After the Wednesday closing bell, we'll get a first-quarter report from Linux peddler Red Hat (NYSE:RHT). Tilt your fedora to a jaunty angle -- we're going in for a closer look.

What analysts say:

  • Buy, sell, or waffle? Nine out of 22 analysts have a buy rating on the stock today. Two are selling, and 11 hold the middle ground. More than 400 of our 31,100 rated Motley Fool CAPS users have told us what they think about Red Hat, making it a two-star stock.
  • Revenues. $117.1 million would be enough for the mean analyst. No, not the guy in the corner with the crazy peepers -- the statistical mean. That would be 39% above the $84 million of sales from the year-ago quarter.
  • Earnings. The average forecast calls for $0.15 per share, up from last year's $0.13 per share.

What management says:
In the year-end conference call, CEO Matt Szulik described his company's efforts to grow globally, while establishing Red Hat as a trusted IT provider brand. "We are working with our customers globally," he said. "We are expanding channels of distribution. We continue to demonstrate our technology leadership and service innovation."

What management does:
Red Hat spent a lot of money on infrastructure over the past few quarters. The R&D and sales budgets both increased more than 70%, far outpacing revenue growth, so there's your operational margin hit. The bottom line was further depressed by far higher tax provisions than the year before.

Margins

11/2005

2/2006

5/2006

8/2006

11/2006

2/2007

Gross

81.6%

82.6%

83.8%

84.2%

84.2%

84.4%

Operating

19.3%

22.3%

23.1%

22.1%

20.7%

21.1%

Net

25%

28.6%

26.9%

22.4%

18.1%

15%

FCF/Revenue

58.5%

61%

61.3%

54.5%

50.8%

44.7%

YOY Growth

11/2005

2/2006

5/2006

8/2006

11/2006

2/2007

Revenue

46.2%

41.7%

39.9%

42.8%

43.2%

43.9%

Earnings

67.3%

75.4%

72.6%

45.3%

3.9%

(24.8%)
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:
Two quarters ago, a barrage of rather direct business attacks from Microsoft (NASDAQ:MSFT), Novell (NASDAQ:NOVL), and Oracle (NASDAQ:ORCL) was met with a cold shoulder from Red Hat. Management said then that the mere fact that such large and established software companies felt the need to do the bombing runs over North Carolina was a testament to how effective its strategy is.

And as we've already seen, Red Hat proceeded to beef up its operations rather than backing away from the challenge. Walk the walk, so to speak. And the revenue growth trend doesn't show any signs of slowing down. So the industry giants haven't put a dent in Red Hat yet, despite their best efforts.

As I keep saying whenever Novell comes up in conversation, Linux isn't going away and you really can make a fortune selling open source software for essentially nothing. The trick is to follow up with a sterling service department and a few value-added subscription products, which is exactly what Red Hat has done. Expect the gravy train to keep rolling, right through the enemy fire.

Microsoft is a Motley Fool Inside Value pick.

Fool contributor Anders Bylund holds no position in any of the companies discussed here, and he prefers Debian or Ubuntu Linux. You can check out Anders' holdings if you like, and Foolish disclosure will help you find the road ahead.