Red Hat Looking More Green & Blue (RHT, VMW)

Red Hat Inc. (NYSE:RHT) is starting to look more and more like a traditional software company each quarter.  The valuations are no longer like virtualization values, and virtualization is probably going to help Linux system sales directly for Red Hat.  Here are the key results:

• Total revenue for the quarter was $127.3 million, an increase of 28% from the year ago quarter and 7% from the prior quarter. Subscription revenue was $109.2 million, up 29% year-over-year and 6% sequentially. Total revenue expectations from First Call were $117 million.
• Net income for the quarter was $18.2 million, or $0.09 per diluted share, compared with $16.2 million, or $0.08 per diluted share, for the prior quarter and $11.0 million, or $0.05 per diluted share, in the year ago quarter.
• Non-GAAP adjusted net income for the quarter was $36.9 million, or $0.17 per diluted share, after adjusting for stock compensation and tax expense as detailed in the tables below. This compares to non-GAAP adjusted net income of $33.7 million, or $0.16 per diluted share, in the prior quarter and $24.5 million, or $0.12 per diluted share, in the year ago period. Non-GAAP expectations from First Call were $0.17 EPS.
• Guidance was issued for the quarter was $131 to $133 million in revenues, and non-GAAP EPS of $0.18; estimates are $0.18 EPS and $132.5 million revenues.

Red Hat released the beta version of the Red Hat Developer Studio, an integrated Eclipse-based set of open source development tools and runtime environment.  VMware’s (NYSE:VMW) rapid launch and faster investor absorption tied with cheaper RAM and multi-core processors are both lining up to be just what the doctor ordered for Red Hat and other Linux players in general (read about that on the Red Hat site on virtualization).

In addition, Red Hat today announced that its Board of Directors had authorized the continuation of the Company’s stock and debenture repurchase program. Under the program, the Company is authorized to repurchase in aggregate up to $250 million of the Company’s common stock and in aggregate up to $75 million of the Company’s 0.5% Convertible Senior Debentures due 2024.

If Red Hat just meets fiscal FEB-2008 EPS targets at $0.70 then even after the 4% jump in after-hours prices its forward P/E ratio on a non-GAAP basis is becoming more than easy to mentally absorb at 27.5.  The company does have more competition, but this new opening up of the desktops from virtualization in 2008 to 2009 and beyond may really open up the market for this company. 

The wildcard for this one tomorrow is going to be the Wall Street research calls with upgrades or downgrades.  These numbers on the surface have no WOW-factor to them, but the flip side is that these numbers are also starting to look more normalized.

Jon C. Ogg
September 25, 2007

Jon Ogg produces the 24/7 Wall St., LLC Special Situation Investing Newsletter; he does not own securities in the companies he covers.