Red Hat sizzles on strong earnings

Updated 10:41 a.m. ET

Shares of Red Hat soared Friday morning, a day after the Linux company beat analysts' quarterly estimates and raised profit targets for fiscal 2002.

At midmorning Friday, the stock was up about 25 percent, rising $1.28 to $6.50 on trading of some 2.7 million shares.

Red Hat (Nasdaq: RHAT) beat analysts' estimates in its fourth quarter Thursday, posting a net loss of $600,000, or breakeven on a per share basis, on sales of $27 million. It also raised its profit targets for fiscal 2002.

First Call consensus pegged the seller of Linux software and services to lose a penny a share on fourth-quarter sales of $26.7 million.

The $27 million in sales represents a 106 percent improvement from the year-ago quarter when Red Hat lost $5.6 million, or 4 cents a share, on sales of $13.1 million.

The company "delivered on our commitment to grow revenue 100 percent while reaching the doorstep of profitability one year ahead of schedule," Chief Executive Officer Matthew Szulik said, during a conference call with analysts. "I expect our rate of strong technical performance to continue into the future."

For the fiscal year, Red Hat posted a net loss of $5.9 million, or 3 cents a share, on sales of $84 million. The company in the previous year lost $19 million, or 19 cents a share, on sales of $42 million.

Chief Financial Officer Kevin Thompson predicted fiscal 2001 earnings of 10 cents per share on sales of $140 million, which would represent 66 percent growth from fiscal 2001 revenue.

Analysts were projecting sales of $154 million in the fiscal year and earnings of only 4 cents a share, according to First Call.

"We're in great financial position going into fiscal 2002," Thompson said.

He said the company ended the fourth quarter with more than $300 million in cash and short-term investments and predicted gross profit margins in fiscal 2002 of 57 percent, the same as in 2001.

Durham, N.C.-based Red Hat is a bellwether for the Linux industry, considered by analysts to be the strongest company devoted to the comparatively new operating system. It was the first Linux company to go public, managing to squeeze in two stock offerings before the Linux hype subsideda year ago.

Ahead of the earnings report, Merrill Lynch analyst Melanie Hollands predicted the company would lose a penny a share on sales of $27.9 million.

"Although Red Hat continues a positive strategic transition, in the absence of any near-term positive catalyst to propel (Red Hat's) stock, we remain cautious and reiterate our accumulate rating," she wrote in a research note.

Prakesh Patel, an analyst at WR Hambrecht, was expecting it to break even in the quarter on sales of $27.9 million.

"I think the stock has been hurt by a confluence of factors, especially the declining stock prices of its counterparts in the Internet infrastructure space," he said. "However, Red Hat's continues to meet estimates just as it has in each of its quarters as a publicly traded company."

In fiscal 2001, Red Hat recorded subscription sales of $45.5 million, up 79 percent from the prior year. Services sales, which are expected to grow at a faster rate than subscription sales in 2002, jumped to $38.5 million, up 125 percent from fiscal 2001.

Last quarter, Red Hat topped the Street view when it posted a loss of $900,000, or a penny a share, on sales of $22.4 million.

Despite the bruising of Linux businesses lately, Szulik was bullish about the company's prospects in a recent interview, pointing to the company's six quarters of meeting or beating analyst expectations and its capital reserves.

"Linux is being accepted by customers globally," he said.

International sales accounted for $20 million in fiscal 2001, or roughly 24 percent of total sales for the year. Company executives said international sales will represent about 25 percent of sales this year.

Red Hat shares moved up to a 52-week high of $64.06 last March before plunging to a low of $5 earlier this month.

Five of the seven analysts following the stock rate it either a "buy" or "strong buy."