How Red Hat, Inc. Keeps the Good Times Rolling -- Regardless of Sector Headwinds

By Markets Fool.com

Image source: Red Hat.

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Open source software veteran Red Hat reported fourth-quarter results last Tuesday.

The company met or beat analyst expectations across the board, and became the first open source business to record annual sales of $2 billion. To put that achievement into perspective, Red Hat crossed the $1 billion threshold just four years ago, and has doubled its yearly sales since then.

Red Hat's fourth-quarter sales rose 17% year over year, landing at $544 million. Revenue for the full fiscal year stopped at $2.05 billion.

Adjusted quarterly earnings soared 21% higher, to $0.52 per share. For the full year, earnings jumped from $1.60 to $1.91 per share.

Wall Street analysts would have settled for earnings near $0.47 per share on $535 million in fourth-quarter revenue. Red Hat easily exceeded these targets -- and the upper ends of its own guidance ranges.

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Looking ahead, management pointed to another year of 17% revenue and earnings growth. The first-quarter stepping stone should see 17% year-over-year sales growth but only a 14% earnings increase. Do keep in mind that Red Hat has a history of setting conservative goals and kicking them down with authority.

On the earnings call, Red Hat CEO Jim Whitehurst noted that his company is a terrible indicator for macroeconomic trends. This is objectively true, if you look at Red Hat's sales performance across market downturns compared to other enterprise software specialists.

RHT Revenue (TTM) data by YCharts.

Microsoft and Oracle saw drastic drop-offs in top-line sales around the 2008 meltdown. Both have also suffered slowdowns in recent quarters, held back by currency exchange headwinds and general hesitation that their traditional tools are right for the rapidly evolving business world.

But Red Hat simply soldiered on through both of these sector slowdowns, as if nothing happened. It is, in fact, likely that these headwinds helped Red Hat steal some business from its larger and more proprietary rivals.

In a one-on-one phone call with Red Hat CFO Frank Calderoni, I asked for a deeper explanation of this important phenomenon. Calderoni was happy to supply more color:

If you look back over a number of years, we have not been affected by economic downturns. Actually, we tend to see an acceleration of business in a downturn because most customers, when they are looking to spend less, start to look for a better-cost solution.

And that fits so nicely in the model that we sell, where we sell open source which has a much lower cost profile than any of the proprietary offerings that have been out there. So that tends to drive more customers in our direction.

And if that weren't enough, Calderoni also explained that IT spending in general is moving away from traditional, proprietary solutions and toward the cloud and open source software in a big way. What used to be an experimental fringe play is now becoming the industry standard, and Red Hat benefits from that mass-market adoption.

All told, this was another strong chapter in Red Hat's ongoing growth story. As a shareholder myself, I expect the company to continue stealing market share from old-school solutions.

The article How Red Hat, Inc. Keeps the Good Times Rolling -- Regardless of Sector Headwinds originally appeared on Fool.com.

Anders Bylund owns shares of Red Hat. The Motley Fool owns shares of Microsoft and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.