Red Hat Crumples in Quarterly Earnings Report

Open-source software maker Red Hat Inc. saw a 24% decline in overall trading Tuesday, September 26 after announcing that quarterly profits were down a full one-third in spite of a revenue increase of 52%. Expenses related to mergers and options-based compensation were targeted as an explanation for the disappointing report, but the long-term outlook for Red Hat sent its stock spiraling.

Major stock analysts cut ratings on Red Hat stock with Prudential reducing the stock to "neutral" weight and Jefferies & Company to "hold." In response, Red Hat stock that had stood at $19.92 fell to $6.40. For the year to date the stock is down more than 4 percent.

At the end of the trading day Red Hat, based in Raleigh, North Carolina, indicated a fall in net profits to $12 million (5 cents a share). Had the company not faced the impact of options and other expenses, the profit would have been $25.1 million, an increase of 11 cents a share. The three-month period ending August 31 saw Red Hat revenue climb from $65.7 million to $99.7 million but at the same time operating expenses went from $42.2 million to $73.8 million, a 75 percent hike.

The company plans continued investment in its business and expects another $1 million rise in operating expenses and a drop in cash flow to $210 million. Regardless of numbers that have Wall Street analysts backing off from the stock, the company's chief financial officer reports Red Hat is pleased with the pace of the company's progress and sees improvements coming in the next quarter.

In the current reporting period Red Hat focused on integrating its acquisition of JBoss as well as other acquisitions in Argentina, Brazil, and India. Red Hat purchased JBoss for $350 million in cash and stock earlier in the year.