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Red Hat Breaks Even, Beats Street Estimate
Posted by
Hemos
on Fri Mar 23, 2001 01:52 PM
from the downing-in-submissions dept.
from the downing-in-submissions dept.
jfinke writes "Linux Today is running an article about Redhat's financial situation.
The company reported an adjusted net loss of $600,000, or break even per share, for the fourth quarter of fiscal 2001, compared to an adjusted net loss of $5.6 million, or $0.04 per share, for the fourth quarter of fiscal 2000. On a reported basis, the net loss was $24.2 million, or $0.14 per share, compared with a net loss of $24.6 million, or $0.17 per share in fiscal 2000." Congrats to all the folks there.
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Red Hat Breaks Even, Beats Street Estimate
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Press release and a quick-n-dirty analyzis... (Score:4)
http://www.redhat.com/about/presscenter/2001/press _Q42001.html [redhat.com]
I haven't been able to reach the article since it appears to be Slashdotted, but I would be surprised if it is anything more than a rehash of the press-release with the obligatory journalist missunderstandings and confusing rephrasing.
A quick-n-dirty summary/analyzis from someone with *some* economic education and experience:
Red Hat's fiscal year 2001 ranges from February 28 2000 to February 28 2001 and that's what they have released figures for.
They made a "reported net loss" of $24.2 million, compared to a net loss of $24.6 million the year before, which by first look might seem like an extremely small improvement. However, their revenue rised by 100%, from $42 million in 2000 to $84 million in 2001, hinting that they are expanding rapidly so their losses are likely to come from investments that haven't payed off yet.
However, their "adjusted net loss" changed much more, from $19 million in 2000 to $5.9 million in 2001. It's very typical that a company that makes large aquisitions/investments wants to spread the cost over a few years and that's most likely what they have done here. This is actually good since it keeps the company's result level (and thus its shareprice) a bit more stable. You can't make your big cost magically disappear, you can only spread it over a few years.
The thing that Red Hat emphasizes is that they only made an adjusted net loss of $600.000 for the *LAST QUARTER*, trying to give the impression that they are on the virge of going break-even. However, remember that this is an _adjusted_ net loss, so they can have done some magic here, but I do find their statement believable considering their rapid increase in revenue, but we can't know for sure until we see the next report.
What I find to be most promising is the rapid increase in revenue. Up 100% compared to a year ago. That shows to me that Red Hat is on the right track.
Re:Where Should I Invest? (Score:5)
Sure, MSFT may have had a better earnings/share, but look at their revenue growth: 18% over the last year vs RHAT's 106% growth. Indeed, RHAT had more growth between quarters (20%) than MSFT did all year.
I know where I'd put my money. (Of course, when you're small, it's easier to get large percentage gains. That works against you when you're large. The rolling average (filters out daily fluctuations) on MSFT's share price has been steadily downward for the last year.)
This is news because.. (Score:3)
This is really impressive, RedHat have done something many many other relatively recent internet boom start ups will never achieve. They have proof that their existance doesn't leak money and that is a cue for their customer base to increase exponentially (when you know your supplier is financially comfortable, you don't mind using them). The same game rules for all corporates apply to Open Source / Free Software companies too. Business is after all, business, but RedHat have one very large difference.
This is good for everyone in the Linux and Free Software worlds. It means RedHat can be pretty confident in gaining more funding, employees and clients and can further fund Free Software development for us all. Those of you not into this will benefit (albeit later) from the poker this provides those 1970's companys to improve their offerings, and I hope you enjoy seeing their profits knowing that money could have staying in your pockets.
While I personally don't see corporate success (at least in the distribution vendor sector) as synonimous with Linux's and Free Software success, it is nice to see that the world isn't locked into its technological straight jackets just yet.
Well done to them.
Wrong- Linux community betrayed Corel (Score:3)
It seems ever since Corel committed their GPL violation about a year back (quickly corrected btw), the linux community has had nothing but scorn for Corel. Slashdot is full of comments trashing Corel and Corel Linux or Corel's CEO or what have you.
I'm reminded of the stories in recent days about Mac OS X bringing UNIX to the masses. Well, a year and a half ago, Corel Linux was an honest attempt to bring Linux to the masses. But by not supporting, and worse, openly bashing the effort, I think the Linux community shot itself in the foot.
So how can you blame Corel for scaling way back on Linux? If their help is not appreciated, why should they bother wasting their time?
Congratulations! (Score:4)
If I lost $600,000, I'd have to take a beating from Vinnie in the back alley... he'd probably break both my legs and an arm as well.
Spread that out over a million or so shares, and it doesn't look as bad though, right? I mean, that near break-even status is fantastic news compared to the bath that all the shareholders have taken if they got in at the IPO...
I'm not trying to bash Red Hat as a company... I think they make a fantastic (albeit relatively shitty) product and I think they're involved in a good (albeit financially stinko) cause. I wish them well. Just don't say congratulations when your money would have been better invested in shares of Krispy Kreme.
RedHat's new Accounting System (Score:4)
Good News Except.... (Score:3)
Foolish perspective [fool.com]
Red hat got those numbers by cutting costs and through an aquisition. The business still has some growing to do, and remember... they are still a reletively small company. Lets all hope they can pull it off.
-pos
The truth is more important than the facts.
Re:Where the good news came from .... (Score:3)
MSFT and Palm do this through their monopoly of their respective software worlds. Coca-cola does it by having the most recognizable product in the world. With Intel it is the high barrier of entry to chip fabrication that makes it impossible for a company like AMD or Transmeta from wiping them out. Some (actually most) also use patents to keep other businesses out of their houses.
I have no idea how RHAT could possibly maintain a moat around their business if they are giving away their software. I think Brand recognition is their best bet.
Linux might be unique; RHAT's business model might be unique; Money is money. I don't see how they can ever be as profitable to an investor as MSFT has been. I wish it weren't that way.
-pos
The truth is more important than the facts.
Re:Reported net loss versus adjusted net loss? (Score:3)
Re:Only on Wall Street (Score:3)
The real story (Score:5)
In financial markets this is a very good thing.
Positive news for a technology company these days is great news for everybody on slashdot. Linux needs a company that can be held up in board meetings and pointed to --> Hey these guys are doing business, the street likes them, linux has some base, let's give it some thought.
I explained linux to my grandfather last night and opensource made him very incredulous. A bunch of random people writing code isn't going to break down conservative barriers. A large successful corporation whose business is linux will break those barriers. Positive news on Redhat is great from this perspective, especially given the present market conditions.
Numbers not so good actually (Score:5)
On a reported basis, the net loss was $24.2 million, or $0.14 per share, compared with a net loss of $24.6 million, or $0.17 per share in fiscal 2000.
They only broke even for one quarter using adjusted numbers. The actual losses are actually quite stunning. The term adjusted losses is just accounting voodoo to hide the company's deteriorating cash position.
Re:how is -$600k break even? (Score:3)
Re:Nice to see... (Score:4)
Actually today on the Canadian Broadcasting Corporation's website, [cbc.ca]Corel Reports a modest profit [cbc.ca]
Break even (Score:3)
As to their accounting (the difference between the $24 million GAAP net loss and the $600k adjusted loss), this is allowable by the SEC and reflects mainly one-time or non-cash charges. Although this sort of manipulation should always raise eyebrows, it is usually subject to intense scrutiny by the outside auditors in a company like this (by "like this" I mean small tech company with a big recent drop in stock price.) The outside auditors often are named as defendants in shareholder lawsuits because they (and the D&O insurance provider) are the only ones with a meaningful way to pay the claims.
The meaningful differences between GAAP and adjusted are:
- Goodwill amortization: this is a non-cash charge to account for a company that was acquired. Excluding this (as an investor) makes sense if the company is not in the business of acquiring companies - if it was unusual (everything here is IMHO, if I need a disclaimer);
- Stock-based compensation: although there are several explanations for this, the most usual one is that a company gave out options before they were public and the SEC said the strike prices were below "fair market value" later on - the difference needs to be amortized over the vesting of the options. Again, a non-cash charge and should be ignored by the investor if the company is not continuing to give out cheap stock;
- Merger, acquisition and other: this is usually the abused bucket. It's hard to know what is in here, if the expenses are cash or not, and if the expenses are actually recurring and not one-time (the company will say they are, of course, but hard to evaluate the truth of that, is what I mean). Luckily, it's the smallest of the numbers.
The proof will be next quarter - assuming they do no more acquisitions, will their operating cash-flow be positive? The only real value in a business is its ability to generate cash in the future, not its reported GAAP earnings. That is what RHAT is trying to tell the street with its adjustments: we are very close to generating cash with our business. Up to you if you believe them or not.
Re:Reported net loss versus adjusted net loss? (Score:4)
Right there, you answered your own question! It's economic voodoo, involving books, calculators, accountants, and most likely the sacrifice of virgins to volcanoes.
-----
D. Fischer
Re:Where Should I Invest? (Score:5)
The more appropriate question, is whether Red Hat will exist in five years. (Of course, some ask the same about MS.) It's considered by most a bad idea to invest in companies that won't exist in a few years.
-----
D. Fischer
Re:Reported net loss versus adjusted net loss? (Score:4)
A loss of $600,000 divided by that 140 million is a loss of $.0042857 per share. Since you can't have
Likewise, if they had a profit of $600,000, it would be considered a break even gain.
Where Should I Invest? (Score:4)
Microsoft's Earnings [microsoft.com]
Or...
"RESEARCH TRIANGLE PARK, N.C.--March 22, 2001-- Red Hat, Inc., the leader in in developing, deploying and managing open source solutions, today reported revenue of $27 million for the fourth quarter ended February 28, 2001, an increase of 106% versus the $13.1 million reported for the fourth quarter of fiscal 2000 and an increase of 20% over the third quarter of fiscal 2001"
Red Hat [linuxtoday.com]
You Decide....
Price/Revenue Ratio (Score:3)
Red Hat would have to double revenues without increasing costs to get to a P/E of 10. I guess that is possible, just about. But Red Hat also faces serious competition and anyone and their brother can set up to compete at any time.
I would take the opposite tack, the cost of information approaches the marginal cost of production in a free market.
Red hat could make money on the consulting side but very few consulting companies are structured as public companies, they are structured as partnerships for very good reasons. Essentially as the Linux market matures the best RedHat employees will do better for themselves by setting up their own consulting companies than working for Red hat.
Re:Price/Revenue Ratio (Score:3)
It is worse than that, it is hard to grow the company quickly without the product quality going down the tubes. If a software company stamps out 1 million extra copies of the software and sells them the extra cash is (practically) pure profit and the quality of the millionth extra copy is the same as the first.
If you have a consulting company it is very difficult to grow faster than 20% a year without quality sinking. Even if you can find the number of good applicants you need it takes time to weed out the good from the bad. Nobody gets a hundred wizards applying for jobs each year, you have to take kids out of college and learn them. That means choosing people who can develop new skills.
A certain famous Mountain view ex-company started out as an elite net savy company and ended up like one of those big consulting Co.s that hire practically anyone off the street who walks in the door. Nobody can do 100% growth in services without the quality going down the tubes.
The basic problem is that geeks have skill sets that are at least as specialized, valuable and in demand as lawyers. The average salary of a lawyer might be much higher ($200,000 vs. $100,000 for the alpha geek) but until now the difference has been made up in stock option grants (last year $0 for lawyer, $0->$2,000,000 for geek). OK so for many these are a lottery but as any bookie will tell you the percieved value of a 1 in 100 chance of making a million is much more than the arithmetic $10,000.
After the dotcrash geeks are demanding cash on the barrel. Those paid in options are getting bigger grants. What this means is that the market is really really good for geeks and not good at all for people hoping to make a fortune off the surplus value of geek labor.
I would expect that in 5 years time the number of geeks would be perhaps 100% larger and the cost of hiring an alpha geek would be at least as high as a lawyer. Already there are a few geeks who command $5-10,000 / day consulting fees and if the black sholles value of their options is counted in million dollar sallaries. I don't ever expect that to become the norm (bar hyperinflation) but the number of golden-geeks will exceed the number of golden lawyers.
Another point to ponder, capital has a high rate of return only when it is scarce. Capital is no longer scarce in geekdom. So why should the gains from linux go to the party providing the ubiquitous commodity (shareholders capital) rather than those supplying the scarce commodity (talent).
Geeks of the world untie, you have nothing to loose but your suits!