NEW YORK – Earlier this week, Red Hat (NYSE:RHT) reported slower billings growth than expected for the third consecutive quarter. The announcement from the world’s largest commercial distributor of the Linux operating system sparked a week-long sell-off in shares, which closed the week at $ 49.95 after starting at $ 53.22.
According to the company, their billing proxy – total revenue combined with the change in deferred revenue – grew by only 8 percent in the second quarter to $ 376 million. However, analysts were expecting billings to grow by 14 percent. J. Derrick Wood at Susquehanna Financial Group LLC noted that ‘this is now the third quarter in a row that they’ve missed on deferred revenue and Red Hat’s ability to sustain billings growth at a mid-teen percentage rate was now under question.’
Company CFO, Charlie Peters, said on a post-earnings conference call that ‘overall foreign exchange rates hit Red Hat’s revenue and billings growth in the second quarter.’ In 2012, sales outside of the United States accounted for more than 43 percent of total revenue. The company went onto state that it expects third quarter adjusted earnings of $ .34 to $ .35 cents per share on revenue of $ 381 to $ 384 million, while Thomson Reuters reported that analysts are expecting earnings of $ .34 cents per share on revenue of $ 391.5 million.
In talking about the second quarter results CEO Jim Whitehurst said that he is not going to abandon pricing power to get the numbers up, stating ‘the problem with a discount is you’ll never get it back.’ Whitehurst went on to tell the Wall Street Journal that ‘we don’t provide guidance around billings because it’s not a good measure; it’s not something we want to manage to, but the Street wants us to put up solid double-digit growth each quarter.’
However, Citigroup software analysts Walter Pritchard said that the next step for Red Hat is to ‘figure out what is going to reinvigorate growth. Whitehurst disputed the idea that Linux is slowing down, claiming that cloud products could show up on the bottom line in about 18 months.
It remains to be seen how Red Hat can win back investor confidence as it would appear the company’s management and analysts have different views of how the business should be performing. While Red Hat should be well positioned to take advantage of cloud computing the transition has not had a big effect of revenues and it may take several quarters to do so.