Revenue Jumps at Red Hat
By Bill Snyder
TheStreet.com Staff Reporter
6/30/2005 7:43 PM EDT
Red Hat (RHAT:Nasdaq - commentary - research) boosted first-quarter revenue by 46% and beat Wall Street's earnings expectations by 2 cents a share, the Linux software vendor reported after the closing bell Thursday.
But the company's statement that the stronger dollar will likely mean somewhat lower-than-expected revenue in the coming quarters sparked a modest selloff after hours. In recent trading shares were down 57 cents, or 4.4%, to $12.53.
For its first quarter, the company reported net income of $12.4 million or 7 cents a share, up from $10.9 million or 6 cents a diluted share a year ago. Revenue was $60.8 million.
Analysts polled by Thomson First Call were expecting a profit of 5 cents a share on sales of $61.3 million. The small revenue miss, CFO Charles Peters said during a call with analysts, was largely caused by the strengthening dollar. "Had the Euro stayed at 130 [to the dollar] , we would have been within our guidance range of $61 million to $62 million," he said.
Subscription revenue, which has been a concern, increased sequentially by 7% to $48.7 million. Another weak spot that showed improvement was cash collections -- days sales outstanding dropped sequentially by seven days to 57 days. Peters said. He added, however, that it would be unrealistic to see another jump of that magnitude in DSOs, particularly because a greater percentage of the company sales are off shore. An improvement of another day or two is possible, he said.
Cash flow from operations was $36.6 million, a 20% sequential increase and the highest level in Red Hat's history.
Red Hat's margins have been pressured by aggressive pricing by rival Linux vendor Novell (NOVL:Nasdaq - commentary - research), which consistently prices at 50% and sometimes as much as 75% below Red Hat, said Katherine Egbert, who follows the company for Jefferies.
Red Hat, however, says it has not changed its pricing in more than a year, and CEO Matthew Szulik says claims of a price war are greatly exaggerated. "I've been hearing that for 12 months and not seeing it," he said during an interview.
Red Hat has also increased spending to improve its customer service and support operation by adding staffers and opening new support centers in a number of countries. Twenty of the quarter's 40 new hires were in the developing world, the company said.
Szulik said that the increase in staff was necessitated by the company's continued penetration into large, technologically complex enterprises. "At this point, we've reached the levels of competence and scale we need, and spending [in that area] should level off," he said.
Whether pricing contributed or not, pro forma operating margins slipped in the February quarter to 17% from 17.6% in the previous quarter, the first sequential decline after at least seven quarters of growth.
A comparable number wasn't immediately available for the May quarter, but GAAP operating margins slipped sequentially to 12.6% from 13%. Margins, said Peters, should be higher this quarter.
Looking forward, the company told investors to expect a profit of 6 cents or 7 cents a share on sales of $64 million or $65 million, compared with Wall Street's expectations of 7-cent profit on sales of $65.9 million.
For the full fiscal year, the company set its revenue guidance at a weaker-than-expected range of $265 million to $275 million because of the stronger dollar, which hurts foreign sales. Analysts were forecasting sales of $276 million.
Because the stronger dollar is a plus on the expense side, the company said EPS will not suffer and should range from 28 cents to 32 cents a share; Wall Street was expecting a 29-cent profit. |
