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Red Hat beats estimates, raises guidance

Linux seller outpaces analysts' revenue and profit expectations for its most recent quarter.

Linux seller Red Hat reported on Wednesday that it had outpaced analysts' revenue and profit expectations for its most recent quarter, suggesting they raise future financial projections and boasting of gains against competitors.

The company's revenue increased 42 percent to $65.7 million for its fiscal second quarter of 2006, which ended Aug. 31. Net income increased 35 percent to $16.7 million, or 9 cents per share.

Analysts surveyed by First Call had expected the Raleigh, N.C.-based company to report net income of 7 cents per share on revenue of $64.9 million for the quarter.

In a conference call, Chief Executive Matthew Szulik said the company's financial results "were strong across all key metrics," including billing, revenue growth, profit margin expansion, net income and cash flow.

Several financial analysts said they were impressed with the results.

"It was a huge quarter. Revenue, earnings per share, billings, cash from operations--all exceeded expectations," said Jefferies & Co. analyst Katherine Egbert. The only disappointment was that Red Hat didn't raise guidance for its future cash flow, she said.

The company also offered guidance for the current quarter, which ends in November, that exceeds analysts' current forecasts. Red Hat projects earnings of 9 to 10 cents per share on revenue of $70.5 million to $71.5 million; analysts surveyed by First Call expected 8 cents per share and $69.4 million.

Snagging share
Some of Red Hat's gains come from increasing revenue through computer manufacturer partners, Szulik said. Unit sales of Red Hat's subscriptions are growing faster than unit shipments of Hewlett-Packard and Dell servers.

"We believe these share gains are coming at the expense of non-Linux operating systems, unsupported Linux and other Linux vendors," Szulik said.

Red Hat also pointed to successes drawing in new customers--12,000 more in the quarter. "That means 37,000 net new customers in the last three quarters," Szulik said in an interview. "In the enterprise computing space, I'm not aware of anybody generating that kind of net new adoption."

Most of those customers don't account for much revenue, but Red Hat's earlier customers also started small, said Chief Financial Officer Charlie Peters.

The company is experiencing growth in four areas, Szulik said: deeper use by existing customers, broadening adoption by new customers, purchases of subscriptions for higher-level software and expansion into new geographical regions.

Operating income rose 90 percent to $12.8 million for the quarter, and operating cash flow increased 48 percent to $45.8 million. After repurchasing $11.6 million of its shares and $20 million of its convertible bonds, the company has cash and investments worth $966 million, Red Hat said.

At the same time, Red Hat's chief rival, Suse Linux Enterprise Server seller Novell, has been under some investor pressure to buy back stock, increase its open-source emphasis and sell off businesses. It agreed on Sept. 22 to repurchase some of its stock.

Red Hat sells annual support subscriptions for its flagship Red Hat Enterprise Linux operating system product, but it also is expanding into higher-level software and funds development of the free Fedora version for hobbyists.

One of Red Hat's chief competitors is Sun Microsystems, which develops the Solaris operating system and now its open-source OpenSolaris relative. But Sun also sells x86 servers that come with Red Hat's Linux, and the two companies are making efforts to have less fractious relations.

"Sun and Red Hat continue to explore multiple avenues for improved collaboration, both technically and in sales and distribution," Szulik said. He declined to share details.