A Red Hat for All Seasons

Red Hat (NYSE: RHT  ) is a success story for troubled times. The economy falters? No problem. Southern Europe on the brink of collective bankruptcy? Sure, but sales are growing there anyway. Corporate IT budgets trimming down? Hey, that's actually a business opportunity!

The company provides a low-cost alternative to the high-margin enterprise software suites you'd normally buy from Microsoft (NASDAQ: MSFT  ) , Oracle (NYSE: ORCL  ) , and IBM (NYSE: IBM  ) . IT directors have started to realize that the lower price doesn't come with the usual quality drop. Red Hat's open-source operating systems, database tools, storage management platforms, and other business-grade products are every bit as good as the traditional, proprietary stuff they're replacing.

That's how and why the company can thrive in the face of macroeconomic headwinds. Budget cuts might not mean canceling projects anymore. Instead, you can often switch to an open-source platform and try again with far lower operating costs.

So Red Hat just reported third-quarter results. Sales jumped 18% year over year, or 21% in constant currency, as a large slice of Red Hat's sales come from depressed European economies. Non-GAAP earnings climbed $0.01 to $0.29 per share. $100 million of operating cash flows minus $28 million in capital expenses equals $72 million of free cash generation -- far above the $35 million bottom-line net income figure.

Share prices jumped as much as 5.7% the next day, and the stock has soared 32% since last Christmas. The market loves Red Hat as it sheds the upstart image and grows into a serious enterprise contender.

And this is just the beginning. In a phone interview with The Motley Fool, CEO Jim Whitehurst explained that the storage business spearheaded by last year's Gluster acquisition might be the industry's biggest growth opportunity. Big data is a huge market. "There's a $20 billion software storage market out there," he said. "That's actually larger than the operating system market."

Exciting stuff for Red Hat investors, but perhaps less inspiring for storage giant EMC (NYSE: EMC  ) , which is watching a new competitor taking shape.

Whitehurst also reminded me that Red Hat aims for "growth first, delivering margins second." That strategy is paying dividends for investors.

RHT Revenue TTM Chart

RHT Revenue TTM data by YCharts.

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