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Needham Starts at Buy, $63 Target

Needham & Co.’s Scott Zeller today kicks off coverage of Red Hat (RHT) with a Buy rating and a $63 price target, writing that “field discussions in our data center software coverage have made increasing mentions of open source alternatives as companies consider their architectures for “data center refresh” and a move to cloud computing for public as well as private cloud buildouts.”

Red Hat’s various offerings are “looking very much like a “stack” (operating system, middleware, virtualization, storage – all open source),” writes Zeller.

The result of that is that Red Hat seems able to expand its “footprint” with customers even in a tough economic environment, he writes.

Today, roughly 40% of the Top 30 deals per quarter have a “middleware” cross-sale component (dollars not disclosed). Renewals of the Top 30 subscriptions average 120-130% of their original value, and we believe this is due to the natural expansion of footprint for RHEL, plus add-on products.

Meantime, what he calls the “core” business of selling licenses to “Enterprise Linux” still produces billings growth of 20% per annum, he observes. That Linux has just 17% of the $32 billion operating system market means growth potential, he suggests, as it takes over from Unix systems, and even from Microsoft‘s (MSFT) Windows, in some cases.

Zeller is projecting Red Hat to make $1.37 billion in revenue this fiscal year ending next February, and $1.21 per share in profit. That compares to consensus of $1.33 billion and $1.19 a share.
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