Red Hat restructures, posts Q4 net loss of $41.9M

Linux market leader Red Hat has restructured its business to widen its focus on the enterprise market while scaling back its embedded Linux operations and closing its network consulting unit.

In an announcement yesterday, the company revealed the strategy as part of its fourth-quarter and year-end 2002 financial results.

The restructuring changes come in response to the soft economy and Red Hat's related performance.

For its fourth quarter ended Feb. 28, Red Hat reported revenues of US$18.6 million, down from $20.1 million the previous quarter and off from the $22 million in revenues in the same period a year ago. For the fiscal year, revenues were $78.9 million, down from $80.8 million the year before.

The company reported a net loss of $41.9 million for the fourth quarter, which included a loss of $28.9 million from continuing operations and additional write-offs for discontinued operations and related expenses. That compares with net losses of $24.2 million one year ago and $15.1 million in the third quarter ended Nov. 30. The net loss for the fiscal year was $139.9 million, compared with a net loss of $86.7 million one year ago.

Red Hat said its adjusted pro forma results -- before amortization of good will, stock-based compensation and restructuring charges -- showed $1 million in net income from continuing operations for the fourth quarter, compared with an adjusted net income of $1.9 million one year ago.

Kevin Thompson, Red Hat's chief financial officer and an executive vice president, said the restructuring will help the company shed unprofitable ventures and increase its renewed emphasis on moving Linux into business computing.

"The enterprise is where the large opportunity for Red Hat is," Thompson said. "We need to rid ourselves of distractions to be able to take advantage of that."

To bolster its claims of increased traction in the enterprise, Red Hat announced several new customers who are making large-scale deployments of its products. They include America Online Inc., UBS Warburg LLC, Morgan Stanley Dean Witter & Co., Inc., Cisco Systems Inc., Nortel Networks Corp., Dell Computer Corp., DreamWorks LLC and Oracle Corp. Red Hat began a major push last September to go after the enterprise market with its products and services.

Meanwhile, Red Hat's embedded systems business is being cut back while the economy remains soft but will be restored when things improve for IT buyers looking for embedded systems, he said.

"We're just taking a more strategic approach to the embedded market," Thompson said. "We still believe it has meaning for us." About eight to 10 workers were moved to different areas within company as part of the retreat, he said.

Another part of the restructuring includes closing its network consulting group, with about 20 to 25 workers leaving Red Hat and moving to other companies along with the vendor contracts they were working on. The company's overall workforce remains at about 630, he said.

The company is also saving approximately $700,000 per year by moving its headquarters from Research Triangle Park, N.C., to its new home on the campus of North Carolina State University in Raleigh, N.C. Dan Kusnetzky, an analyst at IDC in Framingham, Mass., said the moves by Red Hat are sensible.

"There's a lot of opportunity there," he said of the embedded systems market, "but it's not an area where there's an immediate return." Instead, it takes time to develop long-term relationships with companies that will trust another vendor's embedded operating system in their devices, essentially making or breaking the products. "It's a little disappointing, but it's certainly understandable.

"It doesn't surprise me at all that they would want to focus on a place where they could show growth," Kusnetzky said.

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