SEATTLE (Reuters) - Linux software distributor Red Hat Inc. RHAT.O on Tuesday posted its first ever quarterly net profit while revenue rose 21 percent on higher sales of subscriptions to businesses.

The Raleigh, North Carolina-based supplier of Linux -- which can be used and modified freely unlike Microsoft Corp.'s MSFT.O Windows operating system -- also said it expected strong revenue growth in the fourth quarter compared with the third quarter.

Linux reported a net profit $305,000, or nil per share, for the third quarter ended Nov. 30, its first on a GAAP basis, adding that it would only report GAAP (Generally Accepted Accounting Principles) figures from now.

That compared with a net loss of $15 million, or 9 cents per share, a year earlier, and a forecast for break-even on a per-share basis in the third quarter, according to the average of analysts polled by research firm Thomson First Call.

Since Linux software is free, or open source, Red Hat draws in revenue by offering subscriptions for regular software updates and providing services to corporations.

"The collaborative process produces a better software product," said Red Hat Chief Executive Matthew Szulik, "and our results after 14 quarters as a publicly traded company gives us confidence for the future."

Sales of Red Hat's high-end server product for managing computing networks rose 50 percent from the previous quarter to 12,000 subscriptions.

Szulik said Red Hat would "meet or exceed" its goal to sell30,000 Advanced Server subscriptions by the end of its fiscal year ending in February, with sales of 20,000 units so far.

"I think it was a solid quarter. They exceeded expectations on the number of sales of the new Advanced Server Product," said Katherine Egbert, analyst at C.E. Unterberg Towbin. Egbert said she does not own shares in the company and that C.E. Unterberg Towbin makes a market in the shares but does not seek investment banking business from Red Hat.

"Red Hat is doing a nice job of proving you can make a business around open source," Egbert said.

FURTHER GROWTH IN FOURTH QUARTER

Revenue at Red Hat was $24.3 million, up from $20.05 million a year earlier and above analysts' average forecast for sales of $23.43 million.

"We expect to see strong sequential growth in the fourth quarter of fiscal 2003," Red Hat Chief Financial Officer Kevin Thompson told analysts in a conference call, "This growth will continue to be led by our enterprise business."

Businesses such as investment bank Dresdner Kleinwort Wasserstein are adopting Linux as a cheaper alternative to Unix, Thompson said. Linux is essentially a free version of Unix, the multi-version proprietary networking operating system sold by Sun Microsystems Inc. SUNW.O and others.

For the fourth quarter, Red Hat said it expected revenue to grow as much as 13 percent from the previous period to between $26.5 million and $27.5 million.

Fourth quarter net income was expected to be between $1.3 million and $2.5 million dollars, the company said.

Red Hat, which has been hiring staff over the past year, said overall gross margins would continue to improve from the 66 percent margin seen in the third quarter. "In the next 12 months we can top 70 percent," Szulik said.

Red Hat shares, which had gained 2.7 percent on the Nasdaq to close at $6.45, edged back in after-hours trade and stood at $6.33 after the quarterly figures were released.

The shares have gained 86 percent from October lows, buoyed by a broad rally in technology shares over that period, but are still shy of levels above $8 seen a year ago.