Open-source software kingpin Red Hat (NASDAQ:RHAT) reports its fiscal Q1 earnings today. Want to know just how this high-flying company is expected to fare, and get one Fool's take on the company? Read on.

What analysts say:

  • Buy, sell, or waffle? Sixteen analysts follow Red Hat. The stock gets 12 buy ratings and four holds.
  • Revenues. Sales are expected to shoot up 37% in today's report, to $83.3 million.
  • Earnings. The firm's net earnings per share are supposed to grow to $0.09 per share.

What management says:
Last quarter, Investing Relations VP Dion Cornett said of Red Hat's strong growth, "We outgrew leading industry analysts' estimates for Linux market growth." and "the positive interaction between our community, ecosystem, and customers continue to extend our leadership position.". With growth last quarter coming in at 37% year over year, the company is clearly cooking, and with a 99% renewal rate among its top 100 customers, it's also providing value to its customers. Given the recent acquisition of JBoss for $350 million in cash and stock, there should be substantial room for the company to expand its product offerings to large, key clients.

Open source is largely a community-based effort, with users working free of charge to update programs and provide better software for all. Red Hat is one of the prime beneficiaries of the user community, since as it leverages the open source community to provide functionality enhancements and upgrades, along with quicker fixes, for little to no development cost. In the conference call last quarter, management rattled off a compelling example of its value proposition to customers, in which a large brokerage challenged the company to reduce the costs of its hardware failures. Red Hat succeeded in reducing the failover time for hardware from more than two minutes to less than 10 seconds, saving the customer an estimated $4 million.

What management does:
As you can see from the chart below, Red Hat's margin growth is excellent. Keep in mind that the net margins are skewed by the interest income on the $1.1 billion in cash and investments on the company's balance sheet last quarter, as well as the virtual absence of taxes due to tax-loss carry-forwards. High-margin annual subscription revenue grew 53% last quarter. Needless to say, the company should enjoy solid growth for some time to come.

Margins %

11/04

2/05

5/05

8/05

11/05

2/06

Gross

79.4

80.4

80.7

80.9

81.8

82.6

Op.

13.3

13.7

15.7

16.7

19.6

20.9

Net

21.8

23.1

21.8

22.1

25.0

28.6
All data courtesy of CapitalIQ. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Red Hat seems to be doing a lot of things right, creating a rich valuation for the stock. Clearly, there is substantial demand for open-source software due to its flexibility, lower cost of ownership (in most cases), and ability to innovate quicker than a certain Mr. Softy. While Microsoft's (NASDAQ:MSFT) attention remains shifted from the Penguin to a certain search-engine giant, it seems that Red Hat is really taking the opportunity to expand its ecosystem and value offerings to subscribers.

On another front, Oracle (NASDAQ:ORCL) has made a lot of noise about entering the open-source marketplace, stating in early April that it might buy Novell (NASDAQ:NOVL) or release its own version of Linux. While this is certainly possible -- CEO Larry Ellison has been on quite an acquisition spree -- Oracle would have a very difficult time catching up with Red Hat's current momentum. Novell has been stumbling badly in the marketplace in the past two years, with an estimated 20% market share of the Linux server market vs. Red Hat's 63%. In addition, Oracle would have to spend considerable time building a user community to equal Red Hat's. That community is the lifeblood behind any open-source offering.

Hopefully, tomorrow we will be able to review the latest developments from the user community, including an update on the virtualization model, as well as see how Red Hat is staying ahead of rivals.

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Fool contributorStephen Ellisdoes not own shares in any companies named above. You can view his holdingshere.