Markets & Finance

Red Hat Shares Soar on Sales News


Oracle's aggressive plan has apparently failed to put a big dent in the Linux outfit's business

It was a little early to be playing Grinch in October, but Oracle (ORCL) gave it a shot anyway. When the software giant went for Red Hat's (RHT) jugular Oct. 26 with a plan to offer similar services at lower prices, investors whacked more than 26% off the Linux company's stock. But maybe Larry Ellison & Co. should've remembered what the Grinch was wearing atop his pointy green head at the end of the Dr. Seuss classic.

Indeed, on Dec. 21 the Raleigh, N.C.-based outfit showed that it has nonetheless kept selling more support services for Linux, a free operating system that millions of developers update via the Internet. In a burst of pre-Christmas cheer, Red Hat's stock price soared more than 16% on Dec. 22.

Red Hat said late Dec. 21 that its total revenue rose to $105.8 million, up 45% from the year-ago quarter. The company even added 12,000 new customers during the quarter. "This quarter's performance was characterized by strong market demand and solid execution," CFO Charlie Peters said in a press release.

To be sure, Red Hat's profits took hits from things like stock compensation and tax expenses. Net income for the quarter was $14.6 million, down 37% from the same quarter last year.

But investors had been more worried about Ellison than the taxman, after the software giant's CEO said his new program for Linux, Oracle Unbreakable Linux, provides support for less money than Red Hat charges.

Citigroup analyst Brent Thill, for example, had wondered if Red Hat customers would defect to Oracle. But he noted Dec. 22 that Red Hat has actually increased its customer base sequentially from 10,000 additions in the second and first quarter. The company has also renewed 98 of its top 100 deals this year; one of the two deals not to renew was with Oracle.

"Solid results in [the fiscal third quarter] were a clear indication that so far Oracle's attack is having minimal disruption on Red Hat's 80% Linux market share," Thill said in a research note. Thill upgraded Red Hat to hold from sell, explaining that Oracle isn't likely to have a broader impact now until at least the second half of 2007. (Citigroup does and seeks to do business with companies covered in its research reports.)

Thill wasn't the only one to grow more positive on Red Hat's stock, noting that the company's sales haven't been hurt by Oracle's move into the Linux market. First Albany Capital's analyst Mark Murphy upgraded Red Hat to buy from neutral. Standard & Poor's Corp. analyst Jim Yin raised his 12-month target price on Red Hat to $23 from $18. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)


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