible that Red Hat has finally reached a tipping point where it will become the standard provider of operating systems for servers in datacenters and the cloud. In that scenario growth could even accelerate in the next few years.
Still, it would seem that Red Hat at its present price is for the boldest of investors. Currently Red Hat's P/E ratio is 80, compared to 12 for Microsoft and 17 for Apple. Keep in mind that the revenue growth rate for 2011 may not be a good predictor of future growth rates.
Disclaimer: I do not hold a position in Red Hat, or any other company mentioned in this article, though I have in the past. I won't trade Red Hat for at least one week after the publication of this article.
For more detail on Q4 results, see my notes on the Red Hat Q4 fiscal 2012 analyst call.
Keep diversified!
Tuesday, November 29, 2011
SGI Supercomputer Revenue Growth Continues
Looking for the technology company that reported calendar Q3 2011 revenue that was 58% higher than its Q3 of 2010? That would be Silicon Graphics International (SGI), manufacturer of high-performance technical computers (supercomputers) and high-efficiency server systems for datacenters and cloud computing.
GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.
While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.
Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.
Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.
Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.
If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.
The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.
For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.
Disclaimer: I am long SGI. I won't change my position for at least one week from today.
The usual risks apply, so keep diversified!
See also: www.sgi.com
GAAP revenues for fiscal Q1 2012 ending September 30, 2011 were $178.9 million, down 8% sequentially from $195.5 million, but up 58% from $112.9 million in the year-earlier quarter. GAAP net income was negative $2.7 million, improved sequentially from negative $12.1 million and improved from negative $11.2 million year-earlier. EPS (earnings per share) were negative $0.08, improved sequentially from negative $0.39, and also improved from negative $0.37 year-earlier.
While in the red on a GAAP basis, on a non-GAAP basis (mostly eliminating non-cash expenses like stock-based compensation) SGI managed a profit of $2.2 million, or $0.07 per share. SGI has gone through a period of investing to introduce new products, and also expanding its sales force. Profit margins could improve as further ramps in revenue should not require similar ramps in operating expenses.
While not giving guidance by quarter, for fiscal year 2012 (running to June 2012) revenue is expected between $740 and $780 million, up to 24% over fiscal 2011.GAAP EPS is estimated between $0.15 and $0.30. Non-GAAP EPS expected between $0.60 and $0.80.
How are they achieving such stellar growth while other computer makers are lagging? SGI specializes in expensive computers used for scientific research, as well as large systems for cloud computing and Web farms. These are all areas that continue to grow quickly. While there is competition from the likes of IBM, HP, Dell, and Cray, the newest systems introduced by SGI, notably Altix UV, are better at addressing the needs of their markets.
Nor is SGI resting on their laurels. They are introducing computers that run large scale systems running Windows SQL Server. They have improved their compatibility with Hadoop and Red Hat Enterprise Linux. They continue to be a major supplier for Amazon's cloud system. They also have started acquiring small companies that specialize in supercomputer application software. SGI expects that the ability to sell software as well as hardware will be a major advantage for verticals they service, with higher profit margins.
Finally, they ended the latest quarter with $115 million in cash with no debt. They did use $30 million of cash to build inventory in the quarter, but the systems built had been pre-ordered and should be shipping this quarter.
Because of the size of the systems involved, some quarter-to-quarter lumpiness is to be expected.
If you read what scientists are saying about Altix UV, you will realize why management has become very confident in SGI's future. On the analyst call they stated the next big SGI milestone will be $1 billion in annual revenue, which should bring between $1.75 and $2.00 non-GAAP EPS per share.
The recent growth has been in the face of a lot of uncertainty and a poor macroeconomy. Even so, if the doomsayers are right about global slowdown or meltdown scenarios in 2012, that could impact sales. I am more concerned about competition, but it does seem that for now SGI has found a niche where it can outcompete far larger companies.
For more details on calendar Q3 results, see my SGI Q1 fiscal 2012 analyst call summary.
Disclaimer: I am long SGI. I won't change my position for at least one week from today.
The usual risks apply, so keep diversified!
See also: www.sgi.com
Thursday, September 22, 2011
Red Hat at Billion Dollar Run Rate
Red Hat (RHT) is poised to become the first open source software company with a billion dollar per year revenue run rate. Yesterday Red Hat released fiscal Q2 (ending August 31) revenue of $281 million, up 28% from the year-earlier quarter.
The alleged slowdown of the American and global economies has had little effect on Red Hat. This may partly be from the dollar store effect: Red Hat Enterprise Linux, or RHEL, is a much less expensive operating system than its main rivals, UNIX and Windows Server, yet is roughly as capable. Management, however, attributed the revenue growth to an expanded sales force and an expanded line of products to sell. The main products sold in addition to RHEL, are JBoss, their middleware product, and RHEV, their virtualization product. Also, as major customers expand their datacenters, they pay more for the number of copies of software necessary to operate the new hardware.
RHT is a great example of the power of patience, and of the importance of avoiding buying anything in a bubble. Founded in 1993, and going public in 1999, it was caught up in the Internet Bubble, almost immediately reaching a share price of over $100 (implying a market capitalization of over $20 billion) despite being unprofitable and not even generating very much revenue at the time. After the bubble burst you could buy RHT for less than $4 per share.
Despite the crazy pricing swings of the stock, the underlying company kept at its mission of providing an enterprise-quality version of Linux. As years passed revenue grew, and even profits began to accumulate. The last time you could buy RHT cheap was around November 2008, when it was around $10 per share. Today it closed at $41.52.
Right now it is a good stock to hold, but the price-to-earnings (P/E) ratio could scare off many potential investors. At a time when many technology stocks showing revenue growth are trading at P/E's under 20 or even under 15, Red Hat has a (non-GAAP) trailing P/E of 70 and 1 year forward P/E of 54. That is partially justified by the rapid rate of growth; the danger would be if the rate of growth slowed.
I believe Red Hat software offers a tremendous value proposition for enterprises. While revenues are dwarfed by Microsoft Windows Server revenues ($5.9 billion in Q1 alone), and many companies have already converted from UNIX to Linux, the fact that Red Hat has such a small portion of the $50 billion annual server operating system market leaves plenty of room for growth. RHEL also competes with free Linux distributions. Given the staffing it takes to run a free Linux at the enterprise level, TCO can be cheaper when businesses pay for RHEL and the support services that go with it.
I expect Red Hat will continue to do well as a company. Since its product is software, it has high margins and earnings tend to grow faster than revenues. For Q2, GAAP earnings grew 67% over the year-earlier quarter, but it was an exceptional quarter.
Disclaimer: I don't own Red Hat and have no intention to buy or sell it in the next 3 days.
See also:
Red Hat home page
Red Hat investor relations page
My main Red Hat page
My notes on the Red Hat Q2 analyst conference
The alleged slowdown of the American and global economies has had little effect on Red Hat. This may partly be from the dollar store effect: Red Hat Enterprise Linux, or RHEL, is a much less expensive operating system than its main rivals, UNIX and Windows Server, yet is roughly as capable. Management, however, attributed the revenue growth to an expanded sales force and an expanded line of products to sell. The main products sold in addition to RHEL, are JBoss, their middleware product, and RHEV, their virtualization product. Also, as major customers expand their datacenters, they pay more for the number of copies of software necessary to operate the new hardware.
RHT is a great example of the power of patience, and of the importance of avoiding buying anything in a bubble. Founded in 1993, and going public in 1999, it was caught up in the Internet Bubble, almost immediately reaching a share price of over $100 (implying a market capitalization of over $20 billion) despite being unprofitable and not even generating very much revenue at the time. After the bubble burst you could buy RHT for less than $4 per share.
Despite the crazy pricing swings of the stock, the underlying company kept at its mission of providing an enterprise-quality version of Linux. As years passed revenue grew, and even profits began to accumulate. The last time you could buy RHT cheap was around November 2008, when it was around $10 per share. Today it closed at $41.52.
Right now it is a good stock to hold, but the price-to-earnings (P/E) ratio could scare off many potential investors. At a time when many technology stocks showing revenue growth are trading at P/E's under 20 or even under 15, Red Hat has a (non-GAAP) trailing P/E of 70 and 1 year forward P/E of 54. That is partially justified by the rapid rate of growth; the danger would be if the rate of growth slowed.
I believe Red Hat software offers a tremendous value proposition for enterprises. While revenues are dwarfed by Microsoft Windows Server revenues ($5.9 billion in Q1 alone), and many companies have already converted from UNIX to Linux, the fact that Red Hat has such a small portion of the $50 billion annual server operating system market leaves plenty of room for growth. RHEL also competes with free Linux distributions. Given the staffing it takes to run a free Linux at the enterprise level, TCO can be cheaper when businesses pay for RHEL and the support services that go with it.
I expect Red Hat will continue to do well as a company. Since its product is software, it has high margins and earnings tend to grow faster than revenues. For Q2, GAAP earnings grew 67% over the year-earlier quarter, but it was an exceptional quarter.
Disclaimer: I don't own Red Hat and have no intention to buy or sell it in the next 3 days.
See also:
Red Hat home page
Red Hat investor relations page
My main Red Hat page
My notes on the Red Hat Q2 analyst conference
Thursday, June 23, 2011
Red Hat (RHT) Shows Resilience
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/
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/
Monday, March 28, 2011
Oracle, Adobe, Red Hat Show Software Leverage
In theory the software business model is an attractive one. Write a piece of software. Once released, the production cost of each new copy is new zero. Sell enough copies to cover your R&D cost and your operating overhead, and you break even. After that you (and your stockholders) get rich, since each copy costs you nothing. Compare that to hardware based technology, where there (usually) is nowhere near as much profit leverage. Oracle (ORCL) , Adobe (ADBE) and Red Hat (RHT) all showcased the strength of this model when they announced their latest quarter results. Oracle reported fiscal Q3 ending February 28, 2011 on March 23. Partly because of its acquisition of Sun, revenues were up 37% y/y to $8.76 billion and net income was up 78% to $2.12 billion. [See Oracle analyst call Q3 2011] Adobe reported fiscal Q1 ending March 4, 2011 on March 22. Revenues were up 20% y/y to $1.03 billion. Net income was up 84% to $234.6 million. [See Adobe analyst call Q1 2011] Red Hat reported fiscal Q4 ending February 28, 2011 on March 23. Revenues were up 25% y/y to $244.8 million. Net income was $33.5 million, up 43% y/y. [See Red Hat analyst call Q4 2011] Note that for all three companies, profits (net income) were up on a larger percentage basis than revenues. That is the software model: once costs are covered, incremental sales have very high profit margins. Of course, if it were that simple, everyone would start a software company. Software sales are very competitive. Each of these three companies is the market leader in its domain: Oracle with database and business intelligence; Adobe with content generation; Red Hat with enterprise-grade Linux. Fail to make sales and you can lose money, or just scrape by. Naturally hardware companies are very interested in selling more of their own software with their machines, as the higher margins help the bottom line. IBM and HP, for instance, sell software and services, not just computers. One interesting play would be the small storage company Dot Hill. It has adding storage management software to its offerings, which should have a positive effect on its margins in 2011 and beyond. [See also my Dot Hill analysis page] I don't own any of the above mentioned stocks except Dot Hill, although I have owned Red Hat in the past. There are many issues to consider before buying a software stock, including its trailing and future-looking price-to-earnings ratios. So keep diversified!
Wednesday, December 29, 2010
Red Hat accelerates earnings growth
Red Hat (RHT) had impressive improvements in revenues and net income (profits) in its fourth quarter (its 3rd fiscal 2011 quarter). For details, see my Red Hat analyst call summary for the December 21st call.
Still, while Red Hat is a great company, its price-to-earnings ratio is much higher than many other good, rapidly growing technology companies. So at this price it is for momentum players and those who can wait a few years to see its profits catch up to the expectations. I don't own any Red Had stock presently, but did when it had a lower P/E ratio.
Red Hat specializes in Linux for the enterprise and related technologies.
Still, while Red Hat is a great company, its price-to-earnings ratio is much higher than many other good, rapidly growing technology companies. So at this price it is for momentum players and those who can wait a few years to see its profits catch up to the expectations. I don't own any Red Had stock presently, but did when it had a lower P/E ratio.
Red Hat specializes in Linux for the enterprise and related technologies.
Sunday, June 27, 2010
Software Industry Gains in Second Quarter 2010
I follow three software companies that reported quarter results last week: Adobe (ADBE), Red Hat (RHT), and Oracle (ORCL). All of them showed sequential and year/year increases in revenues and profits. While there may be exceptions, it is fair to conclude that businesses are back to upgrading or even buying new software now that the worst of the business panic of 2009 is behind us. [I don't currently own any of these three companies, but I have owned Red Hat in the past and I do some freelance work for a competitor, Microsoft.]
Red Hat, the open source provider of enterprise ready Linux and JBoss middleware, had revenues $209.1 million for the fiscal quarter ending May 31, 2010. That is up 7% sequentially and 20% y/y. For details see my Red Hat Q1 fiscal 2011 Analyst Conference Summary or RedHat.com.
Adobe is known for its content creation programs like Acrobat, now mostly wrapped up in its Creative Suite. Its revenues for the quarter ending June 4, 2010 were $943.0 million, up 10% sequentially and up 34% year/year. For details see my Adobe Q2 Fiscal 2010 Analyst Conference Summary or Adobe.com.
Oracle, the enterprise database and data resource management company had revenues of $9.51 billion in its fourth fiscal quarter 2010 ending May 31. That is up 49% sequentially and up 39% from year-earlier. However, some of that increase is from the acquisition of Sun, which is largely a hardware company. So Oracle is no longer a pure software play, but is more like IBM. For details see my Oracle Q4 Fiscal 2010 Analyst Conference Summary or Oracle.com.
Red Hat is probably taking market share from Microsoft, but the market is expanding so fast this should have little effect on Microsoft revenues. Oracle execs claimed to be taking market share from IBM and SAP. Much of Oracle's gain came from the release of Creative Suite 5 during the quarter. Many companies skipped Creative Suite 4, which came out during the recession. A lot has changed in content creation in the last four years, so version 5 will probably be seen as a necessity by most designers.
All of these companies are trading for spectacularly low P/E ratios compared to past technology bull markets. Investors are skeptical after being burned by technology stocks in 2001 and then by almost everything in 2008. I would say the best way to restore confidence is to give profits back to investors in the form of dividends. Every one of these companies could pay an attractive dividend and still earn plenty of cash for operations.
Red Hat, the open source provider of enterprise ready Linux and JBoss middleware, had revenues $209.1 million for the fiscal quarter ending May 31, 2010. That is up 7% sequentially and 20% y/y. For details see my Red Hat Q1 fiscal 2011 Analyst Conference Summary or RedHat.com.
Adobe is known for its content creation programs like Acrobat, now mostly wrapped up in its Creative Suite. Its revenues for the quarter ending June 4, 2010 were $943.0 million, up 10% sequentially and up 34% year/year. For details see my Adobe Q2 Fiscal 2010 Analyst Conference Summary or Adobe.com.
Oracle, the enterprise database and data resource management company had revenues of $9.51 billion in its fourth fiscal quarter 2010 ending May 31. That is up 49% sequentially and up 39% from year-earlier. However, some of that increase is from the acquisition of Sun, which is largely a hardware company. So Oracle is no longer a pure software play, but is more like IBM. For details see my Oracle Q4 Fiscal 2010 Analyst Conference Summary or Oracle.com.
Red Hat is probably taking market share from Microsoft, but the market is expanding so fast this should have little effect on Microsoft revenues. Oracle execs claimed to be taking market share from IBM and SAP. Much of Oracle's gain came from the release of Creative Suite 5 during the quarter. Many companies skipped Creative Suite 4, which came out during the recession. A lot has changed in content creation in the last four years, so version 5 will probably be seen as a necessity by most designers.
All of these companies are trading for spectacularly low P/E ratios compared to past technology bull markets. Investors are skeptical after being burned by technology stocks in 2001 and then by almost everything in 2008. I would say the best way to restore confidence is to give profits back to investors in the form of dividends. Every one of these companies could pay an attractive dividend and still earn plenty of cash for operations.
Thursday, March 25, 2010
Red Hat (RHT) Virtualization Signal
Red Hat (RHT) continues to be not only a fascinating technology company, but a fascinating experiment in investor psychology. It has always been a good company for its customers, who benefit from its enterprise quality, low cost operating system, virtualization, and middleware. Yet the stock began highly overvalued during the first internet stock boom, became vastly undervalued in the crash that followed, and only in 2009 became somewhat overvalued again.
Yesterday's release of results for the quarter ending February 28, 2010, were quite good compared to realistic expectations, but investor's expectations were not reasonable. With Red Hat stock trading today with a Non-GAAP PE (price/earnings) trailing ratio of 41.4 and 40 times future earnings (per NASDAQ.com), meeting investor expectations was an unlikely scenario. You need faster sequential and annual growth rates to justify that kind of PE in this market.
On a GAAP basis, revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter. Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier. EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.
If the stock were at a reasonable price, those would be good numbers. But emotional investors who do not understand the technology market perpetually convince themselves that Red Hat is the next Microsoft. There is a big difference between being a great company in a niche and being the next Microsoft.
For the details you need to make your own analysis of the value of Red Hat stock, see my Red Hat Q4 2010 analyst conference summary and past summaries.
I have owned Red Hat stock at times; I currently do not own any. If sentiment shifts again and Red Hat becomes undervalued again, I might become a buyer. This in-and-out goes against my main line of investment thinking, buying undervalued stocks and holding them for the long term. But most of the stocks I invest in are not as volatile as Red Hat has been.
Compare Red Hat to Marvell Technology (MRVL). Marvell revenues in the quarter ending January 30, 2010 were up 65% y/y and 5% sequentially. Even taking into account the different business models (Red Hat income is subscription based, so steadier), it is reasonable to expect Marvell revenues and profits to grow faster than Red Hat in 2010 and 2011. Yet Marvell is trading at only 21.4 times past earnings and 13.9 times future earnings. Note that I own Marvell stock. But look at the PEs of other Nasdaq 100 technology stocks and you will see what I mean. Even Apple, which I frequently diss as overpriced, has a trailing PE of just 28 today; certainly no bargain, but not unreasonable.
There are a lot of technology stocks that offer better value than Red Hat right now. That is not because they are necessarily better companies (though some might be); it is just because of their relative stock prices.
More data:
http://www.redhat.com/
http://www.marvell.com/
Yesterday's release of results for the quarter ending February 28, 2010, were quite good compared to realistic expectations, but investor's expectations were not reasonable. With Red Hat stock trading today with a Non-GAAP PE (price/earnings) trailing ratio of 41.4 and 40 times future earnings (per NASDAQ.com), meeting investor expectations was an unlikely scenario. You need faster sequential and annual growth rates to justify that kind of PE in this market.
On a GAAP basis, revenue was $195.9 million, up 1% sequentially from $194.3 million and up 18% from $166.2 million in the year-earlier quarter. Net income was $23.4 million, up 43% sequentially from $16.4 million and up 46% from $16.0 million year-earlier. EPS (diluted earnings per share were) were $0.12, up 50% sequentially from $0.08 and also up 50% from $0.08 year-earlier.
If the stock were at a reasonable price, those would be good numbers. But emotional investors who do not understand the technology market perpetually convince themselves that Red Hat is the next Microsoft. There is a big difference between being a great company in a niche and being the next Microsoft.
For the details you need to make your own analysis of the value of Red Hat stock, see my Red Hat Q4 2010 analyst conference summary and past summaries.
I have owned Red Hat stock at times; I currently do not own any. If sentiment shifts again and Red Hat becomes undervalued again, I might become a buyer. This in-and-out goes against my main line of investment thinking, buying undervalued stocks and holding them for the long term. But most of the stocks I invest in are not as volatile as Red Hat has been.
Compare Red Hat to Marvell Technology (MRVL). Marvell revenues in the quarter ending January 30, 2010 were up 65% y/y and 5% sequentially. Even taking into account the different business models (Red Hat income is subscription based, so steadier), it is reasonable to expect Marvell revenues and profits to grow faster than Red Hat in 2010 and 2011. Yet Marvell is trading at only 21.4 times past earnings and 13.9 times future earnings. Note that I own Marvell stock. But look at the PEs of other Nasdaq 100 technology stocks and you will see what I mean. Even Apple, which I frequently diss as overpriced, has a trailing PE of just 28 today; certainly no bargain, but not unreasonable.
There are a lot of technology stocks that offer better value than Red Hat right now. That is not because they are necessarily better companies (though some might be); it is just because of their relative stock prices.
More data:
http://www.redhat.com/
http://www.marvell.com/
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
Sunday, September 20, 2009
Mixed Software Report: Adobe and Oracle
Adobe and Oracle, two of the larger software companies, reported quarter results this week. Adobe (ADBE) was the weaker of the two, with revenue for its quarter ending August 28, 2009 (3rd fiscal quarter 2009) at $697.5 million, down 21% from $887.3 million year-earlier.
Oracle (ORCL), in contrast had revenues of $5.05 billion, down only 5% from $5.33 billion year-earlier.
The two companies are not, in the main, competitors. Adobe sells applications that are used for content creation (print, graphics, and video), and dominates that field. Oracle sells its database applications and related business management software. It competes mainly with IBM, Microsoft, and SAP, mostly successfully.
Adobe's slow sales mainly reflect the economy, not a loss of market share to competitors. Oracle has certainly gained market share this last year, allowing it to compensate for the slowed economy.
Both companies are involved with big acquisitions, which are always a danger for shareholders, but both have been successful with acquisitions in the past. Adobe is aquiring Omniture, a web analytics company. Adobe wants to build web analytics into its web products, and Omniture is a profitable business in its own right.
Oracle, in case you had not heard, is acquiring Sun Microsystems. It may not be able to keep all of Sun because of regulatory issues. A lot of people are afraid it will kill MySQL, the main open-source competitor to proprietory database applicatins. My SQL was bought by Sun not that long ago. The thing about acquiring Sun is that it has been years since Sun has made a profit. Sun, like IBM, is both a hardware and software company. Oracle appears to be wanting to add more hardware to its lineup. Hardware has low profit margins, but if you sell the hardware, you can usually sell software with it.
You can find out more at my Oracle Analyst Conference Summary for September 16, 2009 and my Adobe Analyst Conference Summary for September 15, 2009.
This week, a smaller but still-important software company reports: Red Hat (RHT) on Wednesday, September 23. You can visit my Red Hat Analyst Conference Summary page and bookmark it. I usually post my summaries by the end of the day the conferences occur, unless I have too much other work.
I don't own Oracle or Adobe stock at this time, and I sold my Red Hat stock recently.
Keep diversified!
Oracle (ORCL), in contrast had revenues of $5.05 billion, down only 5% from $5.33 billion year-earlier.
The two companies are not, in the main, competitors. Adobe sells applications that are used for content creation (print, graphics, and video), and dominates that field. Oracle sells its database applications and related business management software. It competes mainly with IBM, Microsoft, and SAP, mostly successfully.
Adobe's slow sales mainly reflect the economy, not a loss of market share to competitors. Oracle has certainly gained market share this last year, allowing it to compensate for the slowed economy.
Both companies are involved with big acquisitions, which are always a danger for shareholders, but both have been successful with acquisitions in the past. Adobe is aquiring Omniture, a web analytics company. Adobe wants to build web analytics into its web products, and Omniture is a profitable business in its own right.
Oracle, in case you had not heard, is acquiring Sun Microsystems. It may not be able to keep all of Sun because of regulatory issues. A lot of people are afraid it will kill MySQL, the main open-source competitor to proprietory database applicatins. My SQL was bought by Sun not that long ago. The thing about acquiring Sun is that it has been years since Sun has made a profit. Sun, like IBM, is both a hardware and software company. Oracle appears to be wanting to add more hardware to its lineup. Hardware has low profit margins, but if you sell the hardware, you can usually sell software with it.
You can find out more at my Oracle Analyst Conference Summary for September 16, 2009 and my Adobe Analyst Conference Summary for September 15, 2009.
This week, a smaller but still-important software company reports: Red Hat (RHT) on Wednesday, September 23. You can visit my Red Hat Analyst Conference Summary page and bookmark it. I usually post my summaries by the end of the day the conferences occur, unless I have too much other work.
I don't own Oracle or Adobe stock at this time, and I sold my Red Hat stock recently.
Keep diversified!
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.
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)
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.
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