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Linux Subscriptions Paying Off for Red Hat

Red Hat
There is a way to make money from Linux even in a down economy -- it's called subscription revenues.

Linux vendor Red Hat yesterday reported growth in income and revenues on the back of renewal rates for its Linux support subscriptions. Revenues for the company's third fiscal quarter for 2009, which ended Nov. 30, hit $165.3 million, an increase of 22 percent over its third-quarter fiscal 2008 performance a year ago.

On the net income side of the books, Red Hat (NYSE: RHT) reported income of $24.3 million, or 12 cents per share, which is an improvement over the $20.3 million or 10 cent per share it reported for the same period last year. Minus taxes and other costs, profit totaled 24 cents per share, topping Wall Street estimates of 17 cents per share, according to Reuters Estimates.

"Starting with a few highlights from fiscal Q3, we continued to see strong renewals and upsells," Red Hat CEO Jim Whitehurst told analysts during the company's earning call. "We renewed all of the top 25 deals that were scheduled to renew this quarter and they were renewed at approximately 106 percent of prior year's value."

Red Hat CFO Charlie Peters reported that overall subscription revenue for the quarter was $135.5 million, up 17 percent year-over-year. Peters also emphasized Red Hat's subscription model as a key to continued stable growth.

"Our results demonstrate the strength and predictability of our business and the continued demand for open source solutions," Peters told analysts. "Keep in mind that 82 percent of our revenue is recurring and subscription-based. Some of the most mission-critical trading systems in the world run on Red Hat and more mission-critical work is moved our way every quarter."

Among the top deals renewed by Red Hat were three multi-year renewals with large financial services firms. One of Red Hat's top 25 deals also includes a one-year transaction in which the customer moved from a free version of Linux to Red Hat's paid subscription model -- a sale Whitehurst described as a six figure deal.

Red Hat executives on the analyst call did not specifically identify which flavor of free Linux had been abandoned through that six-figure deal. Red Hat develops a free community version of Linux called Fedora, and there are numerous clones of Red Hat Enterprise Linux as well, including one called CentOS.

"This was not a compliance-related initiative," Whitehurst said. "This was purely a getting the customer to understand the value of a paid subscription."

Peters added that the free-to-paid win in the third quarter wasn't the first such deal that Red Hat has had.

Additionally, Red Hat believes there's a large potential opportunity to move users from free versions of Linux to paying subscriptions. Whitehurst noted that Red Hat has over 2.5 million paid subscriptions for Red Hat Enterprise Linux (RHEL). In contrast, Paul Frields, Fedora's project leader, recently told InternetNews.com that Fedora has over 9.5 million users.

"There’s a lot of free RHEL out there. There’s a lot of free, forked versions of RHEL -- the RHEL derivatives -- out there, so again as we build it up, we do a bottoms-up build every year from what our sales force is seeing and what we think we can go get," Whitehurst said. "And we do think there’s a lot of opportunity out there."

He added, however, that it's difficult to make accurate predictions on the number of likely candidates to transition from a free user to paying RHEL customer.

"It's hard for us to ever get those numbers [of free users] synced back up with the top-down view, other then to say that ... there's a substantial amount out there."