December 22nd, 2006
Red Hat: Savings of $5 to $10 per server not motivation to leave us
Red Hat's third quarter went well and the company had bookings of $133 million, well ahead of what analysts were looking for.
Meanwhile, the company said 28 percent of its bookings were multiyear deals. As expected, any competition from Oracle isn't showing up yet in Red Hat's results. "Clearly, the doomsday scenario that some investors feared regarding the entrance of Oracle into the enterprise Linux arena and the ramifications of the Novell/Microsoft partnership did not materialize in the quarter," said W.R. Hambrecht analyst Robert Stimson.
However, what really sticks out of Red Hat's results were the following comments by Red Hat CEO Matthew Szulik (See SeekingAlpha transcript).
"This past week I was at one of our largest customers, which is in the financial services business, and by his statements he made it very clear that saving $5 to $10 on an operating system on a per server basis was not very motivating to him. And as more and more customers move from analog-based models to digital-based businesses, their expectations for the performance and the strategic value of their computing infrastructure rises in importance. And most importantly, as evidenced by our continued strong growth in renewals on a year-over-year basis, they feel that they are getting very strong value from our business as it relates to the pricing question. Certainly, of course, in the enterprise and in the volume that we are selling there is a certain level of discount. But I will defer to Charlie to provide you the specifics."
CFO Charlie Peters then chimed in:
"In pricing we have always been competing against free Linux as one alternative and we have our own, Fedora. There have been other very price competitive distributions in the market. So, I don't think there has been anything new in that regard. And what we have done for at least the last two and a half years was very disciplined pricing approach with our sales guys. I believe, we have stuck to that sort of a pricing model. As regards renewals, in the last 12 months, we have renewed 98 out of 100 of the largest deal up for renewal, including 24 of 25 this quarter."
By the numbers Red Hat appears to overcome any noise from Oracle's Unbreakable Linux announcement. If anything, Oracle gave more exposure to Linux, which wound up helping Red Hat, said Peters.
"There is lots of talk about open source software. Lots of talk about Linux and middleware, and invariably when that kind of talk happens, when people talk about Red Hat and there's an awful lot of advertising went on about open source software so that people think about Red Hat."
Do I buy all of this? Not completely. It's too early to know what impact Oracle will have on Red Hat's business. Although that one customer of Red Hat wasn't going to budge for a savings of $5 to $10 per server, conditions change and other companies may go for cost cutting. After all, if you save $7 per server on 20,000 of them that's $140,000 saved.
What remains to be seen is whether that savings is all that important after factoring in switching costs. The other wildcard is how much do you trust Oracle to hold its pricing once it reels you in. Officially, the jury is out, but Red Hat has allayed a lot of fears for now.
Larry Dignan is Editor in Chief of ZDNet and Editorial Director of ZDNet sister site TechRepublic. See his full profile and disclosure of his industry affiliations.
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