Enterprise Unix Roundup — Red Hat's Spotlight, Not All Glam

By Michael Hall (Send Email)
Posted Jul 15, 2004

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Red Hat again ranked No. 1 in the Linux Web hosting market, but its plans to restate earnings lead to a plunging stock price and class action suits. keychain can open all of your SSH sessions with one password, delivering the advantage of null passwords without the risks.

There are some weeks it's good to be king, and there are probably some weeks where those that are king would rather take the money and not have to deal with all the attention. This is one of those weeks for Red Hat, which skipped from an unpleasant Tuesday of dealing with investor backlash to an even more unhappy Wednesday, wherein it learned that its bad Tuesday had led to a minor frenzy of class action lawsuits.

So let's back up.

Last month, we noted the departure of Red Hat CFO Kevin Thompson mere days before the company's quarterly earnings announcement. The news spooked investors, who drove stock prices down for a few days. But in the geological span of a whole week, the matter seemed largely resolved by the time we went to press: Red Hat pointed out sales and revenue are up, thus calming the market.

It seems, however, Thompson's departure presaged a deeper sort of trouble than jittery investors: The SEC sent a "comment letter" after the quarterly announcement. Red Hat wouldn't disclose the contents of the letter, but shortly thereafter, the company's auditors (PricewaterhouseCoopers) indicated the vendor's revenue reporting wasn't optimal, as it allowed the company to write a half-month's subscription to its services up as a full month of revenue.

Red Hat insists its CFO's departure, the SEC's letter, and the auditing firm's unhappiness are unrelated events.

All the same, the auditing firm's unhappiness with Red Hat's reporting practices led up to a Tuesday announcement that the SEC is reviewing the company's earnings statement, and Red Hat will restate three years of earnings. The company's stock promptly dropped about $5, from around $21 a share at the start of the week to between $15 and $16 as we went to press.

That drop, in turn, triggered a bit of a feeding frenzy in the legal community, as no less than four law firms announced class action lawsuits aimed at punishing the company for announcing something that hurt stock prices.

Our takeaway from all of this is that although Red Hat appears to have determined its revenue in a ... less than optimal manner, the big picture hasn't substantively changed. The money coming in has been shifted around in terms of which months it gets reported, and the company's outlook seems, at least initially, to be solid.

An item at the Motley Fool seemed to concur. It noted that although Red Hat plays in a tough market with "cutthroats" like Sun, HP, and Microsoft (which has always struck us as less of a sneak with a knife than a rampaging elephant with kevlar boots), the news shouldn't be particularly alarming. It might even provide a good opening for folks hoping to get a discount on a generally strong stock.

So that's the bad news, which doesn't seem terrible on balance.

The good news for Red Hat this week was the monthly Netcraft report, in which the vendor still holds an imposing 49.8 percent of the Linux Web hosting market. That good news was tempered a little by an overall decline in share for Red Hat, which held 50.8 percent of that market in January. A few Linux enthusiast sites pounced on the news as indicative of a mass flight from Red Hat as the company pulls back from the Red Hat Linux line in favor of its enterprise products. A quick look at Netcraft's summary, though, indicates that European Web hosting appears to be exploding, and that's a market where Red Hat's never been popular, even before it made its consumer base angry.

There's also some indifferent news: Fedora Core 3 Test 1 was released on Tuesday. To the extent Fedora is a snapshot of what we'll probably be seeing in future releases of Red Hat's enterprise offerings, it's worth watching. Because the distribution provides less apparent quality control than several other offerings out there, we recommend against using it for enterprise production purposes outside of, perhaps, light duty services.

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