Practical Technology

A few months back Glyn Moody, noted open-source journalist, asked the question, "Why No Billion-Dollar Open Source Companies?" Jim Whitehurst, Red Hat‘s CEO answered, "Red Hat could get to $5 billion in due course, but that this entailed ‘replacing $50 billion of revenue’ currently enjoyed by other computer companies. Guess what? Red Hat is on its way.

In its latest quarter, Red Hat’s total revenue was $219.8 million, an increase of 20% from the year ago quarter. Red Hat Enterprise Linux (RHEL) Subscription revenue for the quarter was $186.2 million, up 19% year-over-year. I guess Oracle’s attempt to snatch Red Hat’s business away with a re-branded RHEL really hasn’t worked.

In a statement Whitehurst said, "We continued to benefit from new project spending, expansion and cross selling of our product solutions and strong renewals in our top accounts. Our sales execution in the quarter resulted in organic revenue growth of 20% and the best billings growth rate in two years. During the quarter, we introduced our Cloud Foundations portfolio in an effort to help our customers take advantage of the benefits from cloud computing in an open and cost effective way. Our flexible cloud stack will enable customers to run enterprise applications across physical servers, virtual platforms, private clouds and multiple public clouds. We are beginning to see solid interest in our cloud and virtualization initiatives as well as some early deal activity, including our first private cloud management deal over a million dollars."

And, where is Red Hat getting those customers from? In part, it’s from Oracle and other big-name proprietary software companies. As Moody wrote when he spoke to Whitehurst, he admitted "Something rather profound: that open-source solutions save money for customers by doing away with the fat margins for existing computer companies–and thus shrink the overall market."

Exactly. Open source and Linux is good news for customers and open-source companies, but it’s not good for companies that want iron-control over their customers’ software, such as Oracle.

Red Hat’s net income was, of course, no where near as high as its gross income. The net income for the quarter was $23.7 million, or $0.12 per diluted share. This was down from $28.9 million, or $0.15 per diluted share, in the year ago quarter. But, that drop is something of an illusion. That year ago quarter included a one time tax benefit of $7.3 million, or approximately $0.04 per diluted share.

In terms of being a billion dollar company, it looks to me like Red Hat is well on its way. As Charlie Peters, Red Hat’s Executive VP and CFO wrote in a statement, "Our revenue and operating income growth continued this quarter with strong double digit gains in both, despite the foreign currency head wind." Pretty darn good for this economy wouldn’t you say? Peters continued, "It is clear that our value proposition is resonating with customers." He’s got that right.

As it is, Red Hat’s total cash, cash equivalents and investments as of August 31, 2010 was $1.05 billion. Yes, you read that right; Red Hat already has a cool billion socked away. Even if Red Hat’s growth cools off, and I don’t think it will, by this time next year Red Hat, which is now in fiscal year 2011, will be well on its way to being the first billion-dollar pure-play open-source company for its fiscal year 2012.

Sigh. Its times like this that I’m sorry I can’t own any technology firm stocks, or I’d be betting hot and heavy on Red Hat.

This story first appeared in ComputerWorld.