June 27 (Bloomberg) -- Red Hat Inc., the world's biggest seller of Linux operating-system programs, said first-quarter profit rose 18 percent on sales of new software. The shares dropped after its cash flow missed analysts' estimates.

Net income climbed to $16.2 million, or 8 cents a share, from $13.8 million, or 7 cents, Raleigh, North Carolina-based Red Hat said today in a statement. Sales rose 42 percent to $118.9 million for the quarter ended May 31.

Red Hat released its Enterprise Linux 5 software for business customers in March, adding features that boost security and help server computers use less power. While the new program fueled sales last quarter, cash flow from operations fell 4 percent to $52.3 million.

``Investors are focused on the cash flow, and the cash flow number was weak,'' said James Gilman, an analyst for New York- based Soleil Securities Corp., who has a ``sell'' rating and doesn't own the shares. He had estimated cash flow of $59.7 million.

Shares of Red Hat fell 32 cents, or 1.3 percent, to $23.87 in extended trading after the report. They had climbed 83 cents to $24.19 at 4 p.m. in regular New York Stock Exchange trading. The stock has risen 5.2 percent this year.

Forecast

The company forecast second-quarter profit of 17 cents a share, excluding some costs, beating the average analyst estimate of 16 cents in a Bloomberg survey. Red Hat predicted sales of $124 million to $126 million, compared with an average estimate of $124.8 million.

Excluding some costs, profit last quarter was 16 cents a share, beating the 15-cent average estimate of analysts surveyed by Bloomberg. Analysts had expected sales of $117.1 million.

Investors should focus on annual cash flow rather than quarterly results, Chief Executive Matthew Szulik said in an interview.

``We have over the last eight years tried to tell investors that cash flow is not linear,'' Szulik said. ``There are those who still don't want to believe it.''

Customers' willingness to continue buying software upgrades and services indicates the company is operating well, Szulik said. He said first-quarter expenses were larger than he wanted because of a company-sponsored conference and the introduction of two new products, including Enterprise Linux 5.

A higher percentage of customers adopted Enterprise Linux 5 than the previous version over a similar time period, Heather Bellini, an analyst at UBS AG in New York, said in a note to clients.

Linux is an open-source operating system, meaning its underlying code is shared freely. Red Hat sells its own version of Linux, as well as service and support.

To contact the reporters on this story: Peter J. Brennan in Los Angeles at pbrennan3@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

Last Updated: June 27, 2007 19:34 EDT