Red Hat's black ink
By Sam Williams
June 16, 2000
Buoyed by better-than-expected financial results for the first quarter of
fiscal year 2001, Red Hat (RHAT) executives were racing to jump on the
growing "pathway to profitability" bandwagon this week.
"We believe [Red Hat's] operating loss will decrease for the balance of
2000, until we reach profitability in 2001," said Red Hat chief financial
officer Harold Covert.
Covert's statement followed on the heels of Red Hat reporting operating
losses for the first fiscal quarter of 2 cents a share, 2 cents better than
consensus analysts' expectations according to First Call/Thomson
Financial. Revenues, meanwhile, grew to $16 million, a 95 percent
increase over the same period in 1999, while gross margins grew to 54
percent from 51.7 percent a year ago.
Although the results may have surprised some analysts, they didn't surprise
Covert.
"When we announced our Q4 earnings, we talked about 100 percent
revenue growth and 10 percent growth on gross margins for the year," said
Covert. "I think our numbers yesterday were pretty much in line with those
predictions.
Expects slower growth
Although Covert expects growth to slacken somewhat in the second
quarter, citing seasonal variations in customer demand, he expects recent
strategic moves to speed the company in the coming months. In particular,
he cited Red Hat's midweek acquisition of engineering firm WireSpeed
Communications, a specialist in custom development for both the
embedded systems and telecommunications markets, to solidify the
company's positioning as an infrastructure software and services provider.
"I think it fits our overall game plan," said Covert. "The two fastest growth
areas in the business right now are enterprise servers and embedded
appliances. We're focused on both those areas."
Tuned out
Covert acknowledged that investors who flocked to Red Hat only six
months before probably tuned out the message over the last eight weeks
as Linux stocks suffered in the marketplace.
Covert credited three factors for taking the air out the Linux balloon: An
overall softening of the tech market in the wake of April's antitrust
decision against Microsoft (MSFT), a bursting dotcom bubble that
tarnished the growth-happy business models of more than a few Linux
ventures, and finally the expiration of the six-month SEC-mandated lock-in
period for a number of hot 1999 IPOs.
"Any one of those would have been easy to ride out, but with the
combination of all three, everybody got nailed," Covert says.
Now that the investment mood appears to be shifting back toward
fundamental yardsticks such as profitability and bottom-line growth, Covert
says Linux companies such as Red Hat and VA Linux Systems (LNUX)
should be able to regain some of their luster. Given International Data
Corp.'s latest predicted growth rates for Linux servers and embedded
devices, it's only a matter of time before Linux-related businesses start
spinning open source code into gold, he says.
"It's like we've been saying all along, the business model is sound," Covert
says. "I think people are going to start taking a better look at Linux."
AOL takes IM to the bazaar
With federal antitrust officials casting suspicious eyes on the proposed
TimeWarner-America Online (TWX, AOL) merger, Internet service
provider AOL announced this week that it would open the protocol for its
Instant Messenger online private chat program.
On Thursday, the Dulles, Va.-based company submitted a proposal to the
Internet Engineering Task Force, the grass-roots standards body that
oversees most Internet protocols, to develop an open instant messaging
standard.
AOL, which had jealously guarded the proprietary technology in past
months, has engaged in a running battle with other instant messaging
vendors such as Microsoft, iCast and TribalVoice. It subtly changes its
IM protocol -- thereby barring access to AOL's 50 million IM user base --
each time a competitor product demonstrates compatibility. According to
one competitor, iCast, AOL's IM and ICQ instant chat technologies
dominate 90 percent of the instant messaging market.
In releasing its protocol to the task force, AOL said it was committed to
working with competitors to develop a standard.
While the move might indicate a sudden change of heart, media observers
couldn't help but point out both the Federal Communication Commission
and the Federal Trade Commission's increasing scrutiny of AOL's instant
messaging system. On June 9, the FCC asked for more detailed
information about the closed protocol in a letter to AOL executives. The
FTC, meanwhile, had revealed its intentions of asking AOL execs about
IM in an upcoming review of the TimeWarner-AOL merger.
"It's about time you investigate the stranglehold AOL has on the instant
messaging market," wrote ZDNet columnist Jesse Berst, addressing the
FTC a day before AOL submitted its proposal to the IETF. "It took the
Feds 10 years to finally confront the Redmond bully. By that time,
Microsoft had ruthlessly squashed who knows how many companies. Let's
not give AOL the chance to do the same."
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