Red Hat Misses on the Top Line

The stock falls 6.4% in after-hours trading.
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Updated from 4:21 p.m. EDT

Red Hat

(RHAT)

more than doubled third-quarter sales Wednesday but still failed to meet analysts' sales targets for the period. The company also said that fourth-quarter sales are expected to fall short of current estimates.

Shares of Red Hat fell 96 cents, or 6.4%, to $14.11 in recent after-hours trading; shares closed the regular session down 6 cents, or 0.4%, to $15.07.

The Raleigh, N.C.-based vendor of Linux open-source software and services 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 in the previous quarter.

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 to $56.5 million in the fourth fiscal quarter. Analysts were expecting earnings of 7 cents a share on $58 million in sales.

Red Hat said it expects to generate between $34 million to $37 million in cash flow from operations in the fourth quarter. That's up from the $29.7 million in cash flow from operations in the third quarter that failed to meet the company's targeted range of $32 million to $34 million.

The subscriptions count also may have disappointed some analysts and investors. The company said total subscriptions reached 132,000 units, including 119,000 enterprise subscriptions. But Prudential Securities analyst Brent Thill, for instance, had expected enterprise subscriptions alone to total 131,800 by the end of the quarter. (Thill raised his rating on Red Hat to overweight from neutral weight on Nov. 29; his firm doesn't do investment banking.)

One bright spot in the quarter was deferred revenue -- a key measure of subscription sales -- which climbed $21.7 million, or 22%, sequentially to $121.4 million, driven by strong sales bookings.

With pricing pressure in the Linux server market a big concern on Wall Street, analysts peppered Red Hat executives about pricing trends and renewal rates, which the company has stopped tracking.

CFO Charlie Peters would only say that "pricing has been relatively stable." He also noted that about 20% of bookings were for subscriptions of more than one year, in which the company may charge less per unit to reflect the savings from not having to resell to the customer within a year.