Red Hat Beats Estimates

Revenue jumps 42%.
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Updated from 4:50 p.m. EDT

Raleigh, N.C.-based

Red Hat

(RHT) - Get Report

surpassed the Street's first-quarter expectations, as revenue climbed 42%.

The maker of commercial Linux software said Wednesday that it earned $17.1 million, or 8 cents a share, vs. on net income of $17.1 million, vs. $14.7 million, or 7 cents a share, a year earlier.

Excluding items, EPS was 16 cents. Analysts had expected 15 cents a share, according to Thomson Financial.

Red Hat said revenue grew 42% to $118.9 million, beating the analysts' estimate of $117.1 million.

Subscription revenue was up 44% year over year to $103 million. At the end of the quarter, deferred revenue was $363.1 million, an increase of 43% year over year.

Red Hat shares gave back some of Wednesday's gains in after-hours trading, falling 32 cents, or 1.3%, to $23.87. It

ended the regular session up 83 cents, or 3.6%, to $24.19.

The company's second-quarter guidance met analysts' expectations: Revenue was projected at $124 million to $126 million, with EPS, excluding items, of 17 cents. Analysts had been expecting $124.8 million and EPS of 17 cents.

The company has grown its indirect sales channel to now account for 57% of revenue, significantly up from two years ago when the lion's share of sales was direct, said Chairman and CEO Matthew J. Szulik in a conference call for analysts.

Partnerships, such as one with

IBM

(IBM) - Get Report

, have led channel growth, he said.

Red Hat Enterprise Linux 5 software, which was released in the quarter, for the first time includes virtualization capability, which allows IT departments to consolidate server use.

Virtualization is generally viewed as posing a downside to Red Hat's profitability.

But Szulik said he disagrees with that point of view and downplayed the near-term impact of virtualization. In a straw poll he'd done with Red Hat customers using RHEL 5's virtualization, "none have moved virtualization near their production environments," he said. The technology is deemed still too immature for scaling out across businesses.

Slow deployment of RHEL 5 by North American personal computer makers is related to those companies' manufacturing, adoption-cycle and packaging issues, Szulik said.

He said Red Hat's refusal to sign a patent-sharing deal with

Microsoft

(MSFT) - Get Report

is not open-source zealotry. Microsoft puts pressure on Linux software developers by offering them agreements, such as one made in late 2006 with

Novell

(NOVL)

, in exchange for protection from Microsoft patent lawsuits. "We continue and invite the opportunity to participate with Microsoft around

developing standards and improving the customer experience ... in a heterogeneous environment," Szulik said.

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