Updated from June 17

Red Hat


continues to scare investors off.

The Linux vendor said Thursday that first-quarter revenue rose 53% from a year ago, but still came in shy of expectations. The stock was recently down $1.60, or 7.2%, to $20.79 in premarket trading Friday.

Analyst reaction to the revenue miss was mixed, with CSFB saying the selloff made Red Hat's shares attractive, while First Albany cut its investment rating to neutral.

The Raleigh, N.C.-based company, which previewed its earnings earlier this week to quell concerns about its departing CFO, said first-quarter revenue totaled $41.6 million, up 13% from the fourth quarter and 53% from the year-earlier period. Analysts were looking for $43 million, according to Thomson First Call.

Red Hat reported net income of $10.7 million, or 5 cents a share, in the first quarter, as disclosed Tuesday. That compared with net income of $1.5 million, or 1 cent a share, in the same period a year earlier.

Wall Street analysts expected Red Hat to earn pro forma net income of 4 cents a share.

Outgoing CFO Kevin Thompson, whose departure announced Monday prompted a significant selloff, said enterprise subscription revenue came in a little lighter than expected because many deals were closed toward the end of the quarter.

Red Hat recognizes subscription revenue incrementally over the life of a contract, posting most of it to deferred revenue on the balance sheet first and then moving it to the income statement. Consequently, the company recognized less revenue on the income statement from deals closed later in the quarter than it did for deals closed earlier in the quarter.

Deferred revenue climbed sequentially $15.2 million, or 21%, to $86.1 million. Renewal rates for enterprise subscriptions were 85%.

But Jefferies analyst Katherine Egbert noted that overall bookings -- calculated by adding the change in deferred revenue to revenue -- were down sequentially to $56.9 million from $65.5 million in the previous quarter. That decline, combined with unspectacular guidance, may be a reason for investors to revisit the company's fundamentals, Egbert said.

Still, Egbert has a buy rating on the stock. "My sense is business has flattened for the May quarter and again for August," she said. But "I'm wiling to bet it takes off again," she added, noting that November will be the quarter to watch. (Her firm hasn't done any banking with Red Hat.)

Looking forward, Red Hat expects second-quarter revenue of $47.5 million to $48.1 million, representing sequential growth of 14% to 16%, and second-quarter net income to range from $10 million to $10.2 million, or 5 cents a share. The company expects to close 85,000 to 89,000 subscriptions in the second quarter, representing an increase of 10,000 to 14,000 subscriptions.

The company's earnings guidance fell in line with analyst estimates but its revenue outlook fell short of the consensus estimate of $48.7 million.

In a postclose conference call, CEO Matthew Szulik noted that the second quarter is typically slow because of summer holidays in Europe. Szulik also said he hopes to have a new CFO in place for the company's second-quarter earnings call in September. He said Red Hat is looking for someone with experience running a company with $750 million in revenue and who has a strong background in mergers and acquisitions and international business.

In a telephone interview after the call, Szulik argued deferred revenue growth and cash flow are a better gauge of the company's health than the bookings number calculated by Egbert. Red Hat generated $30.1 million, or 16 cents a share, in cash flow from operations in the first quarter, ending the quarter with $964.4 million in cash and investments.

Szulik also touted the company's record 80% gross margin in the first quarter, which soared even higher to 93% in the enterprise subscription technologies category.

Red Hat, which didn't disclose overall revenue figures Tuesday, said it sold 98,000 software subscriptions, including 75,000 enterprise subscriptions. That represented a 23% sequential jump in enterprise subscriptions and a 13% sequential increase in overall subscriptions.

Average enterprise subscriptions were $430 per year, which was higher than the company's guidance of $400 but lower than the average of $455 in the prior quarter. Thompson said the average enterprise subscription rate in the second quarter should be consistent with the first-quarter average.