Street Blue on Red Hat

Investors punished shares of Red Hat(RHAT) Thursday after the Linux vendor's third-quarter sales failed to meet analyst targets and the company warned of more soft revenue on the horizon.

Shares of Red Hat fell to as low as $13.36 earlier. They were recently down 1.45, or 9.6%, at $13.62.

Analysts expressed disappointment with a number of Red Hat's third-quarter metrics, including flat new enterprise subscriptions and declining cash flow, and suggested the company might be losing some market share as competition heats up with rivals Novell(NOVL) and Sun Microsystems(SUNW).

Pacific Crest analyst Brendan Barnicle noted that Red Hat's new subscriptions may have been flat to down in its November quarter, while Novell's Linux subscriptions increased by 14,000 in its most recently reported quarter. (To many analysts' chagrin, Red Hat has stopped breaking out new subscriptions from renewals and providing average sales price data.)

"While Red Hat remains the Linux leader, Novell may be taking some market share and may be a factor in Red Hat's slower subscription adoption," Barnicle wrote in a morning note. (Barnicle has a sector perform rating on Red Hat and an outperform rating on Novell, and his firm hasn't done banking with either company.)

Other analysts took an even more bearish stance. "Between pricing pressures from fellow Linux vendor Novell, as well as Sun Microsystems, the climate appears cloudy at best," wrote CIBC analyst Curtis Shauger, who maintained his sector underperformer rating on the stock. "We would use the recent strength in its share price as a source of funds." (His firm hasn't done banking with Red Hat.)

On Wednesday, Raleigh, N.C.-based Red Hat reported net income of $10.8 million, or 6 cents a share, in the third quarter, which ended Nov. 30. That was in line with the consensus estimate gathered by Thomson First Call and more than double net income of $4.3 million, or 2 cents a share, in the same period a year earlier.

Excluding taxes, Red Hat earned $11.3 million, compared with $4.3 million in the year-ago quarter and $11.2 million the quarter before that.

Red Hat's revenue rose 55% from a year ago to $50.9 million and 10% from the previous quarter. That fell slightly short, however, of the consensus estimate among analysts calling for $51.8 million in sales.

The company's guidance for fourth-quarter sales also was low. The company projected that it would earn 6 cents to 7 cents a share on revenue ranging from $55.5 million to $56.5 million in the fourth fiscal quarter. Analysts were expecting earnings of 7 cents a share on $58 million in sales.