Friday, December 08, 2006

Calls of Note Part 1

- Citigroup is cautious on Red Hat (NASDAQ:RHAT) ahead of results saying they est FQ3 revs and EPS at low end of guidance - $103M in rev ($103-105M guide), $0.11 ($0.12-0.13 guide). Ests billings of $120M (includes JBoss).

Firm notes they remain bullish on overall Linux adoption rates, but question the shifting economics for the industry. RHAT is in a very challenging period as its continues to integrate the JBoss acq and is in a more competitive Linux mkt. RHAT traditionally has very good visibility in the current quarter revenue due to its subscription pricing but they have modeled the lower end of the range due to the potential distractions the ORCL Unbreakable Linux and the MSFT/NOVL agreement potentially had on deal closings. Citi's billings estimate of $120M represents a 7% increase from an easy compare in 2Q (2Q billings were down 3% sequentially) and includes an estimated $12.75M in billings from JBoss.

RHAT has confirmed that current GM of the JBoss division of RHAT Marc Fleury is expected to be on paternity leave for three months.

Although they do not expect significant immediate mkt. share losses for RHAT, they think customers will seek to negotiate more favorable pricing terms and dedicated ORCL environments will seriously consider using ORCL for support.

Reits Sell and $13.50 tgt.

Notablecalls: RHAT's chart looks weak. Òver 10k $17.50 puts traded yesterday with the $15 strike not far behind. JMP Securities noted on Dec 6 that Fleury's leave may be a precursor to RHAT further lowering expectations related to Jboss as experience suggests that when senior managers of Fleury's stature take leave at such a critical juncture, there is generally risk of no return. Must say I would be somewhat reluctant to initiate a short position if the stock gaps down too aggressively.

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