Red Hat Acquires Makara

A leading open source solutions provider, Red Hat Inc. ( RHT - Snapshot Report ) announced the acquisition of Makara, a developer of deployment and management solutions for applications in the cloud. Terms of the deal were not divulged.

Makara is a premier provider of solutions that facilitate organizations to deploy, manage, monitor and scale their applications on both private and public clouds.

Makara's technologies will accelerate the development of Red Hat’s comprehensive Platform-as-a-Service (PaaS) solution as part of its Cloud Foundation portfolio. Red Hat introduced Cloud Foundations in June 2010.

The integration of Makara’s Cloud Application Platform with Red Hat’s JBoss Enterprise Middleware infrastructure will simplify application deployment and management of cloud applications. It will help customers manage applications efficiently and effectively by scaling, rightsizing, rollback and monitoring.

The integration should also position Red Hat to offer a more comprehensive PaaS solution that allows quicker transition of applications to both public and private clouds with minimal modifications.

Red Hat is a leading vendor of open source, flexible cloud stack, incorporating operating system, middleware and virtualization. The integration of Makara’s tools, technologies and solutions with Red Hat’s PaaS solutions should boost the latter’s market share in the growing cloud computing market.

We also believe that a successful synergy will further augment Red Hat’s penetration in global markets.

Results Analysis

In the second quarter of fiscal 2011, Red Hat’s non-GAAP earnings per share (EPS) of 11 cents fell short of the Zacks Consensus Estimate of 14 cents. However, EPS was in line with the year-ago quarter.

Revenues of $219.8 million beat the Zacks Consensus Estimate of $211.0 million and were 19.7% above the year-ago quarter.

The results were partially driven by strong organic revenue growth based on robust bookings and backlog, higher subscription renewals and solid results from the services business. The company also faced strong currency headwinds in the quarter, particularly from the Euro.

Outlook

During the second quarter earnings call, management raised its guidance for full-year 2011 above the Zacks Consensus Estimate, given strong results in the first half.

The company expects full-year revenues in the range of $877.0 million to $885.0 million versus the previous expectation of $835.0 million to $850.0 million.

Non-GAAP earnings per share (excluding stock-based and one-time charges) are expected to be in the range of 76 cents to 77 cents versus the previous expectation of 71 cents to 74 cents. The Zacks Consensus Estimate (including stock-based but excluding one-time charges) is pegged at 57 cents.

For the third quarter of 2011, Red Hat expects revenues in the range of $226.0 million to $228.0 million and non-GAAP EPS in the range of 19 cents to 20 cents. The Zacks Consensus Estimate is pegged at 15 cents.

We believe that strong execution, a huge backlog and continued investments in growing areas will drive Red Hat’s results in 2011. However, foreign currency volatility, primarily due to troubles in Europe and increasing compensation costs, may hurt results.

Stiff competition from Microsoft Corp. ( MSFT - Analyst Report ) , Novell Inc. ( ) and Oracle Corp. ( ORCL - Analyst Report ) is also a cause for concern. We therefore maintain a Neutral recommendation on Red Hat for the long term.

The stock currently has a Zacks #3 Rank, a short-term Hold rating, given no change in Zacks Consensus estimates, following the second quarter results. We expect the company to report in line with the Zacks Consensus going forward.