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Red Hat Continues to Rise

The company defies a tech slide, buoyed by its first operating profit and a subsequent upgrade.

Red Hat

(RHAT)

defied a tech slide Monday, the second day its shares climbed after the software company beat second-quarter earnings and reported its first quarter of operating profitability.

Shares of the Linux software vendor were up 58 cents, or 5.9%, at $10.46 in recent trading, following a 17.6% jump Friday. The tech-heavy

Nasdaq

was down 1.6% and the Goldman Sachs Software Index was down 1.6% in recent trading.

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C.E. Unterberg, Towbin analyst Katherine Egbert upgraded Red Hat Friday to a buy rating from market perform. She called Red Hat's August quarter results "something to cheer about" and concluded the positive trends shown in the quarter will continue. Although Egbert raised her estimates for fiscal years 2004 and 2005, she acknowledged that Red Hat's valuation at nearly 34 times 2005 earnings is difficult to justify. C.E. Unterberg, Towbin has done investment banking with Red Hat.

"Nevertheless, Red Hat is the only direct way for investors to take advantage of the significant promise of Linux," she said. "And Red Hat's August quarter results prove, for the first time, that a profitable, cash-generating business can be built around open-source software."

Egbert noted that Red Hat will host its annual analyst day Wednesday, when the company is expected to give more detail about its efforts to increase sales to large corporations.

On Thursday, the Raleigh, N.C., company reported second-quarter net income under generally accepted accounting principles of $3.3 million, or 2 cents a share, up from a net loss of $1.9 million, or a penny a share, in the year-earlier period. Revenue was $28.8 million, up 36% year over year and 6% sequentially.

Analysts were expecting Red Hat to earn a penny a share on $28.2 million in revenue in the second quarter, which ended Aug. 31, according to Thomson First Call.

The quarter marked Red Hat's first to post an operating profit, totaling $240,000. That compared to an operating loss of $4.7 million in the year-ago period and $1.1 million net operating loss in the first quarter.

In a conference call after the close Thursday, Red Hat CFO Kevin Thompson said the company expects to earn 2 cents a share in the fiscal third quarter, in line with the consensus estimate. But Thompson said revenue will range from $31 million to $31.6 million, surpassing the $29.9 million consensus estimate for the third quarter.