Red Hat's Profit and Revenue Rise but Not Enough for the Street

Red Hat Inc. (NASDAQ:RHT) managed to increase profit by 7% when compared to the quarter last year, an amazing feat for any software/tech company given the state of the economy.  However, those results weren't good enough for the Street, RHT shares are down 6.6% today and in the $18 range.

But who cares what the company reported, we care about the road ahead --  Red Hat Inc. forecast it will report Q2 profit of 14 cents to 15 cents per share on revenue of $178 million to $180 million. Analysts expect the company to report profit of 15 cents per share on revenue of $179 million.  Red Hat also projected an operating margin of 23 percent.

Two analysts covering Red Hat have already raised their price targets this morning, that's a great sign:

However, despite today's 6% drop, RHT shares have increased 42% since the start of the year, investors who got in early are taking their profits today while the rest of us start to eyeball Red Hat.  

However Merrill downgraded RHT to neutral, that summary comes courtesy of Eric Savitz:

Red Hat (RHT) shares are down sharply today following last night’s fiscal first quarter earnings report, as Bank of America/Merrill Lynch analyst Kash Rangan cuts his rating on the stock to Neutral from Buy.

While revenue and EPS edged expectations, Rangan found other areas of concern. He notes that sequential deferred revenue growth of $2.4 million was the lowest in the last several quarters. Cash flow from operations fell shy shy of his forecast, due to lower accounts receivable. Billings growth adjusted for currency decelerated to 3% from 11%-13% in the second half of fiscal 2009. Average contract length dropped to 19 months, from 24 months.

Rangan writes that his call is not about demand, revenue or margins, “all of which shine.” Instead, he says, the more cautious stance is about “quality of cash flow.” He wants to see growth from deferred revenue, rather than better accounts receivable..

Rangan actually boosted his price target on the stock to $21, from $18; the stock closed yesterday at $20.13. But he adds that “multiple expansion will be challenged ’till deferred revenue and billings growth can resume.”

Finally, while the company is a frequent subject of takeover speculation, Rangan contends that “RHT’s value is best preserved as an independent player,” adding that “a potential acquisition could hurt this neutrality, disenfranchise open source developers and potentially fork [Red Hat Enterprise Linux].”

 

Fellow Masters, should RHT shares continue to fall, its worth adding to your watch list but for now at least we can all feel good about a tech/software company pulling off good numbers -- congrats RHT Longs.