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Wheww Heeww! Red Hat Posts Narrower First-Quarter Loss

By Reed Stevenson

SEATTLE (Reuters) - Red Hat Inc. (NasdaqNM:RHAT - News) on Tuesday posted a smaller first-quarter net loss as it cut expenses to offset an 8 percent drop in revenue related to sales of the Linux computer operating system.

Red Hat, based in Raleigh, North Carolina, said its net loss narrowed to $4.3 million, or 3 cents per share, from a net loss of $27.6 million, or 16 cents a share, a year earlier.

Excluding amortization of goodwill, stock-based compensation and other charges, the supplier of Linux posted an operating loss of $829,000, or nil per share, for the quarter ended May 31. That compared with a loss of $154,000, or nil per share, a year earlier.

Linux can be used and modified freely, unlike Microsoft Corp.'s (NasdaqNM:MSFT - News) Windows operating system.

Analysts polled by research firm Thomson First Call had expected on average breakeven on a per-share basis, excluding charges.

Revenues were $19.5 million, down from $21.4 million a year earlier, but slightly stronger than the company's own forecast of $19.2 million.

Red Hat, which has been shifting its focus toward higher-margin corporate customers, said sales to large enterprises grew 8 percent from the previous quarter.

For the second quarter, Red Hat expects revenue to rise to between $21.8 million and $22.4 million, Chief Financial Officer Kevin Thompson told a conference call, with 90 to 92 percent of that coming from enterprises.

Continued enterprise sales would keep Red Hat on target to achieve its fiscal 2003 goals of 26 percent growth in sales, the company said, reaffirming earlier guidance.

That would mean sales of between $99.5 million and $101 million for the full year, with a full-year profit, excluding charges, of between 4 to 5 cents per share.

Thompson said Red Hat expected a net loss of $3.3 million to $3.8 million, or a loss of 1 cent or nil per share in the second quarter. On an operating basis before charges, Red Hat said it sees a loss of $1.8 million to $2.3 million, or a profit of 1 cent or nil per share.

More guidance would be issued at an analysts conference scheduled for June 27, Red Hat said.

Red Hat shares closed at $5.50 on Tuesday, up 0.18 percent on the day, but down nearly 23 percent so far this year.

The shares slipped to $5.41 in after-hours trade.

HIGHER-END PLATFORMS TARGETED

While Linux free software has been gaining ground as an alternative operating system for corporate servers and computers, Red Hat depends on distribution and technical consulting, an area of corporate spending that has been tightly constrained.

But Chief Executive Matthew Szulik remained optimistic about the outlook for Linux and Red Hat's role in the growth of open-source software.

"Our list of enterprise customers deploying Linux strategically has grown quarter to quarter," he told analysts on a conference call to discuss the results.

Companies such as Amazon.com and AOL Time Warner have turned to Linux as cheaper way to handle corporate computing tasks.

"The big story is Unix-to-Linux migration," Szulik told Reuters in a telephone interview, referring to the proprietary operating system that Linux is modeled after. A version of Unix, Solaris, is sold by Sun Microsystems Inc. (NasdaqNM:SUNW - News).

Up to now, Linux has largely been limited to the world of desktops while proprietary Unix systems have dominated the large-scale computing and server market. Unix's market share has been eroded, however, by Microsoft's aggressive expansion into the area and the threat from Linux as an alternative for lower-cost systems.

Szulik, said, however that an upcoming version of Red Hat's Linux distributed software would support 64-bit computing, which will be available on Intel Corp.'s (NasdaqNM:INTC - News) next-generation Itanium processors and help Linux gain a greater foothold on large-scale enterprise platforms.

"We are going to increasingly compete in higher-end systems," Szulik said.

Szulik said, however, that Red Hat was watching closely to see whether Sun would move into the Linux market with a product of its own. Sun said last month it would come out with a Linux product and also make Solaris more compatible with Linux systems.

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