Red Hat revenue passes $1 billion milestone

The Raleigh-based Linux software developer joins an exclusive club

dranii@newsobserver.comMarch 29, 2012 

Red Hat, the Linux software company that found a way to make money from free software, has joined the exclusive billion-dollar-revenue club.

The Raleigh business reported after the markets closed Wednesday that revenue for the fiscal year that ended Feb. 29 rose 25 percent to $1.13 billion. Fourth-quarter revenue rose 21 percent to $297 million, ahead of analysts’ estimates.

Net income totaled $55.7 million, or 28 cents per share, up from $51.4 million a year ago and also beating Wall Street estimates, after excluding stock compensation and amortization. Shares rose 9 percent in after-hours trading Wednesday on the strength of the company’s fourth-quarter results.

Only about 20 software companies have ever reached the billion-dollar plateau, Charlie Peters, the company’s chief financial officer, said in an interview.

Red Hat’s sales were robust throughout the recession and have remained strong as the economy slowly rebounds. CEO Jim Whitehurst told analysts during a conference call that the company has enjoyed sequential revenue growth for 40 straight quarters.

Red Hat’s solid growth enabled it to add 800 employees last year, boosting its total to 4,560. It has about 800 workers in Raleigh.

Red Hat zoomed from zero to $1 billion in less than 20 years.

The company traces its history to 1993, when Bob Young created a company in Connecticut called ACC Corp., a catalog business that sold Linux and UNIX software accessories and books. Two years later, Young acquired Red Hat Linux, a company formed by Marc Ewing, and renamed the combined business Red Hat Software. In 1996, Red Hat shifted its headquarters to the Triangle.

Young, now CEO of Raleigh-based Lulu, an online publishing company he founded in 2002 after departing Red Hat, said Wednesday that he is “lost in admiration” for what Red Hat has accomplished.

Young said that in the company’s infancy, when he was struggling to pay the bills and was routinely asked how he expected to make money with free software, he never “at a conscious level” considered that the company could be so successful.

“We used to kid around saying, ‘Look, this thing might not work, but if it does work, it is hard to see the limits of it,’ ” Young said. “We were delivering something of such unique value that none of the billion-dollar proprietary software companies were willing to give their customers, which was control over the technology customers were using to build their systems with.”

Red Hat’s free, open-source software gives customers access to the computer code behind it, which makes it wondrously flexible. The company makes money by charging customers for maintenance and support, and for services such as training and consulting. The bottom line is that Red Hat software is significantly cheaper than that of competitors such as Microsoft.

It’s no wonder that Whitehurst, in a speech to a group of local entrepreneurs two years ago, told them to forget about trying to build a better mouse trap. Instead, he advised them, build a better business model.

Volatile history

Investors have long believed that Red Hat was destined for greatness.

On its first day of trading in August 1999, Red Hat shares jumped a jaw-dropping 272 percent. At the time it was the eighth-best opening day in the history of Wall Street.

That was just the beginning of what, in retrospect, was undeniably a case of irrational exuberance. Within months the company’s shares had risen nearly 20-fold, giving it a market capitalization – the total value of its outstanding stock – in excess of $21 billion.

It was an absurd valuation for a relatively small company. Red Hat had a mere 127 employees when it filed plans to go public and had generated just $10.8 million in revenue in its latest fiscal year.

Although a much bigger company today by any measure, its market cap is nowhere near the peak it reached early on. Red Hat shares closed today at $51.39, down 51 cents, giving it a market cap of $9.9 billion. Its shares have risen 24 percent since the beginning of the year.

When the dot-com bubble burst, Red Hat shares plunged to Earth. But, unlike many young technology companies that crashed and burned, its shares have steadily climbed over the years as the company demonstrated it was a business built for the long haul.

Reliable product

Red Hat software is renowned for its reliability and is used by 28 stock exchanges, including the New York Stock Exchange, that handle over half of the world’s trading volume. That reliability also is attracting corporations as they shift to cloud computing and virtualization. Cloud computing allows access to networks of servers on the Internet. Virtualization software enables efficient use of servers.

Local and state economic development officials kicked into high gear last year when Red Hat, which is currently ensconced at N.C. State University’s Centennial Campus, was looking for a new headquarters site – and wasn’t limiting its search to the Triangle.

Red Hat ultimately chose to move to downtown Raleigh, in an office tower being vacated by Progress Energy, after being promised more than $15 million in state incentives – contingent on the company adding 540 local workers over nine years.

Red Hat expects to start moving downtown this summer but doesn’t expect to be fully moved in until next spring.

Other publicly traded companies based in the Triangle that have surpassed $1 billion in annual revenue include Dex One, Martin Marietta Materials, The Pantry and Progress Energy. Privately held business software company SAS also is a member of the club.

LED lighting company Cree, which is based in Durham, is poised to join the list when it posts its annual results later this year. Cree posted $987.7 million in revenue last fiscal year, which ended in June.

$1 billion stepping stone

Red Hat is confident that the good times will continue to roll.

Charlie Peters, the company’s chief financial officer, projected that revenue for the current fiscal year will grow by up to 20 percent, or more than $200 million, to between $1.34 billion and $1.36 billion. The company also expects to hire 1,000 new workers this fiscal year, including at least 100 in Raleigh, Peters said.

For Whitehurst, who has headed Red Hat since the beginning of 2008, today’s revenue milestone apparently is a stepping stone. He told Bloomberg News in an interview last summer that his goal is to reach $3 billion in revenue in five years.

Ranii: 919-829-4877

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