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Red Hat earnings rise on business sales

Corporate subscriptions boost first-quarter income for the Linux company, which is making gains on Novell.

Red Hat, a distributor of open-source Linux software, reported an 11 percent increase in first-quarter net income on Wednesday, boosted by subscriptions from corporate customers.

Red Hat's net income rose to $13.8 million, or 7 cents per share, in the first quarter, ended May 31, from $12.4 million, or 7 cents per share, a year earlier. Revenue rose to $84.0 million from $60.8 million, a year ago.

Red Hat provides update and support services for its version of Linux, which can be copied and modified freely, unlike proprietary software such as Microsoft's Windows operating system.

Analysts had expected the company to earn 6 cents per share in the first quarter on a net income basis, according to Reuters Estimates. Wall Street also had forecast revenue of $83.3 million.

A representative for Red Hat said the company earned 14 cents per share, excluding stock based compensation, in the first quarter. On that basis, analysts had expected 9 cents a share, according to Reuters Estimates.

The company's stock fell 5 percent in after-hours trading.

The 11 percent increase in net income in the first quarter represented slower profit growth compared to the fourth quarter of the past fiscal year when net profit more than doubled.

Red Hat Chief Financial Officer Charlie Peters said the company gained market share on rivals during the quarter, but said profitability looked skewed due to the expensing of stock-based compensation and a higher noncash tax rate.

Red Hat estimated a tax rate of 37 percent of pretax income in the first quarter, but the company said once it takes deductions and accounts for tax credits, its cash tax rate will be five percent for the foreseeable future.

Industry analysts said Red Hat continues to gain market share against Novell, a developer of networking software, while the company moves into new markets like small- to medium-sized businesses.

On a diluted basis, Red Hat's net profit rose to $14.7 million from $13.96 million a year earlier. These figures account for changes in interest and administrative expenses if its convertible bonds become stock.

Shares of Red Hat have fallen nearly 13 percent since the company last reported quarterly earnings on March 28. During that same period, the Nasdaq fell about 8 percent.

Red Hat fell to $23.72 on the Inet electronic brokerage system in after-hours, from a closing price of $25.01 on Nasdaq.