Red Hat Tipping Point?
March 29, 2012
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.
William P. Meyers
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