Red Hat Revenues Up Despite SCO Claims

Red Hat said Thursday that its second quarter fiscal
2004 results show that its business is continuing to thrive despite attacks by
SCO Group on Linux, though it is not unaffected.

“We’re able to continue to grow our business, and our customers are
continuing to deploy our products despite the noise that’s being generated
in the marketplace,” Kevin Thompson, executive vice president and chief
financial officer at Red Hat, told analysts during the company’s quarterly
results conference call Thursday.

However, Thompson conceded that the business has been affected by SCO’s
claims that Linux is an unauthorized derivation of its Unix intellectual
property, upon which it has based further claims that enterprise Linux
users must buy a license from SCO or risk copyright infringement liability.

Thompson said that Red Hat has had to spend a “significant amount of time
walking customers through the issues.” He also noted that potential
customers who have been sitting on the fence concerning Linux deployment
are using SCO’s claims and its multi-billi
on dollar lawsuit
against IBM as an excuse to continue
sitting on the fence.

“It is in our customers’ interest and the industry’s interest to have this
case resolved as soon as possible,” Thompson said.

He also noted that Red Hat does not know when SCO’s motion to
Red Hat’s lawsuit against it will be heard. However, he said
the company is confident that the lawsuit will continue to move forward.

“Clearly we believe that we have a compelling set of facts in the case that
we brought,” he said. “We believe that case will continue to move forward.”

Red Hat launched its lawsuit
against SCO in August, in order to “stop SCO from making unsubstantiated
and untrue public statements attacking Red Hat Linux and the integrity of
the Open Source software development process,” Red Hat CEO Matthew Szulik
said at the time.

On Thursday, the company boasted that it recognized its very first
operating income as a publicly traded company in the second quarter of its
fiscal 2004.

The company, which reported its Q2 results after the bell Thursday, said it
had a net operating income of $240,000 in its second quarter, as compared
to a net operating loss of $1.1 million in the prior quarter, and a net
operating loss of $4.7 million in the year-ago quarter.

It also reported a net profit of $3.3 million, about 2 cents per share, for
the quarter, beating consensus estimates of analysts polled by Thompson
First Call, which forecast earnings of 1 cent per share. Total revenue came
in at $28.8 million, up 36 percent from the $21.1 million it reported in
the year-ago quarter.

The company said the purchase of annual subscriptions of its software rose
10 percent during the quarter. Tim Buckley, executive vice president and
chief operating officer at Red Hat, said that expanding its number of
deployments and multi-year agreements, the company is also gaining ground
in the federal sector. He also noted that the financial services sector
continues to expand rapidly, and momentum is building with application
vendors porting their offerings to Red Hat Enterprise Linux.

“We are seeing the market broaden,” he said. “More companies in various
industries are beginning to deploy our solutions.”

Deutsche Bank Securities Analyst Brian Skiba looked upon Red Hat’s results with favor.

“Red Hat came in with strong results for Q2 and our estimates are going up,” Skiba said in a research note Friday. “The company continues to be a benefactor of reasonable momentum from Linux in the marketplace. The margin expansion story is really beginning to play out, supporting our Buy thesis. We continue to believe Linux momentum remains strong, even in the face of the SCO lawsuit.”

Skiba pointed to the company’s 90 percent year-over-year renewal rate for annual subscriptions, and added 26,000 new annual subscriptions during the quarter.

“Deferred revenue, the key measure of enterprise subscription bookings, grew to $30.4 million, up 26 percent, or $6.3 million sequentially,” Skiba said. “Management noted the pipeline is strong and continues to grow.

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