03.28.08 

rht: FQ4 RESULTS; RED HAT IN DEMAND; MAINTAINING BUY
Last night, Red Hat posted FQ4:08 results of $141.5 million in revenue (+27% y/y) and non-GAAP EPS of $0.20 (+35% y/y), in line with our revenue estimate of $141.8 million and beating our non-GAAP EPS estimate of $0.19 (versus Street consensus of $141.0 million and $0.19, respectively). Management had previously provided guidance in the range of $139.5 to $141.5 million in revenue and non-GAAP EPS of approximately $0.19. Red Hat experienced record bookings, billings and robust growth worldwide. Subscription revenue grew at 27% y/y and total services revenue grew at 29% y/y. In our view, these results demonstrate that Red Hat's additional investments in the areas of sales and marketing, including ongoing process and systems improvements to further automate these functions, are paying off. Red Hat renewed 24 of the top 25 deals up for renewal in the quarter and the total value of these contracts was 120% higher than the original value. That, in combination with a strong backlog, which grew every quarter in FY:08 to $125 million, demonstrates that Red Hat is able to retain its clients, providing us with visibility into FY:09 and an outlook that appears stable and robust. Red Hat has continued to deliver results and appears well positioned to benefit from the weaker economy, in our opinion, as customers will likely choose Red Hat for its ability to deliver highly customized solutions and service while helping customers reduce their tech budgets. Our investment thesis remains intact and we continue to believe that Red Hat is at the forefront of this Open Source movement, with plenty of room for upside for investors in FY:09, in our view, as the company invests in the business to expand its global footprint. Accordingly, we are maintaining our Buy rating and 12-month price target of $26, which represents 26.5x our CY:09 non-GAAP EPS estimate of $0.98. Contact Us for Full Report - PDF

03.26.08 

rht: FQ4 PREVIEW - STRONG GROWTH; EXPECT NO SURPRISES
Red Hat will report earnings on Thursday, March 27th, after the close. We are forecasting FQ4:08 revenue of $141.8 million and Non-GAAP EPS of $0.19. Management has provided guidance in the range of $139.5 to $141.5 million in revenue and Non-GAAP EPS of approximately $0.19. Embedded in our quarterly forecast for Red Hat's top line growth is an assumption that the subscription revenue could grow 28% y/y and total services revenue could grow 25% y/y. To capture a piece of the continued global demand for open-source solutions, Red Hat has been ramping up its sales efforts worldwide, adding and training personnel, with over 2,000 partners to help develop new business opportunities and to renew subscriptions. Red Hat is now present in 28 countries and is experiencing high growth in both the Latin America and Asian markets. The company is seeing more customers across all geographical regions shift towards Red Hat Enterprise Linux Advanced Platform, which is at a higher price point. Management sees a huge opportunity for JBoss and management expects JBoss to be the fastest growing product for FY:09 as the sales pipeline in the middleware space remains strong and competition appears to be minimal. Oracle (ORCL: Hold) continues to have little to no impact on the operating results of Red Hat to date as Red Hat has been able to retain every customer except Oracle itself. For the past few years, Red Hat has been focusing on operational improvements, including automating its sales force with an improved CRM system, which should provide more efficient links throughout the company as it globalizes. We expect to see an operating margin of 21.7% for FQ4:08. Rooted within our operating expense assumption is that Red Hat will continue to ramp up its global expansion efforts for the foreseeable future. Our investment thesis has been predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. We continue to believe that Red Hat is at the forefront of this Open Source movement, and that customers will likely choose Red Hat for its ability to deliver highly customized solutions and service while helping customers to keep costs low. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and 12-month price target of $26, which represents 27x our CY:09 Non-GAAP EPS estimate of $0.96. Contact Us for Full Report - PDF

06.28.07 

rht: FQ1 RESULTS - SOLID AND NO SURPRISES - MAINTAINING BUY
Last night, Red Hat posted FQ1:08 results of $118.9 million in revenue (+41%) and non-GAAP EPS of $0.16 (+24.6%), slightly above our revenue estimate of $117.3 million and in line with our non-GAAP EPS estimate of $0.16. (versus Street consensus estimates of $117.1 million and $0.15, respectively). Previous guidance had been for $116-117.5 million in revenue and EPS of $0.15. The Oracle 'X Factor' has had little to no impact on the operating results of Red Hat to date. FQ1 billings, which the company defines as total revenues plus sequential changed in deferred, was $143 million, a 24% increase on a y/y basis. Management established FQ2:08 revenue guidance in the $124 - $126 million range and non-GAAP EPS guidance of $0.17. The FQ2 revenue guidance was slightly above the Street estimate of $124.8 million and in line with the EPS estimate of $0.17. Although we are encouraged by the strength of the new product lines (i.e., RHEL 5.0, the Red Hat Exchange, and the continued success of JBoss) we believe that the ramp may impact margin expansion in the near term. However, we remain positive about the operating leverage of the business leading to sustainable earnings power over the next few years. Accordingly, we are maintaining our FQ2:08 estimates at $125.7 million in revenue and non-GAAP EPS of $0.17. Accordingly, our full year FY08 estimates go to $519.7 million (from $518.1million) while our EPS estimate of $0.71 remains unchanged. Our investment thesis has been predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. We continue to believe that Red Hat is at the forefront of this Open Source movement, and that investor concerns over Oracle and Novell/Microsoft are somewhat overdone. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and 12-month price target of $26, which represents 32x our C2008 EPS estimate of $0.80. Contact Us for Full Report - PDF

06.21.07 

rht: FQ1 PREVIEW
Red Hat is scheduled to report FQ1:08 results on Wednesday, June 27th after the market close. We are expecting the company to report results in line to slightly above our FQ1 estimates of $117.3 million in revenue and non-GAAP EPS of $0.16 (versus Street consensus of $117.1 million and $0.15, respectively). Previous guidance had been for $116-117.5 million in revenue and EPS of $0.15. We believe that RHEL5 will benefit from first-mover status in providing the first extensively tested virtualization features in an enterprise-class Linux OS. We believe this will drive subscription revenues beyond our 44% growth estimate, or $102.9 million. Management issued full year FY:08 guidance of $510-520 million in revenues and EPS in the range of $0.67-0.72 exiting FQ4:07. We believe the company will increase this guidance following FQ1 results to reflect increased growth expectations fueled by the recent release of RHEL5. We also expect non-GAAP cash flow from operations guidance of $250-260 million to increase closer to our current $285 million estimate. As we expected, the 'Oracle effect' (ORCL: Hold) and 'Microsoft/Novell effect' seem to have been minimal in the Linux marketplace. Although we are keeping a close eye on the competitive dynamics, we see little near-term change to Red Hat's leadership position in the market, with RHEL5 further bolstering the company's FY:08 prospects. We continue to believe that Red Hat is at the forefront of this Open Source movement, and that investor concerns over Oracle and Novell/Microsoft are somewhat overdone. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and 12-month price target of $26, which represents 32x our C2008 EPS estimate of $0.80. Contact Us for Full Report - PDF

03.30.07 

rht: FQ4 RESULTS; THE HAT KEEPS 'RHEL'ING ALONG; MAINTAINING BUY
Last night, Red Hat posted FQ4:07 results of $111.1 million in revenue (+41%) and non-GAAP EPS of $0.15 (+15.8%), slightly below our revenue estimate of $112.1 million and in line with our non-GAAP EPS estimate of $0.15. Consensus estimates had been for $112.5 million and $0.15, respectively. FQ4 billings, which the company defines as total revenues plus sequential changed in deferred, was $138 million, a 35% increase on a y/y basis. The Oracle (ORCL: Hold) 'X Factor' has seemingly had little to no impact on the operating results of Red Hat to date. It is clear to us that the JBoss integration is nearing completion and that JBoss top line growth is to exceed the overall growth in Red Hat revenues in FY:08E (i.e., 30%+). We believe the reacceleration of the JBoss business will result in substantial operating margin expansion in the coming quarters. Investors should remember that Red Hat's operating margins were 25%+ prior to the JBoss acquisition, and we expect Red Hat to return to this level of profitability sooner rather than later, as the JBoss business begins to scale. We believe Management's margin guidance is conservative, leaving room for future earnings surprises down the road. Our investment thesis has been predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. We continue to believe that Red Hat is at the forefront of this Open Source movement, and that investor concerns over Oracle and Novell/Microsoft are somewhat overdone. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and 12-month price target of $26, which represents 32x our C2008 EPS estimate of $0.80. Contact Us for Full Report - PDF

03.15.07 

rht: IT'S OFFICIAL, RHEL 5 IS HERE
Yesterday, Red Hat hosted a conference call to discuss the launch of Red Hat Enterprise Linux 5 (RHEL5) and highlighted its latest service and support initiatives. RHEL5 brings extensively tested virtualization features to the RHEL customer base after trial testing with its Fedora product. While this is not new news, we believe the newly launched Red Hat Network Satellite, an enterprise-class virtualization management solution, will be well-received by customers that are anxious to utilize the cost-savings of virtualization technology, but may have been waiting for a reliable OS vendor. Investors should note that the company did not announce any price reductions, which we believe is a positive sign that competitive impact from Microsoft and Oracle (ORCL: Hold) remains a non-event at this time. The company also announced the launch of Red Hat Data Center Solution, Red Hat Database Availability Solution, and Red Hat High Performance Computing Solution. In conjunction with the product launch announcements, the company is creating the Cooperative Resolution Center, which is now the highest level of support available, and the Red Hat Exchange (RHX), slated for launch later this year. We continue to believe the release of RHEL5 should solidify Red Hat's position at the forefront of the Open Source movement, providing enterprise-class virtualization features in conjunction with a proven service and support infrastructure. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and $26 price target. Contact Us for Full Report - PDF

02.05.07 

rht: MANAGEMENT UPDATE PROVIDES COLOR ON RHEL5 RELEASE; RAISING PRICE TARGET TO $26
Last Friday, we had the opportunity to meet with senior executives from Red Hat at its engineering headquarters in Westford, Massachusetts. Overall, we left the event confident that Red Hat will remain the premier Linux player despite recent competitive hoopla. RHEL5 appears to be on track for a March launch, bringing a host of improvements to the RHEL platform. We believe Red Hat's ability to provide a proven and well-tested virtualization solution bodes well for increased attach rates of server shipments going forward as more customers migrate from free to paid Linux and utilize the advanced features of RHEL5. Clearly, although this evolution will not happen overnight, we believe Red Hat offers the best solution in the marketplace at this time. We continue to believe that the announcements out of Oracle (ORCL: Hold) and Microsoft/Novell that led to weakness in Red Hat shares in recent months have had little to no effect on Red Hat's underlying fundamentals. We believe Oracle's current sales model gives little incentive for its sales force to promote Unbreakable Linux given the relatively high dollar pricepoints of its database, middleware, and application products. The Microsoft/Novell partnership has led to the hiring of roughly 80% of the original Samba development team from Novell. In addition, backlash from the open-source development community against the partnership has only strengthened Red Hat's competitive positioning, in our opinion. Based on our beliefs that pricing remains stable, the RHEL5 product cycle is on track, and that Red Hat remains the de facto enterprise Linux solution in the marketplace, we are raising our price target to $26, which represents 21x our adjusted CY:08 FCF estimate of $268 million. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating. Contact Us for Full Report - PDF

12.22.06 

rht: FQ3:07 RESULTS REBOUND FROM PRIOR QUARTER AND EXCEED EXPECTATIONS
Last night, Red Hat posted FQ3:07 results of $105.8 million in revenue (+45%) and non-GAAP EPS of $0.14 (+23%), beating our estimates of $104.7 million in revenue and non-GAAP EPS of $0.12. Consensus estimates had been for $104.2 million and $0.12, respectively. Overall, we were impressed by the strong billings and new customer addition metrics, which we believe far exceeded Street expectations following recent negative competitive chatter. Clearly, the doomsday scenario that some investors feared regarding the entrance of Oracle (ORCL: Hold) into the enterprise Linux arena and the ramifications of the Novell/Microsoft partnership did not materialize in the quarter. FQ3 billings were $133.4 million, a 50% increase on a y/y basis, well above Consensus estimates of $120-125 million. We believe this will be viewed favorably by investors. Despite much chatter in the marketplace surrounding the status of the JBoss integration, management reiterated previous guidance of $22-27 million in revenue contribution from the JBoss segment from June through the end of FY:07 (February). The company's strong FQ3 results from a top-line, margin, and billings perspective were strong on all counts and allayed fears of a doomsday competitive threat scenario. Our investment thesis has been predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. We continue to believe that Red Hat is at the forefront of this Open Source movement, and that investor concerns over Oracle and Novell/Microsoft were overdone. Accordingly, our long-term investment thesis remains intact, and we are maintaining our Buy rating and 12-month price target of $21, which represents 28x our unchanged C2008 EPS estimate of $0.74. Contact Us for Full Report - PDF

12.20.06 

rht: Q3:07 PREVIEW; WHAT'S UNDER THE HAT?
Red Hat is scheduled to report FQ3:07 results on Thursday, December 21 after the market close. Overall, we are expecting a roughly in-line quarter to both our and Street estimates, as we believe recent concerns over competitive pressures from Oracle (ORCL: Hold) and Novell/Microsoft have been overblown. We believe investors will be most closely focused on billings growth as the most meaningful metric to determine any negative effect from competition, as well as management's commentary on the JBoss integration process. We believe both of these issues will factor heavily into management guidance. Our FQ3:07 estimates call for $104.7 million (+43%) in revenue and non-GAAP EPS of $0.12 (+10%), based on a tax rate of 5.0%. Management's guidance exiting FQ2 was for revenue of $103.5-105 million and EPS of $0.12-0.13. Although the competitive threat of Oracle entering the enterprise Linux arena, coupled with the partnership announcement from Novell and Microsoft have likely weighed on investor sentiment, we continue to believe it is 'much ado about nothing.' We continue to believe that Red Hat's products are 'sticky,' and deeply embedded within its enterprise customers. Billings, which Red Hat defines as revenues plus sequential change in deferred, will likely be a key focus area for investors in FQ3 results. We are estimating $140.4 million in billings for the quarter. Although there may be near-term choppiness in billings as the JBoss integration process continues, we believe our longer-term billings growth expectation of 31% in FY:08 remains achievable. Clearly, the ability of management to achieve this target is dependent on a successful integration of JBoss and a smooth launch of RHEL v5. Our investment thesis has been predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. We continue to believe that Red Hat is at the forefront of this Open Source movement. Although recent announcements have pressured the stock and created a headline risk overhang, we continue to believe our long-term thesis remains intact. Accordingly, we are maintaining our Buy rating and 12-month price target of $21, which represents 28x our unchanged C2008 EPS estimate of $0.74. Contact Us for Full Report - PDF

11.21.06 

rht: IF THE HAT FITS...INITIATING COVERAGE WITH A BUY RATING AND $21 PRICE TARGET
We are initiating coverage of Red Hat, Inc. (RHT) with a Buy rating and 12-month $21 price target. Our investment thesis is predicated on the fact that software companies must offer solutions that provide the purchaser with tremendous ROI potential or enhanced functionality driving a competitive advantage in the marketplace. Accordingly, we believe that there are still enormous returns on investment opportunities associated with the Open Source movement. The ROI potential of open source solutions is too great to be ignored by CIOs, in our view, and we believe open source solutions will increasingly become accepted into the mainstream over time. The recent announcements from Oracle (ORCL: Hold) and Microsoft create an interesting dilemma for investors, however we believe that Dell, IBM and HP, etc., will stay the course and continue to support Red Hat, and the recent headlines have provided a unique opportunity for investors to 'get involved' in the Linux story. One of the key opportunities for Red Hat is the company's ability to diversify beyond its operating system roots. We believe the JBoss acquisition and its application server platform is a nice starting point, and may allow the company to further expand its open source offerings beyond basic systems management applications within the enterprise. We believe that the bulk of the sales force and R&D personnel issues are for the most part behind the company. However, this integration has not gone as smoothly as investors had hoped, and the benefits of this important strategic acquisition have yet to be realized, in our view. In comparison to other 'emerging technology' companies, RHT shares appear undervalued at current prices. When compared to a basket of technology stocks with a similar forecasted growth rate (30+%), the 35x and 28x PE multiples for C2006 and C2007 lag the 52x and 39x median multiples of these selected technology growth stocks. In addition, RHT shares are currently trading at 14x and 12x our C2006 and C2007 FCF estimates on an EV basis, trailing the group average of roughly 20x and 16x, respectively. Accordingly, our 12-month price target of $21 represents 28x our C2008 EPS estimate of $0.74, or approximately 27% upside potential from current levels. Contact Us for Full Report - PDF