"If you can't beat them, arrange to have them beaten." --George Carlin

BREAKFAST WITH THE FOOL
Red Hat Is Red Hot

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By Mike Trigg (TMF Tonto)
December 15, 2000

Upon the market's close yesterday, open source software provider Red Hat Inc. (Nasdaq: RHAT) was like a "red-hot chili pepper" when it reported better-than-expected earnings, which indicate the company hasn't felt any adverse affects of the PC slowdown. The company's announcement was highlighted by strong top-line growth and an improved gross margin, propelling it toward profitability in the second half of next calendar year.

The Durham, North Carolina-based Red Hat reported a fiscal third-quarter (ended November 30) net loss -- excluding onetime items -- of $900,000, or $0.01 per share, compared to a loss of $5.5 million, or $0.04 per share, in the comparable period one year ago. The Street consensus expected a loss of $0.02 per share. Revenues grew to $22.4 million from $10.5 million in the year-ago period. That represented 112% and 21% year-over-year and sequential growth, respectively. The company's strong top line is a good indicator of the commercial acceptance for its Linux solutions. 

"We are seeing increasingly strong demand for Red Hat leadership solutions," said Red Hat President and CEO Matthew Szulik in a prepared release. "Solid results are being driven by customers consolidating their Unix technologies to Red Hat Linux, increased demand from device manufacturers, and continued execution of a solid business model." 

Last night's results are particularly impressive considering the ongoing PC slowdown. In recent weeks, a string of PC-related companies have issued earnings warnings, including Intel (Nasdaq: INTC), Compaq (NYSE: CPQ), and most recently Microsoft (Nasdaq: MSFT). In the conference call last night, management insisted that the company is benefiting from a plethora of companies looking to Linux in order to reduce their cost of ownership. The Linux operating system (OS) is open source and available for little, if any, cost. 

However, with only 4% of desktop computers Linux-based, compared to 87% running Microsoft software, commercial acceptance is an uphill battle. Hence, the company has attacked new growth avenues, such as the embedded software market. Embedded operating systems are invisible to the end user, traditionally powering things like robots and radar systems. However, as computing resources expand past personal computers to newer devices -- like handheld computers and kitchen appliances -- a significant opportunity exists. In the recent quarter, the company landed several embedded wins, including a $1 million contract to power the Samsung line of low-power chips. 

Nevertheless, not all of the news was positive for Red Hat. In fact, a CNET News.com article quoted an analyst from ABN AMRO that voiced concerns over the Red Hat Network and customers' willingness to pay for the system. The Red Hat Network is an Internet-based service allowing customers to develop, deploy, and manage multiple software platforms, which provides real-time innovation and increases a businesses time-to-market cycle. Over the next several quarters, this will be an important part of Red Hat's business to monitor.

Overall, Red Hat reported a solid quarter and is on track to profitability. The company's efforts in this area are apparent, exhibited by its noteworthy gross margin improvement. In the recent quarter, gross margins improved to 60%. However, check out this sequential progress: 41%, 47%, 54%, 57%, and 60%. According to the company, it will reach profitability by the end of the second quarter next year, which ends August 31.

News to Go

The world's largest software and database company, Oracle Corp. (Nasdaq: ORCL), reported second-quarter net income of $623 million, or $0.11 per share, compared to $384 million, or $0.06 per share, in the year-ago period. That beat the Street consensus by a penny. On the top line, revenues increased 17% to $2.7 billion. Oracle's track record of exceeding expectations is lengthy, so beating the Street isn't a shocker, but there were other facets of today's announcement that attracted Hollywood-type attention: database and applications sales growth, and an improved operating margin. Overall, it delivered in all three areas. For more on the story, please visit our after-hours take on the news from last night.

Software giant Microsoft (Nasdaq: MSFT) announced last night that its second-quarter sales and earnings will slip as much as 6% below estimates. Microsoft stated that sales are slowing most on the consumer and desktop side, rather than the corporate platform side, although both businesses are weaker than originally expected. Sales for the second quarter ending December 31 are now expected to be about $6.45 billion, up from $6.1 billion last year in the same quarter, while earnings per share will be near $0.47, up from $0.44 last year. For more on the story, please visit our after-hours take on the news from last night.

Graphic design software provider Adobe Systems Inc. (Nasdaq: ADBE) announced a fourth-quarter profit (excluding investment gains and losses, amortization, and other costs) of $127.7 million, or $0.34 per share. The Street consensus was expecting $0.29 per share. On the top line, revenues grew 26% to $355.2 million from $281.8 million year-over-year. Adobe also announced several management changes. President Bruce Chizen was named CEO and to the company's board of directors. Meanwhile, former CEO John Warnock, the current Adobe chairman, moved to the newly created chief technology officer position. The Motley Fool spoke with Chizen earlier this year.

Networking equipment company Cisco Systems Inc. (Nasdaq: CSCO) announced the company's number two executive, Gary Daichendt, was stepping down to evaluate other career opportunities, effective December 18. "Gary and I began discussing his next career move for a number of months and I am confident that the quality leadership team that Gary has developed for both Sales and Manufacturing will ensure a smooth transition and positive momentum for our customers, employees, partners, and suppliers,'' said President and CEO John Chambers. The company also indicated in its press release that worldwide sales and manufacturing will continue to be led by Rick Justice, senior vice president of worldwide field operations group, and Carl Redfield, senior vice president of worldwide manufacturing operations group.

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