“Linux-based software vendor Red Hat (Nasdaq: RHAT) announced
positive fourth-quarter results after the market’s close yesterday
and that it expects to reach profitability in Q1, a full quarter
ahead of expectations. At first sight, the announcement looks like
a winner, but it’s clear Red Hat beat estimates by cutting costs
and with the help of an acquisition. For a high-growth software
company, more profits on lower revenues gives little reason for
excitement.”
“Adjusting for onetime items, Red Hat reported a loss of
$600,000, or breakeven, compared to a loss of $5.6 million, or
$0.04 per share, in the year-ago period. The Street expected a loss
of $0.01 per share. Revenues more than doubled in the
year-over-year period, to $27 million. But the top-line results
included $5.5 million from its recent acquisition of consulting
firm Planning Technologies. Without that contribution, Red Hat
would have posted a loss of $0.05 per share.”
“In addition to the acquisition, Red Hat beat estimates by
cutting expenses. The company cut back its research &
development expenditures, for example, potentially jeopardizing
future growth. R&D is an investment that helps companies
develop new technologies that maintain competitive advantage. This
is particularly important in high-tech industries, where the rapid
pace of technological change breeds product obsolescence.“