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Red Hat earnings meet expectations

Strong growth in enterprise technology subscriptions help lift the Linux seller's earnings into profitability, compared with a loss a year ago.

Red Hat reported on Tuesday first-quarter results that met analysts' expectations, due in part to strong growth in subscriptions for its enterprise technologies.

Revenue reached $27.2 million in the quarter ended May 31, up 39 percent from year-ago figures. Red Hat, which sells Linux products, reported net income of $1.5 million, or 1 cent a share, compared with a net loss of $4.6 million, or 3 cents a share, a year ago.

Analysts surveyed by First Call expected the Raleigh, N.C.-based company to report net income of 1 cent per share and to generate revenue of $27.3 million.

"Red Hat began the year with a continuation of our progress we've made over the past year," company CEO Matthew Szulik said in a conference call with analysts.

During the quarter, Red Hat generated 23,500 subscriptions for its Enterprise Linux family of technologies--a 10 percent increase over the previous quarter.

Revenue from its enterprise technology subscriptions doubled year over year in the first quarter to nearly $12.3 million, compared with $6 million in the same period a year ago. Similarly, retail subscriptions rose to $4.5 million from $3.6 million.

Although embedded subscriptions fell to $646,000 in the quarter from $1 million a year ago, Szulik said the embedded market will play an important role in Red Hat's long-term strategy.

The drop in the company's embedded subscription and services revenue comes at a time when the embedded device industry has faced a difficult year, he said.

Szulik said Red Hat expects flat revenue for its embedded market in the second quarter, while the enterprise business is expected to grow during the same time period.

Revenue from embedded development services also dropped in the first quarter, to $746,000 from $1 million in the year-ago period, while revenue from enterprise technology services grew to $9 million from $7.8 million.

Red Hat's first fiscal 2004 quarter saw SCO Group, a former Linux company that now sells only Unix, launch a legal attack on IBM's treatment of Unix and Linux. Stemming from that $1 billion lawsuit was SCO's accusation that Unix code was copied directly into Linux and a warning to 1,500 large companies that using Linux could get them in legal trouble.

"Let me state clearly for the record that we're not a party to any Unix source-code lawsuit," said Mark Webbink, Red Hat's general counsel.

But that said, he noted it's understandable how lawsuits over software intellectual property rights and patents occur.

Prior to 1983, patents for software did not exist, while copyrights for source code didn't emerge until 1976. Historically, the government's application process for patents involved reviewing only the first and last 25 lines of source code.

In the fourth quarter of fiscal 2003, Red Hat slipped back into unprofitability, but the company has high hopes that its plan to charge more for its Linux products will bear fruit. For support of its Enterprise Linux products, Red Hat charges an annual subscription fee for each server the operating system is installed on.

Red Hat has support partnerships with the top four server makers: IBM, Dell Computer, Hewlett-Packard and Sun Microsystems. The company's Linux competition comes chiefly from , but Microsoft has put Linux in its crosshairs.

Szulik acknowledged the partners' role, saying: "Oracle, Dell and HP continued to be strong drivers of Red Hat's Linux in the marketplace."