Foolish Forecast: Feather in the Red Hat

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Thursday evening, open-source software expert Red Hat (NYSE: RHT) reports fourth-quarter and full-year earnings for its 2007 fiscal year. I'm temporarily trading my jingly Fool cap for a scarlet fedora to take a look at the company's prospects.

What analysts say:

• Buy, sell, or waffle? Twenty-two analysts follow Red Hat today. Nine of them are buying, two are selling, and the other 11 are holding on to their hats. In our Motley Fool CAPS investor community, it's a two-star stock, based on 375 player ratings.
  
  
• Revenue. Wall Street expects about $112.5 million of revenue, up 43% from the year-ago $78.7 million haul. Official guidance says $112 million to $113 million.
  
  
• Earnings. The analysts expect about $0.15 per share, a bit higher than the $0.13 per share seen last year. These are non-GAAP numbers, and match up to a guidance range of $0.14 to $0.15 per share. In GAAP parlance, we'll be looking at earnings of about $0.07 to $0.08 per share.

What management says:
You might think that Red Hat would see substantial business risks in the new competition from Oracle (Nasdaq: ORCL) and the cross-promotion agreement between Microsoft (Nasdaq: MSFT) and Novell (Nasdaq: NOVL). Not so. CEO Matt Szulik believes that the "recent competitive announcements are expanding the market for open-source software," and expects Red Hat to remain the market leader in open-source platforms.

What management does:
Operating and net margins have taken a hit as the costs of Red Hat's Jboss acquisition work their way into these trailing figures.

Margin	8/2005	11/2005	2/2006	5/2006	8/2006	11/2006
Gross	80.6%	81.6%	82.6%	83.8%	84.2%	84.2%
Operating	15.8%	19.3%	20.9%	23.1%	22.1%	20.7%
Net	22.1%	25%	28.6%	26.9%	22.4%	18.1%
FCF/Revenue	54.4%	58.5%	61%	61.3%	54.5%	50.8%

Y-O-Y Growth	8/2005	11/2005	2/2006	5/2006	8/2006	11/2006
Revenue	48.9%	46.2%	41.7%	39.9%	42.8%	43.2%
Earnings	63.1%	67.3%	75.4%	72.6%	45.3%	3.9%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Linux is coming into its own as an enterprise platform, after years in corporate IT managers' collective doghouse. The mere fact that behemoths like Oracle and Microsoft are openly acknowledging Linux as a legitimate competitor lends heft to market leaders Red Hat and Novell. IBM (NYSE: IBM) is a longtime supporter, too.

A lack of Oracle swagger about Linux wins suggests good news for Red Hat, so I'd be surprised to see the company falling short of its own guidance this time. But the proof is in the pudding hat. Tune in for the full story on Friday.

Microsoft is a Motley Fool Inside Value selection. Get the whole picture with a free 30-day trial pass to our deep-value investing service.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, and prefers community-supported Linux flavors like Ubuntu or Debian. You can check out Anders' holdings if you like, and Foolish disclosure is what it is because of what we all are.