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Red Hat, Inc. Message Board

  • johnny_bdog johnny_bdog Dec 21, 2010 9:24 PM Flag

    RedHat's Problem

    RedHat's problem is that margins are not expanding much, in part due to aggressive headcount expansion...

    Even though theoretically the topline beats and earnings projection matches, investor are disappointed with the margin trajectory...

    You could see the defensiveness on the conference call when the last analyst made a speech theorizing that the Makara acquisitions foreshadows a ramp up in the service business...

    Not sure if it was Whitehurst, but whoever it was protestethed to much and strenuously stated that headcount serves subscription growth. The fear of investors, of course is that the service business is a poorly leveraged model with all the hassles of dealing with alot of human beings...you know, demanding all sorts of benefits, quitting after being trained, suing the company for sexual harassment, etc....

    It does look like this might be a turning point for RedHat valuation...the law of large numbers is killing the revenue growth comps while management is "investing for the future" with headcount increases...

    For momentum investors this business model has hit a wall.

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