Red Hat And NetApp Beat Estimates

The strong results from storage and data management solutions provider NetApp, with annual revenue of $3.4 billion, and Red Hat, the open source giant with annual revenue of $652.6 million, reflect the improving market conditions and the fact that IT spending is easing up.

In November, NetApp (NASDAQ:NTAP) reported a strong second quarter that beat estimates. Q2 revenue declined slightly to $910 million from $912 million last year. Net income was $96 million or $0.27 per share compared to $43 million or $0.13 per share last year. Non-GAAP net income was $130 million or $0.37 per share versus analyst estimates of $0.19 per share. Earlier coverage is available here.

Gross margin grew 4 percentage points over Q1 to 66.7%, mainly due to significantly higher-than-expected product margins. The company’s head count at the end of the quarter increased by 63 to 8,105. NetApp ended the first quarter with cash and short-term investments of about $3 billion, up $293 million over Q1.

Product revenue was down 8% to $525.1 million and accounted for 58% of total revenues. Software Entitlement & Maintenance revenue was $169.8 million, up 11.2% to make up 19% of revenue. Service revenue was $215.0 million, up 14%.

The company said that there were early signs that the spending freezes adopted by its large accounts have begun to thaw. Total revenue generated by the Americas was up 3% sequentially and down 4% y-o-y, accounting for 55% of total revenue. Europe had the second strongest quarter ever, with revenue up 21% sequentially and 10% y-o-y to contribute 35% of total revenue. Asia-Pacific was up 3% sequentially and down 7% y-o-y to contribute 10% of revenue.

Another sign of improving customer sentiment is that short-term renewals of both contract maintenance and software entitlements have moderated while the number of initial purchases of three-year contracts has increased.

NetApp CEO Thomas Georgens said during the earnings call that one of the key components of the company’s strategy to broaden its market reach is to deepen its partner relationships. To this effect, it announced an expanded partnership with Fujitsu for joint product development, joint go-to-market efforts, and the provision of integrated solutions, specifically in the areas of virtualization and data management. During the quarter, NetApp also announced Data on Tap 8, the first combined release of its 7G and GX operating systems with a single code base that are meant to provide a platform for another decade of data management innovation.

NetApp lost the bidding war with EMC over Data Domain and is left with holes in its deduplication portfolio. Other data deduplication alternatives that NetApp might consider are CommVault, FalconStor, ExaGrid, and Permabit.

NetApp expects third-quarter revenue in the range of $935 million to $955 million, GAAP EPS in the range of $0.24 to $0.25 and non-GAAP EPS between $0.36 and $0.37 per share. The stock is currently trading around $33 with market cap of about $11 billion. It hit a 52-week high of $34.99 on December 31.

Last month Red Hat, Inc. (NYSE:RHT) also reported a strong third quarter. Q3 revenue was up 18% to $194 million with subscription revenue up 21% to $164 million. GAAP net income was $16.4 million or $0.08 per diluted share, down 32% from $24.3 million, or $0.12 per share, last year. Non-GAAP adjusted net income for the quarter was $33.5 million, or $0.17 per share. Analysts estimated earnings of $0.16 on revenue of $188 million.

Gross margin grew to 84.8% from 83.9%. The company ended the quarter with $959.1 million in cash equivalents and investments, up $47.3 million from the previous quarter. Operating cash flow totaled $54.1 million, down $7.9 from the previous quarter. Red Hat repurchased 1.9 million shares for $52.3 million. Year-to-date, the company has repurchased 7 million shares for $146.3 million.

On November 1, the company launched its Red Hat enterprise virtualization management solution (RHEV) as part of its virtualization portfolio solution. As an alternative to expensive proprietary solutions in the marketplace, RHEV is designed to be a cost-effective solution that also addresses customers’ performance, security, and scalability concerns.

Red Hat’s top deals in the quarter included 14 deals over $1 million and one deal over $5 million. Among these top deals, 23 include the company’s Enterprise Linux solution, eight the JBoss components, and one deal is primarily virtualization product. For the seventh consecutive quarter, Red Hat reported that all of its top 25 deals that were up for renewal were not only renewed, but were done so with a total value of over 120% of prior years’ value.

For the fourth quarter, revenue is estimated to be about $191 million to $193 million. Fiscal year 2010 full-year revenue guidance has been raised by $10 million to a range of $743 million to $745 million. The stock is currently trading around $30 with market cap of about $5.6 billion. It hit a 52-week high of $31.76 on December 23 after the earnings release.

Red Hat has performed relatively well even through the recession since most of its revenue is subscription-based. Although its core Linux product is free, the company’s revenue comes from providing maintenance and support to companies using Linux, and about 15% of the servers in data centers run on Linux, since it is a general-purpose OS with lower costs and one that works with more than one vendor’s applications. As enterprises became more value-conscious because of the recent downturn, Red Hat has emerged as the number two OS vendor and is expected to increase its market share. The company should strengthen its market position with an open source roll-up with companies like Collabnet and SugarCRM. RedHat had bought open-source virtualization company Qumranet for $107 million in late 2008 and JBoss for $350 million in 2006. In August, VMware bought SpringSource for $420 million, and there are unconfirmed reports that Yahoo! might sell Zimbra to VMware.