Will Red Hat Eventually Crush Microsoft and Oracle in the Cloud?

Red Hat (NYSE: RHT  ) will release its quarterly report on Thursday, and investors have only partially recovered from the beating they took in September when the open-source software company made its last earnings report. With huge competitors Microsoft (NASDAQ: MSFT  ) and Oracle (NYSE: ORCL  ) consistently posing a threat to its much-smaller business, Red Hat has to take every chance it can get to keep its edge against its rivals.

Red Hat has championed open-source software since its beginning, and perhaps the most surprising thing about the company is that it has successfully earned profits for years. Although some potential clients have been satisfied with Microsoft's and Oracle's own proprietary offerings, many customers prefer the flexibility that Red Hat's products give them. Can Red Hat take that competitive edge to the next level? Let's take an early look at what's been happening with Red Hat over the past quarter and what we're likely to see in its report.

Stats on Red Hat

Analyst EPS Estimate

$0.35

Change From Year-Ago EPS

21%

Revenue Estimate

$383.12 million

Change From Year-Ago Revenue

11.5%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Red Hat earnings bounce back this quarter?
In recent months, analysts have actually been fairly upbeat on their views on Red Hat earnings, boosting their November-quarter estimates by a penny per share and their full-year fiscal 2014 projections by $0.03 per share. The stock, though, has struggled, falling 9% since mid-September.

Red Hat hit a huge roadblock with its August-quarter report, in which the company gave future guidance that disappointed shareholders. Even though the open-source software company managed to grow its revenue by 16%, resulting in 25% higher adjusted earnings from the previous year, Red Hat cited concerns about IT spending levels in Europe and much slower growth in billings. Analysts followed by downgrading the stock in fear that sluggishness in billings now would translate to weaker business activity in the future.

Yet Red Hat has actually had some notable successes recently. CEO Jim Whitehurst noted that Red Hat has managed to boost its market share at the expense of Microsoft, against which it competes in key markets like operating software and middleware. In particular, with its new JBoss xPaaS services for OpenShift, Red Hat hopes to offer a comprehensive platform-as-a-service to enterprises customers to help them take better advantage of cloud-based applications and business processes. Furthermore, its OpenShift Enterprise 2 release earlier this month includes new features that include data-center infrastructure integration and collaborative capabilities, all the while retaining the flexibility and scalability that open-source arrangements have always fostered. That makes many customers prefer the products to those that Oracle and Microsoft offer, as they tend to be more rigid in keeping a proprietary handle on their clients.

Red Hat has also established itself as a major authority figure in the industry, despite its small size. When the Affordable Care Act website had problems at the beginning of its open-enrollment period, the federal government asked for help from both Oracle and Red Hat to diagnose problems and make the Obamacare applications work better for end users.

In the Red Hat earnings report, watch to see if the company expands on its announcement last week that it would collaborate with Dell to create private cloud solutions using Red Hat's OpenStack platform. Success in the venture would give Red Hat another point in its favor in competing against Oracle and Microsoft, validating Red Hat's status as a key player in the industry.

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