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Red Hat Has Wings

Red Hat (Nasdaq: RHAT  ) reported results for its fourth quarter and full fiscal year yesterday. The proponent of open-source software technology has been doing well as of late -- let's see if the trend is still intact.

For the fourth quarter, total sales revenue increased 37% to $78.7 million. Operating income more than doubled to $19.8 million. Net income jumped 130% to $27.3 million, or $0.13 per diluted share.

For the year, total sales revenue increased 42% to $278.3 million. Operating income performed yet another doubling act, coming in at $58 million. Net income increased 75% to $79.7 million, or $0.41 per diluted share.

If only all earnings reports could be like this. From the top to the bottom line, as far as the eye can see, there is but one element present -- growth, the most valuable commodity on Wall Street. Red Hat is surely on a roll with its business. Annual subscription revenues increased 53% last year, and deferred revenues increased 63%.

Rich Smith covered the margin situation in his Foolish Forecast article, so let's take a look at the current stats. For the year, gross margin was 82.6%, operating margin was 20.9%, and net margin was 28.6% (check out Rich's forensic exploration into the odd relationship between the operating and net margins). These percentages indicate that the positive trend remains in place.

So how is the cash flow situation? Just fine. Net cash from operations increased over 50%, coming in at $186.6 million. Free cash flow increased 58% to just under $170 million.

Red Hat is firing on all cylinders, thriving not only in the long shadow cast by operating-system behemoth Microsoft (Nasdaq: MSFT  ) , but also in the shorter ones cast by companies such as Novell (Nasdaq: NOVL  ) and SCO Group (Nasdaq: SCOX  ) . Microsoft may have little to fear from Red Hat, but the latter nevertheless has demonstrated that it can profitably offer an alternative to Mr. Softy's mainstream dominance.

The one problem with Red Hat is that you really have to be willing to pay a steep price to bet on its continued growth. As of this writing, comparing the company's price-to-free cash flow, I come out with a multiple greater than 30. That isn't cheap; add to that the recent run-up in the share price, and you've got that time-honored cliche, "Wait for a nice pullback."

Great company, great growth. Price? Probably not so great. But don't let that stop you from following the company's prospects and performing additional due diligence, because this was a very nice report. Even Mr. Gates might feel compelled to tip his hat to the company. (Yeah, right.)

More Takes on Red Hat:

Microsoft is aMotley Fool Inside Valuerecommendation. For more top-shelf companies from Wall Street's bargain bin, sign up today for a free 30-day guest pass.

Fool contributorSteven Mallasowns none of the companies mentioned. The Fool has adisclosure policy.

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