Red Hat Could Also Roll-Up OpenSource

Last month IBM, when it showed interest in buying Sun, set off a flurry of speculation about the takeover of the open source giant, Red Hat, by Oracle. Let’s take a closer look.

Founded in 1993, Red Hat is the leading open source solutions provider with annual revenue of $652.6 million. Its main products are its operating system platform, Red Hat Enterprise Linux and JBoss Enterprise Middleware. As per IDC, Linux-based servers accounted for 13.6% of all server revenue in the fourth quarter of 2008, up one percentage point from last year.

By 2006, even Oracle had forayed into the open source market with its own version of Linux. And since then, speculation has been rife that it would acquire Red Hat. IBM’s recent bid for Sun refueled these speculations. Now that the IBM-Sun deal has failed, what happens next? Red Hat has a market cap of about $3.5 billion and in my opinion, they should try to do an OpenSource roll-up themselves. We observed in our last post on Oracle that it is likely to roll-up SaaS next, and recommended several acquisitions for Sun in the Open Source arena, which could just as well as acquisitions for Red Hat.

On the financial front, Red Hat, Inc. (NYSE:RHT) last month reported fourth quarter earnings that beat analyst estimates driven by cost measures and share repurchase. Q4 revenue was up 18% to $166.2 million with subscription revenue up 14% to $139.4 million. GAAP net income for the quarter was $16.0 million, or $0.08 per diluted share, compared with $24.3 million, or $0.12 per diluted share, for the prior quarter and $22.0 million, or $0.10 per diluted share, in the year ago quarter. Non-GAAP adjusted net income for the quarter was $42.3 million, or $0.22 per diluted share. Analysts estimated earnings of $0.20 on revenue of $167 million.

For the full year, total revenue was up 25% to $652.6 million and subscription revenue was up 20% to $541.2 million. GAAP net income was $78.7 million or $0.39 per diluted share, compared with $76.7 million or $0.36 per diluted share in the prior year.

In fiscal 2009, Red Hat made two key acquisitions of Amentra and Qumranet that support its Middleware and Datacenter strategies. Operating cash flow was $59.7 million in Q4 and $236.4 million for the full year. Total deferred revenue balance at the end of the year was up 15% to $543.1 million. Total cash, cash equivalents and investments were $846.1 million at the end of the quarter. Red Hat redeemed $570 million in convertible debt and repurchased 2.9 million shares.

For the fiscal year 2010, Red Hat expects total revenue in the range of $720 to $735 million, representing growth of 10 to 13%. Non-GAAP EPS is expected in the range of $0.58 to $0.62 per share. Q1 Revenue is estimated to be between $171 and $173 million and non-GAAP EPS is estimated to be about $0.13 to $0.14 per share. The stock is currently trading around $19 after hitting a 52-week high of $18.78 on April 3. It hit a 52-week low of $7.50 on November 21.