Red Hat (NASDAQ:RHAT), the open source leader, has some substantial opportunities in front of it, mainly related to the disruptive nature of the subscription-based business model in the software world. However, in the here and now, it has some pretty cool things going on -- think virtualization opportunities, for one thing (more on this later). Given the rich stock price, much of this potential is priced in, but that doesn't mean investors can't obtain decent returns by waiting for an even sharper dip in the price. Let's review the last earnings report and see how the latest initiatives are stacking up.

Revenue for the quarter was $84 million, up 38% year over year, and subscription revenue was $71.5 million, up 45% year over year, slower than last quarter's 53% increase. Now the confusion kicks in: earnings were $0.07 a share, versus expectations of $0.09 a share.

First, a stock option expense of $7.63 million knocked off $0.02 a share, and a GAAP tax rate was 37% versus 5% cash tax rate -- which most analysts were modeling -- causing an additional hit to earnings. Without those expenses, earnings would have beat analyst expectations with $0.14 a share. That being said, gross margins improved 500 basis points to 84% and operating cash flow came in at roughly $52 million, up 43% year over year, both indicators of a strong underlying business. Indeed, the company continued to extend their market share lead in servers over their bumbling competitor Novell (NASDAQ:NOVL).

Unlike (NASDAQ:CRM), Red Hat's subscription-based business model does not face quite the same "integration" threats from larger competitors. True, Microsoft (NASDAQ:MSFT) has an all-in-one package with Windows, but it can't extend the Windows application monopoly into the open source world without destroying its own business. This gives Red Hat substantial freedom to innovate via their user community and prove their business value proposition to customers -- with little to fear from Mr. Softy.

Look at virtualization, for example; virtualization uses software that allows one computer to function as many computers at the same time. Think of opening five to ten windows on one computer screen, and having each window be an entirely separate computer, no different than five or ten machines spread out across a room. The savings for a business in both space and fewer machine purchases are obvious, yes?

Virtualization is only estimated to make up 5%-10% of servers now, but it can be a multi-billion dollar business per Red Hat CEO Mathew Szulik. VMware, now a part of EMC (NYSE:EMC), pioneered the market space, but Red Hat recently entered the market place simply by including Xen, a free open source virtualization tool, in their latest software packages. Mr. Softy still has only a rudimentary product in this space, but announced back in April that it would help Linux users use the Microsoft product, in an effort to keep a toehold in the market. Microsoft supporting Linux? I guess the times are changing.

Open up to open source with further Foolishness:

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Fool contributor Stephen Ellis does not own shares in any companies named above. You can view his holdings here .