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'Strong Results': Red Hat's Revenues, Profits Soar To Open New Fiscal Year

Posted June 28, 2006

— Driven upward by a 45% jump in subscription renewals, Red Hat (Nasdaq: RHAT) launched its fiscal 2007 year with earnings of $13.8 million, the Linux software developer and services provider reported on Wednesday.

Chief Executive Officer Michael Szulik described the financial report as "strong results" in a conference call with analysts after the markets closed. Subscription revenues reached $71.5 million.

Red Hat's aggressive international growth strategy and its focus on serving existing customers is paying off, Szulik said.

Noting that the Hatters had added more than 10,000 new customers in the quarter, Szulik said the number reflected "the continued expansion of our global customer base".

Red Hat also signed renewal agreements with all 25 of its top customers whose contracts came due in the quarter, he added. Szulik noted that Red Hat has now won renewals with 99 of 100 top customers over the past four quarters.

Red Hat reported quarterly revenues of $84 million, a 38% increase from one year ago. Earnings hit $13.8 million, or 7 cents a share, compared to $12.4 million or 7 cents in 2005.

Expenses did increase to $57.9 million from $40.5 million in the same 12 months last year. Red Hat attributed the expense increase to increased sales, marketing and engineering costs.

"We're excited to enter fiscal 2007 with strong, consistent results," Szulik said.

Analysts had estimated Red Hat would report 6 cents to 9 cents a share in earnings. In the conference call, Red Hat said questions concerning the expensing of stock options helped confuse the earnings picture.

Red Hat shares dropped 71 cents, or 3 percent, in after-hours trading.

Looking ahead through the rest of the year, Chief Financial Officer Charlie Peters increased Red Hat's revenue estimates to $400-405 million from $370-375 million. The jump reflects revenues from open source developer JBoss, which Red Hat recently acquired. Red Hat also closed on acquisitions of partners in India, Brazil and Argentina in the quarter.

"The first fiscal quarter marks a great start to an exciting year for Red Hat," Peters said in a statement. "In particular, we continued to deliver rapid top-line growth and market share gains.

"While profitability comparisons to prior periods' results are skewed as a result of the implementation of FAS123R (expensing of stock options) and a higher non-cash tax rate, the company's core operations continue to improve in efficiency as evidenced by our growing cash flow," he added. "Furthermore, the actual cash that we have to invest back into the business to drive growth is not affected by the accounting treatment."

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