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Red Hat Inc. (NYSE:RHT) reports preliminary financial results for the quarter ended 2012-08-31.

Red Hat Inc. recently reported its preliminary financial results based on which CapitalCube provides a unique peer-based analysis of the company. Our analysis is based on the company's performance over the last twelve months (unless stated otherwise).

Red Hat Inc.'s analysis versus peers uses the following peer-set: Oracle Corp. (NYSE:ORCL), VMware Inc. (NYSE:VMW), Hewlett-Packard Co. (NYSE:HPQ), Citrix Systems Inc. (NASDAQ:CTXS), Symantec Corp. (NASDAQ:SYMC), CA Inc. (NASDAQ:CA), BMC Software Inc. (NASDAQ:BMC) and Quest Software Inc. (NASDAQ:QSFT). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.

Quarterly (USD million)2012-08-312012-05-312012-02-292011-11-302011-08-31
Revenues322.6314.7297.0290.0281.3
Revenue Growth %2.56.02.43.16.3
Net Income35.037.536.038.240.0
Net Income Growth %(6.6)4.1(5.9)(4.3)23.2
Net Margin %10.911.912.113.214.2
ROE % (Annualized)9.710.610.311.011.9
ROA % (Annualized)5.56.05.96.57.0

Valuation Drivers

Red Hat Inc. currently trades at a higher Price/Book ratio (7.5) than its peer median (5.5). The market expects Red Hat Inc. to grow faster than the median of its chosen peers (PE of 76.8 compared to peer median of 30.4), and to improve its current ROE of 10.3%, which is below its peer median of 15.8%. Thus, the market seems to expect a turnaround in Red Hat Inc.'s current performance.

The company's profit margins are below peer median (currently 12.0% vs. peer median of 16.5%) while its asset efficiency is about median (asset turns of 0.5x compared to peer median of 0.5x). Red Hat Inc.'s net margin is less than (but within one standard deviation of) its five-year average net margin of 12.6%.

Economic Moat

The company enjoys both better than peer median annual revenue growth of 24.6% and better than peer median earnings growth performance 36.7%. Red Hat Inc. currently converts every 1% of change in annual revenue into 1.5% of change in annual reported earnings. We view this company as a leader among its peers.

Red Hat Inc.'s return on assets is less than its peer median currently (6.0% vs. peer median 8.2%). It has also had less than peer median returns on assets over the past five years (4.9% vs. peer median 7.3%). This performance suggests that the company has persistent operating challenges relative to peers.

The company's gross margin of 88.4% is around peer median, suggesting that Red Hat Inc.'s operations do not benefit from any differentiating pricing advantage. In addition, Red Hat Inc.'s pre-tax margin of 17.4% is also around the peer median, suggesting no operating cost advantage relative to peers.

Growth & Investment Strategy

Red Hat Inc. has grown its revenues faster than its peers (20.2% vs. 5.3% respectively for the past three years). The market also sees relatively higher long-term growth prospects for the company, giving it a better than peer median PE ratio of 76.8. Overall, we classify the company's growth prospects as superior relative to its peers.

Red Hat Inc.'s annualized rate of change in capital of 8.1% over the past three years is around its peer median of 8.1%. This investment has generated a less than peer median return on capital of 9.2% averaged over the same three years. The below median return implies that the company is not investing well.

Earnings Quality

Red Hat Inc. reported relatively weak net income margins for the last twelve months (12.0% vs. peer median of 16.5%). This weak margin performance and relatively conservative accrual policy (25.0% vs. peer median of 12.7%) suggest the company might likely be understating its net income, possibly to the extent that there might even be some sandbagging of the reported net income numbers.

Red Hat Inc.'s accruals over the last twelve months are positive, suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer median -- which suggests a relatively strong buildup in reserves compared to its peers.

Trend Charts

Company Profile
Red Hat, Inc. develops and supports Linux and open source software solutions. It provides open source software solutions to the enterprise, including enterprise operating system platform, Red Hat Enterprise Linux, enterprise middleware platform, JBoss Enterprise Middleware, virtualization and cloud solutions and other Red Hat enterprise technologies. Red Hat primarily operates through three geographic business units: the Americas, Europe, Middle East and Africa and Asia Pacific. The firm changed its name from Red Hat Software, Inc. to Red Hat, Inc. in June 1999. Red Hat also offers support, training and consulting services to its customers worldwide. The company was founded by Robert F. Young in March 1993 and is headquartered in Raleigh, NC.

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Source: Earnings Analysis For Red Hat Inc.