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Profit Pops at Red Hat But KVM Payoff Will Wait - InternetNews.
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Profit Pops at Red Hat But KVM Payoff Will Wait

Despite a slowing U.S. economy, Linux vendor Red Hat continues to grow, thanks in part to uptake of its JBoss middleware solutions as well as an expanding business for its Red Hat Enterprise Linux solutions. But it cautioned investors not to expect an immediate return from its recent moves in virtualization and from other initiatives, like Fedora.

Revenues for the company's second fiscal quarter for 2009, which ended Aug. 31, hit $164.4 million, an increase of 29 percent over its second-quarter fiscal 2008 performance a year ago.

On the net income side of the books, Red Hat (NYSE: RHT) reported income after charges of $21.1 million, or 10 cents per share, which is an improvement of 16 percent over the $18.2 million it reported for the same period last year.

Before adjustments for charges and other expenses associated with Generally Accepted Accounting Principles, Red Hat posted a per-share profit of 20 cents -- topping Wall Street estimates of 18 per share, according to analysts polled by Thomson Reuters.

Though revenues and earnings are on the rise, there are a few areas of the Linux distributor's operations that aren't yielding any revenues yet.

On a call with financial analysts discussing its results, CEO Jim Whitehurst noted that Red Hat is not making any money at all from its Fedora Linux distribution. Whitehurst also noted that Red Hat is not expecting to make any money this year from its recently acquired Qumranet virtualization technology.

That acquisition was a major focus for analysts on the call, who repeatedly questioned Whitehurst about the financial impact that Qumranet and its Kernel-based Virtual Machine (KVM) technology would have. The technology competes with Xen, a hypervisor long used by Red Hat in its enterprise offering, but the company has claimed that it better positions Red Hat to challenge a different foe entirely: Microsoft.

Whitehurst responded that Xen remains the virtualization technology in Red Hat Enterprise Linux 5 and that the company doesn't plan to change that. He also reiterated that while some industry observers see a looming contest among virtualization hypervisors stemming from its Qumranet buy, he's not among them.

"We strongly believe that the hypervisor, over the long term, is relatively irrelevant," Whitehurst said. "In the same way people used to buy TCP/IP stacks and now that's built into the operating system, that will happen with virtualization as well."

Whitehurst was also asked about whether or not Red Hat has plans to monetize its free Fedora Linux distribution. The open source Fedora Project -- a community-oriented Linux distro backed by the company -- began five years ago this week.

"Fedora is our key open source development platform with the community -- we have no plans to change that," Whitehurst said. "It is our community edition from which we develop a true enterprise-class piece of software with Red Hat Enterprise Linux, so it's core to what we do. It's not something we look at directly monetizing nor is it something that we have considered."

[cob:Special_Report]In terms of the challenges that face the continued growth of Red Hat's business, Whitehurst also addressed a question about the competitive threat from Oracle. Red Hat competes with Oracle (NASDAQ: ORCL) for both the middleware business and on the platform business against Oracle's Enterprise Linux, which is based on Red Hat technology.

"We rarely see them out there on the deals," Whitehurst said. "We feel strongly that [Oracle Linux] is a fork that doesn't provide a whole lot of incremental value. We feel good about our relative position competing with them."

That said, Whitehurst reiterated the statement he made last quarter that Red Hat's JBoss business is gaining at the expense of Oracle's BEA division.

Whitehurst also addressed concern about the relative exposure of Red Hat to the turmoil in the financial services market. Among Red Hat's large financial services clients is the New York Stock Exchange. Both Whitehurst and Red Hat CFO Charlie Peters noted that the financial services vertical only represents approximately 10 percent of Red Hat's revenues, so they are not overly exposed.