Open source is still popular, and Red Hat (NYSE:RHT) is riding the wave. What remains to be seen, though, is whether Red Hat can prove that there is further leverage in its business model and/or when investors will start to care about this detail. Although Red Hat has as good a shot as any of being a force in server and desktop virtualization for years to come, ultimately there has to be a resolution to the tension between market share and margin.
A Great Quarter ... Or Is It?
On first blush, it looks like Red Hat is primed destroy the bears. After all, the company did post an impressive 25% revenue growth number for its fiscal fourth quarter well ahead of even the high end of the analyst range (which, with 22 analysts, was surprisingly tight). Other numbers looked quite good as well. Subscriptions were up 24% from last year, and 5% from the last quarter. Billings were up 31%, and deferred revenue jumped almost 20%.
And now for the "yeah, but ..." Operating income (presented on an adjusted basis) grew 31% and the operating margin jumped about a full point from the year-ago level. The thing is, analysts were expecting better margins. Red Hat got a sizable boost from lower taxes and an R&D credit, and the company basically met its expectations without those factors.
So where is the operating leverage? Should it not stand to reason that a solid beat on the top line would translate into a solid beat on the bottom if there was good operating leverage within the model? Sure, some will say that "any beat is a good beat," but those stories do not tend to work over the long haul.
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