Strong financial performance in the most recent quarter and continued growth in results despite a challenging economy have led Standard & Poor’s (S&P) Rating Services to raise Red Hat Inc.’s  (RHT) corporate credit rating from BB to BB+.

Red Hat is a leader in open source software solutions and has been upgraded thrice in less than two years. The company believes that it is still in the early stages of growth and has tremendous growth opportunity beyond 2010.

We believe the company’s strong market position, focused execution, strong balance sheet, impressive cash flow, international expansion and proven value proposition will help grow its business in the near term and deliver strong revenue growth beyond fiscal 2010.

We remain positive on the company’s long-term growth given its robust performance, driven by the record bookings and billings, substantial recurring revenue stream and growth in deferred revenues.

Moreover, the company’s products such as enterprise operating platform (Red Hat Enterprise Linux-RHEL) and enterprise middleware platform (JBoss Enterprise Middleware Suite) are gaining traction. We expect these products to increase customer renewal rates and drive growth, resulting in further upside for the shares in the coming quarters.

During the most recent quarter, the company released new products which will further establish Red Hat as a leader not only in open source operating systems management and virtualization but also in cloud computing solutions.

Red Hat’s second-quarter results beat analysts’ expectations on both the top and bottom lines. Better-than-expected results were due to the improving IT spending environment and Red Hat’s robust growth potential, new product launches, strong execution and increased customer demand in open source software solutions.

Moreover, profitability improved as Red Hat partners Incorporatedluding Intel Corp. (INTC), International Business Machines (IBM), Cisco Inc. (CSCO) and Dell Inc. (DELL) opted for its source products.

However, pricing pressure from its major competitors such as Novell Inc. (NOVL), Microsoft Corp. (MSFT) and Oracle (ORCL) in the virtualization business may hurt the company’s results in the near future.

Given the company’s various positive attributes and record growth in earnings there is room for further upside from the current levels. Thus we have a Neutral rating on the stock.

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