Jason Maynard at Credit Suisse is downgrading Red Hat's stock from "outperform" to "neutral." Interestingly, his downgrade isn't based on Red Hat's financial performance for this quarter, but rather stems from alleged turmoil in Red Hat's personnel. In other words, he sees the company hitting some speed bumps on its road to JBoss integration that will show up in third and fourth quarter numbers:
We are downgrading shares of Red Hat to Neutral from Outperform and trimming our price target to $22. The downgrade is based on lack of conviction in our original thesis that field execution would gradually improve and the JBoss product line would experience a meaningful uptick in sales. Our checks indicate that the organization continues to be in a state of flux as the company works through its transition to a multi-product company. These struggles appear to be more pronounced than we had anticipated and will likely take longer to fix. In our opinion, these challenges are largely fixable but it won't happen overnight....
We are not making this downgrade based on concern about the August Q2 results that are scheduled to be reported on Tuesday the 25th of September. Our sense is that results should land in line with guidance given the nature of the subscription revenue model. It is fair to point out that demand remains fairly steady and the open source business model provides good visibility into quarterly results. That said we are trimming our price target to a level that we believe is more reflective of the growth characteristics of the business.
Where does Maynard see the flux? A few areas.
- Churn in JBoss headcount. I'm not sure why this would be surprising. This is typical of any start-up acquired by a larger company. Perhaps the clash of civilizations between Red Hat (a bit more conservative) and JBoss (a bit less conservative) has exacerbated this, but a strong cadre of JBoss' best has stayed with Red Hat.
- Red Hat reorganization. I've heard, as has Maynard, that Red Hat is considering a broad reorganization that will see distinct business units around each product area (operating system, middleware, network delivery). This seems like a good thing if, in fact, Red Hat is struggling with No. 1 above. Let the JBoss team operate quasi-independently and meet their business requirements without thinking too hard about the OS business (i.e., support for Windows should be a non-issue). This is similar to how Oracle has managed its acquisitions, to good effect. Jason's concern is that it will take time to smooth out the organization. Point well taken.
- Tim Yeaton (SVP, Worldwide Marketing) has apparently left Red Hat to join a start-up. I've heard this from multiple sources, but I've also heard different ideas on what the impetus behind this change was. I thought/think highly of Tim, but Red Hat has a strong enough brand/market presence to carry through changes like this.
- Red Hat Exchange doesn't appear to be the secret of life. Maynard writes that "Red Hat Exchange isn't gaining the momentum and interest from customers or ISVs. We haven't heard a lot of enthusiasm or uptick in business from many of the participants." He didn't ask Alfresco. We have continued to work with Red Hat on a range of opportunities related to RHX and I continue to be optimistic. Red Hat has been very flexible in re-engineering RHX in response to market demand. Is it perfect? No. But from where I sit I can see a lot of work to improve it, and the customer interest to indicate the changes are moving in the right direction.
I'm more sanguine. While now is no time for Red Hat to rest on its laurels--its market keeps getting more and more competitive--it's also no time for panic. The company has, on the surface, an incredibly powerful story, with the market-leading Linux distribution married to the market-leading middleware stack. Now it just needs to ensure that everyone internally is aligned.
The company has gone through such formative times before, and came out on top. I have no doubts as to whether it can do so now.