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Sales Surge Lifts Red Hat

Bill Snyder

Red HatRHT got back in the good graces of investors with a strong third-quarter financial report that featured a 2-cent-a-share upside surprise and a 45% jump in revenue.

The news gave shares of the open source software provider a much-needed boost: In after-hours trading Thursday, the stock was up $2.54, or 14%, to $20.50.

The Raleigh, N.C., company earned $15.5 million, or 7 cents a share, including options expenses, down from $24.6 million, or 12 cents a share, a year ago. Total revenue was $105.8 million.

But excluding options outlays, Red Hat, which develops and supports a popular version of the Linux operating system, earned $29.6 million, or 14 cents a share.

Analysts polled by Thomson First Call were looking for earnings of 12 cents on sales of $104.2 million.

Subscription revenue was up 48% in the latest quarter to $88.9 million, and operating cash flow jumped 44% sequentially to $13.6 million.

Looking to the current, or fourth quarter, the company told investors to expect pro forma earnings of 14 cents to 15 cents a share on revenue ranging from $112 million to $113 million. Analysts were forecasting EPS of 13 cents on revenue of $111 million.

Red Hat needed the good news. The company has had a very tough year on Wall Street as investors worried about competition from OracleORCL, which is now selling support for Red Hat's version of Linux, and from NovellNOVL, which teamed up with MicrosoftMSFT to push its rival version of the open source operating system.

Before today's session, shares of Red Hat were off about 34% on the year.

CFO Charlie Peters said on a conference call with analysts that the company is "cautiously optimistic that competitive efforts by some of the largest technology companies in the world are actually expanding our opportunity."

Was he whistling in the dark? Trip Chowdhry, managing director Global Equities Research, said Oracle has misread the market for open source software. "Oracle thinks Linux support is a cost issue; it isn't. It's a business issue," he said. His company does not have an investment banking relationship with Red Hat or Oracle.

One measure of Oracle's damage to Red Hat would be a sharp drop in prices. Indeed, the giant database company promised to sharply undersell its smaller rival when it entered the Linux market earlier this year.

In a brief interview after the announcement, Red Hat CEO Matthew Szulik would not disclose his company's average selling prices, but did say that Red Hat is "showing better gross margins, better long-term deferred revenue [and other metrics]. Those are not indicative of major price cutting."