March 28, 2006 1:41 PM PST

Red Hat growth tops estimates by a notch

Linux seller Red Hat on Tuesday reported net income for its most recent quarter rose 131 percent to $27.3 million, or 13 cents per share, edging a penny ahead of analyst expectations.

For the quarter ended Feb. 28, the company's revenue increased 37 percent to $78.7 million compared with the year-earlier quarter, Red Hat said. That was slightly more than the average of $78.3 million that analysts surveyed by Thomson First Call expected. Those analysts also forecast net income of 12 cents per share.

The company offered a bullish assessment of its performance. "This past year's results affirmed our ability to scale for growth," Chief Financial Officer Charlie Peters said in a statement. The company's gross margin, an important measure of profitability, increased from 81 percent a year earlier to 84 percent, "even as we built out our infrastructure through investments in headcount and systems," Peters said.

In a conference call, Red Hat Chief Executive Matthew Szulik called the year's performance strong, but said the company won't get lazy. "We are in the early days of a very large global market, and we are driven to avoid complacency as we enter fiscal 2007," he said.

Of the 25 biggest support contracts up for renewal in the quarter, all 25 were renewed, Szulik said, bringing the yearly tally to 99 of 100.

The Raleigh, N.C.-based company develops Linux and accompanying higher-level open-source software, making revenue from annual support subscriptions. It competes with operating system sellers such as Novell and Microsoft as well as with some hardware companies, such as Sun Microsystems, that offer their own operating systems.

For its full fiscal 2005, the company's revenue increased 40 percent to $278.3 million compared with fiscal 2004, while net income increased 75 percent to $79.7 million.

Linux is catching on widely, but making a business out of the software isn't simple. The No. 2 Linux seller, Novell, hasn't had an easy time moving its NetWare business to the open-source operating system, for example. Novell revenue declined in its most recent quarter, and the stock price slid afterward.

For the quarter now under way, analysts expect net income of 9 cents per share on revenue of $83 million.

Peters forecast revenue would be between $82.5 million and $83.5 million for the current quarter, but earnings are expected to be 8 cents per share. In addition, this will be the first quarter the company includes stock option expenses, which will reduce that total, he said.

However, Peters also estimated cash flow from operations for the full fiscal 2007 would increase from the previous forecast of $1 per share to $1.05 to $1.10 per share.

Red Hat plans to hire about 100 new employees each quarter of fiscal 2007. The company has more than 1,100 employees, a company representative said.

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net income, Red Hat Inc., Linux seller, Novell Inc., stock option

 

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