Red Hat Gaining Share of IT Budgets

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 |  About: Red Hat, Inc. (RHT)
by: Larry Dignan

Red Hat’s (NYSE:RHT) fiscal third quarter results add up to one conclusion: The company is gaining more share of corporate IT budgets.

Indeed, the company met, or beat, expectations on all key metrics: Revenue, deferred revenue, billings, deals signed and earnings. Red Hat landed larger deals and upped its outlook for the fourth quarter and fiscal 2010.

Red Hat reported pro forma earnings of $33.5 million, or 17 cents a share, a penny ahead of Wall Street estimates (statement). Including a charge related to a litigation settlement, Red hat reported net income of $16.4 million, or 8 cents a share, down from $24.3 million, or 12 cents a share, a year ago. Revenue was $194.3 million, up 18 percent from a year ago.

For the fourth quarter, Red Hat projected revenue of $191 million to $193 million with pro forma earnings of 15 cents a share to 16 cents share. Earnings are in line with consensus estimates and revenue is higher than the $190 million expected. For fiscal 2010, Red Hat projected revenue of $743 million to $745 million, ahead of its previous range of $720 million to $735 million.

Simply put, Red Hat is executing well.

Part of Red Hat’s momentum can be attributed to landing big deals. Red Hat has won high-profile endorsements in the government sector with the Department of Defense and the White House. The company also landed a big deal with NTT, the large Japanese telecom. Red Hat CEO Jim Whitehurst also noted on a conference call that the company had “several wins, which include a large private cloud implementation project with a major movie studio.”

These deals are a mix of virtualization management applications and the core Red Hat Enterprise Linux.

Red Hat CFO Charlie Peters highlighted deals for Red Hat’s enterprise lineup as well as JBoss, its middleware suite. Peters noted on a conference call:

Our top 30 deals in the quarter included 14 deals over $1million. One, deal over $5 million and two sizable free-to-paid deals, within these top deals we saw continued growth customer deployment and traction for RHEL Advanced Platform and JBoss at 23 deals include RHEL and eight deals include the JBoss components and one deal is primarily virtualization product.

One of the top deals with large financial services from the renewed and significantly expensed infrastructure as it migrates to Microsoft Windows to Red Hat Enterprise Linux, coupled with a migration to JBoss for another java based platform. This migration path as resulted in saving of a $0.5 million to-date and they expect to serve us a $1 million a year end hardware and support cost by moving from a Windows based environment to a virtualizes Red Hat Enterprise Linux Environment.

In the server operating system wars, Red Hat is making progress against Windows servers, but the company is still being used to replace Unix overall. When an analyst asked Whitehurst about whether Red Hat was replacing Windows more frequently in the market, he said:

It’s still primarily Unix. One of our major deals was a Windows to Linux (move). We’re competitive against Windows, but the value proposition is just so extreme versus Unix. I’ll certainly say we are seeing more progress against Windows than we were a year ago. I think as people get more comfortable with the product and get a chance to demonstrate of that broader value proposition, certainly it’s an increasing mix to gets Windows, but still that would be in the minority of business.

Piper Jaffray analyst Mark Murphy said in a research note that:

(Red Hat’s results are) “consistent with our global partner survey that revealed a better Q3 demand environment and an improving pace of Unix-to-Linux migrations. Finally, our customer survey work continues to indicate that Red Hat is rapidly gaining a greater share of IT budgets and taking market share from the competition.

Deutsche Bank analyst Todd Raker noted Red Hat’s take on better IT spending:

We came away from Red Hat’s November quarter results encouraged that 1) the overall macro environment is improving for IT, and 2) Red Hat is re-emerging as one of the better growth companies in software. We believe it is poised to continue its strong growth profile as IT spending and server shipments rebound.

What’s next for Red Hat? More of the same, with a few tuck-in acquisitions. Peters said:

From an M&A perspective, the type of targets we would look really hasn’t changed much. We’re looking at technology to tuck in as compliment to our existing business. The second (area) might be something in the services space. Then the third might be something in the distribution area that helps us get into geographies that we currently don’t have a large present. Generally, these types of companies in our space are going to be relatively small.