June 2, 2008 - Red Hat Inc. (RHT-NYSE) hopes that businesses are ready to try open-source operating systems on for size. The company dominates the market for Linux, the open-source computer operating system (OS) that is the chief rival to Microsoft's Windows operating systems. In addition to its Red Hat Enterprise Linux OS, the company's product line includes database, content, and collaboration management applications; server and embedded operating systems; and software development tools. Red Hat also provides consulting, custom software development, support, and training services.

While revenues increased, so did gross margins, going to 84.9% from 84.3%. The tepid growth came from higher expenditures on sales and marketing as well as research and development. The tax rates also increased. When the bottom line was calculated, earnings were 10 cents a share, the same as the last quarter of 2006.

Earnings for the 2007 were 36 cents a share, up from 29 cents the prior year. This year analysts predict 45 cents a share and 55 cents next year. Revenues were $523 million in 2007 up noticeably (30.6%) from 2006 at $400.6 million. This year analysts see $670 million and next year, $810 million. Over the next 5 years, expectations are for sales to grow, on average, by 24% a year while earnings increase by 19.5% a year, on average, in the same time period.

Another advantage Red Hat has beside the open source programs is price. Its Enterprise Linux 5 operating platform costs less than Microsoft's. It also has improved performance in indirect sales channels. Most of RHT's revenue gains come from direct sales to major enterprise customers. Now the company is marketing more to system integrators and other independent vendors. Its JBoss middleware product should also increase sales meaningfully due to higher priced software subscriptions and more efficient sales efforts.

Revenues waiting to be recognized (deferred revenues) at the end of the February quarter amounted to $473 million, up 40% from the prior year's level. That's revenue that is recognized in the year in which service is given. Much of Red Hat's business is on a subscription basis so future revenues, at least for the next year or two, is easily predicted. Without extraordinary items, so are earnings.

More numbers: Return on Equity is 8.9%. This is a mid cap stock with a market cap of $4.3 billion on 193.19 million shares outstanding. Current assets are about 1.2 times current liabilities with cash at $990 million. There is no dividend. There is no long term debt. The beta is 2.48 which makes this stock a wild ride (beta measures a stock's movement compared to the S&P 500's movement in the last year. That means RHT moved almost 2.5 times more, in the same direction, as the index. The P/E (price to earnings ratio) is an astronomical 67 based on the last 12 months' earnings. Using forward earnings of the next 12 months, the P/E registers 30.

Red Hat stock traded at $2.40 a share in 2001. Since then it ran as high as $32.50 in 2006. The stock has trailed off that level and seems to be heading higher once again. Whether it can keep going will depend on those earnings coming in at or better than analysts predict. With a strong backlog and increased revenues, there's a chance they will.

- Company Web site: www.redhat.com

- Ted Allrich