Bill Snyder
Red Hat(RHAT Quote - Cramer on RHAT - Stock Picks), the fast-growing Linux software developer, is in the penalty box and is likely to stay there until investors are convinced that the issues that forced a disappointing second quarter are safely behind.
In recent trading on Wednesday, the morning after the company reported, shares had plunged by $6.07, or 23.1%, to $20.22. "Red Hat has little time on its side to disprove the bears. Disappointing second-quarter billings call into question the true health and trajectory of the core business. The third quarter is a pivotal quarter for Red Hat," wrote Citigroup analyst Brent Thill. The earnings report caught Wall Street by surprise. The stock had run up prior to Tuesday's announcement, and most analysts figured the company would report a solid quarter. By some measures, it did: On a non-GAAP basis, Red Hat beat expectations by a penny, and sales were up a robust 52%. But investors focused on a drop in billings, which are seen as a forward-looking measure of growth for a company with Red Hat's complex subscription business model, and on cash flow. Cash flow from operations slipped to $43.9 million from $45.8 million a year ago. And with revenue and deferred revenue from newly acquired JBoss backed out, organic billings came in at $106.8 million, a sequential drop of 7%, according to Goldman Sachs analyst Rick Sherlund. The analyst noted that the figure represented a year-over-year gain of 16%, but that's "a significant slowing in growth," said Goldman Sachs. The company's third-quarter forecast also didn't inspire. Red Hat said it expects a third-quarter profit of 12 cents to 13 cents a share on revenue of $103.5 million to $105 million. Analysts were expecting 12 cents from earnings and a top line of $105.7 million.
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