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Red Hat Releases 2nd Quarter Financials
Booker writes "Red Hat, Inc. has released their 2nd quarter financial results. You can see the press release here. Operating at a loss, but then we all knew that would happen for a while. Revenues up 95% over last year.
Kinda ironic that an Open Source company has to join The Man on Wall Street before their balance sheet becomes publicly available. :)
- Big companies like Dell and IBM have staff that remember what happened when some uncareful deals were made with Microsoft.
- It may be cheaper to keep several Linux vendors alive and kicking than to commit to one.
- Playing the My Kernel Developer Is Better Than Your Kernel Developer game is none too safe.
- The Only Works With RedHat Linux label came long ago, and can't afford to stay.
This should not be misread as a prediction of impending failure, but merely to say that the commonly misperceived "infinite clout" just isn't that "infinite," even if they do have some on-paper billionaires...If it hadn't been for some real sharp intellectual property lawyers, Microsoft would probably have been a bit of "IBM toe jam."
After all, Macmillan Publishing was "devoted" to Red Hat Software until they became "devoted" to Linux/Mandrake...
Look, for instance, at the VA Linux Systems Ubergeek List. Note that they've "got" Ted T'so and H.J. Lu, amongst quite a list of important "Kernelmeisters."
Red Hat has some notable kernel hackers, notably Alan Cox and Stephen Tweedie; it is not vastly apparent that they have infinite clout in this regard.
If you're not part of the solution, you're part of the precipitate.
The last quarterly earnings for MSFT I could fine states MS brought in revenues of $4,331,000,000 for the quarter ending March 31st. Versus $4,400,000 for RHAT.
Or put another way, it takes Microsoft a little over 131 minutes to bring in revenues equal to what RHAT brings in during a quarter!
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Why does everyone keep saying that they're going to turn a profit eventually?
Their business model is unsustainable. They sell support, and at a flat-rate fee that doesn't cover the cost of support for those who use it. The only way they could turn a profit is to have the vast majority of people who buy their product need little or no support. Sooner or later people are going to figure out that it's stupid to buy the retail package just because they might want the support at some point in the future. After all, they can try to install it for free and then pay for the support only if they need it.
The revenues they have now are a mix of Linux-boosters who are giving charity and ignorant people who don't understand that the software is free.
They will never sustain big corporate clients, because an in-house Linux expert is cheaper and more useful.
Red Hat is never going to turn a profit, unless it becomes a fashionable charity. Yet another high-profile, high-price stock with nothing behind it.
No, it is not a requirement that companies have to eventually file an IPO. There are many companies out there that are privately held (not publicly traded).
A public offering is basically the sale of ownership of a portion of the company - this allows RHAT to receive a bunch of $$$ to finance their continued growth (which they're going to definitely need, as we'll see later). The other option is to NOT file an IPO, and continue to finance their growth expenses from their tiny current revenue stream.
Investors are willing to pay a huge premium now for two reasons: #1, based on the revenue growth rates (i.e. 95% per year), this company COULD be making a ton of money 5-10 years from now, and #2 they read all about it on Slashdot (OK, maybe not).
Why does RHAT need such aggressive growth? Well, 5-10 years from now, their business model indicates that they will be primarily a services company (remember, the base product is free). So, they don't make money selling millions of copies of RHAT linux (which one person with a CD burner could do in their basement). Rather, they make money providing support and customization services for millions of copies of RHAT linux (which requires thousands of service provider gurus worldwide). Without very aggressive expansion, they can't achieve that.
Note the cycle here - RHAT needs $$$ to continue to grow, and investors only value RHAT primarily on the growth it displays (for future returns). So, if they can't continue to display astounding growth quarter after quarter, the stock goes in the tank. That's why announcements like these are important - even though the company is losing money, the revenue stream is demonstrating growth.
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I still can't figure out how a $4 million revenue company (quarterly) with a $0.09 per share loss (quarterly) can be worth $7.4 billion. It makes no sense. There are companies with over $1 billion in annual sales reporting huge profits not valued that high. Linux-Mandrake sales in July (10,445) more than doubled Redhat sales (4802). SuSE apparently is a profitable organization. My only guess for its high evaluation is because it is the sole pure linux stock available right now. When more Linux companies go public, watch for Redhat's stock to drop some.
A company can operate at a loss for a while, as long as there is a reasonable expectation for profits in the future.
Simple example: I'm Bob Young, I have $1 billion dollars in my pocket, and I want to start a company for my hot new product, Linux Cabbage Patch Beanie Babies. I anticipate that my expenses will be $10 million the first year, and grow at 10% per year as my company grows. Also, I anticipate that my revenue will be $1 million the first year, and will grow at 100% per year as my hot new product catches on.
(Excuse the ugly formatting on this table - I hope you get the idea):
Year Expenses Revenue Profit
1..... 10..... 1..... -9
2..... 11..... 2..... -9
3..... 12..... 4..... -8
4..... 13..... 8..... -5
5..... 14..... 16.... +2 (woo hoo!)
6..... 15..... 32.... +17 (jackpot!)
etc.
Now, suppose I'm not Bob Young, and I only have $10 million in my pocket. Based on the above numbers, I'm bankrupt after year 2. So, I need to find investors (either one big one, or lots of little ones) who believe that these LCPBBs are as hot a product as I think they are, and will finance this loss in the short term in order to reap profits in the long term. A corporate merger would give me one big investor - an IPO gives me lots of little ones.
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