Tough choices ahead for Red Hat?

I missed Red Hat’s fiscal 1Q09 release a few weeks ago, so I went back and read the transcript and dug into the numbers a little.

As you can see in the table below, total revenue growth has averaged 31 percent/quarter since fiscal 1Q08. Surprisingly though, Sales & Marketing and R&D have grown 32 percent/quarter and 37 percent/quarter over the same period. More evidence to refute the myth that open source doesn’t need sales, marketing or R&D investments.

It is good to see that R&D is growing faster than Sales & Marketing. However, it’s not sustainable for R&D and Sales & Marketing to grow faster than revenue for long periods of time. It’ll be interesting to see which of these two items gets crunched the most in an effort to raise profitability. (Hint: a 7 percent profit growth is pretty weak). On one hand, spending on sales and marketing is required to close deals. On the other hand, spending on R&D ensures product competitiveness.

BTW, I wanted to ensure that Red Hat wasn’t playing games with deferred revenues in order to make its quarterly revenue targets. (I’m overly suspicious of SEC filings since finishing my second accounting and finance courses and realizing how easy it is for management to manipulate financial results.) It does not appear that this is occurring.

Overall, Red Hat is performing well, but watch for reductions in its cost structure. Alternatively, if Red Hat could grow revenue significantly, it would be able to maintain the levels of R&D and Sales & Marketing spending. Fun times ahead…

Anyhow, happy Fourth of July and we’ll catch you next week!

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies, or opinions.”