Red Hat Tests Investors' Patience

Red Hat(RHAT Quote - Cramer on RHAT - Stock Picks) is taking a beating Thursday, as investors frown over news that the company's takeover of JBoss will take longer than expected to pay off.

In recent trading, shares were off $2.16, or 8.6%, to $22.85.

The rough treatment on Wall Street followed a complex and rather confusing earnings call after Wednesday's close in which Red Hat posted strong first-quarter results, and issued higher guidance for the year. But the company also said that it will need to add more infrastructure to support JBoss, purchased for $350 million (plus an additional payment linked to future performance) in April.

Strong sales of its Linux software helped Red Hat boost first-quarter revenue by 38%.

Total revenue for the May quarter was $84 million, while subscription revenue increased by 45% compared to the same quarter last year.

Red Hat posted a profit of $13.8 million, or 7 cents a share. A year ago, net income was $12.4 million, or 7 cents a share. But the company said earnings for the quarter are not comparable because it has begun expensing stock options.

For the same reason, Wall Street's earnings expectations of 9 cents a share may not be comparable. Analysts were looking for revenue of $83.3 million.

Options cost the company $7.63 million, or about 2 cents a share, said Dion Cornett, Red Hat's vice president of investor relations. According to Cornett, the comparison with First Call is also difficult because some analysts included the options expense while others did not, and there were various tax-related differences within First Call's poll.

If options expenses, tax rate changes and the impact of the conversion of a $570 million convertible debenture are taken into account, the company would have posted a non-GAAP profit of 14 cents a share, according to Cornett.

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