UPDATE 2-Red Hat profit rises on demand for Linux software

(Adds background, comments from analyst, company. Updates shares)

By Jim Finkle

BOSTON, June 27 (Reuters) - Red Hat Inc. (RHT.N) reported an 18 percent jump in net income on Wednesday, but shares in the maker of business software declined as its quarterly cash flow fell short of Wall Street expectations.

The developer of Linux software, used to run business computers and corporate data centers, also said it was on target to meet full-year earnings forecasts it released three months ago.

It posted fiscal first-quarter profit of 16 cents a share, excluding items, just ahead of analysts' average forecast of 15 cents, according to Reuters Estimates.

But cash flow fell short of some forecasts for the period, which ended May 31, due to higher-than-expected spending.

Chief Financial Officer Charlie Peters told investors the extra costs were the result of some one-time items, including spending on the release of a new version of its flagship product and a users conference, along with negative foreign currency impact.

The company reported $52.25 million in non-GAAP cash-flow from operations. Jefferies & Co. analyst Katherine Egbert said that fell short of her forecast of about $55.5 million.

In addition to the shortfall, investor may have been spooked by the fact that the results were otherwise just about in line with expectations, she said.

Red Hat shares have climbed 13 percent since the beginning of May amid hopes it would post strong quarterly earnings.

"The business is healthy. But you just get the sense that there is nothing exciting here," Egbert said. "There is no explosive metric you can point to. It is boring."

Fiscal first-quarter net income including items rose to $16.2 million, or 8 cents a share, from $13.8 million, or 7 cents a share, a year earlier. Revenue rose to $118.9 million from $84.0 million in the quarter ended May 31.

The software developer's biggest rival is Novell Inc. (NOVL.O), which late last year enlisted the world's No. 1 software maker, Microsoft Corp. (MSFT.O), as a partner in its battle to woo customers away from Red Hat. The two are working together on product development and sales.

It also competes with a cloned version of Red Hat Enterprise Linux from Oracle Corp. (ORCL.O), which the business software maker introduced at the end of last year.

Chief Executive Matthew Szulik said in an interview he understood why some investors would be disappointed the company did not raise forecasts, but that he was proud of the results.

"Six months ago two of the four largest computer companies in the world were threatening to kill us," he said. "(Yet) we have continued to execute against our financial commitments."

For the second quarter of this year, Red Hat is now forecasting it will report earnings per share excluding items of 17 cents on revenue of $124 million to $126 million.

Analysts had been expecting the company to report second-quarter profit before items of 16 cents a share on revenue of $124.4 million, according to Reuters Estimates.

Both Red Hat, based in Raleigh, North Carolina, and Novell offer similar -- but not necessarily compatible -- software packages, based on a set of basic computer code known as the Linux kernel.

Red Hat shares were quoted at $23.87 in after-hours trading. They had closed at $24.19 on the New York Stock Exchange before the results were released.