Red Hat showing strong growth

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 per cent to $65.7m for its fiscal second quarter of 2006, which ended on 31 August. Net income increased 35 per cent to $16.7m, or nine cents per share.

Analysts surveyed by First Call had expected the company to report net income of seven cents per share on revenue of $64.9m 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.

Jefferies & Co analyst Katherine Egbert said: "It was a huge quarter. Revenue, earnings per share, billings, cash from operations - all exceeded expectations." 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 nine to 10 cents per share on revenue of $70.5m to $71.5m; analysts surveyed by First Call expected eight cents per share and $69.4m.

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 Dell and HP servers.

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

Red Hat also pointed to successes drawing in new customers - 12,000 more in the quarter. Szulik said in an interview: "That means 37,000 net new customers in the last three quarters. 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 per cent to $12.8m for the quarter, and operating cash flow increased 48 per cent to $45.8m. After repurchasing $11.6m of its shares and $20m of its convertible bonds, the company has cash and investments worth $966m, 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 22 September to repurchase some of its stock.

Red Hat sells annual support subscriptions for its flagship Red Hat Enterprise Linux operating system product but it is also 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.

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

Stephen Shankland writes for CNET News.com