J.P Morgan Comments On Red Hat Following Earnings Report

Red Hat RHT reported a better than expected top line, none of which made it to the bottom line when excluding a lower tax rate. Strong revenue, billings, and bookings were better than expected, though EPS and cash flow were in line with guidance and expectations. None of the top-line outperformance fell to the bottom line, either in earnings or cash flow, both of which were in the guidance range. RHT forgoes one of the most attractive characteristics of the enterprise software model due to its high sales cost of renewals, which J.P Morgan views as a significant flaw in the model and one that JPM believes is not well understood by investors. J.P Morgan credits RHT for driving material growth, which will likely continue, and believes subscription revenue implied in F2012 guidance is conservative. However, JPM continues to question the value assigned to RHT shares as this growth should not experience the kind of leverage typically associated with an enterprise software company. J.P Morgan has an Underweight rating and $32 PT on RHT RHT closed Wednesday at $39.97