Microsoft Still Cleaning Up With Windows, Aug 29, 2007

Whether from Linux open-source technology or virtualization, many have predicted the demise of Microsoft's traditional software business. So far the company that built its house on Windows isn't caving in to soothsayers.

Red Hat got back in the good graces of investors with a strong third-quarter financial report that featured a 2-cent-a-share upside surprise and a 45% jump in revenue

Shares of Red Hat rose on heavy trading Monday, as investors bid the stock up in anticipation of Tuesday's second-quarter earnings report.

Shares of Red Hat soared Thursday, as technology investors fled from Novell, the Linux vendor's major rival.

Oracle has been running roughshod over the enterprise-software world of late, winning gobs of market share by buying up the competition in an $18 billion acquisition spree.

Novell's first-quarter sales dropped by 5.5%, but the Linux software provider was still able to eke out small upside surprises on the top and bottom lines.

Fourth-quarter profit more than doubled at Red Hat as enterprise subscription revenue rose 92%.

An embarrassing accounting mistake is shaking faith in Novell's internal controls, prompting a sharp early selloff and an analyst's downgrade.

With most of Wall Street betting against it, SCO Group could face a last chance at redemption in a series of court battles that will play out over the next few weeks.

Investors punished shares of Red Hat Thursday after the Linux vendor's third-quarter sales failed to meet analyst targets and the company warned of more soft revenue on the horizon.

The already-bruising battle for control of the fast-growing Linux market has become even tougher after Dell announced Wednesday that it will distribute Novell's version of the upstart operating system on its servers.

Linux software vendor Lindows indefinitely postponed its IPO Thursday after lowering its proposed price range twice in the past week, according to underwriter Roth Capital Partners.

San Diego-based Lindows becomes the latest in a string of companies to postpone or withdraw its IPO in recent days amid a dive in the stock market. At least two companies -- The Active Network and MatchNet -- withdrew their IPOs Thursday, citing unfavorable market conditions, according to Renaissance Capital's IPOhome.com site.

SCO Group continued to beguile Thursday, announcing a share buyback after a ninefold run-up in its stock price that reflects wagering on its multimillion-dollar legal campaign to privatize Linux.

The technology outfit said it will buy back up to 1.5 million common shares over the next 24 months, believing as it does that they are an "attractive investment opportunity" at current levels. That level was recently $9.50, down a penny from Wednesday night, but up from the $1.09 they touched in February 2003.

Microsoft is not on the verge of getting swept away by a Linux tsunami, as some open-source software enthusiasts have suggested. But Linux is a small wave slowly building every day, and threatens to dampen Microsoft's higher-growth server business.

Analysts differ over when the Linux wave reaches a critical crest, indicating that point has yet to arrive. But as it builds, Linux is putting Microsoft on the defensive, forcing the world's largest software maker to cut prices and consequently threatening margins.

Red Hat reported third-quarter earnings in line with Wall Street estimates Thursday, but the Linux software vendor's revenue swelled 36% from a year ago, beating analyst expectations.

The Raleigh, N.C., company reported third-quarter net income under generally accepted accounting principles of $4.1 million, or 2 cents a share, up from net income of $214,000, or break-even on a per-share basis, in the year-earlier period. Revenue was $33.1 million, up 36.2% year over year and up 14.9% sequentially.

Almost every week, it seems, another government is jumping on the Linux bandwagon, badmouthing Microsoft all the way. But for all the headlines, the open-source software movement remains very much a fringe business, raising troubling questions for investors who've plowed into publicly traded Linux providers in the past year.

Shares of SCO Group skyrocketed to their highest level in nearly three years after a Wall Street brokerage firm initiated coverage of the stock with a buy rating.

Deutsche Bank analyst Brian Skiba accompanied his buy rating with a $45 price target, but cautioned that investors should consider an investment in SCO "extremely high risk and volatile." Shares of SCO propelled $5.13, or 33%, to $20.66 in recent trading.

Since late January, at least 18 federal lawsuits have been filed against VA Linux, claiming the Fremont, Calif.-based company conspired with its investment bankers in a kickback scheme to drive up the price of its shares in what was the largest percentage gain in at least a decade for a stock in its first day of trading. Those suits, which seek certification as class actions, also name the lead underwriter of the VA Linux IPO, Credit Suisse First Boston, as a defendant.

Lineo withdrew its proposed $60 million initial public offering, according to a filing with the Securities and Exchange Commission.

Rueppel said the key development to watch is penetration into the ranks of Fortune 500 companies by Linux-based applications like the ones in which Red Hatspecializes. Acceptance of Linux technology by large, established companies is the kind of evolution that "will make investors comfortable," he said.