Red Hat, Inc. Earnings: Margins Suffer for Five Quarters Straight, but Net Income Climbs

S&P 500 (NYSE:SPY) component Red Hat, Inc. (NYSE:RHT) reported net income above Wall Street’s expectations for the first quarter. Red Hat, Inc. is engaged in providing open source software solutions. They are known for their version of Linux, Red Hat Enterprise Linux.

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Red Hat Earnings Cheat Sheet for the First Quarter

Results: Net income for Red Hat, Inc. rose to $32.5 million (17 cents/share) vs. $24.1 million (12 cents/share) in the same quarter a year earlier. A rise of 34.8% from the year earlier quarter.

Revenue: Rose 26.6% to $264.7 million YoY.

Actual vs. Wall St. Expectations: RHT reported adjusted net income of 24 cents/share. By that measure, the company beat the mean estimate of 22 cents/share. Estimates ranged from 22 cents per share to 23 cents per share. It beat the average revenue estimate of $253.6 million.

Quoting Management: “Red Hat has begun fiscal year 2012 with a strong first quarter including year-over-year billings growth of 28% that contributed to revenue and profitability that exceeded the high-end of our expectations,” stated Jim Whitehurst, President and Chief Executive Officer of Red Hat. “We believe there is a fundamental shift in IT spending, in which cloud computing and virtualization have become key strategic priorities. We believe that Red Hat is well positioned to capitalize on this growing demand as enterprise customers look to Red Hat when upgrading and modernizing their IT infrastructure.”

Key Stats:

The company has enjoyed double-digit year-over-year revenue growth for the past five quarters. Over that span, the company has averaged growth of 22.5%, with the biggest boost coming in the most recent quarter when revenue rose 26.6% from the year earlier quarter.

Last quarter marked the fifth straight quarter that the company saw shrinking gross margins as gross margin fell 0.1 percentage point to 84% from the year earlier quarter. Over that time, margins have contracted on average 1.1 percentage points per quarter on a year-over-year basis.

The company has now seen net income rise in three-straight quarters. In the fourth quarter of the last fiscal year, net income rose 43.4% and in the third quarter of the last fiscal year, the figure rose 58.5%.

The company has now beaten estimates the last two quarters. In the fourth quarter of the last fiscal year, it topped expectations with net income of 17 cents versus a mean estimate of net income of 16 cents per share.

Competitors to Watch: Oracle Corporation (NASDAQ:ORCL), CA, Inc. (NASDAQ:CA), BMC Software, Inc. (NASDAQ:BMC), Novell, Inc. (NASDAQ:NOVL), Microsoft Corporation (NASDAQ:MSFT), Intl. Business Machines Corp. (NYSE:IBM), EMC Corporation (NYSE:EMC), Hewlett-Packard Company (NYSE:HPQ), VMware, Inc. (NYSE:VMW), and Symantec Corporation (NASDAQ:SYMC).

Stock Performance: Shares of RHT are up 4% from the previous close.

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(Source: Xignite Financials)