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December 21, 2006

Red Hat bullish in face of Oracle and Microsoft threats

If recent moves into the Linux market by Oracle and Microsoft have impacted market-leading Red Hat Inc, it's not showing up on the company's financial statements yet.

By CBR Staff Writer

Red Hat yesterday reported a fiscal third quarter that impressed Wall Street and sent its share price up, in after-hours trading, to levels approaching those of early October, before Oracle Corp made its move against Red Hat Linux.

GAAP net income did fall during the three months ended November 30, from $24.6m a year ago to $14.6m this year, but that was largely due to non-operational stock option expenses and taxes. Without that, profit was $29.6m, or $0.14 a share, two cents better than the analysts’ estimate.

Revenue was up 45% at $105.8m. Revenue from subscriptions was up 48% at $89m. Chief executive Matthew Szulik, speaking to analysts, seemed to essentially dismiss the immediate impact of Oracle and Microsoft, noting that bookings were particularly strong.

We’re cautiously optimistic that competitive efforts by some of the largest technology companies are actually expanding our opportunities, he said.

In late October, Oracle announced that it would start selling support for a de-branded version of Red Hat Linux, and that it would undercut Red Hat’s pricing. While some observers did not buy the hype, Wall Street jitters were enough to cut 24% off Red Hat’s share price the next day.

Even more controversially, in November, Microsoft teamed with Novell to offer SUSE Linux support, as part of a deal that seemed designed, at least by Microsoft, to create uncertainty about Red Hat’s intellectual property standing and drive sales to Windows and/or SUSE.

They’re simply trying to bang on a drum that was banged on three years ago in the SCO case, Szulik said, referring to SCO’s floundering lawsuit against IBM over Linux IP.

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Not surprisingly, yesterday analysts’ attentions were still caught up in the potential implications of these two new competitors.

Szulik was somewhat dismissive of the pricing pressure, noting that when volume discounts are considered, price was not at the forefront of the minds of large enterprise Linux buyers.

He added that 98 out of the 100 largest deals up for renewal in the last 12 months we in fact renewed. In the third quarter, only one of the top 25 Red Hat Linux customers did not renew, and that was because they became a competitor, according to Szulik.

He also did not seem too impressed with the Microsoft-Novell announcement from earlier this week that Deutsche Bank, Credit Suisse and AIG Technologies have become the first customers under the new partnership. Szulik said the deals we not competed.

Those were existing accounts, and at least one of them is also a Red Hat account. They were older engagements and we were not involved with those, Szulik said. I don’t think that they opened it up for competition at this time.

Chief financial officer Charlie Peters said he expects earnings per share for the current quarter to be $0.14 to $0.15, up to two cents better than analysts on average had been expecting. Shares were up as much as 15% in after-hours trading.

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