Red Hat Q1 Income Up 23%, Misses on Cash Flow

Red Hat reported Q1 net income rose 22.7% to $16.2 million, or $0.08/share. Adjusted earnings totaled $33.7m ($0.16/share), beating the Street by a penny. However, shares fell 3.3% to $23.40 in after-hours trading -- giving back almost the entire 3.6% they gained in regular trading -- on news of disappointing cash flow from operations (-4% to $52.3m). CEO Matthew Szulik said in a Bloomberg interview that investors should focus on annual cash flow instead of quarterly results. He said Red Hat has been telling investors "cash flow is not linear" for the past eight years. Sales climbed 42% to $118.9m, beating analysts' average estimate of $117m. Sales of Enterprise Linux 5 outpaced those of the previous version over a similar period, according to a UBS analyst. Its March launch accounted for some of the firm's higher expenses, noted Szulik. Subscription revenue climbed 44% y/y and 7% q/q to $103m. Total deferred revenue rose to $363.1m. Update: Szulik told Reuters in an interview Red Hat had been in talks last year with Microsoft over a patent accord -- which broke down -- after which Microsoft signed a similar deal with Red Hat rival Novell. As part of the deal, Microsoft agreed not to sue Novell customers for what it claimed this May are 235 patent violations of its source code. It has encouraged other open source vendors to seal similar pacts. But the Free Software Foundation, which is in charge of the General Public License with which Red Hat and other vendors sell their Linux distributions, is about to update that license to Version 3 -- which will forbid companies to distribute Linux code if they enter such strategic pacts, which the foundation believes aids Microsoft. Szulik would not answer when asked if Red Hat was currently in negotiations with Microsoft.

Sources: Red Hat F1Q08 Earnings Call Transcript, Press release, Bloomberg, MarketWatch, Reuters
Commentary: Rethinking Red Hat Through Its 10-K Filing • Microsoft Closes Third Linux Deal: Is Red Hat Next? • How Red Hat is Monetizing JBoss
Stocks/ETFs to watch: Red Hat, Inc. (RHT), Microsoft Inc. (MSFT), Novell (NOVL). Competitors: Oracle (ORCL), SourceForge, Inc. (LNUX). ETFs: iShares Goldman Sachs Software Index (IGV)

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