Red Hat

Almost all Linux companies would have to grapple with the perennial question of how they can make money through software subscriptions and services rather than selling packaged boxes. For a while, investors have questioned if the shares of top Linux company Red Hat are indeed overvalued.

For instance, the company's third-quarter net profit was only US$305,000 for fiscal year 2003. Although it was an improvement over the previous quarter in the same year, the numbers were nothing to shout about, industry analysts observed.

But after efforts by Red Hat to target the growing demand for Linux in government and large enterprises through distribution agreements with Dell and HP, the company achieved record sales in the quarter ended May 31 this year.

The best performance for Red Hat to date, CEO Matthew Szulik said the solid growth will propel the company ahead in its expansion to tap the growing demand of Linux worldwide. He also has his sales force to thank--all of Red Hat's 25 largest enterprise contracts were renewed, and there were also 190,000 new subscriptions, compared to 98,000 in the same quarter last year.

Red Hat remains the forerunner in Linux in North America, and it is making strides in other parts of the world, including China where it has set up a development lab, and Japan which is a fast-growing market for Linux.

Observers have cautioned that Novell's acquisition of SuSE could potentially change the balance of power in the enterprise Linux market. But it's been two years after the merger was announced, and that has not been the case. Novell is reported to be grappling with pressures to sell off some businesses and to focus on Linux.

Red Hat's license revenue increased from 40 percent to 63 percent between 2002 to 2004, while Novell dropped from 25 percent to 20 percent during the same period, according to analysts.