Just as I saw some rays of hope in Oracle’s fiscal-fourth-quarter bad news reported on June 23, I see some seeds of rain in the forecast in Red Hat’s fiscal-first-quarter good news reported on June 24. Tout sheets like The Register and the technical press look at Red Hat (RHT) revenue numbers in the same way they look at enterprise software suppliers such as Oracle (ORCL). But the key number for Red Hat, because of its subscription revenue model, is deferred revenue as with other information technology (IT) service suppliers (such as EDS before it was acquired by HP or Shared Medical before it was acquired by Siemens).
Forget the double-digit growth numbers headlining many article in the press. In the last three months, Red Hat deferred revenue grew only $24 million (4%) or $3 million (flat) depending on how you look at it. This exchange between a financial analyst and Red Hat includes the detail:
“Sarah Friar: And then just on the numbers, the difference… in deferred revenue on the cash flow statement versus what we can see on the balance sheet, is that all just a currency difference.
“Charlie Peters: … on the deferred revenue, let me just add a little bit (to what was said earlier in the conference call). The question is, the change in the deferred revenue, if you [take it] up the balance sheet, it’s about $24 million. The change in deferred revenue if you look at the cash flow statement, it’s about $3 (million), and part of it is currency, part of it is US dollar.
“I would break it down this way, in the short-term section there’s a positive change of $6 million and additional $14 million change from currency for roughly a $20 million change in short-term. And long-term consistent with what I said about the changing of the average life of the contract from 24 months historically last two quarters to 19 months this quarter, we have a US dollar reduction in long-term deferred of about $3 million.
“Which is more than offset with a currency improvement of $7 million for a net change in long-term of $4 million. Hope that provides everyone better clarification.”
I’m sure it does if you’re a CFO like Charlie Peters. But the net of it is that Red Hat dodged another analyst’s question on new vs. renewal subscription business and its services/training business was down again sequentially. The latter should be an important indicator of current (vs. renewal) business activity and as for the former, either way you look at deferred revenue (cash flow or balance sheet; long term or short term; $3, $4, $6, 7, $14, $20 or $24 million), almost as much of it is getting posted as revenue as is getting booked. That’s not a good sign. Still one quarter does not make for good comparisons.
Then there is all the blogoblather about Red Hat being acquired. It is no coincidence that the two examples of IT services suppliers mentioned above have been acquired by HP and Siemens. The large multi-discipline IT guys want the kind of predictability found in Red Hat’s subscription model. But despite the tout sheets salivating over an acquisition of Red Hat, Red Hat doesn’t become a meaningful takeover candidate to a prudent large company until the subscription-revenue run rate gets over a billion. And until it is clear from the deferred revenue calculation that the run-rate is growing. That is the number to watch over the rest of 2009.
-- Dennis Byron
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