Red Hat Set to Exit 2010 on a High Note

Linux vendor Red Hat (NYSE:RHT) is set to report its third fiscal quarter 2011 earnings after market close today. With new technology releases in full swing during the quarter, expectations are running high for a strong performance.

At the end of its second fiscal quarter 2011, Red Hat provided revenue guidance of between $226 million to $228 million. In a research note, analyst Trip Chowdhry of Global Equities research, noted that he expects that Red Hat will beat their forecast revenue numbers with revenues of $228.6 million. [login]

Part of Chowdhry’s optimism comes from growth in new Red Hat Enterprise Linux installations against those from rival Microsoft.

“For every 8 new project starts, 5 are occurring on Red Hat Linux Platform and 3 are occurring on Microsoft Platform,” the Global Equities Research note states.

A key part of Red Hat’s continuing growth during the quarter comes from the launch of the Red Hat Enterprise Linux 6 (RHEL 6) platform. RHEL is Red Hat’s flagship Linux platform and the RHEL 6 release marked the first major release upgrade since RHEL 5 debuted in 2007.

According to Chowdhry, RHEL 6 is already off to a solid start and benefits from hardware partnerships from multiple vendors including HP, IBM and Fujitsu.

Another important trend that is helping to fuel Red Hat’s growth is the movement from free users of Linux to paid users of RHEL. Red Hat has been focusing on converting free users to paid users and it’s an effort that is paying off. Chowdhry noted that as enterprise projects get funded, enterprise customers are switching from free Linux to paid Linux.

The movement to the cloud is seen as a driver for the movement from free to paid version of Linux. Red Hat has multiple efforts currently underway as part of its Cloud Foundations initiative. Red Hat is positioning Linux and its integrated KVM virtualization technology as the core infrastructure for enabling multi-tenant cloud services.

From a competitive perspective, Novell, Red Hat’s primary Linux rival in the enterprise space has been undergoing a period of transition which may also benefit Red Hat. Novell is now set to be acquired by privately held Attachmate in a deal valued at $2.2 billion.

“Our research indicates that Red Hat’s business is showing improving secular growth trends, including accelerated new project starts on Red Hat Linux, launch of new RHEL 6.0, and acceleration in market share wins against SUSE Linux, and continued acceleration in shift from Free to Paid Linux,” Chowdhry wrote. “These data points give us confidence that Red Hat’s business will continue to show incremental growth in revenues and earnings.”

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