Here's How 1 Tech Stock Wins in a Recession

Red Hat (NYS: RHT) runs a rare business model. Other software houses rise and fall with the economy, catching a wave whenever corporate budgets are flush with cash. The Linux vendor zigs when that traditional model zags.

The company's second quarter served as another reminder of this unusual state of affairs.

First, the usual numbers. Non-GAAP earnings stayed flat year over year at $0.28 per share. Operating cash flows, on the other hand, jumped 35% to $104 million. That would translate into $0.53 of hard-to-fudge cash income per share. That figure warms an old Fool's heart.

Total revenue rose 15% year over year to $323 million. But how did the troubled markets in Southern Europe fare? From Spain to Greece, the Mediterranean rim is under the fiscal gun right now, which makes the region a litmus test for my thesis on Red Hat.

The proof is in the Zabaglione
"Southern Europe is very strong for us," said CEO Jim Whitehurst in a one-on-one phone interview. "It far exceeded our expectations, well over 20% growth rate. I believe it was the strongest region relative to our expectations."

Why does Red Hat run counter to the rest of the industry? It's a question of deep, deep value.

Red Hat's software licenses tend to be significantly cheaper than competing products from Microsoft (NAS: MSFT) or Oracle (NAS: ORCL) . That's one part of the equation -- affordable software for small and medium businesses, or low-cost mass deployments for enormous data centers with thousands of servers.

I hear the objections now: "You get what you pay for!" But that old adage doesn't really apply here.

It'd be one thing if Red Hat dumped substandard products on the market at cut-rate prices, but that's hardly the case. Its operating system, database, and middleware products are award-winning packages in their own right, and backed by top-notch technical support services. Red Hat systems provided superior returns on your IT investment when I worked in that field eight years ago. The company is bigger, richer, and more mature now. The cost-benefit calculation only tips even further in Red Hat's favor these days.

What it all boils down to
Put it all together and you get a fantastically resilient business model. The same financial crises that might cripple the competition actually boost Red Hat's prospects. As long as the company can sell best-in-class products together with high-quality support services, customers walk away from the transaction both happier and richer.

If you find this model appealing, I'd encourage you to take a second look at fellow middleware specialist TIBCO Software (NAS: TIBX) and cloud-computing wrangler Rackspace Hosting (NAS: RAX) as well. These companies share Red Hat's commitment to top-notch products at a reasonable cost, and all three are justifiably proud of their customer service operations.

Oh, here's another shocking coincidence -- all three stocks have absolutely crushed the market in 2012. So the disruptive innovators beat old-school elephants when the going gets tough. Imagine that.

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Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Oracle and Microsoft. Motley Fool newsletter services have recommended buying shares of Rackspace Hosting, Tibco Software, and Microsoft. Motley Fool newsletter services have also recommended creating a synthetic covered call position in Microsoft. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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