Red Hat gave investors an early present Wednesday, handily topping last quarter's earnings views on torrid sales of its Linux software.
For the quarter ended Nov. 30, the Linux seller earned 12 cents a share, 33% over analysts' views and double the year-ago figure. Sales grew 44% to $73.1 million, 3% over estimates.
Red Hat shares, which rose 3% Wednesday to 26.56, jumped an additional 4% in after-hours trading.
As the No. 1 seller of Linux software, Red Hat has become a choice supplier among technology buyers, says Matthew Szulik, the company's chief executive. "Customers are narrowing their lists of approved vendors, which magnifies the success of category leaders," he said in a conference call.
For its fiscal fourth quarter, which ends in February, Red Hat expects to earn 11 to 12 cents a share. That would be 15% above current estimates and double the year-earlier earnings. It expects sales to grow 36%, reaching between $77.5 million and $78.5 million.
The Linux operating system competes with Microsoft Windows and, more directly, with Unix on low-end systems. After recent improvements to Linux, Red Hat and others look to get the software onto bigger, more complex systems.
According to International Data Corp., dollar sales of servers shipped with Linux installed grew 34.3% in the third quarter, with unit shipments up 20.5%. The software is growing faster than any other server operating system.
Raleigh, N.C.-based Red Hat has excelled at tapping into that growth, analysts say.
"Red Hat has done a very good job of recognizing what the needs of its customers are and putting together software with those needs in mind," said Charles King, an analyst with the research firm Pund-IT.
The core Linux software is free, written collectively and shared freely under a software development model called open source.
Red Hat packages Linux with related software that makes it easier to install and use.
It sells subscriptions for support -- a business model that provides steady, predictable income.
At the same time, Red Hat is expanding into other types of open-source software.
It sells application server software, a certificate system for managing user access, a directory server that keeps track of user accounts and a global file system to manage data storage.
Analysts expect Red Hat's sales and earnings to continue growing at double-digit rates for at least several more quarters -- though the growth may slow a bit.
But not everyone is enamored. Though Banc of America Securities analyst Kirk Materne expects "solid results" from the company, he downgraded the stock this month, saying it was overvalued.
Red Hat may struggle to meet cash-flow goals in the future -- especially as tax rates rise, Materne says. He also wants to see the firm bolster its non-Linux sales staff.
Red Hat faces other challenges, both in and outside the Linux market. Servers running Microsoft Windows account for far more industry sales -- even if they're not growing as quickly as Linux systems.
And Novell, a distant No. 2 to Red Hat in Linux sales, has vowed to get more aggressive.
It recently restructured to focus on its Linux business. It's touting the upcoming version 10 of its SuSE Linux server software, which includes advanced features such as virtualization and clustering. Those two technologies help make low-cost hardware more efficient.