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!
Showing posts with label operating systems. Show all posts
Showing posts with label operating systems. Show all posts
Friday, March 30, 2012
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
Wednesday, March 24, 2010
Adobe (ADBE) Illustrates Tech Spending Revival
Adobe (ADBE) held its first quarter fiscal 2010 analyst conference yesterday and reported generally good numbers. Revenue was $858.7 million, up 13% sequentially from $757.3 million and up 9% from $786.4 million in the year-earlier quarter. Earnings per share (EPS) were $0.24, up sequentially from negative $0.06, but down 20% from $0.30 year-earlier. (See my Adobe Q1 2010 conference summary)
Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.
I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.
Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.
Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.
In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.
2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.
I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.
Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.
Note that the quarter reported ended March 5, 2010. So the period mostly overlaps with what most companies would call their first quarter ending March 31, 2010. So it is an early indicator for software, and probably hardware, trends in the quarter.
I don't own Adobe stock, nor do I think it is undervalued compared to other tech stocks. But I do think that revenues and profits will accelerate this year.
Creative Suite 5 (CS5), the upgrade from CS4, will be released later this year. CS4 has been a disappointment, and that is mainly due to the recession and the Windows operating system cycle. CS4 corresponded to Windows Vista; CS5 will take advantage of Windows 7.
Can we admit now that much of the depth of the recession in the last quarter of 2008 and first quarter of 2009 was a business panick? Businesses cut their purchasing to the bone, some times well into the bone, because of economic uncertainty from the banking/financial sector failures, which in turn had been triggered by the housing downturn. But except for housing and finance, by and large the technology businesses were healthy. Many had large pools of cash to draw on, and were never in any danger of going under. By firing employees and cutting their own spending they made the economy worse, in particular within the tech sector, where they do a lot of buying each other's products.
In Adobe's case lots of people, freelancers and corporate drones alike, decided they could make do with CS3 rather than upgrading to CS4. Also, CS4 did not run so great on Windows XP. Remember when XP was introduced and their was the usual anti-Microsoft campaign and people were slow to adopt it? Then, once they learned XP and got used to it, they could not live without it and did not want to learn a new operating system. The same might have been true of Vista. I use Vista and it was a major improvement on XP. But between the usual timidity and the recession, a lot of people, including large enterprises, skipped Vista. Delaying taking advantage of its higher productivity over XP. Of course, Vista consumed more resources (faster processors, more memory), so by sticking with XP people were also able to avoid hardware upgrades.
2010 looks like it is shaping up to be one big refresh cycle. Old desktops can be replaced by supercomputers or even notebooks at $500 per pop. Windows 7 has gained people's confidence and really shines on newer hardware. And CS5 is going to have many new features that will increase productivity among creative professionals. As the guys at Adobe said, Create Suite lets you create once, then easily export the content to print, large screen Web format, mobile format, or even high-definition video. And it won't work well with a pokey old single-core computer running XP.
I am predicting a great year for AMD, Intel, NVIDIA, Adobe, and Microsoft. Most other innovative tech companies, both hardware and software, should do well to the extent they are competitive within their specialties. Right now the tech companies I actually own are Marvell, AMD, Dot Hill, Microchip, TTMI, SGI, and Applied Materials. Typically the first quarter of a year is seasonally down for tech companies, but I expect it to be less seasonally down than usual, followed by ramping through the year.
Later today Linux specialist Red Hat will report results for its quarter ending February 28. At openicon.com I'll be posting my Red Hat (RHT) analyst conference summary soon after the conference ends. And probably my column hear tomorrow will give some additional insight into Red Hat.
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
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)
Subscribe to:
Posts (Atom)
