Red Hat Falls On Sharp Numbers

    September 27, 2006
    WebProNews Staff

A disappointing second quarter for the Linux distributor met with fierce retribution from shareholders in trading.

That sharp whistling sound was that of Red Hat shares dropping in after-hours trading and continuing to plunge when the market opened after the company announced a serious dip in its earnings.

The stock closed at 26.32 before Red Hat revealed its financials on September 26th. Investors did not take the news well, despite revenue growth of 52 percent:

Net income for the quarter was $11.0 million or $0.05 per diluted share compared with $16.7 million or $0.09 per diluted share for the second quarter of the last fiscal year. Due to differences in the accounting treatment for taxes and stock compensation expense between fiscal 2006 and 2007, net income is not directly comparable between these periods.

Investors may be taking a harder look at the company’s free cash flow. They may be looking at it too hard, according to comments from a company executive:

Chief Financial Officer Charlie Peters said the company expects operating results and cash flow to improve in the second half of the fiscal year with much of the integration work behind it.

The company projected a third-quarter profit of 12 to 13 cents per share on revenue of $103.5 million to $105 million. Analysts are predicting a per-share profit of 12 cents.

“We believe the second quarter will be the low point for cash flow and profitability,” Peters said. “The pipeline is strong and the outlook remains solid.”

Despite Red Hat’s JBoss acquisition providing $7 million in revenue, that $350 million purchase could be part of the disappointing earnings side, MarketWatch reported:

Jefferies analyst Katherine Egbert said the company is having a tough time digesting JBoss, which it purchased for $350 million in cash and stock earlier this year.

“Investors will likely view RHAT as a ‘show-me’ story, given billings weakness and reduced guidance,” Egbert wrote in a research note. She cut her price-target on Red Hat to $24, from $34.

Red Hat is taking the numbers in stride. Said Peters, “Revenue grew nicely and we expect the recent introduction of the Red Hat Application Stack will help continue that trend. We expect operating results and cash flow will improve in the second half of fiscal 2007 since much of the heavy integration work is behind us already.”


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David Utter is a staff writer for WebProNews covering technology and business.