Red Hat - Investors Send Shares In The Red After Company Fails To Beat Expectations

| About: Red Hat, (RHT)
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Shares of Red Hat (RHT) lost up to 3% in after hours trading on Monday. The open source software solution provider reported its second quarter results for its fiscal 2013 after the close.

Second Quarter Results

Red Hat reported second quarter revenues of $322.6 million, up 15% on the year. Excluding the negative impact of a strong US dollar, revenues were up 20%. Revenues came in line with analysts consensus of $322.1 million.

GAAP operating income fell by 5% to $50.0 million, with GAAP operating margins coming in at 15.5%. Net income fell 12% to $35.0 million, or $0.18 per diluted share.

Non-GAAP net income fell by a penny to $0.28 per share. Non-GAAP earnings came in line with analysts expectations.

CEO Jim Whitehurst commented on the results, "Our double-digit growth was driven by demand for Red Hat's open source technologies that are key to creating innovation, scale and flexibility in our customers' data centers and their business."


For the full year of its fiscal 2013, Red Hat reiterated its full year earnings outlook of $1.16-$1.20 per share. The company slightly revises its annual revenue outlook downwards. Red Hat now expects full year revenues of $1.32-$1.33 billion, down from an earlier guidance of $1.34 billion.

CEO Whitehurst commented on the growth, "While our business momentum in the underlying demand trend for our subscriptions remain strong, we do expect our services to continue with single-digit growth for a while longer."


Red Hat ended its second quarter with $870 million in cash, equivalents and short term investments. The company operates without the assumption of debt for a comfortable net cash position.

For the first six months of its fiscal 2013, Red Hat generated revenues of $637.3 million. The company net earned $72.5 million, or $0.37 per diluted share.

Currently the market values the firm at $11.1 billion, valuing the operating assets of the firm at $10.2 billion. Full year revenues are expected to come in at $1.325 billion, valuing the firm at 7.7 times annual revenues. The company is on track to earn $150 million per year, or $0.75 per share. This values the firm at 68 times annual earnings.

Red Hat currently does not pay a dividend.

Investment Thesis

Year to date, shares of Red Hat have risen some 35%, despite the little pullback in after hours trading. Shares rose from the low forties at the start of the year, peaking in the low sixties in April after the company issued a strong outlook for the first quarter. Shares traded between $50-$60 ever since, now exchanging hands around $56.

Over the past five years, shares have almost tripled. Shares rose from $8 in the end of 2008 and steadily rose to a peak of $60 this year. Revenues are expected to double from 2009's annual revenue of $653 million, to $1.325 billion for its fiscal 2013. At the same time, net income rose from $79 million to an expected $150 million. Between 2009 and now, Red Hat has retired roughly 7% of its shares outstanding.

Instead of naming the company Red Hat, investors seem to call it "Red Hot". Shares have had a great run in both the medium and long term. Monday, shares saw a modest 3% correction as the company fails to beat analysts consensus. Investors are also disappointed after the company lowered its full year revenue outlook.

Value investors should stay away from Red Hat. Valuation multiples are very high, despite solid revenue growth. A strong financial position, and double digit revenue growth does not justify a valuation of almost 8 times annual revenues and 70 times earnings. In March of this year, I already indicated that I would be on the sidelines.

Shares are not a convincing short, as merger & acquisition action could always occur in the technology area.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.