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Red Hat Attracts Admiring Glances but Still Slides

NEW YORK (TheStreet) -- Red Hat (RHT - Get Report) beat Wall Street's fourth-quarter estimates, prompting analysts to highlight the software maker's growth potential. Weaker-than-expected guidance, however, weighed heavily on the stock during Friday trading.

Shares of Red Hat were off 4.72% at $53.49 on Friday.

The software maker earned 39 cents a share on revenue of $400 million, up from 36 cents a share and $348 million in the prior year's quarter. Analysts were looking for earnings of 37 cents a share and revenue of $399.92 million.

Speaking during a conference call to discuss the results, Red Hat CEO Jim Whitehurst noted that the company enjoyed a record number of deals over $1 billion during the quarter. The CEO cited demand for Red Hat's core platform and application development products, including its middleware offerings. Middleware is a form of software that links different computer programs.

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BMO Capital Markets analyst Joel Fishbein raised his Red Hat price target to $64 from $62 on Thursday, noting that the company's billings growth was driven by strength across geographies, verticals and product lines. The analyst maintained his "outperform" rating on the company.

This sentiment was echoed by Evercore Partners analyst Kirk Materne. "Red Hat delivered a solid finish to FY14 with a strong billings quarter," he wrote. "We see RHT as a solid mid-teens grower with the potential for upside in 2H15 as RHEL 7 becomes generally available and OpenStack starts to more meaningfully contribute to billings." Materne maintained his $64 price target and "overweight" rating on Red Hat.

Red Hat has thrown its weight behind OpenStack, an open source cloud computing software. Three of the company's top five fourth-quarter deals had an OpenStack component. Red Hat Enterprise Linux (RHEL) also forms part of Red Hat's open hybrid cloud technology.

Red Hat's guidance, however, is in the spotlight Friday. For the first quarter, Red Hat expects revenue between $412 million and $415 million and earnings, excluding items, between 32 cents and 33 cents a share, below Wall Street's forecast of $415.44 million and 38 cents a share. Red Hat also forecast a non-GAAP operating margin of 21%, down from 24.3% in the fourth quarter. The company attributed the contracting margin to sales kickoffs, global marketing events, hiring and the timing of the Red Hat and Open Stack summits in April and May, respectively.

BMO Capital Markets' Fishbein feels that Red Hat may exceed its guidance target. "We view initial guidance of about 14% growth and a 100bp margin contraction as likely conservative given solid billing trends exiting the year with deferred revenue and billings both accelerating in the quarter, up 18% and 24% on an as reported basis," he wrote.

Red Hat's billings came in at $565 million during the fourth quarter, an increase of 24% from the same period last year, while subscription revenue increased 16% year over year to $351 million.

Red Hat's free cash flow, crucially important for generating share repurchases, is also on Wall Street's radar. During the company's earnings conference call, Chief Financial Officer Charlie Peters said that fourth-quarter free cash flow grew 21% year over year, as Red Hat's Capital Expenditure subsided. The software maker predicted fiscal 2015 free cash flow between $530 million and $580 million, and noted that free cash flow should grow upwards to 19% compared to fiscal 2014.

On Friday, BMO Capital Markets' Fishbein slightly increased his free cash flow estimates for the company to $543 million in fiscal 2015 and $634 million in 2016.

-- Written by James Rogers in New York.

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