Commercial Linux distributor Red Hat is reaching towards its goal of hitting $1bn in sales. In the fourth quarter of fiscal 2010, the company had double digit revenue growth and posted record billings for the services backing its Enterprise Linux and related products, and it finished off the year with overall sales up 14.7 per cent, to $748.2m, and net earnings up 10.8 per cent, to $87.3m.

Not too shabby considering the global economy was melting down during the first half of Red Hat's fiscal year and is only now showing some signs of stability.

For the fiscal fourth quarter ended February 28, Red Hat had subscription sales of $169.2m, up 21.4 per cent, while training and services revenues actually declined a smidgen to $26.7m. Total sales came in at $195.9m for fiscal Q4, and despite all of its costs rising and a drop in interest income, the company nonetheless was able to boost net income in the quarter to $23.4m, up 46.3 per cent. Since last year, Red Hat has shifted more of its cash pile into debt and equity securities, but still has $970.2m in cash, equivalents, and securities in the bank. The company ended the quarter with $646m in deferred revenues, up 19 percent from a year ago.

What a contrast Red Hat makes with Novell, which might bring in more money each quarter but whose Linux business is much smaller and has just hit break-even in its fiscal 2010 first quarter ended in January. Novell has close to $1bn in the bank and has rejected what amounts to a $940m takeover deal (net of cash) from hedge fund operator Elliott Partners. Red Hat is the better buy, but with a market capitalization of $5.7bn and a multiple that probably makes it worth at least $10bn the way Wall Street thinks, Elliott doesn't have the cash to buy Red Hat. And maybe no one else does either.

In a conference call with Wall Street analysts, Jim Whitehurst, Red Hat's president and chief executive officer, said that the quarter saw the telecommunications sector pick up, with strong attach rates for maintenance tools, an increase in embedded Enterprise Linux sales, and traction gaining for the Enterprise MRG real-time and grid variant of the company's Linux distro. The JBoss middleware business picked up too, and the company closed a multi-million dollar deal for JBoss products with a big bank in the quarter.

Whitehurst said that Red Hat only renewed 24 of the top 25 deals that came up for renewal, and they renewed at 130 percent of the value of the contracts in the prior year among those 24 accounts. Comically, Red Hat was sad to lose a deal at that one big account (an unnamed technology company), but Whitehurst said that it had already signed a six-figure deal with another division of that same company. So there. With some of the major stock exchange wins in the past year - including the Tokyo Stock Exchange last week - about half of the volume of equity trading in the world now touches Red Hat Linux in some way, according to Whitehurst.

Charlie Peters, Red Hat's chief financial officer, said that the company inked 18 deals worth over $1m in the fiscal fourth quarter, and it had three deals worth more than $5m. And some 60 per cent of the top 30 deals done by Red Hat in the quarter had Enterprise Linux Advanced Platform - the more expensive version of the server Linux from Red Hat with unlimited virtualization - as a component.

In the past year, this percentage has ranged from 60 to 70 per cent. Peters said that the Red Hat direct sales force closed some big deals in Q4, which shifted the percentage of revenues coming from direct sales up to 44 per cent, compared to 38 per cent in fiscal Q3. Channel partners accounted for the remaining 56 per cent, but this has been trending up in past quarters. By geography, 59 per cent of Red Hat's revenues in Q4 came from the Americas, with 26 per cent from EMEA and 15 percent from Asia/Pacific. This is consistent with past quarters.

During the fiscal 2010 year, Red Hat bought back 10 million of its shares, and this month spent the last $10m of a $250m share repurchase authorization to get a few more. In conjunction with the earnings announcement this afternoon, Red Hat's board announced that it was allocating another $300m for the company to buy back shares, which are used to compensate employees and to prop up per-share earnings numbers.

Looking ahead to fiscal 2011, Whitehurst said that the uptake of JBoss middleware and the Linux Advanced Platform would be as important to the growth of Red Hat as improving server sales. What will also help Red Hat's commercialized KVM virtualization hypervisor is the desire to see a second alternative to VMware's ESX Server, and the company wants its Red Hat Enterprise Virtualization, which launched in November 2009, to be that alternative.

"Most customers don't want one platform," Whitehurst said, referring to virtualization platforms, not operating systems. "They want two. Frankly, we don't see Microsoft all that often. It's not that customers don't like VMware - a lot of them are high on VMware - but they don't want to get stuck with just one vendor and they want us to be the alternative."

Peters put some numbers on the future to give Red Hat something to shoot for. In the first quarter of fiscal 2011 ending in June, Red Hat expects revenues of between $202m and $204m, and non-GAAP earnings per share of between 17 and 18 cents. For the full fiscal 2011 year, Red Hat is projecting sales of between $835m and $850m, which would represent a 12 to 14 per cent increase over the year just ended, and non-GAAP EPS of between 71 and 74 cents.

That's the same or slightly less profits on a non-GAAP basis with revenue growth, which seems to imply that costs are going to rise somewhere this year. Most likely having to do with the development and marketing of the upcoming Red Hat Enterprise Linux 6, due around mid-year. ®